Lessons from BP's collapse

When BP's share price fell, shareholders' pockets felt lighter by up to £58 billion. Much, probably most, of the drop in share price reflected the collapse of the value of BP's reputation, once a huge asset even if it did not appear in BP's balance sheet.

Good corporate reputations are built on the assumption that management is sound so that, for example, it joins up knowledge, culture and behaviour across the entire organisation and learns systematically from the many small mistakes that do not cause a disaster. 

 

Anything that undermines this assumption is an important risk to reputation.  In a view that summarised the new perception of BP, Professor David Green suggested "the painful truth is that BP may not have been very well run."  Perceptions like this were important reasons for BP's reputational collapse.  

The first release from the final report of the US President's National Commission Report into the Deepwater Horizon blowout seems to confirm (at page 90) that the perception was in fact justified even if the management deficiencies were not known to BP's board at the time.

“But most of the mistakes and oversights at Macondo can be traced back to a single overarching failure—a failure of management. Better management by BP, Halliburton, and Transocean would almost certainly have prevented the blowout by improving the ability of individuals involved to identify the risks they faced, and to properly evaluate, communicate, and address them.”

Few companies systematically analyse risks to their reputation. As a result, there is a large, widespread lacuna in management - and board - knowledge of risks to reputation in this important area, among others.

This is the result of history. As originally conceived, classic risk management and Enterprise Risk Management (“ERM”) were not designed to find reputational risks. Even state-of-the-art risk management and ERM miss large and important areas of risks to reputation. The lacuna is made worse because traditional approaches do pick up some risks to reputation, lulling practitioners into a false sense of security.

The consequence is that many – from my own sample of observations I believe most – well-regarded companies have large and important gaps in their risk analysis as regards reputational risks.  This leaves potentially catastrophic risks and risk combinations unrecognised.  As a result, the opportunity to manage this huge area of risk to shareholder value is lost.

Boards - particularly Chairmen and Chief Executives - need to recognise this lacuna and set strategy to deal with it.

Anthony Fitzsimmons 
Reputability
London
www.reputability.co.uk