Monday, November 15, 2010

Can Shareholders Benchmark “Safety Culture”? More Learning from the Gulf Coast Oil Disaster

Sanford Lewis
Investor Environmental Health Network

In its preliminary examination of the causes of the Gulf oil spill disaster, the Presidential Commission appointed to investigate has tentatively concluded that the underlying cause of the incident was not that the companies involved placed cost-cutting over safety, but rather that there was a lack of “safety culture” and, perhaps, safety competence.

From what we know about the incident so far, it is apparent that multiple things had to go wrong in order for the disaster to have been triggered. Decisions were made, sometimes in a hurry and overriding certain safety concerns. For instance:

1. The morning of the explosion, there was a dispute between the rig operator and BP over BP’s plan to replace heavy mud, used to keep the well's pressure down, with lighter seawater to help speed a process that was costing an estimated $750,000 a day and was already running five weeks late. BP overrode the rig operator’s objections.

2. The lack of safety culture was indicated by an employee survey conducted by Transocean (the rig operator) about a month before the disaster. The company found that rig employees had a fear of reprisal if they reported unsafe conditions. For instance, “only 46.3 percent of participants felt that, if their actions led to a potentially risky situation (e.g., forgetting to do something, damaging equipment, dropping an object from height), they could report it without any fear of reprisal," according to a CNN account of the report.

The focus on safety culture by the Presidential Commission raises a challenging, difficult question for shareholders: Can companies be benchmarked to determine which ones have an effective “safety culture” and which are at greatest risk of causing the next catastrophe?

Learning from the BP Experience
Some past shareholder initiatives have proven ineffectual at providing informed answers to this question. As I analyzed in greater depth in a recent blog post, the BP experience is notable in demonstrating how sustainability reporting failed to provide transparency on fundamental issues of risk-taking and risk management. In 2005, for example, BP Global Reporting Initiative Sustainability Report laid out some excellent company goals and values:

Responsible. We are committed to the safety and development of our people and the communities and societies in which we operate. We aim for no accidents, no harm to people and no damage to the environment.

These goals were stated in the same reporting year in which the company experienced a disastrous refinery explosion in Texas City. The company asserted in subsequent sustainability reports that it had learned from and was correcting the hazards identified as a result of Texas City. However, a 2009 reinspection by the Occupational Safety and Health Administration (OSHA) found 439 “willful” violations, many considered gravely serious, because the company had not addressed issues identified in the aftermath of the 2005 disaster. In particular, the agency noted the failure of the company to identify which instrumentation was critical to safety in its complex Texas City refinery. Despite these continuing problems, the 2009 sustainability report, issued after the OSHA allegations, continued to assert the notion of steady progress and commitment to safety at BP. Then, in 2010, OSHA fined the company $50 million for these continued violations -- by far the highest penalty ever assessed by the agency.

One cannot find sufficient information in BP sustainability reports to recognize that its safety culture has been seriously lacking, or to allow comparison with the culture of other companies. The GRI’s Guidance for preparing sustainability reports places a great deal of emphasis on the need for companies to “Describe the Management Approach.” This offers managers an opportunity to paint a flattering corporate self-portrait, setting forth their rendition of corporate goals, policies, and practices. It may encourage the development of two separate, disconnected cultures, a reporting culture that states some admirable goals, and a more true to life operational culture that may perpetuate the worst tendencies and lack of focus on safety.

Potential investor inquiries to probe a company’s safety culture.
In 2009, the SEC authorized investors to file resolutions seeking evaluations of risk to companies associated with significant policy issues. (Staff Legal Bulletin 14E.) Here are a few initial suggestions for how shareholders might use the “risk evaluation” opening provided by the SEC to probe “safety culture”at companies where safety concerns may be prominent:

1. Disclosure of ongoing regulatory enforcement allegations.
Existing SEC requirements for disclosure in the 10-K regarding regulatory enforcement proceedings provide too little information, too late. Even as weak as it is, the existing requirement to disclose anticipated environmental penalties in excess of $100,000 (Reg S-K, Item 103), has been poorly enforced by the agency. The recently enacted Financial Reform Act includes more stringent disclosures of regulatory allegations such as serious enforcement actions, orders and penalties -- but only for coal mining companies. This legislation could provide a model for investors to request safety risk reports, including disclosure and breakdowns of:
• The number of major violations once they are alleged by regulators in the past year;
• Orders to close facilities or withdraw products based on health and safety concerns;
• Suspensions of existing or new permitting for any period of time based on health and safety concerns; and
• Cumulative amounts of penalties paid.
The SEC staff should allow such resolutions since such reporting would help to flag and benchmark very significant risks related to big safety concerns at some companies; as such, it would be inappropriate for the staff to categorize such requests as excludable, even though legal compliance on routine matters can itself be seen by the SEC as excludable “ordinary business.”

2. Responses to emerging scientific literature findings regarding catastrophic risk.
Disclosure of catastrophic risks identified in scientific literature are inconsistent. Studies warned of the risks of deepwater drilling, such as technical problems and blowouts, warranting an industry task force. Shareholder requests for risk evaluation reports could include requests for a report that summarizes:

• peer-reviewed scientific studies indicative of potentially catastrophic risks of products or activities ( and to treat such studies in a precautionary manner, so that they are disclosed even where there may be some remaining scientific debate or uncertainty);

• profiles of the severity and scale of the potential problem; and

• measures being taken by the company to minimize adverse impacts or maximize business opportunities associated with the catastrophic risk issue.

3. Anonymous surveys or independent audits probing employee safety culture
In a recent conversation with Shelley Alpern of Trillium Asset Management, she asked whether shareholders could request reports from companies that lead to direct monitoring of the safety culture by surveying a company’s employees. As instructively conducted at Transocean, employee safety culture surveys ask employees to report on various attitudes and contingencies of safety culture. Any shareholder request for such surveys should emphasize the need for such employee surveys to be conducted with genuine assurance of anonymity, and also to evaluate whether employees believe they can report unsafe conditions, and even cause operations to stop, without fear of reprisal.

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