Inside Wall Street: The Other Cleanup BP Must Work On -- Its Management

It's difficult to comprehend why BP (BP) hasn't perceived the obvious: For the giant oil company to regain public and investor confidence, the solution isn't to send its uncharismatic Chief Executive Tony Hayward to placate its major partners and stakeholders. Instead, BP should quickly provide new leadership and replace its ineffective top decision-makers.

That would be just the first step in trying to win back the confidence of its partners and regaining investors' trust while it continues to work on stopping the massive oil leak in the Gulf of Mexico and cleaning up the environmental disaster it's creating.

Already some very responsible observers have made the call to oust BP's top executives. The Financial Times in an editorial on July 6 said there's an urgent "need for changes at the top of BP." And foremost investor Warren Buffett has said Hayward needs to be replaced for the good of both BP and the U.S.

The FT made clear what it believes BP should do: "There is no question that top management will have to be changed following the Gulf of Mexico oil spill." It noted that BP's response has "exposed shortcomings in leadership and presentation."

The Chairman Also Has to Go

Pressing that point, the FT said: "The chairman, Carl Hendrik Svanberg, has failed to show grip. Arguably, he should not have allowed Tony Hayward to become BP's post-spill public face in the first place. He should have intervened after it became clear that Mr. Hayward was floundering. His communications with shareholders has been inadequate."

The British newspaper advised that BP should start "by replacing Mr. Svanberg as soon as possible." The new chairman could then oversee the replacement of Mr. Hayward," while the well is plugged and cleanup continues." Any incoming chief, says the FT, must come up with a plan to rebuild the company and address its cultural shortcomings. "BP's future may depend upon finding someone who convincingly fits this bill."

Buffett, expressing his exasperation in an interview on July 8 with Yahoo News and the Huffington Post, pointed out that "it's not in the interest of BP to actually continue with Tony Hayward as CEO" after the worst oil spill in U.S history, which happened under his watch. Hayward "may be the most wonderful guy in the world," says Buffett, but it's not in "BP's interest and not in our country's interest to have him continue" as CEO.

"You Are Responsible"

Hayward had insisted before a congressional panel in June that he had nothing to do with the construction of BP's Deepwater Horizon oil rig in the Gulf. To Buffett, however, that doesn't relieve Hayward of responsibility for the spill. "When you have something of that impact on society, it's like the captain of a ship -- you are responsible even though some second lieutenant made all the mistakes," says Buffett.

BP's stock has lost about 50% of its value, to $34 a share, since the Apr. 20 oil spill disaster, so it's hard to expect the sadly inarticulate CEO will be able to convince BP's shareholders to stay with BP's stock, much less make them believe that BP is on track in its pursuit of growth over the long haul. .

Some European-based analysts who track BP are voicing the same concern about BP's current management -- and the erosion in the value of its stock.

"A Succession of Major Accidents"

Analyst Lucy Haskins of Barclays Capital in a recent report noted that "there are serious corporate governance questions" given the magnitude of events at BP, which she describes as "structurally disadvantaged."

Haskins wondered whether the nonexecutive (outside) directors and the shareholders "can continue to support an executive management that, even before the Macondo [oil well spill], had presided over a succession of other major accidents in the U.S." The repeat failures, she says, "raise serious questions about how the company manages the integrity of its assets." The analyst notes that the "trade-off between cost and safety is a recurring theme" at BP. Hayward acknowledged BP's failings in this regard, Haskins says, when he took over as CEO in 2007.

These concerns prompted Haskins to downgrade BP's stock to "3-underweight," which is equivalent to a sell recommendation, from "2-eqal weight" (or neutral) on June 17, noting that BP faces a "multi-year disadvantaged industrial position relative to its peers." She points out that the ramifications of the oil spill disaster, including the suspension of the dividend payments and the huge financial liabilities facing the company, not only cut short-term shareholder returns "but also put at risk BP's ability to grow long-term shareholder value."

Years Will Be Needed to Restore Stability

BP's nonexecutive directors should consider "the whole corporate governance system of the company, with potential for major changes in structure and management," advises Haskins. The minimum that the board should consider is appointing a new CEO, she says. Another option is to appoint a new leadership team from outside the company. It could take a number of years to restore stability, figures Haskins, "but it is changes of this magnitude that we think are now on shareholders' minds."

Can BP meet its ultimate liabilities? London-based analyst Alejandro Demichelis of Bank of America Merrill Lynch says the question "cannot be answered with confidence, given the enormous liabilities of the spill." While he believes that that BP's asset base is deep enough to help the company weather the storm, the ramifications of the oil-spill disaster will "materially erode BP's competitive advance versus its peers for the foreseeable future," predicts Demichelis. On June 17, he downgraded his rating on BP to neutral from a buy, with a price target of $37.80. (Unconfirmed rumors circulated in London on Sunday that Apache Corp. is in talks to buy some BP assets, including its holdings in Alaska's Prudhoe Bay.)

In sum, it's difficult to imagine that shareholders will come back to BP's stock in significant numbers without its board imposing significant changes in its upper management as soon as possible.