Saturday, June 5, 2010

Poor Corporate Governance, and Regulations vs Torts


"The White House's designated point man in the crisis, Adm. Thad Allen of the Coast Guard, was still publicly reaffirming his trust in the BP chief executive, Tony Hayward, as recently as two weeks ago, more than a month after the rig exploded. This is baffling, and then some, given BP's atrocious record prior to this catastrophe. In the last three years, according to the Center for Public Integrity, BP accounted for "97 percent of all flagrant violations found in the refining industry by government safety inspectors" — including 760 citations for "egregious, willful" violations (compared with only eight at the two oil companies that tied for second place). Hayward's predecessor at BP, ousted in a sex-and-blackmail scandal in 2007, had placed cost-cutting (and ever more obscene profits) over safety, culminating in the BP Texas City refinery explosion that killed 15 and injured 170 in 2005. Last October The Times uncovered documents revealing that BP had still failed to address hundreds of safety hazards at that refinery in the four years after the explosion, prompting the largest fine in the history of the Occupational Safety and Health Administration."

Though this isn't what Rich means, this does shine an interesting light on the nature of regulation vs torts as mechanisms of ensuring corporate governance, and methods of effective regulation.

Regulation clearly failed with BP - it was a poorly governed company (seriously, for one company to account for 97 percent of safety violations is not an indicator of corporate greed, it's an indicator of the danger of outlier-poor corporate governance - another reason for a substantial overhaul of corporate boards).  Torts in the face of violations, however, will certainly reform the company going forward. In this particular case, it's a devastatingly large disaster, but not all torts are.

Amount of regulation doesn't seem to be the problem here - 760 violations!? - but quality of regulations does seem to be. For BP to be allowed to operate with the safety record it had, and also for all of the deepwater drillers to be allowed to operate with no concept of how to stop a major leak (and no advance in safety since the 70s) is pretty appalling. Instead of regulating more and getting mired in bureaucracy (with its necessary web of politics, exceptions and favoritism), perhaps regulating simpler and creating more substantive consequences for misbehavior would be better? This goes for financial reform, as well - a bank regulator is never going to understand what a bank is doing, but it can certainly make it costly for a bank to not understand what it's doing itself (this is a reason I love my "accelerating bailout tax" idea and the contingent convertible debt ideas - they're results oriented, not micromanagement).

It's like the rule in the Navy for people who run ships aground. If you're a captain and your ship runs aground, you never get another ship, regardless of whether it was your fault... it forces every captain to sweat bullets to keep his/her ship from running aground, and it's a much better system than "if waves are between 10 and 15 feet, keep 40 feet from known reefs and if waves are between 16 and 20 feet keep 60 feet away", which would just be "more regulation" and creates incentives for "creative response", which is the term for firms who obey the letter of the law but skirt intent (reminds me of the tax credit program intended to reward paper companies who cut CO2 emissions last year, but ended up incentivizing firms to switch away from carbon-efficient processes to produce more carbon - does anyone have a link to this?). The calls for "more regulation" are highly misguided - "more decentralized and better-enforced regulation" and "very significant incentives for self policing, with monitoring to make sure you're actually doing so (a la the safety violations with which BP was charged but never forced to fix)" are much better approaches.

(By the way... for Rich to link Anthem Blue Cross to Toyota, the irresponsible banks and BP is unconscienably stupid. Anthem Blue Cross's reaction wasn't skirting regulations, it was a direct result of them.)

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