Friday, June 4, 2010

The Oil Spill and Financial Markets ...

... have little to do with each other, you might think. I beg to differ and ask that you consider the following:

1) On the left is a chart that compares BP's stock price (courtesy Yahoo! Finance) with those of Chevron, Exxon, Shell and the Dow Jones Industrial Average over the last year. If you ignore the expected under performance since the accident, you will see that while BP trailed the Dow and Chevron, it outperformed both Shell and Exxon - till the date of the accident.
A quick review of analyst comments in the last quarter of 2009 reveal a common theme - BP's cost control (we now know how that happened don't we?) was a key reason for their optimism. In fact, even today, the consensus analyst recommendation on BP is a "buy"! Doubtless there were, in this period, several public and private interactions with investors where BP management would have reiterated their commitment to costs being kept within certain metrics. This would then have been communicated down the line, translated into limits so should we be surprised that corners were cut?
2) BP's "independent" Directors predictably include several luminaries from the worlds of industry, consulting and financial services. Apart from having approved the much vilified Mr. Hayward's significant (2+ million quid) bonus last year, surely they should have made themselves comfortable that the Company's safety procedures were up to speed? Will they now face any liability? Shouldn't they?
3) But most pertinently, given Boards act as shareholders' representatives, do any of us believe that had the CEO recommended, when things were going well, that the Company bite the bullet and spend the money needed to bring safety systems to a sustainably acceptable level, which would have entailed higher ongoing expenses and costs as well, that the Board would have quickly acquiesced? We'll never know for sure but my guess is that the CEO's job would have more likely been in jeopardy and as a Board member himself he would have known that.
BP is of course not unique in this respect with public companies globally facing the same issues but the consequences in this case have been tragic with long term implications.
There must therefore be no option but to put the Company out of business and if that entails significant losses for shareholders then maybe that will finally spur improvements to corporate governance practices generally.
The most difficult part of this process is likely to be getting Boards, managements and most importantly investors, to shift their focus away from the short term ...

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