Ethics Question: Facing $500,000/day in penalties, would you cut corners?

It is easy to get angry at BP and its contractors for the Deepwater Horizon debacle. And we are. What is the good that comes from looking at the situation more closely? We can learn a great lesson about a common ethics question facing leaders everywhere: Financial consequences of operations failures inevitably produce bad decisions unless ethics policies are woven into the organizational fabric at every level.

In a brilliant article by Ian Urbina, the NY Times reported the many shortcuts taken by BP and its contractors to finish drilling the Deepwater Horizon well to begin collecting oil and gas riches from this generous reservoir. Urbina points out that BP was 43 days late finishing the well. BP's contractor, TransOcean, who drilled the well, charged $500,000 per day for its services. At the time of the explosion, BP already owed over $21 million in extra fees! This is enough money to make most decision makers freeze up and BP was no exception. In an effort to find the lesson, let’s look more closely at critical policy failures that contributed to BP’s disaster:
- Did the BP executive in charge have the experience and training to manage the tension created from financial pressure vs. the imminent dangers to lives and the environment? How many $21 million decisions had they made previously? Or $500,000/day decisions?
- Did the BP engineers on the well site have instructions and communication lines to make good decisions on the spot?
- Did BP's Standards of Business Conduct training address safety and environmental management and disaster avoidance?
- Did BP clearly tell executives, managers and employees how to manage financial dilemmas like Deepwater Horizon, trading off short-term financial losses to avoid long-term financial disasters?

Answers to these questions will reveal insights about how BP mismanaged the well operations, and will inform the rest of us how to manage our own operations with the right ethics and financial objectives. I suspect that as the criminal investigations continue, we will learn answers to these and many related questions.

The penalty fees of $500,000 per day is insignificant compared to the costs BP now faces: a $75 billion decline in market value, loss of life from well operators who died in the explosion, the worst environmental disaster in US history that will cost millions if not billions to clean up, and a black mark on BP’s reputation so large it may never recover. How could BP’s leadership not understand that short-term penalties could never be more severe than these potential costs? Despite the overwhelming financial incentives to not take shortcuts, why were they taken anyway?

I believe three factors swayed BP decision makers in the wrong direction, providing clear lessons for leaders everywhere:
1. Rarity: The last time a deepwater well blowout occurred was over 30 years ago. Faced with such an unlikely event, BP decision makers discounted the risks. Rarity tricks leaders to make wrong conclusions that nothing bad will happen because the odds are in their favor. This same belief that rarity “means never” led to the US real estate bubble, where investors came to believe that housing prices would always go up.
2. Inexperience: BP decision makers lacked experience and/or training to grasp the ramifications of their decisions or the magnitude of the potential disaster. Lines of communication were ineffective. Authority was dispersed between BP, its contractors and the US government, so no one was running the ship. Moreover, BP should have asked if anyone in the chain of command had previously made a $1B environmental disaster decision. Or had they previously made a $500,000 per day decision?
3. Insufficient Assessment Tools: As most innovation executives thoroughly understand, a project that is significantly and repeatedly behind schedule frequently hides fundamental flaws that require major rework by the leadership team. For example, a product that can't be manufactured in volume might have a design flaw that must be reworked by engineering. BP decision makers ignored the warning signs, failing to halt drilling and re-assess the entire project design until it was too late.

The Five Lessons for executives and leaders everywhere become clear in light of this disaster:
1. Balance operational performance incentives and penalties so decisions meet both long-term and short-term objectives.
2. Clarify lines of communication and authority so that all team members know the name of the person accountable for the project and know how to reach them.
3. Manage innovative projects closely and heed warning signs that they might be flawed in fundamental ways.
4. Challenge teams to strive for intellectual honesty in risk assessment. Don't accept easy answers like the 'rarity' argument.
5. Funnel decisions to managers and executives who possess sufficient experience and training to make the right decisions, in spite of fierce and unimaginable pressures. Ask your leaders about their experience to predict how they would manage their teams in the face of fierce adversity.

Let's hope a disaster like the one in the Gulf never occurs again. By understanding BP’s missteps, leaders everywhere can implement changes in their organizations that drive leaders to take control back from compelling financial pressures -- $500,000 a day, as serious as that is, should never force an unethical decision.

Twelve Months in the Garage

Thinking back on my corporate entrepreneurial experience inside HP, each start-up had its share of peaks and valleys -- personally, professionally, and emotionally. In every case, the most exhilarating period was spent 'in the garage', learning, experimenting, creating. During this insane period there are few real pressures, when a small team bonds in marvelous ways to build lasting friendships, and when each new discovery creates such excitement that it generates both a physical and emotional response -- what I call a 'goose bump moment'.

Every leader of a new business venture needs to understand the critical nature of the 'garage period'. The 'garage period' is defined as the initial project phase when a dedicated and highly-motivated team focuses on a loosely-defined opportunity, officially sanctioned or not. In the garage period, three critical roles emerge:
1) Technologists and marketers assess company assets and technology against the target opportunity, and invent solutions.
2) Marketers study end-to-end business requirements and engage potential customers to perfect the company's portfolio.
3) Business leaders assess employee 'fit' and investor expectations.

A couple of important company dynamics take place in the garage. The first dynamic that forms in the garage is the foundation of the company culture. Successful executives actively manage company culture for rewarding risk-taking, failures and successes; for defining attitudes about diversity of people and ideas; and for defining lasting core values. The second dynamic that forms is management practices; however, management practices can change significantly once the company emerges from the garage door. While still in the garage, each member chooses to join the team, enjoying the intensity, excitement and camaraderie. It is one of the best development opportunities an employee experiences in any company, large or small. No team member wants to waste such a once-in-a-lifetime opportunity. However, as the company grows, the need for more traditional and formal management policies is required as new members join the team.

I often get questions during my lectures at Berkeley’s Haas School of Business about the concept of ‘leaving the garage’. Why leave the garage if it’s so rewarding and successful? When companies leave the garage, isn’t that when they lose their way? For most successful companies, there is a small team that never leaves the garage, continuing to innovate great things for the company. However, garage metaphor captures the focus of the senior leadership team which changes from creating the business ‘inside the garage’ to operationalizing the strategy and scaling the business ‘outside the garage’ to deliver the financial results expected from investors. Google represents a great example of leadership transition from inside to outside the garage. Google spent its first years inside the garage developing its brilliant search algorithms. However, as it neared the point of exiting the garage (defined as its IPO), Sergey Brin and Larry Page, Google’s co-founders hired Eric Schmidt, an experienced technology executive, to provide critical leadership outside the garage. For every successful start-up, the garage door always stays open to help the leadership team innovate to adapt quickly to its dynamic business environment.

When I decided to leave HP twelve months ago to start up Borei Corporation, an entertainment technology firm, one question I had was, how would this cycle play out without the support network provided by friends, technologists, mentors, and support staff from HP? In other words, would our time in the garage be as rewarding?

My new venture is indeed generating the thrilling peak-and-valley cycle -- just as within HP. We spent the past twelve months in the garage, building technology for the entertainment industry, inventing technology for toys and games that will change toys forever. Along the way, we had were numerous 'goose bump' moments that turned into brilliant solutions that toy makers are snatching up as quickly as we can invent them.

After twelve months, the Borei team is about to emerge from the garage without knowing exactly what lies ahead. Even without knowing, each team member has a sense of accomplishment that will last a lifetime.