BP’s governance lesson: don’t trust formulas

By Edward Hadas
June 18, 2010

The Gulf of Mexico disaster has wrecked many reputations. BP, President Barack Obama and the whole offshore drilling business are all struggling under the weight of an uncontrolled flow of oil. A key feature of British corporate governance — a separation of the role of chairman and chief executive — is also under threat.

The two-at-the-top approach has some thoughtful defenders. Paul Myners, a high profile British critic of supine institutional shareholders, told students at Yale on Thursday that his board experience, on both sides of the Atlantic, supports the case for separation. He says a single leader can stifle “effective and challenging discussion”.

Myners does not discuss BP. But the oil company is certainly no poster child for the British way. The crisis has shown the current chairman and chief executive, Carl-Henric Svanberg and Tony Hayward respectively, to be a pair of relative weaklings.

Their predecessors, Peter Sutherland and John Browne, were both considered tough and the duo was widely admired. In retrospect, though, it seems clear they presided over the creation of a dangerously weak safety culture.

To get the split model to work, it is necessary to find chairmen who are strong enough to keep the boss in check, but restrained enough not to meddle unnecessarily. Purists also insist that chairmen should come from outside the company — if not the industry — guaranteeing a high level of ignorance about many important matters.

Myners may exaggerate the strengths of the split model. But he is right that the combined model can go badly wrong. It allows bosses with hyper-egos to push companies anywhere they want, with other board members following along like fearful ducklings.

So if split and combined are both imperfect, what is the right formula for boards of directors? There isn’t one. Shareholders need to recognize that companies and countries are too diverse for such a one-size-fits-all approach.

Besides, there is no way to eliminate the greatest weakness of all governance arrangements, which is not structural but moral. Chairmen, chief executives and board members will always be prey to foolishness and greed.

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