The ethics of owning BP stock

By Felix Salmon
July 6, 2010
my ethics question in a Q&A sent to his investors:

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Value investor Whitney Tilson is long BP, and answered my ethics question in a Q&A sent to his investors:

Q: Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning it, in light of the company’s bad behavior?

A: As noted earlier, BP appears to have an atrocious safety record. In owning the stock, we are not endorsing its behavior, either before or after the Deepwater Horizon accident. But as value investors, we sometimes have to hold our noses when we invest because the cheapest stocks are often the ones of companies that have behaved badly or are otherwise tainted. Example include McDonald’s, which many believe bears responsibility for the obesity epidemic in this country (see Fast Food Nation and Super Size Me), and Goldman Sachs, which many blame for the global financial crisis (see The Great American Bubble Machine).

That said, we would have a problem owning stock in a company if we believed that its core business harmed people – most subprime lenders at the peak of the housing bubble, certain multi-level marketing firms and tobacco companies come to mind. BP certainly doesn’t fall into this category.

As for BP’s safety record, we don’t defend it, but we don’t think BP is deliberately blowing up its own rigs and refineries and killing its employees. If an email emerged that the CEO or board of BP were warned that the Deepwater Horizon rig was likely to explode and failed to act, we would certainly rethink the morality of holding the stock.

I don’t find this answer compelling at all. First is the language in which Tilson talks about his comparables, McDonald’s and Goldman Sachs. He writes about what “many believe” and what “many blame”, and cites the most shrill and stringent critics in both cases. Being a contrarian value investor is all about making your own mind up, and what’s germane here is what (and whether) the investor thinks about the ethics of the investment, rather than what someone like Morgan Spurlock or Matt Taibbi thinks.

Tilson then says there are companies he’d have a problem investing in, if they make harmful products. That seems to imply that it’s worth taking a serious look at the ethics of owning stock in BP. But his conclusion is trite, setting up a straw man of BP deliberately killing its employees, and saying that he’d only have a serious ethical problem with BP if it knew the explosion was likely.

Note the definite article here: Tilson is saying that he’d only have qualms if BP knew this particular explosion was likely. But the ethical case against BP is that it acted with reckless indifference towards safety standards in general, that it cut corners knowing that doing so increased the likelihood of disaster, and that it should have known that an explosion was likely, at some point, and that the chances of this explosion happening at a BP rig were significantly higher than the equivalent probability at other big oil companies.

This has important implications for the stock, of course. BP has thousands of oil rigs; the chances of one of them exploding are not much smaller today than they were a few months ago. The clean-up and other costs associated with the Deepwater Horizon are one thing, but how much will BP be forced to spend on upgrading the safety systems at all of its other rigs, now? We’ve learned our lesson, and surely all want to ensure that this kind of thing doesn’t happen again. But we’ve barely started to think about what that kind of root-and-branch revamp of BP’s physical and managerial safety systems might cost, both in terms of cash and in terms of opportunity cost. I’d be interested in what Paul O’Neill thinks — before he was Treasury secretary, he did amazing things for Alcoa’s safety record. If Tony Hayward’s successor wants to do something similar, it won’t be easy, and it won’t be cheap.


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“the chances of this explosion happening at a BP rig were significantly higher than the equivalent probability at other big oil companies”

We don’t actually have any evidence of this, though, do we?

We know that BP’s US refining business, which is a low-margin, low-skilled, cost-centre industry, has a poor safety record. We can condemn BP legitimately for putting workers’ lives at risk in this business and not making the major changes you’d hope for after Texas City. But this has nothing to do with Deepwater.

We also know that BP’s exploration business is managed globally (ie not by the same people who manage US refining), is run as a profit centre and is on the cutting edge of technology – and we know that BP’s US exploration business does not have a notably poorer safety record than its competitors.

There’s been no credible evidence presented that any of the other majors would have managed either the rig or the cleanup any better. Indeed, we know that their Gulf of Mexico disaster plans are very similar to, and contain many of the same errors, that BP’s did.

Suggesting that Deepwater Horizon primarily reflects BP’s evilness, rather than primarily reflecting wider systemic risks associated with deep drilling in extreme conditions combined with poor industry-wide regulation, is missing the point completely and paving the way for another disaster down the line…

Posted by johnband | Report as abusive

I think a much easier answer for Tilson would have been to say that as a part-owner of the company, he tries (or will try) to effect positive change in BP, by impressing on BP to improve its safety protocols or change management or whatever.

I don’t see what’s gained by selling the stock as a demonstration of his repugnance. The sin was committed when he owned it. So as an owner, he was already responsible. Likewise, if he bought it now, the sin was committed before he owned it. And he can try to fix things with his ownership powers or not.

Posted by PopEconomics | Report as abusive

I have no opinion — real question.

Has BP been worse than the other majors? Globally?

If so then does it’s sleazy cost-cutting been more profitable than the others? One would think that it’s sins would manifest it’s higher profits, higher share price on PE, etc etc.

If not more profitable then has sleaze not even produced any corporate gain? Irony indeed if so.

Posted by dsucher | Report as abusive

dsucher: ‘has BP been worse than the other majors?” YES; in the US, responsible for 97% of major infractions of all the Big Oils. By cutting corners, it has avoided OpEx and CapEx its competitors bear. But, for what gain, now?

Posted by crocodilechuck | Report as abusive

All of the other companies said under oath that they would never have made the mistakes BP did (of course)

Ethical? Does anyone even know what that word means? Although it has all been said before it bears repeating:

BP was given the permits to drill this well given their worse case scenario ability to clean up.

Being BP falsely promised the Minerals Management Service that its oil spill response plan “could recover 197 percent of the daily discharge from an uncontrolled blowout of 250,000 barrels per day,” they obviously cannot handle a spill of their promised capability.

BP was involved in the Exxon Valdez cleanup and although the promise at the time was, “We will make you whole.” (sound familiar) There is still oil in the sands and can be seen on the surface, still cases before the court and the fishing industry was devastated.

I think he also missed the point in the jobs lost, the mental anguish and possible repercussions from that as well as the wildlife and sea life which are being affected and will continue to be for years… decades?

Then of course there is the lack of procedure and safety equipment that was not used on this well because, it was not required in the USA. (see Bush and Cheney for that joint effort)

Although they designed a special meter for measuring oil put, they said they couldn’t measure the spill and estimated 1k barrels in May, then 5k and now it is 100k. All to mask their liability as they scrambled to hide the truth.

The past track record for spills is in the majority, but I cannot quote because I can’t find a URL. BUT they have been in business under a number of names and should be expert enough to do a job well and safely, not just quickly and with the least expense.

The extra cost for safety equipment was 500k and of course precious preparation time to make it safer. (BP admitted that in the hearings, that they didn’t use it to say time and $) I would call not using safety equipment available, which they use elsewhere in the world, negligence.

Being they were aware they were in a highly pressurized area and they knew in advance there were problems the selling of stocks may also not be a coincidence either.

Having said all that, I doubt the lack of ethics in BP is that much higher on the evil greedy sleazy scale then the others, but seeing the dead wildlife and the dying dolphins and the poor cleanup response.

johnband is probably right. The evilness is likely systemic. The human and environmental costs be damned for the drill baby drill junkies.

Posted by hsvkitty | Report as abusive

Mr Salmon and several of the people commenting so far have missed an important point here. As yet there has been no investigation and no trial. There are also suspects other than BP in this accident, e.g. Transocean.

Despite this people have already simply decided that BP acted with “reckless indifference”, that the company’s behaviour is “bad”, and that “win was commited when he owned it”.

Could it be that BP is being singled out from the group of suspects because it is perceived as foreign? Don’t the people making the comments above understand the legal process?

Posted by MrDodge | Report as abusive

Investing in BP at this moment is worse than a crime: it is a _mistake_. The Deepwater spill is nowhere close to being contained (maybe in August, but I will offer a gentleman’s wager against it) and the total cost of cleanup and damages will run well into the tens of billions. This isn’t the backwaters of Alaska, where only a few dopey environmentalists like me are going to get upset about the plight of sea birds: millions of people are going to be hurt directly by this spill for years and years to come.

Add to this the fact that federal stimulus money is running out and belt-tightening seems to be the order of the day everywhere, so the likeliest cause is for a bear market to continue and energy demand to soften.

BP is far liklier to go to zero than it is to regain it’s April 2010 levels in the forseeable future. The best outcome for the company at this point is that it becomes Gulf Cleanup, Incorporated.

Posted by ckbryant | Report as abusive

Every investment is a vote. BP is a company that I cannot vote for.

People often forget just because the oil will one day not be visible, that the problem will be gone. Skewed bacterioplankton populations have never been discussed by the media, and its long term implications are massive.

Posted by chaetodon | Report as abusive

YES; in the US, responsible for 97% of major infractions of all the Big Oils

No – that’s solely the refinery business, and that’s if you take “egregious” (ie “exacerbated by the fact you’ve already been slated for a major incident”) violations, due to Texas City as above. It genuinely isn’t worse than other companies upstream.

BP is far liklier to go to zero than it is to regain it’s April 2010 levels in the forseeable future.

BP has no chance of going to zero, because BP America Inc can declare bankruptcy and then we’ll be left with a company that can’t do business in the US, but which still has significant assets in the UK, Asia and Africa.

Posted by johnband | Report as abusive

If moral people refuse to own the stock, exactly what kind of company do we expect BP to be?

BP will only change in response to shareholder pressure, so we better hope that shareholders are moral, ESPECIALLY for the businesses with the trickiest ethical quandaries.

Posted by right | Report as abusive

Q: How much BP stock do you have to buy before they start listening to you?

A: All of it.

The question remains, what sort of person would be likely to do such a thing. Judging from empirical observation – not the most scrupulous sort.

Posted by HBC | Report as abusive

If only immoral shareholders are left holding BP stock, is the world better or worse off?

As a recent purchaser of a chunk of BP stock I fully accept BP’s responsibility to clean up the Deepwater fiasco, whatever the cost. The infinitesimal say I have as a minority shareholder I will use to encourage this end, as well as ongoing change to BP’s practices.

Posted by inboulder | Report as abusive

Would it be unethical for Exxon-Mobil to take over BP and put all of its substantial corporate resources behind the cleanup? Would it be ethical for indignant investors to destroy BP financially, making it impossible for them to meet their cleanup obligations?

It would be unethical for an investor to condone or encourage cost-cutting practices that compromise safety, but I see nothing evil in buying shares to sustain BP’s viability as an ongoing concern. Dragging BP down benefits nobody at this point (except for whatever vultures take over its assets in the fire sale).

Posted by TFF | Report as abusive