June 6, 2016 By FTI Consulting
In the face of today’s increasingly complex global marketplace, boardrooms are ablaze with discussions about corporate governance and corporate social responsibility. By now, you’ve heard the maxim that the social responsibility of a business is to maximize profits for the sole benefit of its shareholders. This is an echo from the work of economist Milton Friedman who posited that governments alone should shoulder the responsibility of ensuring the common good of local communities.[i][ii] But, it’s not always that simple. During turbulent times, making decisions between maximizing shareholder value and satisfying conflated interests of stakeholders can be like trying to nail jello to a tree.
What many businesses fail to recognize is the literal and figurative cost of making the decision to maximize profits to satisfy fiduciary duties to shareholders. Business leaders have an obligation to examine at what cost to employees, local communities, the environment, and their own moral fiber and to what end they are extracting shareholder value. These very poignant reflections lead to the emergence of a centralized, stakeholder-oriented view. Some might argue that stakeholders are as important as or even more critical to business operations than shareholders. When you violate trust and credibility with stakeholders, it stands to undermine the fundamental ability to operate a business successfully and sustainably.
A recognizable demonstration of this dynamic is the 2010 Deepwater Horizon incident in the Gulf of Mexico. While there has been much in the way of finger pointing over the root cause of the blowout of the Macondo well, criticisms of BP and its partners have centered largely on a culture that put cost-cutting measures ahead of safety, noting the significant decreases to operating costs and substantial increases to oil and gas output leading up to the 2010 incident. Critics have argued that BP’s shareholder-oriented approach is largely to blame for the incident that claimed eleven lives, spilled more than three million barrels of crude oil into the Gulf of Mexico and irreparably damaged the company’s trust and credibility with its stakeholders, including citizens of coastal communities, elected officials, consumers, employees, and regulatory agencies.
Gulf Coast residents lost their jobs, businesses, and homes. Area residents and cleanup workers were exposed to potentially harmful and toxic chemicals emanating from the oil itself and efforts to clean it up. Lawmakers moved swiftly to recover economic, environmental, and health injuries to their respective states and communities with threats of damaging legislation and sweeping regulatory reforms on the oil and gas industry. General consumers scorned the company at every turn and organized boycotts of BP gas stations were commonplace. And, BP employees worldwide were ridiculed by friends and family alike during the oil spill.
In response to the incident, the Obama administration immediately issued a 6-month moratorium on all deepwater offshore drilling in the Gulf of Mexico and the U.S. Environment Protection Agency banned the company from competing for any more oil leases in the Gulf of Mexico. Not only did the incident claim innocent lives and cost the company billions in damages, but it also upended confidence among shareholders, resulting in a dramatic drop of the company’s stock price and deterioration of shareholder wealth. From April 19, 2010, to June 25, 2010, BP’s share price came down by 55%—from $59.48 a share to $27 a share.[iii] While share prices have since rebounded, they have yet to approach pre-spill levels.
While the 2010 Deepwater Horizon incident serves as an unsettling reminder about the dangers of putting profits first, much can also be learned from the incident in the way of restoring trust among stakeholders. BP opted for a more humane act of citizenship than others who faced similar incidents. BP launched its now famous “Make it Right” campaign, acknowledging its role in the events that led up to the incident, accepting responsibility for cleanup and pledging to do whatever was necessary to restore the Gulf to pre-spill levels.
BP took steps to extricate the company from the systemic damages done to stakeholders to ensure a future where it could continue to operate in the Gulf of Mexico and return value to its shareholders. From the outset, London-based BP understood it neither had the right people nor the right relationships to respond appropriately to an incident of this magnitude, lacking assets and employees in many impacted coastal communities (e.g. Mississippi, Alabama, and Florida). They quickly set out to identify those who did, hiring local responders, spokespeople, lobbyists, and community relations personnel that provided a much needed shot in the arm to their credibility and offered valuable, local insights to aid ongoing restoration, and recovery activities
The company then deployed employees to Gulf communities most impacted by the spill. They opened offices across the Gulf Coast region, with the mindset that if employees were rooted as part of the fabric of the local community, they would better understand the challenges, needs, and complexities of the local landscape and be more prepared to provide support. Employees would be shopping at the same groceries stores, attending the same tee-ball games, and sitting in the same carpool lines as Gulf Coast residents impacted by the spill. And, in these moments, a genuine opportunity existed to build real and lasting relationships that could restore trust and credibility to the company. This highly localized focus on stakeholders afforded the company and its employees the opportunity to better understand the plight of those impacted by the spill and the chance to begin to rebuild bonds once broken.
After the Deepwater Horizon well was capped and oil stopped flowing into the Gulf of Mexico, tarballs washed up on local beaches periodically, requiring the company to clean them up. BP utilized large sand sifting machines that separated debris from the sand and then returned the sand to the beach in pristine form. One beachfront property owner complained about the disappearance of seashells from the sand in front of her condo. Seemingly, the company had done such a fine job cleaning the beaches that it had actually made things seem worse to this individual.
The company arrived at a solution whereby seashells were manually placed on the woman’s property. This action had a profound impact on this individual, as she appreciated the genuine gesture and the demonstrated willingness of the company to try to make things right for her during a very turbulent time. Ultimately, this act of sincerity proliferated throughout the community and stood as a genuine symbol of the company’s commitment to making things right in the Gulf Coast.
This story is a testament to the critical nature of understanding the unique needs and complexities of stakeholders and the influence and reach stakeholders have when conveying your corporate message. Even seemingly inconsequential gestures can serve as important building blocks from which to begin the arduous task of reshaping negative perceptions about your business long term.
Years later, following the implementation of BP’s community-oriented strategy, coastal elected officials, and their families could be seen alongside representatives from BP enjoying the sounds of a local music festival. It wasn’t so long ago that these same officials turned hostile in a business meeting about damage claims, offering to introduce a physical altercation to the discussion. This stakeholder evolution is illustrative of the type of real and substantive transformation that can take place when a genuine commitment and focus is made to repair trust and restore credibility with stakeholders. It begins by taking responsibility for your actions, repenting, and making a concerted effort to change the way you do business.
Businesses should take great care not to lose sight of the stakeholder perspective when looking to maximize profits for the company. Often, stakeholder groups have unique and valuable insights that can be critical to returning value to shareholders.
It all starts with identifying and analyzing stakeholders to determine the level of importance of each to your organization. Low influence stakeholders are those that you’ll need to passively keep abreast of developments within your organization, while high influence stakeholders should be managed and regularly engaged. When you are faced with conflicting stakeholder priorities, possessing this level of analysis will help your organization allocate resources in a manner that produces maximum value for your business in the long run.
Next, take great care to sketch out a comprehensive list of the most critical issues facing your organization and the relevant stakeholders related to these issues. This list will help you choose the most appropriate engagement strategies for each stakeholder group.
Finally, develop a proactive plan for outreach to stakeholder groups. It is important to remember that engaging and fostering constructive relationships with stakeholders involves establishing open lines of communication, creating dedicated channels and opportunities for input and feedback, and inviting stakeholders to become key partners in the implementation of your organization’s strategy.
Doing these things effectively can promote sustainability in your business and create opportunities to return value to shareholders over the long term.
[i] Goodpaster, K. (1991). Business Ethics and Stakeholder Analysis. Business Ethics Quarterly.
[ii] Freeman, R. E. (1984) Strategic Management: A Stakeholder Approach, p46, Boston, MA: Pitman.
[iii] Yahoo! Finance. (2016) http://finance.yahoo.com/q?s=bp&ql=1