The relationship between corporate
governance, global governance, and
sustainable profits: lessons learned from BP
Nick Lin-Hi and Igor Blumberg
Nick Lin-Hi and
Igor Blumberg are based at
the University of Mannheim,
Mannheim, Germany.
Abstract
Purpose – The recent oil spill disaster in the Gulf of Mexico as well as a multitude of other corporate
scandals repeatedly draw attention to the importance of good corporate governance. This paper seeks
to explain the possible reasons for violations of principles of good corporate governance in corporate
practice.
Design/methodology/approach – The paper opens with a brief illustration of the Deepwater Horizon
case by relating BP’s corporate governance rules to its actual decision making in the context of offshore
drilling in the Gulf of Mexico. The insights gained through this analysis are used to identify a basic
precondition for the realization of good corporate governance in corporate practice.
Findings – This paper finds a link connecting the conflicts in the relationship between short- and
long-term interests of corporations and good corporate governance. Occasionally, deficits in the
institutional environment foster the pursuit of quick wins through violations of corporate governance
rules. To resolve the tension between short- and long-term objectives, good institutions are required that
provide incentives for sustainable behavior without endangering corporations’ short-term
competitiveness. This is the starting point for global governance efforts.
Practical implications – On the basis of the analysis in the paper, new implications for business are
derived with respect to the relationship between corporate and global governance.
Originality/value – The paper derives a theoretical framework that captures the relationship between
corporate governance and global governance. This framework identifies an interplay between corporate
and global governance that allows corporations to bring good corporate governance to life and thereby
to invest in the conditions of their sustainable success.
Keywords Corporate governance, Global governance, Gulf of Mexico, Institutions, Sustainable profits,
Oil industry, Management activities
Paper type Conceptual paper
Introduction
On April 20, 2010 the Deepwater Horizon drilling rig, operated by the British energy
company BP, exploded and subsequently sank two days later. The explosion that occurred
in the Gulf of Mexico killed 11 workers and caused millions of liters of crude oil to gush into
the ocean. The accident is the largest offshore oil spill in US history with devastating
environmental and economic consequences for thousands of people in the region of the Gulf
of Mexico.
Along with the recent financial crisis, numerous corporate scandals, and managerial
misconduct, the disaster in the Gulf of Mexico proved to be yet another severe shock to the
corporate world. The regular reappearance of such scandals calls attention to the apparent
weaknesses in the governance structures of corporations and ultimately, raises the question
of how good corporate governance can be ensured in the everyday business world in a
sustainable fashion.
DOI 10.1108/14720701111176984
VOL. 11 NO. 5 2011, pp. 571-584, Q Emerald Group Publishing Limited, ISSN 1472-0701
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The academic discussion provides a variety of suggestions for the organization of good
corporate governance. A number of highly sophisticated studies have researched issues
such as the structure of a board in terms of the promotion of the effectiveness of its
monitoring and controlling function (e.g. Fama and Jensen, 1983; Zahra and Pearce, 1989),
alternatives with respect to board composition (e.g. Baysinger and Butler, 1985; Kakabadse
and Kakabadse, 2008), or the rules for CEO succession and CEO selection processes
(e.g. Allen and Panian, 1982; Brickley et al., 1997). A considerable body of research is
devoted to the topic of executive compensation as a mechanism of good corporate
governance (e.g. Jensen and Murphy, 1990; Shleifer and Vishny, 1997). In addition, external
audit committees are linked to good governance (e.g. Cohen et al., 2002; Watts and
Zimmerman, 1983). Other good governance mechanisms are proposed within the sphere of
business ethics: codes of ethics, ethics management systems, corporate ethics programs
(e.g. Bonn and Fisher, 2005; Verschoor, 1998; Wieland, 2001), ethical corporate culture, and
ethical leadership (e.g. Diacon and Ennew, 1996; Trevino et al., 1999).
These few examples illustrate that the theoretical discussion about corporate governance
proposes a variety of success factors and best practices for the design of structures and
processes for good management, administration, and monitoring which can greatly
contribute to the sustainable success of corporations. Given the prevalence of corporate
misconduct, however, it becomes clear that many corporations fail to effectively implement
good governance mechanisms – although they have a substantial body of theoretical
insights at their disposal.
The frequent ineffectiveness of corporate governance in practice provides the focal point for
this article. We examine why corporations often fail to act in line with their own corporate
governance rules. We take a closer look at the possible drivers that oppose the realization of
good governance within daily business. We argue that a systematic reason for the violations
of good corporate governance principles stems from the conflicting relationship between
the short-term goals of corporations in terms of quick wins and the realization of sustainable
profits. We argue that in order to deal with this tension, corporations should actively pursue
global governance efforts by shaping their global institutional environment. We elaborate on
this proposition by drawing on the example of BP’s governance rules that appear to have
failed to perform one of their most central tasks: the prevention of disasters such as the one
that occurred in the Gulf of Mexico.
The article is structured as follows: first, we give a brief overview of the disaster in the Gulf of
Mexico. We then outline that, in principle, BP was well equipped with the appropriate
governance structures to prevent this catastrophe. Subsequently, we show that BP
bypassed its own corporate governance rules in order to realize problematic quick wins.
Afterwards, we offer an explanation for the frequent violation of good corporate governance
principles through the pursuit of problematic quick wins, which is closely tied to the
conflicting relationship between short- and long-term needs in business. Based on this, we
identify the systematic relevance of institutions in promoting good corporate governance
and, thus, corporate long-term success. This is the starting point to argue in favor of global
governance, i.e. that corporations actively engage themselves in the establishment of
effective institutions. The article finishes with a brief conclusion[1].
BP and the disaster in the Gulf of Mexico
On April 20, 2010 the offshore oil drilling rig Deepwater Horizon, operated by the British
energy company BP in the Gulf of Mexico exploded and then sank two days later. As a result,
crude oil began gushing into the ocean from the borehole located approximately 1,500
meters below sea level. After many months and a series of failed attempts, it was not until the
beginning of August that BP finally succeeded in shutting down the well. It is estimated that,
in total, about 800 million liters of crude oil poured into the waters of the Gulf of Mexico. At
present, the long-term environmental impacts cannot be fully determined. However, it is
certain that the oil spill caused one of the worst environmental disasters in US history.
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For BP, the oil spill threatens its very existence, as evidenced by the immense financial
burden the company is currently suffering from. In mid-June, under intense political and
public pressure, BP agreed to establish an independent fund of $20bn to satisfy
compensation claims stemming from damaged natural resources as well as state and local
response costs. However, it remains questionable whether this sum will suffice to cover all
subsequent obligations. It appears to be not unlikely that BP will have to pay billions of
dollars in fines and will be confronted with a large number of lawsuits. In light of this financial
burden and the prevailing risks, the company temporarily lost roughly 50 percent of its
value[2].
In addition to the direct financial consequences, the oil spill disaster has caused several
negative side effects that are likely to affect BP’s long-term success. In particular, severe
damage to the company’s image as well as the public’s long-term loss of confidence in the oil
drilling industry are both probable impacts of this event. Furthermore, the BP case is likely to
affect the entire oil industry since new or stricter regulations are to be expected (Phillips,
2010; Williamson, 2010). All in all, the disaster in the Gulf of Mexico will turn out to be
extraordinarily expensive for BP.
In the following section, we address the question of whether the disaster occurred due to
BP’s bad corporate governance, given that inadequate or lacking governance structures
usually serve as explanatory variables for corporate misconduct. For this purpose, we
conceptualize corporate governance as the aggregate of all formal and informal rules and
structures prevailing in a corporation. In the context of BP, the rules explicitly targeted at
preventing accidents like the one in the Gulf of Mexico are of particular importance to our
analysis. Ultimately, such governance rules are supposed to ensure sustainable value
creation.
BP and corporate governance
First of all, it should be noted that BP had committed itself to sustainable conduct: ‘‘We are
committed to the safety and development of our people and the communities and societies
in which we operate. We aim for no accidents, no harm to people and no damage to the
environment’’ (BP, 2008, p. 1) Also, BP’s slogan ‘‘Beyond Petroleum’’ and the logo of a green
and yellow sunflower pattern express the sustainability aspirations of the company.
A glance at various BP documents reveals that the company undertook a series of corporate
governance efforts in order to internally anchor sustainable and responsible behavior.
According to BP’s sustainability review, the company had put a variety of governance
mechanisms in place, promising that the group chief executive ‘‘will not engage in any
activity without regard to health, safety and environmental consequence.’’ (BP, 2009a, p. 5)
BP had also institutionalized a safety, ethics, and environment assurance committee
(SEEAC) which advises the board and monitors non-financial risk through regular
information reviews and reports from the safety and operations function (BP, 2009a, p. 5).
Furthermore, a Group Operations Risk Committee, which monitors key safety and
environmental figures (BP, 2009a, p. 5) and an operating management system (OMS), which
ensures ‘‘a rigorous approach to safe operations’’ (BP, 2009a, p. 21) had been installed. The
OMS includes procedures such as integrity management, incident investigations, crisis
management, as well as other risk management tools (BP, 2009b, p. 14). Also, there was an
84-page Code of Conduct which, in combination with business conduct standards,
constituted the centerpiece of BP’s compliance and ethics program (BP, 2009b, p. 51). BP
had conducted an annual compliance certification process (BP, 2009a, p. 29) and had
employed monitoring and assurance providers, such as a group compliance and ethics
officer and an external auditor (BP, 2009b, p. 20). Finally, BP was in possession of the
whistle-blowing system ‘‘OpenTalk’’ (BP, 2009a, p. 29) and a variety of other governance
mechanisms.
All in all, BP seems to have composed quite a variety of good corporate governance
mechanisms. As such, it comes as no surprise that BP’s accomplishments in the area of
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sustainability have been acknowledged by various third parties. Along with several awards
from the Mineral Management Services (MMS), BP received the ‘‘Chairman’s Stewardship
Award‘‘, the nation’s highest honor for exemplary efforts in environmental stewardship, from
the Interstate Oil & Gas Compact Commission in 2009, the ‘‘Frank Condon Award for
Environmental Excellence’’ from the Environmental Federation of Oklahoma in 2009, and an
award for the use of environmental best management practices from the US-Bureau of Land
Management in 2008 (BP, 2009c, p. 35).
There is every indication that BP undertook several governance efforts to ensure
sustainability and to prevent accidents. In light of these efforts, how could the disaster in
the Gulf of Mexico have happened? We put forward the proposition that the accident did not
happen due to bad or lacking governance rules, but instead was a result of the fact that the
prevailing rules did not sufficiently guide corporate behavior. It is obvious that BP’s
governance rules did not engender their designated governance function of ensuring
corporate sustainability. In our opinion, the reason for this behavior can be traced back to the
company’s willingness to take excessive risks driven by the aim to realize quick wins –
ultimately, at the expense of sustainable profits. In the following section we elaborate on this
proposition.
BP and the issue of quick wins
Several internal documents suggest that BP’s management was informed about the safety
concerns with the Deepwater Horizon and the drilling operation months before the oil spill
(Casselman and Gold, 2010). For example, in June 2009, BP was concerned about the well
casing and the blowout preventer as BP engineers reported that the metal well casing could
collapse under high pressure. In addition, BP was aware that the blowout preventer was
leaking fluid, a problem that could limit its ability to operate properly (Urbina, 2010). Douglas
Brown, a mechanic with 20 years of professional drilling experience, stated in a CNN
interview that he had never worked on a well with such a large amount of gas coming out of
the mud before, and in an internal e-mail from April 14, 2010, the BP engineer Brian Morel
termed the well a ‘‘nightmare’’ (Congress of the United States, 2010, p. 5).
Although significant problems and risks were well known to BP, the company continued to
work on the oil well as if it were business as usual. Several decisions made by BP suggest
that the increased risk was ignored and that appropriate risk-avoidance measures were not
taken. Instead, BP’s management made decisions which were driven by short-term goals to
realize cost and time savings (quick wins). A 14-page document from the US Congressional
Committee on Energy and Commerce highlights this point by leveling the following five
accusations at BP (Congress of the United States, 2010, pp. 1-3):
1. Despite the fact that their own internal study recommended the use of a double-wall
casing for the well (so called ‘‘liner construction’’), BP managers chose a simpler and
cheaper construction with few barriers to gas-flow.
2. Despite the advice of BP’s contractor and services provider, Halliburton, to use
21 ‘‘centralizers’’, which fix the well casing in the centre of the borehole, BP used the
cheapest possible option, installing only six of these centralizers.
3. A test to measure the efficacy of the cementing of the well was cancelled by BP. A crew
from the oilfield services provider Schlumberger that was already on the drilling rig for the
purpose of running the test was sent away.
4. Despite a guideline from the American Petroleum Institute to fully circulate the drilling
mud in the well from the bottom to the surface before starting the cementing process,
BP did not accomplish a single complete process of circulation.
5. BP decided not to install the casing hanger ‘‘lockdown sleeve’’, which locks the wellhead
and the casing at the level of the sea floor.
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The common denominator of all these decisions is that in consequence, BP was able to
reduce costs and realize quick wins. As, for instance, internal e-mails prove, BP was able to
save $7m to $10m and a lot of time by choosing a more risky well casing option (Congress of
the United States, 2010). The focus on quick wins also explains why the rubber seal on the
blowout preventer which was damaged four weeks before the explosion had not been
repaired (Casselman and Gold, 2010) and why despite four negative pressure tests on the
eve of the catastrophe the operation was declared finished by BP (BP, 2010, pp. 38-41). It
seems that BP tried hard to complete the drilling as quickly as possible. This appears
especially plausible given the fact that the drilling operation was running over budget and
behind schedule. Each additional day incurred enormous expenses running into the millions
of dollars. The leasing of the Deepwater Horizon alone cost about $500,000 per day
(Mackowsky et al., 2010, p. 8).
The aggregate of BP’s decisions led to the disaster in the Gulf of Mexico. Although these
decisions enabled BP to capture quick wins through enormous cost and time savings, now
the company must pay the bill. The enormous direct costs of the disaster as well as the
massive damage to BP’s reputation indicate that the decisions carried out by BP were
detrimental to the corporation’s long-term success. This case demonstrates that
corporations should have an enlightened self-interest in avoiding problematic quick wins
at the expense of sustainable profits (see also Lin-Hi, 2009). In the following, we unfold the
implications of the conflicting relationship between problematic quick wins and long-term
success with regard to good corporate governance.
Good corporate governance and the tension between short- and long-term success
Corporate governance is a multi-layered topic (e.g. Clarke, 2005; Daily et al., 2003; Turnbull,
1997) that has become of enormous practical importance (John and Senbet, 1998, p. 372;
Shleifer and Vishny, 1997, p. 737). In very general terms, corporate governance comprises
the entirety of internal rules for the purpose of the management, administration and control of
corporations (e.g. Hart, 1995; Venkatraman et al., 1994; Williamson, 1998). The discussion
about corporate governance includes such issues as the content of rules (e.g. Huse, 2005;
Whistler, 1984) as well as aspects of their internal implementation (e.g. Aguilera and
Cuervo-Cazurra, 2004; Ocasio, 1999). The overall objective of good corporate governance
is to align the behavior of organizational members in a way that promotes the sustainable
and successful operation of corporations.
The example of BP demonstrates that the sustainable success of corporations can be
jeopardized by problematic quick wins. Against this backdrop, corporate governance can
be understood as the institutionalization of rules that aim to prevent the realization of quick
wins that often entail negative long-term consequences. In this context, corporate
governance can be assigned the character of voluntary self-commitment of an individual
corporation. Corporations commit themselves via corporate governance rules to certain
standards in order to protect their future success. From this perspective, the corresponding
opportunity costs in terms of the abdication from problematic quick wins as well as the costs
of the internal implementation of corporate governance can be viewed as investments in the
conditions for sustainable profits of a corporation.
However, reality shows that corporations often pursue problematic quick wins and
consequently endanger their future success. This is also the case when there are
governance structures in place that should actually prevent such decisions from being
made. Apparently, BP’s corporate governance rules did not sufficiently regulate their
actions. This shows that governance mechanisms do not always engender their designated
effects. The academic literature identifies a variety of explanations for such shortcomings,
for example, inappropriate board composition (e.g. Jensen, 1993; Agrawal and Chadha,
2005; Benz and Frey, 2007), a lack of auditor independence (e.g. Cohen et al., 2002;
Cullinan, 2004), poorly designed compensation contracts (e.g. Bebchuk and Fried, 2006;
Hall and Murphy, 2003), and cultural and institutional influence on the effectiveness of
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governance rules within specific situational contexts (e.g. Doidge et al., 2007; Licht, 2001).
In the following, we want to provide an alternative explanation for the lacking relevance of
corporate governance rules by focusing on the binding force of governance mechanisms on
corporate decision-making.
As evidenced in practice, the frequently lacking relevance of corporate governance rules for
corporate decision-making can be linked to the ‘‘urgency of short-term needs’’ (Luhmann,
1971) of everyday entrepreneurial life. Corporations operate under time, cost, and
competitive pressures and are confronted with a variety of short-term challenges (Lin-Hi and
Suchanek, 2011). The competitive market can force corporations to focus on quick-wins and
this may induce myopic behavior of inflating current earnings at the expense of corporations’
long-term success. Examples of such quick wins are cost-savings through the reduction of
safety measures, auditing budget cutbacks, negligence of maintenance activities, or lack of
employee training.
It is characteristic for myopic and short-term motivated corporate decision-making that
possible consequences of such decisions – in BP’s case the oil spill disaster – are not
sufficiently considered (see also Lin-Hi and Blumberg, 2011). This goes hand in hand with
the phenomenon that short-term effects are frequently given a higher weight than
sustainable success. In this sense, the urgency of short-term needs determines the
selection of goals and alternatives and impairs the rationality of certain decisions (Luhmann,
1971; Keinan, 1987). Decisions in favor of short-term benefits, however, can ultimately
undermine the idea of sustainability since this idea stands virtually opposed to harmful quick
wins. This can foster the violation of corporate governance rules and thereby, ultimately
undermine the conditions for sustainable profits.
The effectiveness of corporate governance rules is therefore, in principle, linked to the
conflicting relationship between short-term and long-term success. The relevance of
corporate governance rules for actions in daily business can be impaired because
compliance with rules raises current costs, while the benefits of compliance do not usually
pay off until a later date. Hence, it is possible that long-term effects on sustainable profits are
not sufficiently considered due to short-term market pressures. This tension can force
companies to undermine existing corporate governance rules in order to realize quick wins
and enhance their short-term competitiveness. Ultimately, it does not make sense to invest in
the conditions of sustainable profits and at the same time, risk dropping out of the market
due to loss of competitiveness in the present. Therefore, there are indeed incentives to
refrain from beneficial long-term investments (such as compliance with corporate
governance rules) in order to ensure short-term competitiveness.
The relevance of institutions for good corporate governance
The conflicting relationship between short-term and long-term success cannot always be
satisfactorily resolved by a single corporation, particularly in highly competitive markets.
There are situations in which a single corporation must assume that its competitors will
pursue quick wins, thereby improving their competitive position in the status quo. This
constitutes a problem based on the logic of the Prisoner’s Dilemma which – depending on
the context – can be modeled as the Tragedy of the Commons (Hardin, 1968) or as the
problem of the Logic of Collective Action (Olson, 1965). A corporation that refrains from
problematic quick wins risks competitive disadvantages vis-à-vis corporations that do
realize quick wins. Thus, in such dilemmatic situations, for a single corporation the realization
of quick wins represents a dominant strategy and all corporations are therefore incentivized
to pursue the quick win strategy at the expense of sustainable profits. This ultimately results
in a collective self-damage, whereby all corporations undermine the conditions of their
long-term success.
This problem is of a collective nature and, thus, must be addressed on the collective level
(Pies et al., 2009). Only if all corporations in an industry refrain from quick wins will a single
corporation be capable of abdicating from quick wins as well. As such, it is necessary that all
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corporations are able to rely on the premise that quick wins will not be realized by any
corporation in the respective industry. To fulfill this precondition, certain mechanisms are
required that exert a binding effect on all corporations. Systematically, such a binding effect
can only be provided on the constitutional level by institutions that coordinate the actions of
players (e.g. Brennan and Buchanan, 2000; North, 2006; Ostrom, 2007). Institutions are ‘‘the
rules of the game in a society or, more formally, are the humanly devised constraints that
shape human interaction’’ (North, 2006, p. 3). Institutions such as property rights, labor laws,
safety regulations, or fishing quotas create reciprocal expectations and trust with respect to
the behavior of different actors involved in an interaction and thus, open up new possibilities
for cooperative and mutually beneficial actions[3]. In this case, institutions are able to offer
corporations incentives to invest in the conditions of sustainable profits and thereby to act in
line with good corporate governance rules.
Appropriate institutions on the constitutional level collectively enable corporations to opt not
to pursue problematic quick wins and, instead, invest in the conditions of sustainable profits
in an incentive-compatible way. Through institutions’ mode of impact, quick wins become
less attractive for all corporations. Ideally, institutions create situations in which it is no longer
possible to generate competitive advantages by realizing quick wins. This improves the
possibilities for corporations to act in a sustainable manner. Hence, institutions ultimately
shape the preconditions for the actual effectiveness of corporate governance rules in daily
business by aligning the short and long-term incentives to comply with corporate
governance rules. In this sense, appropriate institutions are to be conceived of as
fundamental preconditions for the realization of good corporate governance and sustainable
profits.
Global governance and long-term success
Traditionally, the design and establishment of institutions was exclusively reserved for
politics and the nation states. However, in a global society and due to the nation states’ loss
of power (e.g. Ohmae, 1995) corporations cannot always expect governments to fully
provide the institutions necessary for good and sustainable business. Hence, corporations
face the challenge of becoming political actors themselves (Scherer and Palazzo, 2007). In
a globalized world, corporations do not merely act as rule takers but also possess a
constitutional interest (Vanberg, 2007). This is the starting point for global governance.
Global governance means that private actors assume constitutional tasks that originally fell
within the remit of state actors. We understand global governance as processes through
which corporations contribute to the creation of a productive institutional order. By engaging
in global governance processes through institution building, corporations promote better
rules of the game than those provided by the governmental actors or put institutions in place
that are missing in a market. Hence, global governance efforts aim to counteract the global
deficits on the constitutional level. Corporations establish (global) rules for value creation by
themselves and submit themselves to self-regulation. This is in their enlightened self-interest
since collective self-restraint allows the realization of mutual betterment (e.g. Pies et al.,
2010). Corporations acknowledge the ‘‘limits of liberty’’ (Buchanan, 1975) and create
productive ‘‘freedom under the law’’ (Hayek, 1976, pp. 85-8) through global governance
processes and the resulting self-restraint.
To foster institutional improvements within the scope of global governance processes,
corporations can collaborate with a variety of different stakeholders, for example
non-governmental organizations (NGOs), business associations, or inter-governmental
organizations such as the UN or the OECD (for an overview, see Abbott and Snidal, 2009).
Such global governance efforts, for instance, include the establishment of institutions which
try to promote secure property rights and a stable rule of law, fight corruption, or strive for the
improvement of environmental, social, labor, and safety standards. Corporations are, in
principle, well equipped with know-how and resources to develop effective global
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governance institutions due to their information and knowledge advantages over
governmental actors (e.g. Detomasi, 2007, p. 325).
In practice, global governance efforts are in initial stages. Nevertheless, there are some
examples of global governance practices which advance self-regulation of corporations.
A prominent example is the Responsible Care initiative launched by the Canadian Chemical
Producer’s Association in 1985 and driven by chemical industry’s leading corporations. The
launch of this initiative is strongly related to a series of chemical accidents during the 1970s
and 1980s – most infamously the Bhopal disaster – which endangered the entire chemical
industry’s licence to operate (e.g. King and Lennox, 2000). By advancing the Responsible
Care project, chemical companies committed themselves to the promotion of and
compliance with higher health, safety, and environmental standards in order to avoid bad
practices, regain their public trust, and ensure the long-term viability of the industry
(Prakash, 2000). Today, more than 50 national chemical manufacturing associations and
their respective member companies submit themselves to the standards and principles of
the Responsible Care, thus contributing to the sustainable development of the chemical
industry.
Another example for global governance is the Business Social Compliance Initiative (BSCI),
which was launched by the Foreign Trade Association in 2002. Today, this corporation-driven
project unites more than 700 companies worldwide and aims at improving working
conditions in the global supply chain by formulating and implementing a harmonized code
of conduct and monitoring system for all member corporations. The BSCI code of conduct
rests on the ILO Conventions, the UN’s Universal Declaration of Human Rights and the UN’s
Conventions on Children’s Rights and the elimination of all forms of discrimination against
women (Business Social Compliance Initiative, 2009). In this sense, the BSCI aims at
ensuring compliance with certain, social, environmental, labor, and safety standards,
especially in markets with insufficient rules of the game. By fostering effective social
compliance throughout the entire value chain, the BSCI helps its member companies to
reduce the risks of bad practices and the respective financial and reputational damages and
allows for the promotion of sustainable profits.
Both of these examples show that global governance has nothing to do with idealism but
with good management. Global governance is about the creation of institutional
preconditions for the long-term success of corporations. Without good rules there is
always the danger that the incentives shaped by the institutional environment trigger
particular actions which induce the realization of problematic quick wins, and thus, – since
all corporations pursue quick wins – lead to collective self-damage. Hence, a lack of
appropriate institutions tends to negatively influence the sustainability of all corporations in a
market in the long run.
The problems of institutional deficits become apparent when looking at the Deepwater
Horizon case. It can be argued that the oil spill disaster in the Gulf of Mexico occurred partly
due to insufficient rules of the game, specifically due to deficits with regard to the regulations
in the field of oil and gas drilling. In the USA, the safety legal and environmental standards for
offshore oil and gas drilling were quite low, especially when comparing them to regulations in
other countries, such as Brazil or Norway. To name two examples: whereas in Norway the
blowout preventer systems must be tested at the intervals of seven days (Holand, 1999,
p. 96), the MMS – the US governmental agency that regulates offshore oil and gas drilling –
requires drilling companies to test the reliability of their blowout preventers within a maximum
of 14-day intervals (Regg, 1998). Furthermore, whereas in Brazil and Norway, remote-control
shut-off switches, which enable the activation of the blowout preventer in case of emergency,
are mandatory, in the USA, the use of acoustic switch-off triggers is voluntary (Gold et al.,
2010). Therefore, at least in retrospect of the oil spill disaster, it can be argued that society
and BP would have been better off if there were higher safety and environmental standards
in place as these are likely to have reduced the risk of the explosion, the subsequent oil leak,
and collateral damages to the environment and BP. It can also be argued that higher
standards are beneficial for the entire oil industry because ultimately, all corporations are
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confronted with the risk of incidents due to too low standards and respective financial and
reputational damages. Thus, it can be argued that corporations should have an enlightened
self-interest in global governance.
Accordingly, global governance efforts can help corporations to counteract the danger of
bad and sometimes enormously expensive practices, and thus to secure the long-term
success for all corporations involved. By subjecting themselves to higher safety or
environmental standards via institution building and the respective collective
self-commitment, corporations are less likely to trigger incidents that may negatively
affect their long-term success. Without such institutions, corporations often tend to strive for
the cheapest solutions and, hence, just meet the minimum standards prescribed by law and,
thereby enhancing the risk of corporate misconduct. Thus, the establishment of institutions
via global governance works as a safety net, reducing the risk of corporate scandals, their
public disclosure, and respective financial and reputational damages. Global governance
efforts reshape the overall incentive structures of an industry in a way that makes the
realization of sustainable profits more attractive for all corporations. Since all corporations in
an industry collectively commit themselves to higher standards, a single corporation has no
competitive disadvantages in cases of compliance with good standards.
On the whole, the establishment of global governance institutions allows corporations to
resolve the conflicting relationship between short-term and long-term success on a
competitively neutral basis. The effective promotion of institutions offers corporations the
opportunity to actively shape their future and to create their own conditions for successful
and sustainable operations in the marketplace. In this sense, global governance supports
good corporate governance because it allows corporations to refrain from realizing
problematic quick wins without losing their short-term competitiveness. Hence, global
governance efforts can be considered as investments in the internal relevance of corporate
governance rules for corporate decision-making and, thus, as investments in the conditions
of sustainable success.
Conclusion
In the introductory message of BP’s code of conduct, the former CEO Tony Hayward asserts:
‘‘The underlying philosophy of the Code is that there should be no gap between what we say
and what we do’’. Obviously, this assertion had little to do with the actual governance and
management of BP. The oil spill disaster in the Gulf of Mexico demonstrates that BP’s
corporate governance rules were not sufficiently effective in terms of their relevance for
every-day action. Rather, BP strove for the realization of quick wins and accepted that its
internal corporate governance rules were bypassed. Ultimately, the company acted at the
expense of sustainability.
According to the argumentation of this article, BP’s decisions were largely fostered by
institutional deficits in the oil and gas industry in the USA. Certain decisions are likely to have
been made differently if there had been institutions in place that would have ensured higher
safety and environmental standards. However, due to the bad rules of the game, there were
no significant incentives for BP to comply with higher standards – notwithstanding the fact
that they were formally defined via corporate governance. Instead, the prevailing institutions
set incentives to realize quick wins, thus impeding investments in BP’s long-term success.
However, not only BP but the entire oil industry had incentives to act in a similar fashion.
Thus, this collective problem exhibits the characteristics of a Prisoner’s Dilemma.
The BP case and the theoretical elaborations demonstrate that good corporate governance
alone is not sufficient to ensure corporate long-term success. It is a necessary, but not
always sufficient, condition to set appropriate incentives in terms of managerial
compensation, to design the ‘‘optimal’’ board of directors in order to monitor and control
managerial decision-making, or to establish corporate ethics programs. Corporate
governance efforts to ensure corporate sustainability reach their limits where markets are
characterized by a deficient institutional environment. In such situations, it is incumbent
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upon corporations to establish good institutions by themselves through global governance
efforts and to collectively self-commit themselves to the respective rules of the game. This
should be in the enlightened self-interest of corporations because in doing so, they can
counteract individual and collective self-damage and be able to enhance the conditions of
their future success.
Corporations are more likely to be effective in ensuring long-term success if managers and
corporate governance bodies, such as the board of directors or committees, take the
relevance and the modus operandi of institutions into account. However, it seems that there
is a great need for the business community to become informed about the beneficial role of
institutions and the idea of global governance. In business, the paradigm which still seems
to be dominant is that ‘‘fewer rules are always better’’. For instance, BP – like virtually the
entire oil industry – was ‘‘successfully’’ lobbying for lower and less legal regulation of
offshore drilling in the USA (see also Freudenburg and Gramling, 2011). Against this
background, it is important to highlight that corporate long-term success does not depend
on more or less rules, rather on good institutions. Corporate governance efforts undertaken
to secure the long-term success of corporations can only engender their effectiveness if the
external incentives stemming from the institutional environment do not oppose this aim.
Thus, corporate governance, global governance, and sustainable profits are closely
inter-related.
Notes
1. It should be noted that, in this article, we operate with a holistic understanding of corporate
governance. Therefore, in analyzing the conditions of good corporate governance, we focus on the
interplay between internal and external incentive structures and do not address the specific tasks of
single governance bodies, such as the boards of directors or committees.
2. The financial strain for BP subsequent to the catastrophe was also reflected in the company’s credit
rating. In mid-June, Fitch slashed BP’s credit rating from AA to BBB, which is just two notches above
junk status. The rating agency estimated that BP may face total pending liabilities of between $35bn
and $67.5bn.
3. In formal terms, institutions manage existing incentive problems by modifying the payoffs of the
Prisoner’s Dilemma in a way that provides corporations with incentives to make mutually beneficial
decisions. For example, such behavior can be facilitated by means of penalties that sanction the
realization of problematic quick wins. Institutions alter the incentive structure of the single
corporation by making certain actions – in this case the realization of quick wins – sufficiently
unattractive.
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About the authors
Nick Lin-Hi is Professor at the Business School of the University of Mannheim, Germany, and
holds the Junior Professorship for Corporate Social Responsibility. He studied Business
Administration at the Catholic University of Eichstätt-Ingolstadt and received his PhD from
HHL – Leipzig Graduate School of Management. At HHL he worked as a Research Assistant
and Assistant Professor at the Research Professorship for Sustainability and Global Ethics.
Nick Lin-Hi is Visiting Lecturer at several universities in Europe. Because of several CSR
consulting projects he is very familiar with ethical challenges in business practice. Nick
Lin-Hi is currently working on the questions of the responsibility of business (corporate social
responsibility) and the market economy’s moral legitimacy. Nick Lin-Hi is the corresponding
author and can be contacted at: lin-hi@uni-mannheim.de
Igor Blumberg, born in 1982 in Russia, studied business administration with intercultural
qualification at the University of Mannheim and Hanken Swedish School of Economics in
Helsinki, Finland. He received his Diploma in October 2009 with the majors in Marketing,
Organization Studies and Business Ethics. Since 2010, he has worked as a Research
Assistant at the Junior Professorship for Corporate Social Responsibility at the University of
Mannheim, Germany.
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