Management Matters More Than Ever
According to reports, U.S. investigators examining the causes of last year's Deepwater Horizon disaster haven't exonerated BP (NYS: BP) in their findings, but they have indicated shared responsibility among contractors Halliburton (NYS: HAL) and Transocean (NYS: RIG) . Three cheers for BP, right? Wrong.
Speculative traders may not care as long as BP doesn't bear the full brunt of blame. The oil company's shares have rallied about 5% today, at my last check. But long-term shareholders should take the news as a reminder that management teams who exhibit little or no acknowledgment of potential risks endanger their investors' holdings.
Disasters dance marathons = depressing
The government's report flags flawed management at BP, which it says tried to save time and money in the short term without properly weighing possible risks of those strategies.
A glance at BP's two-year stock chart illustrates its stunted stock returns since the deadly Deepwater Horizon disaster and the subsequent oil gusher in the Gulf of Mexico. But today's bullish headlines about BP's diluted blame seem to gloss over the company's frankly hapless response to the oil it allowed to gush into the Gulf of Mexico.
BP isn't the only company that's become an object lesson in the perils of myopic management. Prior to the financial crisis, Citigroup's (NYS: C) then-CEO Chuck Prince summed up big businesses' dangerous blindness to future risk with his infamous dance marathon comment -- in essence, that his bank was happy to keep lending at the moment, and would worry about a crisis whenever it arrived. (Incidentally, dance marathons were first popular in the Roaring '20s and during the Great Depression.) Financial companies willfully ignored risk in their manic race for profits. When the crisis they created finally struck, the banks took investors, American taxpayers, and U.S. economic safety down with them.
Drilling down for preparedness
Fortunately, some corporate managers and boards have summoned the courage to address potential risk, instead of pretending it can't happen to them. In honor of the recent 9/11 anniversary, Wharton studied "Risk Management in the Era of the Unthinkable." The dreadful 9/11 terrorist attacks proved that paradigm-changing events can happen, and that preparing for them is responsible, not paranoid or pessimistic.
Wharton's Michael Useem, Howard Kunreuther, and Erwann Michel-Kerjan have been surveying leaders of S&P 500 firms. After 50 interviews thus far, they have found that boards of directors have become more directly involved in risk management for big crises, and that many firms are now running disaster drills of all types.
These "disaster drills" aren't just related to physical events like attacks or natural disasters, but also to other major value- or business-destroying crises. For example, one major bank they interviewed makes its senior executives practice what they would do in the event of another financial entity's failure.
Managers don't need to run drills to prepare for every corporate danger. Sometimes, resisting Wall Street's pressure to prize short-term results above all else can work just as well. Costco's (NAS: COST) retiring CEO Jim Sinegal has always realized that scrimping on employee benefits to boost near-term profitability posed a more serious risk to the company's long-term business success. Emulating Wal-Mart's (NYS: WMT) historically maligned labor practices would have simply endangered Costco's goodwill among customers and employees alike. Sinegal knew better.
Be safe, not sorry
An ounce of prevention is worth a ton of cure. The report on BP, Halliburton, and Transocean's roles in the Deepwater Horizon disaster and its aftermath shouldn't be dismissed or celebrated. Its findings should remind shareholders to push hard for high-quality managers who resist the short-term thinking, limit risk, and keep strong, well-considered plans in place in case of crisis.
Risk management is good management. Before you pull the trigger and buy a stock, remember to contemplate the quality of the company's leadership. Safety isn't underrated, in life or in your portfolio.
Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.
At the time this article was published