The concept of corporate governance is the system by which business corporation are directed and controlled. The three main aspect of good corporate governance are seen in shareholder right, transparency and board accountability. (Corporate governance by Alan Calder 2008).
Definition: Corporate governance is concerned with holding the balance between economic and social goal and between individual and common goal and aim is to align as nearly as possible the interests of individual, corporation and society (Sir Adrian Cadbury, 1999).
Using the British Petroleum case, we develop a model of efficient corporate governance addressing all facets of the society in which corporations exist such as economic, ethical, political, and social. These facets determine the norms by which corporate decisions are judged. Without incorporating every facet into decisions, companies will eventually fall short and company just can’t do the things in profit motive by sacrificing the moral and ethical issues
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British Petroleum failed in averting the Mexico oil spill due to lack of coordination between board and chairman and interlacing all the facets of society in the corporate decision making process. This failure contributed to the mismanagement of the company by a relatively detached board of directors who failed to assimilate high ethical management standards into the foundation of decision making process. This model developed here will help companies in addressing the appropriate system of corporate governance which serves as a foundation to avert failure through the practice of high ethical patterns of behavior which are needed to survive in the modern business world.
Case analysis and discussion
By late 2010,the British Petroleum has become a cause célèbre amongst those concerned with corporate governance and particularly with the social, ethical and environmental responsibilities of business In the 21st century, corporate governance has become critical for medium and large organisation. The organization which fallows corporate guidelines strategy performs well than compared to organization which does not adhere to the guidelines. Corporation work with governance framework which is first set by law and then by regulation emanating from the regulatory bodies to which they are subject.
The chairman and Boards of directors are responsible for the Mexico disaster as they not properly scrutinised the outsourcing to the partner and we call as leadership failure. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. It will be critically analyses the corporate governance structure of British Petroleum and its related issues regarding the corporate social responsibility.
British Petroleum Corporate Governance structure
Board structure
British Petroleum Board fallows unitary board structure, characterized by one single board comprising both executive and non executive directors. The unitary board is responsible for all aspects of the company activities and all the directors are working to achieve the same ends. The shareholders elect the directors to the board at the company annual general meeting.
The Board of British Petroleum focuses more on Agency theory which take into account of principle- agent framework. The work of Jensen and Meckling (1976) in particular, and of Fama and Jensen (1983), are associated with this Agency theory (Corporate governance -Christine A Mallin).
In Agency Theory, in the context of corporation and issues of corporate control, agency theory views corporate governance mechanisms, especially the board of directors as agent to monitor the functioning of management or the corporation. The focus of the theory is on design proper incentives measure and implementing those incentives and monitoring the performance. Economic performance is vital, and increasing shareholder value is deemed good. Agency theory, however, is not able to address the issues of non-direct shareholder interests such as political pressures and societal expectations from firms such as British Petroleum
The corporate governance structure of a firm should provide the medium of norms and best practices which balance the needs of all stakeholders of the firm. Therefore, the model of corporate governance structure for firms must include economic, political, social and ethical norms for decision making in order for firms to gain and retain legitimacy which leads to resources and survival.
British Petroleum Plc board governing principle is as fallows.
The BP Board is responsible for the direction and oversight of BP plc (BP) on behalf of the shareholders and is accountable to them, as owners, for all aspects of BP’s business. The Board recognize that in conducting its business, BP should be receptive to other relevant constituencies.
British Petroleum believes that good corporate governance involves to specify the role and responsibilities and the proper utilisation of distinct skills and processes. The Board therefore focuses on activities that enable it to promote shareholders’ interests, such as the consideration of long-term strategy, the monitoring of executive action, and ongoing Board and executive management succession. The board gives clear guide lines for the allocation of authority for the executive management of BP through the group Chief Executive (GCE) and these can be seen in the Governing principle
The BP Goal
The Goal of British petroleum is to maximize the shareholders value by investing the resources to activities in the oil, natural gas, petrochemical and energy business.
The role of the Board
The Board is collectively responsible for pursuing the BP Goal and is accountable to shareholders for all the actions of BP. The Board’s role is to govern BP by discharging its sole responsibilities, which include
Focus primarily on strategic issues;
Regard to economic, political and social issues and any other relevant external
Matters which may influence or affect the development of BP’s business; and
Exemplify through these Board Principles and its expectations for the conduct of the BP business and its employees.
The Board and its processes
The Board will take into confidence and seek to obtain the view of the shareholder as a whole, the board will decide the agenda for the financial year and these will be done with consultation of chairman, general chief executive and company secretary. Discussion at Board meetings will be open and constructive and the record will be kept confidential, unless there is a specific decision or legal requirement to make disclosure.
The entire director can obtain independent professional advice relating to director’s own responsibilities and the affairs of BP.
Board Composition and Compensation
Composition, Size, Independence and Tenure
The Board comprise a experienced individuals with appropriate range of knowledge and working principle in
Experience in dealing with strategic issues and long-term perspectives;
Leadership experience, a superior knowledge of business principles and capacity
Independent thought;
Ability to participate constructively in deliberations; and
Willingness to exercise authority in a collective manner.
The director are elected annually by shareholder and half of director excluding the chairman, are non-executive director.
Board and Director Evaluation
The Board will evaluate its own working condition and performance including the work of its committees and this is done to keep the efficiency of the board. The performance and contribution of individual directors as members of the Board will be reviewed periodically, with the Chairman’s performance being reviewed annually. The non executive will monitor the work of General chief Executive, the performance of the
Executive directors will be monitored by the GCE and Non-Executive directors.
Board Induction and Education
All the directors will be given induction and training program for enable them to fulfil their responsibilities as directors, all the directors especially non-executive directors are prepared give sufficient time for the discharge of their BP responsibilities. The board will be kept informed by the directors through company secretary. The Nomination Committee will keep under review the commitments of Non-Executive directors and make recommendations to the Board if the Committee concludes that a director’s other commitments are inconsistent with those required by BP.
Role of the Chairman
The Chairman will the leader of the board and act as facilitator, and has authority to act and speak for the board meeting on matter relating to the board principle. The Chairman is empowered to make any decision, establish any policy, take any action or enter into any obligation which is consistent with the Board Principles. and, in so doing, may interpret the Board Principles in any reasonable manner. The Chairman will ensure that systems are in place to provide directors with accurate, timely and clear information to enable the Board to consider properly all matters before it. The Chairman is responsible for ensuring the integrity and effectiveness of the Board Principles.
The chairman role is clearly followed as per Sir Adrian Cadbury observation “the primary task of chairman is to chair the board. This is the work they have been appointed to do and, however the duties at the top of the company may be divided. Chairing the board is their responsibility alone (p. 78). He clear highlights an important difference between CEOs and chairman.
This principle is adhered by the British Petroleum as per Sir Adrian Cadbury statement on chairman.
Role of the Deputy Chairman
The Deputy Chairman will play as role of chairman in his absence and deputy Chairman normally serve as the Board’s Senior Independent Director and will be accessible to shareholders who have concerns that cannot be addressed through normal channels.
The Company Secretary
The company secretary is selected by the nomination committee and all the board members have access to the advise and service of company secretary.
The Company Secretary is responsible for advising the Board and the Committees on all governance matters, ensuring that Board procedures are followed, that the applicable laws and regulations for the conduct of the affairs of the Board are complied with and for all matters associated with the maintenance of the board
Board Committees
The Board consists of permanent committee which are as
The Chairman’s Committee,
Safety, Ethics and Environment Assurance Committee (SEEAC),
Remuneration Committee,
Audit Committee,
Nomination Committee
Chairman’s Committee: Consist of chairman and all non-executive Directors and it work include;
- Evaluate the performance and the efficiency of the GCE
- Review the structure and systems for senior executive development and determine the succession plan for the GCE, the Executive directors and other senior members of executive management
- Determine any other matter which is appropriate to be considered by all of the Non-Executive directors
Safety, Ethics and Environment Assurance Committee: consist of four to six Non-Executive Directors and it work include
Monitor and obtain assurance that the management or mitigation of significant
BP risks of a non-financial nature is appropriately addressed by the GCE
Receive and review regular reports from the GCE or his delegate, the Group Internal Auditor and the Group Compliance and Ethics Officer regarding the GCE’s adherence to the relevant Executive Limitations and his management in responding to risk
- Review material to be placed before shareholders which addresses environmental, safety and ethical performance and make recommendations to the Board about their adoption and publication
- Remuneration Committee: Consist of at least three Non-Executive Directors and it work include
- Determine the terms of engagement and remuneration of the GCE and the Executive directors and to report on those to shareholders
- Determine on behalf of the Board matters of policy over which BP has authority relating to the establishment or operation of BP’s pension scheme of which the
Audit Committee: Consist four to six Non-Executive Directors and it work include
- Monitor and obtain guarantee that the GCE’s internal control system is in place and implemented effectively in the observance of the audit and relevant toExecutive Limitations
- Review regular reports from the GCE or his delegate, the Group Internal
Auditor and the Group Compliance and Ethics Officer which evidence the GCE’s adherence to the relevant Executive Limitations and his management in responding to risk
- Review all financial disclosure documents including quarterly results, annual accounts, prospectuses, information and offering memoranda to be placed before shareholders or filed with regulatory bodies and make recommendations to the Board about their adoption and publication
Nomination Committee: Consist of chairman and chairs of SEEAC, Audit and Remuneration committee and it work include
- Categorise recommend candidates for appointment or reappointment as directors and company secretary
- Review the mix of knowledge, skills and experience of the Board to ensure the orderly succession of directors
- Evaluate outside directorship/commitments of the Non-Executive directors
Risk and Internal Control
The GCE will not cause or permit BP to operate without a comprehensive system of controls and internal audit to identify and manage the risks that are material to BP, to protect BP’s assets and to monitor the application of BP’s resources in a manner which meets the standards of external auditors. (BP governing plc extract from bp.com)
Weakness of corporate governance structure in British petroleum
In the wake up of Gulf of Mexico oil spill, the corporate governance structure and the governing principle collapsed , the oil giant send uncharismatic leader, chief executive Tony Hayward to placate its major partners and stakeholder. Instead, BP should quickly provide new leadership and replace its ineffective top decision-makers. That would be just the first step in trying to win back the confidence of its partners and regaining investors’ trust while it continues to work on stopping the massive oil leak in the Gulf of Mexico and cleaning up the environmental disaster it’s created,The Financial Times in an editorial on July 6 said there’s an urgent “need for changes at the top of BP.” And foremost investor Warren Buffett has said Hayward needs to be replaced for the good of both BP and the U.S.
The FT made clear what it believes BP should do: “There is no question that top management will have to be changed following the Gulf of Mexico oil spill.” It noted that BP’s response has “exposed shortcomings in leadership and presentation.”(Gene Marcial, financial columnist in Daily finance 7/12/2010)
Analyst Lucy Haskins of Barclays Capital in a recent report noted that “there are serious corporate governance questions” given the magnitude of events at BP, which she describes as “structurally disadvantaged.”
Haskin advises BP’s nonexecutive directors should should change the whole corporate governing system of the company, like appointing new CEO and new leadership team.(Analyst Lucy Haskins of Barclays Capital in financial times December 2010)
As we can see, on paper, BP addressed the management team’s responsibilities in their corporate governance program. It is this same program that is being rated by Management & Excellence and ranked accordingly. BP ranked number three on the list and surprising to many as BP ethics are based solely on board structure and policies. If the rating were based on management actions then we would have a new ranking, as ethics should be based on the “verbs” that management take in the day-to-day operations of the company; not the policies.Â
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Olsen (2005) points to BP having more fatalities than compared to other company and also the recent 11 death in the April 20, 2010 explosion of the Deepwater Horizon (Casselman, 2010). Considering death toll of BP and disaster like the Texas Refinery explosion, pipeline leaks, illegal doming, and the Gulf Coast oil leak, we feel some things out of place and the rating system has it wrong, as environmental issues cannot be measured by policy and Procedure but the actual action and their day-to-day activities to gauge the ethical behaviour.
Effective boardrooms need to be able to perceive fraud and misdeeds within their organization. To accomplish this, directors need to make sure they have internal controls that monitor, detect, and measure the usefulness of red flags. Employees and management must be properly trained to spot red flags within the scope of their job functions. Properly trained employees and management should be able to spot red flags sooner; leading to a reduction in cost per incident for fraudulent activities within the organization.Â
Creating an effective board, by utilizing Leblanc and Gillies’ (2003) model, can strengthen the overall sustainability of an organization. Effective boards have to understand the ethical risks, red flags, and internal controls within their organization. As failure to do so, often leads to a road, no one wishes to go down
As per Tony Jackson review in Financial times British Petroleum has a stubborn nature of corporate culture which is difficult to change and also has defective safety culture. If we go through BP annual report which shows its top priorities are safety but it has not adhered to this statement as seen from Texas refinery explosion and Gulf of Mexico oil spill. Independent safety expert has given advise about BP US refinery safety upto to scratch and from we can assume there specific problem of corporate governance, Several investment professionals have said recently that the BP affair underlines the duty of owners to examine companies on safety. The recently refurbished UK Corporate Governance Code lays out the official position. “The board,” it says, “is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.”
In other words top level management policy is not carried in execution below and this will make us believe the hypothesis of weak corporate governance in BP. Several institutional investors didn’t buy BP share because of before the disaster because of safety worries.
These all indicate weakness in safety, Ethics and environment Assurance Committee and actual fact the work is not up to mark of the committee
Recommendation for good corporate governance in British Petroleum
In general, we would recommend that corporate governance structure should establish a relationship among a company, its shareholders, and society in order to promote a fair, transparent, and accountable principle in an enterprise. Furthermore, the board of directors should be independent from the sphere of influence of the CEO and senior management. The board must bear no material relationship between the corporation and major independent directors. The Board should fallow the combined code of UK and Sarbanes-Oxley act of US as per the company operation of BP Refineries.
Corporate governance structure for a particular firm must fulfill with societal norms to maintain legitimacy and resources in that society. In the model of corporate governance structure for firms developed in this manuscript, norms included economic, political, social and ethical norms
Further, compliance by all the five groups of corporate governance structure -the Board of Directors external analysts, regulators, outside advisors and management form the model of corporate governance and all the group should remain independent in order to maintain check and balance
The more proactive role is needed by the states and companies for the development process aimed at balancing economic growth with environmental sustainability and social cohesion, has motivated the following three interlinked business movements:
This can be done by the following way
Worldwide reforms on corporate governance.
Corporate social responsibility
SUMMARY
In critically examining the case of British petroleum we have discussed with example of how corporate governance failures directly led to the fall in share price and loss of confidence in investor community. Though it is a helpful example to study and provide a scholarly discussion of the destructive effects a failure of corporate governance structures and corporate social responsibility can have on a company’s shareholders, stakeholders, and society in general; a broader analysis leads us to conclude that having a governance structure in place that blends all appropriate norms of ethical, social, political and economic facets of society will have the most lasting and positive impact on all stakeholders.
The interaction of all groups in the corporate governance structure is needed to help a corporations abide by best practices at all times. Sound corporate governance give confidence in the investors that the business environment in which the company operates is fair and transparent. It tells investors that that the company is made up of conscientious employees who respect the rights to ethics of care, justice, rights and utility. Overall, the notion of corporate governance is contained in the ethics of care, justice, rights and utility, and this is why it is of supreme importance in all business entities.
Reference and Bibliography
New UK Corporate Governance Code in force from 29 June 2010
BP plc -Board Governing Principle, September 20,2010 from bp.com
Takis katsoulakos and Yannis Kat soulacos, Emerald Group publishing Ltd, Volume. 7 no. 4 2007,pp-355-369,
Uche Nwabueze and Joan Mileski, Emerald group publishing Ltd, Volume 8 no .5, pp 583-594
Tony Jackson (2010), BP must ensure Its good intension become reality. Financial times, 27 June
Oil spill Panel’s Reilly Fault Regulator, Wall street Journal(online), New York, March 4th ,2011
Leblanc R & Gilllies J(2003), The coming revolution in corporate governance, Ivey Business Journal
BP leads nation in Refinery Fatalities, Retrieved (2010), 1st October
Ross, M (2008) 1st April, Fraud Red Flags
Mallin A C (2010) 3rd edition, Corporate Governance
Guler Aras & David Crowther (2009), A Handbook of Corporate Governance and Social Responsibility
Robert G Monks and Nell Minow(2004), 3rd edition, Corporate Governance
Joseph. B. White, Proquest Document ID: 2282002181, Source , Newspaper
British Petroleum Annual Report 2011
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