How To Prevent A Company From Becoming Another BP
Boston – If such a disaster can happen to a big company like BP, can it happen to any business?, asks Gary W. Patterson, CEO of FiscalDoctor®, an expert on risk management.
“BP’s response to the oil spill is a textbook case for businesses to follow in what NOT to do in times of a crisis, ” said Patterson, author of the book, “Stick Out Your Balance Sheet and Cough: Best Practices for Long-Term Business Health.”
BP committed severe risk assessment, contingency planning, and crisis response mistakes, which have so far wiped out about 35% of the company’s shareholder value and exposed it to billions of dollars in cleanup costs and lawsuits.
Businesses should learn from this example and not make these same critical mistakes, according to Patterson:
- Under-estimating the chances of major or catastrophic risks. “Did BP get caught up in the ’It can’t happen to us’ mentality? Companies need to regularly assess the most likely areas where hidden risks might occur, ” said Patterson.
- Lacked tested and effective contingency plans. “BP’s backup systems and contingency plans to date have not worked. Companies must test their contingency plans before they are needed to ensure they work, and that they are prepared to move on to the next level of response when necessary, ” said Patterson.
-Failure to immediately accept accountability and responsibility instead of trying to pass the blame. “In Congressional hearings, BP pointed fingers and passed part of the blame on to the rig’s builder, Halliburton, and operator, Transocean, instead of immediately stepping up and accepting responsibility. ’The buck stops here’ is the only response for companies to take in these situations, ” Patterson said.
- Meeting only the required legal minimums instead of doing the right thing. “BP’s offshore rig did not have a $500,000 remote-controlled acoustic shut-off switch installed that may have shut down the damaged well, which has a replacement cost of about $560 million. The switch is not required by U.S. regulators, although two other oil-producing countries, Norway and Brazil, mandate its installation. BP and other oil companies had questioned the cost and effectiveness of the switch to U.S. regulators, ” Patterson said.
- Not demonstrating leadership and vision when action is finally taken. “Why does BP continue to look so disorganized, almost as if its executives are creating a contingency plan on the fly? ” asked Patterson.
- Sacrificing the latest technologies and safety systems to budgetary constraints. “Budget considerations sometimes delay implementation of the newest technologies until, at the last minute, cost becomes no object. Now BP remains consistently one step behind where it needs to be as incredibly complex, expensive remedial procedures have to be tried, and there are no other options. Businesses can pay the cost now, or pay MUCH more later, ” said Patterson.
- Not providing accurate and timely information to those working in the field. “What decisions made in the week before and after the crisis would have been different if the other problems on this list did not exist?, ” asked Patterson.
Patterson recommends that companies adopt the following seven-step emergency plan for dealing with potential risks:
1. Commit to contingency planning
2. Establish a risk tolerance framework
3. Identify potential risks that your company may be up against
4. Highlight worst-case catastrophic and critical risks
5. Identify the top 5 to 10 risks that are not included in your financial statements
6. Develop a coherent action plan that is approved by your executive team
7. Establish a proactive media policy
“Compare the BP fiasco to the classic example of how well Johnson & Johnson handled its Tylenol nightmare years ago. Part of Johnson & Johnson’s success in dealing with the crisis was the result of a well-thought-out contingency plan, superb execution, and taking immediate responsibility. The public’s approval of the company’s action was expressed through its increased market share. This is a far cry from the negative impact on the BP brand, as well as the entire oil industry, ” said Patterson.
“After all, the goal is to control a company’s financial destiny with adequate procedures and timely information. Capitalize on hidden high return opportunities, while limiting exposure to risk. Otherwise, the cost of what a company don’t know can be the company. This blowout may not cost BP employees, executives, suppliers and shareholders their company. It has definitely demolished the value of the stock that individual investors hold, ” said Patterson.
“Companies with far less shareholders’ equity than BP should be concerned. Much smaller companies that are part of the oil industry, or sell to the oil industry, will be decimated. While BP will get bailed out and survive this catastrophe, no one will come to the rescue of a smaller company that doesn’t have a BP global status, ” Patterson added.
FiscalDoctor® works with leaders to control their financial destiny and capitalize on hidden, high-return opportunities, while limiting exposure to risk. He offers services from a financial/operational assessment identifying key issues for resolution to a comprehensive enterprise risk management (ERM) review for creating a roadmap to achieve corporate vision and goals. For more information, please visit www.fiscaldoctor.com
About Gary W. Patterson, FiscalDoctor®
Gary W. Patterson, FiscalDoctor®, has worked with over 200 companies during more than 30 years of top management experience in manufacturing, technology, wireless, service and distribution in companies including high potential, Inc 500, middle market and Fortune 500. Patterson has been interviewed or presented internationally to publications and groups including Entrepreneur, Glass Hammer (UK), Directors & Boards, Risk Management Magazine and Top Producer, is the author of “Stick Out Your Balance Sheet and Cough: Best Practices for Long-Term Business Health” (http://tinyurl.com/stickoutbalance) and speaks on enterprise risk management, risk analysis, strategic budgeting, leadership, and change management.
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