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On May 11, 2010,  U.S. Dept. of the Interior Secretary Ken Salazar announced that he would separate the public safety and environmental enforcement side of the Minerals Management Services (M.M.S.) agency from its leasing and revenue collection function. While this move eliminateed the structural conflict of interest in the agency, it might not do enough to protect the regulatory function of the agency’s public safety and environmental enforcement roles.  The regulator can all too easily be coopted, or captured, by the firms it is regulating.

According to The New York Times, M.M.S. agency has routinely overruled its staff biologists and engineers who raised concerns about the safety and the environmental impact of certain drilling proposals in the gulf and in Alaska, according to a half-dozen current and former agency scientists. Those scientists said they were also regularly pressured by agency officials to change the findings of their internal studies if they predicted that an accident was likely to occur or if wildlife might be harmed.  “M.M.S. has given up any pretense of regulating the offshore oil industry,” said Kierán Suckling, director of the Center for Biological Diversity, an environmental advocacy group in Tucson, which filed notice of intent to sue the agency over its noncompliance with federal law concerning endangered species. “The agency seems to think its mission is to help the oil industry evade environmental laws.” One scientist who has worked for M.M.S. for more than a decade, said, “You simply are not allowed to conclude that the drilling will have an impact. If you find the risks of a spill are high or you conclude that a certain species will be affected, your report gets disappeared in a desk drawer and they find another scientist to redo it or they rewrite it for you.” For one thing, the regulators rely on information from the firms–data that is hardly provided in an objective fashion.  But such reliance pales in comparison with the political muscle of the oil companies–their campaign contributions being just the tip of the iceberg.  Moreover, large concentrations of capital are inherently a threat to a viable republic.

It should be no surprise that the government would welcome the cooperation from the companies involved in the accident in the Gulf; it reduced the pressure on the officials to go after the companies (and hence risk alienating their future contributions).  According to The New York Times, “Under federal law, even in the case of a major accident, the company responsible for the oil well acts in concert with government in cleanup activities and can help put out information about the response effort.”  Shortly after the spill, government agencies and BP set up a joint information center and a Web site detailing remediation efforts. BP started to promote its attempts to “stop the bleeding” (i.e., cut off the leaking oil in the Gulf).  With a restored image, the company could resume lobbying for less regulation, even though the accident demonstrates insufficient enforcement.

Source: http://www.nytimes.com/2010/05/12/us/12interior.html?ref=us ; http://www.nytimes.com/2010/05/14/us/14agency.html?hp

In Senate testamony on May 11th, 2010,  the three companies did their best to point the finger at each other, with the result that neither BP, Transocean or Halliburton would admit, undoubtedly for liability purposes, any contributory role. In the midst of such liability evasion, those of us in the wider society want to get to the bottom of the accident so future such accidents can be prevented. In pointing the finger at the other guy while ignoring one’s own role, the managers of the three companies are added insult to injury.  The BP executive did not mention that several days before the explosion on the Deepwater Horizon oil rig, BP officials chose, partly for financial reasons, to use a type of casing for the well that the company knew was the riskier of two options, according to a BP document. Specifically, BP managers opted for a “long string” pipe for the well rather than a liner tieback that would have cost $7 million to $10 million but would have added barriers to prevent gas from reaching the surface.  BP managers were not unaware of this risk. The concern with the method BP chose, the document said, was that if the cement around the casing pipe did not seal properly, gases could leak all the way to the wellhead, where only a single seal would serve as a barrier. As another instance of cutting corners to save time and money, BP engineers used just six “centralizers,” rather than twenty-one as recommended by Halliburton, to stabilize the well before cementing it. According to an April 16, 2010 email from BP’s well team leader, the problem was that the extra centralizers would have taken ten hours to install. Another official wrote of the decision: “Who cares, it’s done, end of story, will probably be fine.”   BP managers also decided not to take twelve hours to completely circulate the heavy drilling fluid in the well that would have enabled detection and removal of any leaking gas. BP also skipped a test to determine if the cement had properly bonded to the well and rock formations. A petroleum engineer independent of BP told a congressional committee that the decision was “horribly negligent.”



Workers from the rig and company officials said that hours before the explosion, gases were leaking through the cement, which had been set in place by the oil services contractor, Halliburton, which Dick Cheney once ran. But it was not merely the casing and cement that were problematic. On 60 Minutes on May 16, 2010, a worker who was on the rig when the accident happened spoke of a BP manager overruling a Transocean manager to cut corners, such as beginning to drain the pressure fluid from the well before the third “cork” was installed.  The methane was able to reach the rig’s engines because there was insufficient pressure to keep the gas down in the well.  Also, a BP manager had earlier ignored the worker’s warning that there were shreds of rubber coming up in the drilling–the rubber being from the device that was supposed to take pressure readings (e.g., whether there is gas in the well).  Nevertheless, the BP manager who testified before the Senate blamed Transocean and Halliburton managers, and on the morning after the 60 Minutes interview BP’s COO said he was just focused on the clean-up and knew nothing of such “details” even though his specialty was in development and exploration. Both in cutting corners and in ignoring his job description, BP’s COO demonstrates a willful disregard for societal norms wherein society itself is protected and accountability is accepted.  Sadly, this attitude is not uncommon in the business world.

Perhaps as business operations expand in businesses too big to fail, the societal dangers in the attitude are magnified because more damage can result. In other words, it becomes increasingly dangerous to a society to allow such an attitude to exist.  Where societal norms are ignored by business managers, perhaps the societal norm that allows for their authority should be rescinded as well. This is a social contract reading of society, wherein if one side of the norms are broken, the other side is deemed invalid as well.  The problem is that social contracts unravel rather slowly or incrementally, such that a dangerous attitude can be allowed to remain in a position of authority.  It is worth investigating whether violating societal norms is actually detrimental to a company’s bottom line. 

To the extent that a social contract has a certain inertia, it may be that the bottom line can survive long enough to allow the attitude to survive and perhaps even prosper.   These matters are distinct from questions of justification, which lie in the field of business ethics, and from those of whether more government regulation is needed, which lie in the field of business and government. We can define corporate social responsibility as meeting the general expectation in a society that people admit to their wrong-doing or mistakes and make amends.  This is different from the ethical question of whether people should admit to their wrong-doing or mistakes and if so why.  It is also distinct from the question of the proper relationship between business and government.  Business and society involves the relationship of business interest and societal norms.  To treat the latter (or the former, for that matter) as ethical requires ethical justification, which is more than simply aligning business and societal norms.  In other words, a societal norm is not in itself ethically justifying (consider Nazi Germany as a case in point).  With these distinctions in mind, I turn now to the field of business and society.

I contend that the people at BP (and Halliburton) admitting to their role and paying for economic damages incurred by third parties would be more important than BP’s charitable giving, even if some people in the wider society may have let BP off the hook for the accident if the company’s managers had decided to announce a new philanthropical project unrelated to the accident. Working on another society problem does not make up for having not admitted to BP managers' negligence.  Culpability, on other words. cannot be obviated or transferred so easily.

Too often, business managers use the term “responsibility” even as they are evading it for financial reasons. BP initially estimated the daily output of the leaks at between one and fourteen thousand barrels a day; BP picked the low end-point because the amount of fines the company would pay was tied to the volume. That the company managers were misleading the wider society didn’t seem to factor into their financial decision. As a result, the anticipated damage to the Gulf (and the world) was not sufficiently appreciated in the wider society. The convenient use of  the term “responsibility” can be gleemed from the Senate testamony of Lamar McKay of BP.  “As a responsible party under the Oil Pollution Act,” he said, ”we will carry out our responsibilities.” But he quickly added that Transocean “had responsibility for the safety of the drilling operations.”  That is to say, he acknowledged the obligation to be responsible for his mistakes while conveniently ignoring the mistakes made at his company. By pointing the finger at people at another company, McKay was contradicting his own asseveration on being responsible.  It is like he was lying even as he insisted that people shouldn’t lie.

Pointing the finger is childish, even if it is done for financial reasons. Steven L. Newman, president and chief executive of Transocean, did no better that the BP executive when he said that the accident had to have arisen from elements of the work done by other companies. “Were all appropriate tests run on the cement and the casing?” he asked, apparently implicating Halliburton. Tim Probert of Halliburton said in turn that all work on the casing by his company was carried out “as directed by the well owner,” meaning BP.  Suggesting that the men act like adults and take responsibility for what their coworkers had done (or failed to d0), the ranking Republican minority member on the Senate Energy and Natural Resources Committee, Lisa Murkowski of Alaska, told them to stop the finger-pointing. “I would suggest to all three of you that we are all in this together,” she said. Notice that she is pointing to a societal norm, rather than using an ethical rationale. She is essentially asking the executives to step up to societal standards. Unfortunately, there was no sign that the three boys would take responsibility for their actions, as they continued on, still oriented to the other guy.  The cost to society includes a more difficult route to uncovering the cause of the accident and possible accidents to come from BP. The company’s clean-up efforts do not address the cause of the accident; the spending does not go far enough. In other words, BP can’t spend its way out of it…or can it?  Are there societal norms that allow it to suffice?  My question is this: why hasn’t the social contract unravelled that has allowed the managers at BP to continue to hold their jobs (and BP to remain in business)?  Is economic liberty at play here–society saying that there is room in such liberty for a shirking attitude?

Sources:
http://www.nytimes.com/2010/05/27/us/27rig.html?hpl
“Congress Says BP Crew Focused on Costs,” The Wall Street Journal,  June 15, 2010, p. A5.

U.S. Sen. Rand Paul (R-KY), was the Tea Party candidate who challenged the Republican establishment to win the party’s Senate nomination in Kentucky on May 18, 2010. A day later, he publically criticized a plank of the Civil Rights Act of 1964. Specifically, he said in an interview with Rachel Maddow on MSNBC television that he supported the sections of the Civil Rights Act that applied to public accommodations but had concerns when it came to its applicability to private business. He had raised similar concerns earlier in the day about the Americans with Disabilities Act in an interview on National Public Radio. Asked by Maddow if a private business had the right to refuse to serve black people, Mr. Paul replied, “Yes.”

In citing the rights inherent in private property, Mr. Paul, an eye surgeon, was refusing to recognize the “publicness” in a business being open to the public, as distinct from someone’s house, which is not open to the public. In other words, Mr. Paul was ignoring the qualification to private property that comes into play as soon as said property is opened to the public.  Such property is quasi-public precisely because it is open to the public.  Hence, society, through its government, has a right to dictate the obligations going with that element of publicness.  Mr. Paul would have been on firmer ground had he limited his statement to private clubs, such as country clubs, which do not receive public money and are not open to the public.  However, even here, if people associate in a way that hurts others by intentionally excluding them, there might be an argument in favor of subjecting them to the Act, though such an argument seems weaker than those for freedom of association and on private property not open to the public.

Rand Paul also said on ABC TV that President Barack Obama’s criticism of BP in the wake of the Gulf oil debacle sounds “really un-American.”  Paul said that the president’s response is part of the “blame game” that’s played in the United States. The game, he argued, leads to the thinking that tragic incidents are “always someone’s fault” when sometimes accidents just happen. Sen. Paul was ignoring that BP overrode Transocean in directing its employees not to use “mud” to maintain pressure in the well as cement “corks” were being inserted.  Also, managers at BP claimed to have the technology to stop any leak or spill when no such technology existed. In short, the managers at BP put the Gulf at risk in order to cut corners so as to earn more profit (as if $2 billion a month was not sufficient).  Rather than go after the mentality of shirking amid a “more, more, more” mentality wherein nothing is ever enough, Paul went after the representative of the victim–society as a whole.  That is to say, he added insult to injury by going after the victim rather than the culprit.  In so doing, he ignored key elements of the culpability.

Listening to the candidate the Maddow show on MSNBC, I was more concerned by the way he chose to evade questions than by his failure to take “being open to the public” into account in his view on civil rights law. At one point, Rachel Maddow asked him, “yes or no,”  on whether he would exclude private businesses from the Civil Rights law.  He replied that he was against the violence that took place in the 1960s in association with Walgreen’s lunch-counters. Beyond not answering the question, Mr. Paul seemed to be continuing with what he wanted to say–ignoring the question entirely as a mere interruption to be dismissed. I noticed a few times that after Maddow did indeed interrupt him, he simply picked up with what he had been saying.  Could his ignoring the questions be related to his ignoring the “open to the public” qualification and the risky shirking of BP?  In other words, might it be that Mr. Paul simply does not see what is inconvenient to his world view?  If so, I contend that this character trait is far more alarming than even his evasions and his over-simplified view on private property and the oil spill.  If you have ever tried repeatedly to tell someone something only to have your statement ignored as the other person continues on with what he or she was saying, you know what I mean. Sadly, I suspect that Rand Paul didn't notice it. This character flaw is by no means limited to him. Nor is this an invitation for partisan aspersions on the Republican Party.

Rather, I suspect that not answering questions--even asking one's own instead of given any answer to a question outstanding--is a growing attitude in modern America. I have witnessed it myself in emailing people I don't know on matters involving an actual or potential commercial transation. Does the computer come with Office 2007? Reply: When you would like to come by to look at it?  But what about Office 2007?  Or take apartment hunting:  Are utilities included in the rent? Reply: Call me to make an appointment to see the unit. Nietzsche would have a field day with such a mentality that vaunts itself as superior by "virtue" of its own assumed dominance. The basis of Rand Paul's non-answer, in other words, could have been an attempt to dominate beyond his place on Maddow's show. In other words, his non-answers could have been refusals rooted in a will to power that was biting off more than it could chew on someone else's show.

In terms of having a will to power based on strength, many of the stations or offices in modern society that we view as being entitled to dominate are in fact weak.  Nietzsche points to the modern moralist's thou shalt not as an attempt by the weak to dominate beyond their innate weak constitution. He also points to the attempts of the modern manager to dominate in such terms (and the priest as well). In watching various personalities giving non-answers while being interviewed on television, I find myself wondering if they know they are doing it. If they do, they are indeed rascals; if they do not, their stygian pathology is much deeper than I am equipped to investigate. Perhaps the modern illness is malignant narcissism to such an extent in a personality that the delimited perspective eclipses even awareness of what oneself is doing.

Sources: http://www.nytimes.com/2010/05/21/us/politics/21paul.html?ref=politics   http://www.msnbc.msn.com/id/37273085/ns/politics-decision_2010/

A month into the BP oil spill in the Gulf of Mexico, some commentators began to wonder out loud whether the US Government ought to take over for BP in stemming the leak. As frustrated as those commentators were at BP–after all, the oil company had shirked safety procedures and lied about having the technology to manage such a spill–they had to admit that the US Government did not have the technical expertise to divert or shut off the oil.  For better or worse, we had to rely on BP in capping the leaks.

Having to rely on the culprit to solve the problem and clean up the mess sounds a bit like how the financial crisis of 2008 was managed.  In other words, we have managed to become dependent on firms such as Goldman Sachs and BP even where they are the culprits.  To be sure, government is an authority or umpire in society, not a producer.  To treat government as a business evinces a category mistake of sorts. Were it to operate as a producer, there would be a conflict of interest in its governmental capacity because it would be inclined to favor itself even as its umpire function requires having an even hand. It is also a cateogory mistake to treat a business as having a governmental capacity.  Hence, we don’t want the banking or oil lobby running Congress.

Rather than become an oil company, the executive branch of the US Government ought to concentrate on better organizing itself in its umpire capacity. In particular, the Department of Homeland Security (i.e., the Coast Guard), the Energy Dept, and the Interior Department each had a ball in play as the oil spill unfolded. Hence the umpire could not speak with one voice, as the US President must rely on someone to handle the day to day umpiring.  We couldn’t very well have the President living on the Lousiana coast as the oil leaked.  Having too many cooks in the kitchen makes for confusion. The relevance of the Interior Department alone is debatable, as the spill did not take place in the interior. Even so, the administrators were falling over each other in positioning themselves. Advocating that the government take over from BP would only multiply the harmful effects from the confusion that is immanent in the branch’s structure.  I would even contend, moreover, that the US President should concentrate on governmental domains in which the several states cannot act (even if some won’t!), rather than wading into every problem.

In short, the US Government can’t do it all, hence it shouldn’t try. Where it is the only umpire in town, such as out in the Gulf, it should concentrate on being a good umpire. This includes not only simplifying its own organization (in the exec branch), but also keeping itself from being unduly influenced by business so it can be an effective umpire.  Allowing Wall Street to have influence over the writing of financial regulation (or oil companies in MMS) not only compromises the government’s umpire function, it also permits sordid companies to exist, and thus to potentially be relied upon in stopping the leaks whether in the financial world or in the Gulf.  The US Government ought to concentrate its power so it can be a viable umpire, rather than allowing itself to become a confused sieve.

As BP was wrestling with stopping the oil leak in the Gulf of Mexico and cleaning up the oil, a controversy broke out between the company’s stockholders and the  US Government on whether any dividends should be declared and paid before the company has taken care of the Gulf.  BP earned more than $16 billion in 2009. Based on higher oil prices, in the first quarter of 2010 the company’s profit more than doubled to $6.08 billion from $2.56 billion  in the first quarter of 2010.  BP’s dividend payment accounted for about £1 of every £8 handed out by British companies in 2009. Given the higher profit in the first quarter of 2010, stockholders were expecting more in dividends.

The question was how much the company’s costs in regard to the Gulf would or should cut into the dividents; the political question was whether any surplus wealth should be paid to investors before the company’s legal and moral obligations were taken care of in the Gulf region.  Although not suggesting that their company was not obligated to stop the rupsure and fund the clean up, BP officials claimed that their company had already paid in other ways.

Already by mid June, 2010, BP shares had fallen more than 40 percent since the fatal explosion at the Deepwater Horizon drilling rig in April, wiping more than £50 billion, or $73 billion, from the company’s market value. The drop came after lawmakers in Washington called on BP to suspend its dividend and advertising campaign to pay for the cleanup, and a senior official said the Justice Department was “planning to take action.” Most shareholders rejected concerns that the costs of a cleanup and possible damages could force BP into Chapter 11 bankruptcy protection, and said the drop in the share price is not justified by the value of BP’s assets.  BP officials indicated the company’s executives would decide in July whether to keep the quarterly dividend at 14 cents a share for the second quarter. In 2009, the company paid about $10.5 billion in dividends.

By June 10 2010, the company’s cost in regard to the oil spill had reached about $1.43 billion. A BP official said it was “too earlier to quantify other potential costs and liabilities associated with the incident.”  Earlier in June, BP officials told investors that the company had $5 billion cash on hand and that it was generating “significant additional cash flow” as the price of oil remained above $60 a barrel. BP had 18 billion barrels of proved reserves and 63 billion barrels of resources at the end of 2009 that it could draw on.

Iain Armstrong, an analyst at investment manager Brewin Dolphin in London agreed with BP that the company had enough money to pay for the cleanup efforts and also rejected any potential concern that the company might not be able to pay for its debt. “It’s gotten completely out of hand,” Mr. Armstrong said. “It’s a totally overpoliticized situation. There is a disconnect between reality and BP being totally lambasted… . Ironically, by being extremely strong financially, BP has become a target here,” he said. I contend, however, that BP became a target because of its atrocious safety record and its culpability at Deepwater Horizon.

BP falsified regulatory documents by indicating that there was zero percent risk of an off-shore rig accident creating a rupsure and that the company had the technology to stop and clean up such a problem.  Tony Hayward admitted after the explosion that BP lacked the “tools you would want in your tool kit” to close a blown deep-water well.  In other words, the earlier claim to have had the technology was a lie (which MMS never bothered to disconver, as the agency had been captured).  Lest it be said that no group of people is perfect, BP’s history attests to justifiable blame.

In 2005, a blowdown drum overfilled with liquid hydrocarbons at BP’s Texas City refinery killed 15 and wounded 170.  BP was cited for old equipment, overworked and unsupervised employees and contractors, and managerial inattention to safety. The US Chemical Safety Board put the cause as “organizational and safety deficiencies at all levels.”  Meanwhile, a shoddy ballast system was found at BP’s offshore platform Thunder Horse.  In 2006, a corroded pipeline in BP’s Purdhoe Bay field in Alaska leaked thousands of barrels. In the following year, Tony Hayward became the CEO. He promised to make safety his priority. Yet in 2009, the Occupational Safety and Health Administration fined BP a record $87.4 million for more than 700 safety violations at the Texas City refinery. Nonetheless, David Nicholas, a BP spokesman, wrote, “Safe, reliable operations have been and continue to be our number one priority.”  Not only has this not been the case, BP managers (and lawyers) have been more interested in minimizing liability than being responsible for the consequences of the lapses.

At Deepwater Horizon, when an employee discovered that one pod of the blow-out preventer was leaking, a manager simply shut it down and used the other pod (rather than fixing the leak). Another worker found such low hydrolic pressure in the device that he knew it was time to leave.  In Congressional testimony, Tony Hayward said BP regarded the equipment as the fail-safe mechanism, even as blow-out preventers in general have a 44% failure rate and the device at Deepwater Horizon was known to have a broken pod. Furthermore, after the well fire, the company low-balled the estimated volume of oil going into the Gulf in order to minimize its future liability.  During the first week after the explosion, the company’s estimate was 1000 barrels per day.  During the second week, the company estimated 5000.  Meanwhile, company documents show an estimate of 100,000 per day as a worse-case scenerio. That the wider society would not be sufficiently informed of the magnitude of the clean-up required did not seem to bother the managers at BP, whose concern was mainly to minimize the company’s liability (and thus maximize their stockholders dividends).  Selfishness among the culpable is telling. At the very least, responsibility can be defined as paying for the harm consequent to one’s mistake.  Satisfying such responsibility has priority over dividends, which are residual, after all. In making the protection of dividends (and the stock price) a priority, BP’s managers evinced a reversal of priorities that was ahistoric for the modern corporation.

It is for these reasons, not because BP is a giant corporation or is British, that BP was the target of such scathing rebuke by the American public and the American governments. Mr. Armstrong said that President Obama should not forget that 40 percent of BP shares are owned by United States shareholders. “So he’s not doing them any favors either,” he said. Again, I beg to differ. Acting in the public interest, Barak Obama is doing us all a favor.  Of course, the politics of this matter were no doubt different in Europe.

London’s mayor, Boris Johnson, said Thursday that the drop in BP’s shares was slowly becoming a political issue in Britain. “When you consider the huge exposure of British pension funds to BP and the BP share price and the vital importance of BP then I do think it starts to become a matter of national concern if a great British company is being continually beaten up on international airwaves,” he told BBC Radio on June 10th. However, Reuters quoted Prime Minister David Cameron as saying, “This is an environmental catastrophe. BP needs to do everything it can to deal with the situation, and the U.K. government stands ready to help. I completely understand the U.S. government’s frustration.”

In a general sense, the governments are relatively oriented to the public interest, whereas BP, as a private corporation, has a fiduciary obligation to its stockholders.  Robert Reich referred to this obligation as a company’s “corporate social responsibility” on the Countdown with Keith Obermann show on MSNBC on June 14, 2010.  “Social” can admittedly be in reference to stockholders’ social concerns (though “social concerns” is rather vague); however, the term can also refer to society, which is larger than any group of stockholders. To BP’s management, it makes perfect sense in terms of corporate governance to declare and pay dividends as long as the company has enough resources to cover its actual and contingent liabilities related to the gulf.  Considering the billions that the company has in oil reserves, it could satisfy both. In an economic sense, the dichotomy may not make sense.  However, politically, there is resistance to the declaration and payment of dividends, and this “irrational” element is ignored by BP to its economic peril.  Essentially, the political reaction is challenging the right of the company to continue to exist. At the very least, the objection is that the company should not be run as normal.  In other words, the political claim is ultimately that BP has broken the social contract that legitimates its right to conduct business within the US.

Lest we have become too ahistoric, it might be worth our while to study the history of the modern corporation.  Originally, the modern joint-holding company was delegated a function to do for the public by a government.  If the company had enough left over after performing the function, it could give the surplus to the stockholders.  Through the twentieth century, the interests of the stockholders became increasingly central, eclipsing even the “delegated public function” aspect of the charters.  Essentially, a society gives a group of people permission to do a function. This implies that doing the function, and taking care of any adverse consequences caused by the company, are primary.  The political demand of the American governments is that dividends not be declared or paid until BP has rectified the Gulf region as required by law, societal norms, and ethical standards. From the standpoint of BP having been granted permission to operate in the US (leaving aside the billions in contracts from the US Government), the demand is not so much the product of irrational exuberance.

In effect, BP’s managers ignored systemic risk.  In being the closest we have to anyone able to solve the problem, BP is too big to fail. Managers at the company lied about being able to handle a major rupture. The MMS regulatory agency went along, having been coopted by the industry it was to regulate.  This is a failure of business as well as government.  All the emphasis on BP taking orders from the US Government in the wake of the rupture can be interpreted as “reaction formation” given the powerlessness felt in government having been so dominated by private interests ahistorically oriented to their stock price.  If the Gulf of Mexico seemed broken, this condition could be read as a symptom of a political-economic rupture.  I suspect that big business has gotten too big—taking too big risks, capturing governments, and acting with impunity.  As if the financial crisis of 2008 was not enough of a warning call, the oil spill of 2010 depicts too big to fail in very concrete terms.  Whether governments have sufficient power to reassume the driver’s seat in delegating public functions to private commercial associations depends on whether legislators have enough backbone to limit the size and wealth of big business.

Sources: http://www.nytimes.com/2010/06/11/business/11bp.html?hp
Countdown with Keith Obermann, MSNBC TV, June 21, 2010; Byran Walsh, “The Spreading Stain,” Time (June 21, 2010), pp. 51-59.

In terms of corporate governance setting executive compensation to align the employee's incentives to the financial interests of the company even beyond his or her term of employment, it is apparently quite easy to go overboard. This can include severance packages for top managers--packages that may not reflect the performance of the executive. At the very least, it would appear that corporate lawyers are not writing very good contracts. Worst yet, insider board-management friendships may mean that the gap between achievement and severance pay may be intentionally wide. Sadly, the innocent non-management investors whose interests are not adequately represented in the board room pay the price, even if they don't perceive it on an individual level.  Even so, the lack of fairness alone calls for an end to the insider luxuriating.  The case of BP, whose rig exploded in the Gulf of Mexico in 2010, provides a good case study.

BP’s CEO Tony Hayward lost his CEO position—or he wanted out—at the tune of $1.6 million per year to be a non-executive board member at BP’s Russian joint venture. In addition, he could draw on his pension valued at over $17 million  and could keep all of his BP stock options that could be worth millions if BP bounces back. At the time of the announcement of his stepping down and BP’s 2010 second quarter loss of $17 billion, BP Chairman Carl-Henric Svanberg said in a statement: “The BP board is deeply saddened to lose a CEO whose success over some three years in driving the performance of the company was so widely and deservedly admired.”  The statement evinces either an attempt at PR or a state of denial.  Hayward became CEO promising to put safety first.  To say that he succeeded in his own priority would be to ignore facts.

In testifying before the investigative subcommittee of the US House Committee on Energy and Commerce a month after the explosion, Hayward stuck to his script in saying he is for safety.  “Since I became CEO, we have made a lot of progress [on safety],” he said. ”We have focused like a lazer on safety.”  When asked about the reports from company employees of unsafe corner-cutting at Deep Horizon, Hayward replied that the company’s investigation is in progress. ”I haven’t drawn a conclusion,” he said to Rep. Waxman the full committee’s chairman. Waxman replied, ”you are stonewalling and evading responsibility.”  Challenged by Rep. Peter Welch to point to even one bad decision made by BP, Hayward said, “I’m not able to draw that conclusion at this time.” Asked by the subcommittee’s chairman, Rep. Stupak, if it was improper for BP to have overruled the contractor’s recommendation that BP’s intended changes to the blowout preventer not be made because, as Hayward himself had written, the equipment is the failsafe mechanism (i.e., if it fails, nothing else can stop the oil from gushing out), Hayward replied, “the blowout preventer is the failsafe mechanism.”  In spite of BP’s role in the disaster, Hayward wasn’t giving anything away in his testimony even though being more forthcoming would have helped the committee write legislation to prevent such a disaster in the future. Another representative asked Hayward for his opinion on skipping tests at Deep Horizon. Again, he said he could not answer the question until his company’s investigation was complete because he wasn’t there.  “Because you lawyer told you not to answer?” the representative asked in reply. It is not beyond reason to suppose that Hayward’s lack of opinion on matters pertaining to his business is part of a larger effort of the people at BP to evade the charge of negligence, which would increase the company’s financial liability. In other words, BP’s management was still acting in their own interest, as well as that of the BP stockholders—even in the midst of culpibility for a major disaster. This can be seen in the red-tape in BP’s claims process.  In spite of the company’s role in the disaster, the management was oriented to determining “legitimate” claimants.

Such conduct is similar to that of the banks that fought more regulations in the wake of the bank’s own culpability in the financial crisis of 2008.  Even amid the culpability, the banking lobby owned Congress (according to Sen. Dick Durbin).  In treating the fiduciary duty to the stockholders as absolute, the banks and oil companies evince not only a reductionism in the face of a larger business environment, but also an apparent selfishness that borders on a personality disorder.  Even if such managers are vaunted by their stockholders, there is the question of whether corporate governance has a susceptability to rewarding managements that screw up.

Hayward claimed at the hearing that he set the tone from the top at BP (in stressing safety). Given the pattern of continued safety violations, including those at Deep Horizon, his function doesn’t appear to matter much.  Accordingly, one representative asked him what his bonus would be for 2010.  Apparently his bonuses were not always in line with the profitability of the company.  Having made safety his priority is particularly telling, given BP’s continued track-record. In terms of corporate governance, if a management of a company under which shirking safety has resulted in a disaster even as the CEO has made safety his priority is not removed by its board, the owners of the company have a legitimate grievance against their board members. It is difficult to say whether Hayward was pushed out or wanted out. He had become public enemy number one in the US.  Even if he was ousted, the financial conditions of his ouster were out of sync with the results of his “leadership” (e.g., a $17 billion loss, and a huge contingent liability in the Gulf).  The disjunction between executive compensation and the executive’s results reflect very badly on corporate governance itself.   For any BP stockholders bemoaning the drop in the company’s stock price and the deminished or delayed dividends, removing the strong bias in corporate governance itself that is in favor of incumbant managements (e.g., proxies, proximity to the board, the business judgment rule) might well be a priority in the wake of the disaster in the Gulf of Mexico.

Source: http://www.msnbc.msn.com/id/38423486/ns/business-oil_and_energy/

In the U.S. Constitutional Convention, James Madison in particular stressed the nepharious quality of faction in relation to the public good. He argued that if a republic is extended in scope sufficently that there are more factions, none of them would be able to dominate and the public good would emerge. In a republic in which there are only a few major parties, the people's perspectives can become delimited by the parties' paradigms in an either-or dual macro-framework. That is to say, societal blind-spots can exist. To the extent that both BP and the relevant U.S. Government regulatory agency, MMS, were both culpable in the Deep Water Horizon rig explosion in 2010, both the Republican defense of business and the Democratic defense of government fall short. Even so, these respective defenses went on undaunted in the wake of the disaster and in the next year. To be sure, old paradigms die hard.

Albeit an oversimplification, it can be said that the Democratic party in the United States stresses the power of business as the problem, whereas the Republican party there views the problem as being government.  In campaigning for President in 1980, Ronald Reagan bluntly said that government was indeed the problem.  Deregulation ensued and industry self-regulation was like a fad. The idea was that the checks and balances in goverment that protect the liberties of the citizens could be applied at the industry level such firms would provide a check on eachother automatically. Lost in the buzz was the extent to which an industry would be willing to sacrifice its own long-term viability in order to protect even the bad among its own.

In 2010, the Republican paradigm whereas business is good and government is bad resulted in some Republican office holders defending a piriah (BP) and continuing to urge deregulation in order to excoreate against the US Government and frustrate the Obama Administration.  The ranking Republican on the US House Energy and Commerce committee apologized to BP’s CEO for the “shakedown” by Obama in extracting a $20 billion fund for the claims in the Gulf region. Meanwhile, Democrats were hard-pressed to admit that a goverment regulatory agency, namely MMS, could be so inept and corrupt.  It was not so much a matter of more regulations being needed; rather, the problem was government regulation itself.

Democrats could point to the encroaching nature of big business over the regulators, but absent a shakedown in the size of the biggest companies, the wherewithal of the regulators not to “partner up” with the regulatees may be an intractable problem in government regulation.  The traditional argument in capture theory that regulators depend on their respective industries for information doesn’t even break a sweat in what is needed to explain the extent of the power of big business over government regulatory agencies.  The imbalance of power is systemic: government officials being too feckless and corrupt. and big business being too powerful for the good of the republic.  In their letters, Jefferson and Adams agree on the need for a natural aristocracy of virtue and talent, rather than the artifical sort of wealth and birth.  Absent a natural aristocracy, systems whether business or government, cannot but be ineffective and corrupt.

In 2010, BP’s sordid safety record and its explosion in the Gulf of Mexico challenged the paradigms of both parties.  In actuality, business and goverment, as well as business and government, contain problems that exceed and transcend a particular paradigm. In treating the two party paradigms as a dichotomy, we miss the interaction effect that exists among the respective sectors’ problems.  It might be that the founders were correct in their suspicion of factionalism, as it does indeed detract from the common good.  Where a paradigm keeps one from acknowledging problems that are in the radar of an “opposing” paradigm, a person is not apt to serve the public interest.  In other words, both paradigms are limited.  The BP-MMS interaction and the subsequent explosion and responses exposed the delimited nature of the partisan paradigms.

With much power comes implicit responsibility. Hence, on February 21, 2011, the world recoiled when Gaddafi violently turned on his own people--using his power sans responsibility in a selfish attempt to stay in power. So too, the world had been shocked in April, 2010 when BP's Deepwater Horizon oil rig exploded in the Gulf of Mexico and that the Gulf itself was at risk. That a company could ruin something as big as the Gulf of Mexico came as a surprise to many. That a company, or three in this case, could have minimized such a risk by, for example, sending the U.S. Government contingency plans on Gulf clean up that included rescuing sea animals that actually live in the artic, shocked the public just as much. How could people holding such power treat its use with such carelessness concerning any downside?  The defense of having followed company policy or having excuted business procedures pales in comparison with the societal demand that power, whether public or private, be handled responsibly.  In other words, people take it for granted that power is given to adults rather than to children.  I think we would be surprised how often this has not been the case.  The case of Transocean demonstrates this thesis.

Transocean, which owned the Deep Water Horizon that exploded in April of 2010,  was the subject of a criminal investigation into possible tax fraud in Norway. The company indicated in S.E.C. filings that Norwegian officials could assess it about $840 million in taxes and penalties. The filings also contended that a final ruling against Transocean could have a “material impact” on the company. The company was also the target of tax inquiries in the United States and Brazil. Furthermore, drilling equipment from Transocean was shipped by a forwarder through Iran and until 2009 the company had held a stake in a company that did business in Syria. The State Department claimed at the time that Syria and Iran sponsor terrorism.

In reaction to these charges,  a Transocean statement simply claimed that the managers at the company had always acted appropriately and that they would prevail in any investigations. This is interesting, for “always” is quite an accomplishment.  Once I took a self-inventory and one question was “I always tell the truth.”  Of course, no one always tells the truth, so the question was geared to assessing how truthful one is in taking the test.  Had I answered yes, I would have been lying. The transocean statement, taken by itself, indicates a proclivity to lie, for no human being always acts appropriately. Transocean's statement evinces a certain arrogance, as if to say, "We are above reproach."  Such an attitude is dangerous where there is sufficient power at one's disposal that one's actions can do real damage to the planet.

Transocean, which drilled in some 30 countries and employed more than 18,000 people, owned nearly half of the 50 or so deepwater platforms in the world in 2010. “These people are capable and considered the gold standard of deepwater drilling,” said Peter Vig, managing director at RoundRock Capital Management, an energy hedge fund in Dallas.  I contend that expertise in drilling does not sufficiently counter the kind of charges that were brought against the company. To focus only on expertise in operating machinery or in managing a company as though they were all that matters in business is to hold an extremely narrow perspective on what counts. Furthermore, to let blantantly false asseverations stand (such as of always acting appropriately) is to enable a pattern that can literally destroy a major marine ecosystem.

Source: http://www.nytimes.com/2010/07/08/business/global/08ocean.html?_r=1&hp

See related: http://euandus3.wordpress.com/2010/06/10/bp-dividends-to-stockholders/   http://euandus3.wordpress.com/2010/06/17/tony-hayward-sticking-to-script-safety-is-bps-priority/

Senator Kirsten Gillibrand, D-NY, claimed in July of 2010 that the UK government should investigate what role BP played in Britain’s decision to free Abdel Baset al-Megrahi in August 2009. Al-Megrahi is the only person convicted of carrying out the 1988 bombing of a Pan Am airliner in which 270 people were killed over Lockerbie, Scotland. This is not to say that he acted alone. In February, 2011, Gadhafi's justice minster, Mustafa Abdel-Jalil, who resigned in protest against Gadhafi's massacre of unarmed protesters, told a Swedish newspaper that Gadhafi had ordered the attack. Abdel-Jalil also claimed that Megrahi threatened to "spill the beans" unless his return to Libya were secured. It would appear that BP, a publically-traded stock corporation, played a vital role between Gadhafi and the British government. If so, then aside from Gadhafi's sordid role, this case presents us with an issue of business ethics. Specifically, does a corporation, which is essentially private wealth but with responsibility befitting the power that comes with such wealth, cross a line when its employees engage in foreign policy? The ethical problem inherent in interfering in a juridical sentence is troubling enough; if an unelected corporation becomes so powerful that it can affect international relations between (and foreign policies of) countries, then the issue involves not only business ethics, but also democratic governance. As the line between private and public blurs, the respective bases of legitimacy can become conflated or transposed.

In May 2007, BP signed a $900 million exploration agreement with Libya. Also that month, Britain and Libya signed an agreement that paved the way for al-Megrahi’s release from a Scottish prison. A spokesman for BP has admitted that people at the company lobbied the British government over the prisoner transfer deal with Libya in late 2007, but the company’s spokesman denied that the lobbying played any role in the government’s decision to release al-Megrahi nearly two years later. Senator Charles Schumer, D-N.Y., argued that ”the whole thing has deep circumstantial evidence that points to the fact that there was a trade-off — release the terrorist in exchange for an oil contract.” Schumer and three other US senators — Kirsten Gillibrand, Robert Menendez and Frank Lautenberg — wrote to Secretary of State Hillary Clinton asking that the State Department investigate whether BP had a hand in the release. “Evidence in the Deepwater Horizon disaster seems to suggest that BP would put profit ahead of people — its attention to safety was negligible and it routinely underestimated the amount of oil gushing into the Gulf,” they wrote. “The question we now have to answer is, was this corporation willing to trade justice in the murder of 270 innocent people for oil profits?” The answer appears to be “yes.”

In an interview with the Daily Telegraph (September 4, 2009), Jack Straw admits that when he was considering in 2007 whether the bomber should be included in a prisoner transfer agreement (PTA) with Libya, Britain’s trade interests were a crucial factor. When asked in the interview if trade and BP were factors, Mr Straw admits: “Yes, [it was] a very big part of that. I’m unapologetic about that … Libya was a rogue state… . We wanted to bring it back into the fold. And yes, that included trade because trade is an essential part of it and subsequently there was the BP deal.” In short, BP employees have admitted to the lobbying and Jack Straw has admitted that BP’s contract was a factor—the two sides meet and the knot is tied.

Analysis:

Even BP’s lobbying effort was not decisive in the exchange agreement, the involvement of BP managers even as they and BP stood to gain from an oil exploration contract evinces a conflict of interest that should have been barred by ethics guidelines at the company. Moreover, the company had no standing in the prisoner exchange matter such that it had any business in lobbying. At most, the legal person legal doctrine and the associated “money as free speech” doctrine pertain to a company’s main business. The doctrines ought not give a company all rights of citizens because corporate charters are delimited to particular domains or functions. Furthermore, to expect a company to put ethics ahead of profits is to conflate a firm with a human being.  To be sure, a company is made of people (and capital). However, the association is focused rather pointedly on one thing: maximizing shareholder value through profits. Accordingly, managers know legal requirements, whereas ought and should are more difficult to translate into cost-benefit analyses. In other words, a company is like a shark in that both are single-minded feeding machines. To expect a machine to obviate its next feeding because of an ought is to treat it as something other than what it is.  I suspect that as onlookers we tend to project our own values onto company managements—even companies themselves—instead of coming to terms with what a company is.  It is a feeding machine with one directionality and an expansive appetite, which includes venturing into other domains such as (hypothetically)  lobbying for an exchange of prisoners in exchange for a lucrative oil contract. In other words, companies are designed to transgress even their own charters. They are like Hal in the film 2001—the computer that took on a life of its own. Ideally, a company would convert anything in a given society into a commodity, with price being the universal measure. The US senators are objecting, in effect, to the commodization of the prisoner exchange, and to the “boundary issues” of BP.

The “so what” of this analysis is the following: it is particularly dangerous for a company or industry to be so powerful that it can unduly influence a government both in terms of a judicial sentence and in relation to other countries. Given the expansive nature of a company, society must have a means of keeping corporations within their proper domain of providing goods and services.  In a plutocracy (rule by wealth),  private wealth is the basis of government. This is not the case in republics, which are characterized by representative democracy.

Sources:
http://www.msnbc.msn.com/id/38256677/ns/world_news-africa/
http://www.heraldscotland.com/news/home-news/megrahi-threat-to-reveal-truth-over-lockerbie-1.1087516?utm_source=twitterfeed&utm_medium=twitter

Related (on BP): http://euandus3.wordpress.com/2010/05/17/business-society-bp-clips-societal-norms/
http://euandus3.wordpress.com/2010/06/22/bp-and-mms-complicating-the-different-demons-of-the-democratic-and-republican-parties/
 http://euandus3.wordpress.com/2010/06/17/tony-hayward-sticking-to-script-safety-is-bps-priority/ http://euandus3.wordpress.com/2010/06/10/bp-dividends-to-stockholders/  http://mole45.wordpress.com/2009/09/05/jack-straw-admits-lockerbie-bombers-release-was-linked-to-oil-well-thats-a-shock-if-we-can-go-to-war-for-it/

Mark Bly, BP’s head of safety and operations, released on September 7, 2010 an internal report blaming not only the company, but also its partners for the Deepwater Horizon rig explosion and oil spill. A spokesman at Transocean quickly lashed out, calling it a “self-serving report” that minimized what was critical: BP’s “fatally flawed” well design. For example, “Over a 40-minute period, the Transocean rig crew failed to recognize and act on the influx of hydrocarbons into the well,” the report states. A BP spokesman declined comment on whether BP staff were also supposed to be monitoring the pressure. Companies such as Royal Dutch Shell monitor all their wells in real time from central locations. Also, the “unstable” cement mixture used by contractor Halliburton allowed hydrocarbons to leak into the well, the report said. However, it was BP managers who decided to use a long production string rather than a casing tie back, decreasing the number of barriers to gas flow. Also, BP employees neglected to run a cement bond log (CBL) to test the integrity of the cement. They installed fewer than one third of the recommended number of centralizers, dramatically increasing the risk of cement channeling and gas flow Failing to conduct a complete “bottoms up” circulation of the well to insure the quality of the cement seal. Lastly, they did not run a lockdown sleeve to secure the production string to the well head, eliminating yet another barrier to a blowout. In his report, Bly defended the well’s design, which has been criticized by industry experts. “The investigation team reviewed the decision to install a 97/8 in. x 7 in. long string production casing rather than a 7 in. production liner, which would have been tied back to the wellhead later, and concluded that both options provided a sound basis of design.” To relegate or ignore the contributing factors of design while pointing to Halliburton’s “unstable” cement mixture suggests a subterranean motive. A likely candidate is minimizing damages from the many legal challenges facing BP.  That is, Mark Bly was essentially trying to spread the blame in order to spread the damages so his company could limit its losses from the well explosion. Such a purpose deviates from BP’s commercials wherein BP managers protest that they are doing everything they can to take responsibility for the disaster. Were it only true that saying it made it so. Even as BP’s media blitz was extolling the company’s responsibility, claims were being so scrutinized that the US Government pressured the company to allow an independent party deal with the claims. Sadly, some people are doubtlessly being taken in by the commercials. Just being on the air proffers a certain degree of legitimacy. It is more difficult to discern how a report is being used. A shark is a feeding machine. So too is a company. To expect a company to all of a sudden lose sight of its function is to believe in the tooth fairy.

Source: http://www.msnbc.msn.com/id/39046088/ns/us_news-environment/
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