The ethics of owning BP stock
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.