Showing posts with label occupational safety. Show all posts
Showing posts with label occupational safety. Show all posts

Saturday, April 2, 2011

Transocean Executive Compensation Bonuses for "Best Safety Year in 2010" in spite of the Deep Water Horizon Explosion

0 comments Posted by Find Insurance Online at 9:56 PM

Transocean, the world’s largest off-shore oil rig company, owned the Deep Water Horizon rig that exploded in the Gulf of Mexico in April of 2010. Astonishingly, the company awarded its managers healthy bonuses. Even more astonishing, safety was a major component. Even without intending to, the compensation sets up managers in a conflict of interest—their compensation motivating them to keep up the good work rather than to correct for what went wrong in the management of the Horizon rig. In other words, the bonuses give all the wrong incentives, and there has been no principled leadership to point in the other direction.

The Wall Street Journal reports that the company’s management reckons 2010 as its “best year in safety performance” in spite of the accident. In a filing on executive pay, the management of Transocean reported, "Notwithstanding the tragic loss of life in the Gulf of Mexico, we achieved an exemplary statistical safety record." Based on the total rate of incidents and their severity, "we recorded the best year in safety performance in our company's history." That must be quite a history if almost trashing the Gulf of Mexico is considered a good year.

According to the journal, “Transocean uses two safety criteria to calculate executive bonuses: the rate of incidents per 200,000 hours that employees work, and the potential severity of those incidents. In 2010, the rate of incidents dropped by 4% from 2009.” Even so, the potential severity of the exploded rig in the Gulf must have been off the charts.  This tiny caveat laid aside, the journal reports that “Transocean's executives received two-thirds of their target safety bonus. Safety accounts for 25% of the equation that determines the yearly cash bonuses, along with financial factors including new rig contracts.” Flush with most of their bonuses, the executives could afford to be sympathetic with the families of the eleven people, nine of whom had worked for Transocean, who died in the explosion.

According to the journal, a spokesman for Transocean said, "The statements of fact in the proxy speak for themselves, but they do not and can not adequately convey the extent to which everyone at Transocean is keeping the families of the men who lost their lives at Macondo in their thoughts and prayers as we approach the first anniversary of the incident." Lest the public be taken in by this PR, it is important to observe that normative sentiments like sympathy do not compute in a business calculus, whereas bonuses do. To the managers themselves, we can be sure that the bonuses did not go unnoticed.

On an individual level, which do you suppose is closer to the manager at Transocean: his bonus or the families of the victims? Which could be expected to motivate him more?  The bonuses act, in effect, at odds with the motivation society would naturally expect in the wake of such a major disaster. Rather than giving managers a reminder that perhaps they should not have been so subject to the BP managers who had sought to cut corners, the bonuses say, “keep up the good work!” In other words, it enables the displacement of responsibility that was on display when executives from Transocean, BP, and Halliburton testified before Congress after the explosion. Each of the managers blamed those at the other companies. According to the journal, “Transocean has largely blamed BP, saying that as the operator, BP had final responsibility for all decisions on the rig. BP, in turn, has said its contractors, including Transocean, made critical errors.” Such a childish mentality is unworthy of adults running big companies, especially if the latter are capable of destroying a major portion of the planet. With much power comes great responsibility (rather than childishness).

Lest merely owning the rig absolves Transocean managers from their role and responsibilities, we might want to look at the message that the bonuses send to the managers.  That message confirms the “blame the other guy” mentality and says, in effect, “you need not spend much time and energy on correcting for anything that went wrong on our part at the Horizon because it was a good year.” In other words, “you must have been doing something right.”

The idiosyncratic manager who has a hunch that the corporate culture or the company’s safety procedures are fundamentally flawed would have to ignore the message in his bonus, which, by the way, undoubtedly becomes the default “cultural understanding” in the corporate culture of the company. To act on his hunch, the manager would have to be quite principled.  Not a stranger to principled people,  his action would involve running up against a resistant culture whose groupthink and childish “blame the other guy” proclivity had just been reinforced financially.  In other words, we should not expect much self-criticism and correction from inside Transocean. 

Accordingly, we should resist the temptation that comes with higher gas prices to have our government’s regulators look the other way in keeping after deep water rigs. People who advocate deregulation even in the wake of the rig explosion in the Gulf of Mexico, which came less than two years after the “too big to fail” financial crisis of 2008 (big bonuses ensued there too), might do well to consider the signals that Transocean’s board gave its managers following the company’s best year on safety performance. That is one show the rest of us should skip, or at least leave after the first act. In fact, rather than relying on companies or industries to police themselves, we might want to reckon them as actors keeping to a certain carefully crafted script.

Click to add a comment or question (and view them) on the safety bonuses in executive compensation at Transocean.




 

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Thursday, March 3, 2011

BP's CEO notes delete edit Tony Hayward: A Golden Parachute Despite Failing on Safety

0 comments Posted by Find Insurance Online at 7:52 AM

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/

 

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