The art and science of communications: From strategic to personal

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BP Oil Spill, Toyota Recall Put Spotlight on Reputational Risk – Via Suite101

The vanishing act in 2001 of energy giant Enron and Big Five auditor Arthur Andersen in the wake of a fraudulent accounting scandal shows how real the threat is. For corporate risk managers, the question is whether reputational risk can be managed directly or whether it results from other types of failure.

The situation faced by BP as the oil spill in the Gulf of Mexico ran on for weeks with increasing amounts of pollution washing ashore was a collapse of its reputation due to operational failures in the original oil rig accident and the subsequent cleanup effort.

The stock price plunged as the oil producer, which can trace its origins back to 1908, faced a battery of legal and liability claims that threatened to empty even its very deep pockets.

Companies sometimes have to adopt massive and costly measures to stem the threat of reputational risk. In late 2009 and early 2010, Toyota had to recall some 9 million vehicles after a number of fatal accidents were attributed to unintended acceleration. The auto giant also had to suspend sales of several models while fixing the problems.

Reputation - you've got to work at it.

Banks, the quintessential managers of risk, have wrestled with the problem of how to measure reputational risk and how to safeguard against it. Many banks consider it an effect of failures in the three major risk categories – credit risk, market risk, and operational risk, says staff writer David Benyon in a specialist publication on bank risk management.

But operational risk itself was considered impossible to measure just a decade ago, Benyon adds, so that some risk managers anticipate an evolution in assessing and managing reputational risk.

Goldman Sachs acknowledged the issue in a filing earlier this year with the Securities and Exchange Commission after a spate of negative publicity about its actions in selling the mortgage-backed securities blamed for causing the 2008-09 financial crisis.

The “adverse publicity … can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations,” Goldman said in the filing.

The Spanish bank Santander spent an estimated 500 million euros in early 2009 to make good the losses by investors in one of its funds that placed money with Bernie Madoff, an investment manager who pleaded guilty to running a Ponzi scheme that led to investor losses of some $50 billion altogether.

Sometimes these efforts fall short and lead to the company’s demise, as was the case with Enron and Andersen. In June 2010, the security firm Blackwater put itself up for sale after various efforts to repair damage to its reputation from actions in Iraq were unsuccessful.

A roundtable discussion at the Association of Insurance and Risk Managers in April found that risk managers overwhelmingly agree that reputational risk is important to their organizations, but only 6% felt they were leaders in this field.

While Toyota seemed on the road to recovery after its decisive action, the eventual fates of BP and Goldman Sachs remained to be determined in mid-2010. What was certain is that corporate risk managers will be paying more attention to reputational risk.

Sources:

“Why chatter matters,” by David Benyon,OpRisk & Compliance, January 2010.

“A good name? Priceless,” Strategic Risk, April 1, 2010

Darrell Delamaide – Via Suite101


According to the Times, BP said that its costs for the oil spill in the Gulf of Mexico spill have reached $1.25 billion (£870 million) as it set out plans to place a second cap on the leak.  Further, as of 1 June, BP’s shares had fallen by 13%, as reported by the BBC.  It has lost nearly a third of its value since the Deepwater Horizon blowout on 20 April.

There is no doubt that the sheer severity of the Gulf catastrophe has had a monumental effect on the reputation of BP, justly or not, and the financial cost will be staggering.  But with perception being reality, how much has the ‘perception’ of BP’s response contributed to the financial accounts?

BP’s engineers, along with countless others from several agencies, have worked tirelessly to stem the oil flow, yet still they are seen as the culprits, while the US government and its loose legislative approach to oil drilling in the area, Haliburton, responsible for the mechanical upkeep of systems that failed, and Transocean, the drilling company hired by BP, largely avoid the ire of the public.  BP’s response has been massive, practically and financially, yet their efforts are all painted against the blame which is thrown at them.

The fact that public anger is concentrated on BP, and not others, may have something to do with the media response they put forward.  It terms of crisis communications they have acted quickly and succinctly, as can be seen from their online work.  But their words, coming from their spokesperson of choice, CEO Tony Hayward, have acted as a magnet for anger and distrust, not sympathy and understanding.  And the question, albeit unquantifiable, must be raised: how much has the performance of Hayward in the media contributed to the financial hammer blow? 1%, 5%, 10% (even at 1% we’re taking  lots of zeros)

It is ironic that Tony Hayward, a very capable CEO, has always been known for his aggressive approach to maintaining and raising safety standards.  His experience in the field of oil exploration and the industry as a whole is (or should be) beyond reproach.  But all that counts for little when dealing with a vengeful media, encouraged by a public baying for blood, feeding a crisis maelstrom.

Hayward - Good CEO, bad spokesperson?

The cleverest, most capable, experienced, sensible, respected, even honest, CEO is never necessarilycapable of dealing with a media storm.  Such circumstances tend to be way outside their comfort zone, in an environment normally way out of their control.  The angel of the boardroom may be adept at managing people, resources, time, finances and the market, but without considerable forethought, experience, and training in dealing with the media these management attributes will count for little, and may cost a lot.

Hayward has been castigated for his performance in the media – from wanting his life back, when 11 were killed in the initial tragedy, to claiming that the ocean is very big, when to locals that’s not quite the point.  There are many other examples, in which Hayward has added (excuse the pun) fuel to the fire.

CB3, having looked into Hayward’s background and career, has no doubt over the honourable intentions of BP’s Chief, but if CEOs, senior managers, subject matter experts and spokespeople are ever going to face the media under such an onslaught, preparation, practice, mentoring and extensive training are utterly vital.  Working your message (assuming you know what it is), reconnecting during interview, handing tangential issues, subtle bridging, persuasive techniques, linguistic dexterity – these are all cerebral actions which must be almost second-nature during the sparring of a harsh media interview, manifesting itself in a rapid mental obstacle course.  Speaking confidently at the annual AGM, providing lively and humourous dinner party chat amongst other titans of industry, eloquently arguing your case in the  boardroom – all good and well, but such attributes, whilst handy, will not enable the dynamics, strategy and tactics required of a crisis media interview (or any media interview, come to that). It is a different ball game, in a different ball park, in a different country.

In defending one’s reputation during a crisis, being seen to do the right thing is crucial but as Hayward has shown, words spoken in the media during a crisis can be very, very expensive, immediately and for a long time afterwards.