Monday, May 10, 2010

In the Aftermath of the Deepwater Horizon Oil Disaster: Can we install Precaution in the Corporate Operating System?

In the Aftermath of the Deepwater Horizon Oil Disaster: Can we install Precaution in the Corporate Operating System?

Should BP and other corporations follow the “precautionary principle”?

By Sanford Lewis

We don’t yet know the full toll on regional and global ecosystems and economies from the unprecedented BP Deepwater Horizon oil catastrophe in the Gulf Coast. But it is not too soon to draw one lesson — the need for a dramatically different decision-making principle to operate whenever a corporation threatens what is most valued by humanity. Now is a good moment to ask whether there is more we can do to install such a principle in the corporate “operating system.”
For over a decade, there has been a mostly quiet and scholarly discussion about the Precautionary Principle. This is essentially a common sense notion that when an activity may pose the potential for severe or irreversible damage to the things we hold dear, businesses and governments must take all reasonable precautionary measures to avoid the damage. The principle demands action even in the face of uncertainties, such as how likely it might be for such severe damage to occur, or whether the acting entity may be held legally accountable for the resulting damage.

Despite its common sense, the Principle does not drive relevant decisions in most corporations today. In the case of the Gulf Coast disaster, BP reportedly saved $500,000 by omitting a remote acoustical emergency valve. The company had fought regulations in the US, similar to those already effect in Norway and Brazil, which require such a valve. And while other companies voluntarily install the valves even where not legally required, BP and its contractors did not do so. We will probably never know whether the valve would have stopped the current disaster. But the uncommon sense of the Precautionary Principle would dictate that the valve should have been in place.

This raises the question of whether it is possible to install this principle in corporate “operating systems” in a way that would lead companies to make more precautionary decisions.
Here are a few ideas for reader input.  Do these ideas strike you as worth pursuing as part of corporate social responsibility and socially responsible investment initiatives?

Integrate the Precautionary Principle to Enterprise Risk Management?
Enterprise Risk Management (ERM) is a widely used process by which a company reviews and manages its “risk profile.” See Enterprise Risk Management Framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2004).  Financial and reputational risks are typical drivers of decisions under ERM. In contrast, integrating the Precautionary Principle to ERM would mean requiring action when  the environment or other core social values such as human rights are seriously threatened, regardless of projections of whether  the related costs will be internalized to the corporate bottom line.  Some forward-looking companies such as Dell, Samsung and Bristol-Myers Squibb  have  already adopted the Precautionary Principle.  One wonders whether and how those companies are already integrating the Principle to ERM.  Where else are there opportunities to advance Precaution as a decision-making principle within ERM?

The  Precautionary Principle and human rights? The Deepwater Horizon disaster is not just an environmental catastrophe. Because it threatens the right to livelihood of  many coastal people who rely on the ocean for fishing, and the right to a  healthy environment,  it also is a human rights disaster. The Precautionary Principle is relevant to protection of human rights as well as to the environment.  Shouldn’t society require that businesses operationalize the idea that if their actions may trample fundamental human rights, even if there is some uncertainty, they must consider and apply measures  to avoid such harms?   The opportunity to instill such a principle may exist now.  Professor John Ruggie, the Special Representative of the UN Secretary-General on Business and Human Rights, has proposed a framework that would, among other things, encourage corporations to “respect” human rights by exercising “due diligence.”  (The framework is due to be refined and finalized by June 2011.)  At a recent gathering to discuss the framework, lawyers asserted that getting their corporate clients to engage in “due diligence” is difficult because “human rights” are  so amorphous.  How can they know with certainty when such rights are about to be violated?  Could integrating the Precautionary Principle, or something like it, into the UN framework help to ensure that corporations respect human rights even in the face of uncertainty?  

Integrate the precautionary principle to  corporate charters, perhaps beginning with emerging “green” and “sustainable”  corporate models?
The deepest place to install the Precautionary Principle would be in the “DNA” of the corporation, the corporate charter.  At least theoretically, efforts could be undertaken to amend corporate charters to require the application of the Precautionary Principle. But an easier place to begin may be through the new efforts to provide mechanisms to incorporate  and  certify companies as “green” or “sustainable.” For instance, on April 14, 2010, the state of Maryland established a new law allowing companies to incorporate as “Benefit Corporations,” integrating societal benefit goals to their charters and missions, and backing this up with review and certification by respected third-party certifiers (much like Underwriters’ Laboratory reviews safety).  Other states are also considering such laws. The incorporation and certification programs that are emerging are an attempt to overcome widespread greenwash, as a result of companies like BP attempting to self-certify or brand themselves as green.  Could a litmus test be whether the new “green” corporations have adopted and operationalized the Precautionary Principle?

There are many other potential opportunities and strategies for integrating the Precautionary Principle to corporate decision-making, such as shareholder resolutions, legislation, and directors’ fiduciary duties.  In the aftermath of Deepwater Horizon, the time is ripe to begin the work of integrating the common sense of precaution to corporate decision-making systems. Which of these opportunities do you find most promising, and why?

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