Corporate Governance and The Short Falls of Current CSR

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This paper looks Corporate Governance Structures and Corporate Social Responsibility (CSR).  BP will be used as a a case study, using the Deep Water Horizon Blow out in the Gulf of Mexico in April 2010 as an example of the shortcoming of CSR in this ever changing relationship between multinationals and their internal and external stakeholders and is by no means a direct criticism of BP. The paper will be broken into three parts, the first part will explain what Corporate Governance aims to achieve and describe the two predominant models used. The second part will look at which structure BP has in place and the third part will look at the wider responsibilities of CSR. 

Corporate Governance is the systems put in place to control and direct a Corporation.  (Cadbury Committee, 1992) It is concerned with managing the relationships between the management team, the board, shareholders and stakeholders. Its aim is to prevent any conflict of interest between the stakeholders in the company, with the focus being on the relationship between the shareholders, the principle, and the management team, the agent. Ensuring that people within the business can be held accountable. (Cadbury Committee, 1992) Corporate Governance tries to ensure that a company is controlled in a responsible and transparent way. With the aim of ensuring the future success of the organisation and instilling confidence in shareholders and capital market investors.

There are two dominant models, which are currently in use, both aim to provide the necessary mechanism, but vary slightly from one another, the first is the Rhineland model, which is a two-tier system. Consisting of a Supervisory Board that is made up of non- executive directors who represent the shareholders and employees and an Executive Board that is responsible for the day-to-day running of the company. The Supervisory Board is also responsible for hiring the members of the Executive Board and signing off any key decisions made by them.  (Hopt, 1997)

The second model is the Anglo American Model, which has one tier structure, consisting of one Board, which comprises of Executive from the company and Non- Executive Directors, who are nominated by the shareholders. There are more Non- Exec Directors on the Board and they chair key committees such as audit and compensation. The Chief Executive of the Company also holds the position of Chair of the Board, although, this is much more common in the United States than in the UK, where the Chair of the Board is a separate individual.  (Bowen, 2008)

The BP has adopted the Anglo- American Governance structure, as they are a UK registered company. They have single Board on which four members of the executive team including the CEO sit along with nine non- executive directors and the Chairman. As mentioned previously it is common in the UK for the CEO and Chairman to be separate individuals, as is the case with BP.  Along side the board the company has six committees, the Remuneration, Audit, the Safety, Ethics and Environmental Assurance Committee and finally the Chairman and the Nomination and Results Committees. There is a sixteen page document on the website, entitled ‘The Board Governance Principles’ that explains exactly what is expected from the Board and the Non-Executive Directors and since the Deep Water Horizon Disaster they now have the Gulf of Mexico Committee, which is tasked with managing the companies social responsibilities vis a vis the Oil leak in 2010. (BP, 2012)

As BP is one of the largest companies in the world it is expected that they would have a very robust Governance structure in place but prior to the oil spill in the Gulf of Mexico the companies record, particularly on health and safety was very disappointing and the question has to be asked. Did the Board properly oversee the management’s effort to embed a culture of safety? Driving the safety policies deep into the culture of the company. Even before the Gulf of Mexico, BP had serious high profile incidences, such as the Texas Refinery explosion in 2005, killing 13 workers, and the failures in Alaska. The inquiries that followed pointed to serious breaches in the health and safety management within the company. 

In the immediate aftermath of the Gulf of Mexico disaster it was becoming clear that those in charge of the rig had cut corners in health and safety to get the rig operational. This illustrates that the management team within the business had not learned lessons from the previous incidents and had not implemented the correct safety policies within the organisation.  Following on from this, what was the Executive Board doing, where was the oversight from the non-executive directors, ensuring correct procedures where followed and implemented into the organisation.  All of this points to systemic issues within company, from the top right through to the operational management. The Governance was clearly inadequate and not providing the correct oversight, the Board were not doing their duty to the rights and interests of the shareholders and stakeholders and the value of the stock reduced by over 50%, dividend payments were stopped and the company has had to pay out on the region of $20 billion in compensation (Heineman, 2010) 

The Gulf of Mexico disaster also raises interesting questions about what is CSR and who are the stakeholders? It was not only the employees and shareholders who were affected by the disaster, more importantly the local communities in the immediate Gulf area were far more affected. So where does a company’s CSR end and what responsibilities does BP have to these stakeholders? Clearly the US authorities decided that they had a large responsibility. The disaster has had an impact on the area that will last for years to come, both environmentally and socially.  

This illustrates that CSR must now cast its net wider to take into account their social responsibility to the wider stakeholders affected by the decisions that the companies make.  Clearly, the current Anglo- American model, as can be seen in the case of BP, has been inadequate in Governing the company to ensure that it runs its business interests in the correct manner, both to its shareholders and all stakeholders. But, by adopting the supervisory board from the Rhineland model, would this add the necessary oversight and new perspective needed? This would certainly go some way to correctly the problem, as it would take the employees views into account more and give shareholders more influence. Although, it still leaves out the external stakeholders (wider society) whose interests will need to be taken into account. How this role would be implemented would need to be considered by the company and the Government, although there would be a serious risk of over legislating Corporations in this area, which is not something that should happen, as interference from the State can slow down a company.

What companies need to do is to find a way whereby they can incorporate the needs the of external stakeholders into there Governance structure and thus provide a more holistic CSR. In the case of BP this would not have only given them a wide perspective, but it would have also saved their shareholders $20 billion. This case illustrates why companies need to develop a better CSR, or as I said in the introduction a sustainable business strategy, which highlights the elements that need to be understood, who are the stakeholders both internal and external, how important are they to the business? The Government and policy, health and safety, and what role technology can play. It is worth mentioning at this point that these factors do not apply to every sector of  industry, the commodities sector, i.e. Oil and Gas and mining are probably the sectors that need the most robust and holisitc CSR policies, this does not mean that other sectors should not follow suit.

Appendix

BP.com Governance Principles 2011

((Hopt, Klaus J., "The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance" in Hopt, Klaus J. and Wymeersch, Eddy (eds), Comparative Corporate Governance: Essays and Materials, de Gruyter, Berlin & New York, 1997,

Bowen, William G, The Board Book: An Insider's Guide for Directors and Trustees, W.W. Norton & Company, New York & London, 2008

Heineman, B. 2010 http://www.businessweek.com/managing/content/jul2010/ca20100727_717276.htm
 

The Cadbury Committee, 1992