BP Oil spill – reputation damage

The oil spill threatening currently the Mississippi delta region is being portrayed in the US as a major environmental disaster attributable to a British oil exploration company, British Petroleum. It suits US politicians addressing a domestic American audience to make a scapegoat of a foreign firm. The use of colourful language is all part of this distancing - ‘BP now stands for Bayou Polluter’. The local fisheries and tourist industries will need compensation, so any hint of culpability among local US operators must first be expunged in the land of litigation.

BP is no stranger to controversy in the US. The Amoco refinery fire and the Alaskan pipeline leak are just two recent accidents to dog BP in its US operation. The American oil giants don’t like the idea of a foreigner operating in their back yard extracting revenue from their natural resources. In some respects BP is a political Aunt Sally, but what does reputation damage really look like?

Firstly there is the immediate drop in share value as investor confidence is lost, currently this has wiped about $20bn off the company value. This is far more containable than the current deep sea well-head escape. Forecast compensation to fishery and tourism in the region will amount to a further $6bn and this does not include the bill for clean up costs. It is also possible that the US authorities will slap a fine on BP but the direct cost can be deferred - the Exxon Valdez spill 21 years ago is still being contested by oil company lawyers, so a there is a precedent for protracting a settlement deal.

The real damage comes in the form of future political risk, governments around the world who might have considered awarding an extraction contract to BP, will now be more wary of the track record of BP and, like Lady Bracknell, judge the corporation to be too ‘careless’ to merit the risk. The damage to reputation comes in the form of lost future business, which is of course almost impossible to quantify, but will take a long time to rectify as perceptions not facts are the currency in question.

The current strategy adopted by BP is to focus on preventing an environmental catastrophe irrespective of cost. This makes good sense ecologically and politically. The company has made it clear that this is not an admission of liability and will seek to recover these costs from its local operators and suppliers once it can build a case of culpability. In the end BP hopes to pin the blame either on the licensed rig operator, manufacturer of the fail-safe valve that didn’t work, or some other hapless local contractor in the supply chain. This will of course draw more political heat in the US.

BP, like Toyota, is suffering reputation damage because of its global size and inability to supervise local quality standards. Dependence on local operators is an inherently weak link in the chain. The global brand becomes contaminated by the actions of local operators too far removed from the core values of the corporation. Like Toyota the revenue generating machine is fuelled by hubris and thus senior management become immune to corporate risks. In studies of reputation damage it is often found that the Group Head of Risk has been warning for some time of potential damage, but his voice in the boardroom was deemed too cautious and removed from commercial reality of acceptable risk.

The lesson from the BP story is not an environmental one but one of risk analysis. A crisis of reputation such as this highlights the corporate control systems in risk appetite and tolerance.