The Need for ERM is Crystal Clear

Unlike the waters of the Gulf of Mexico, the need for companies to have robust enterprise risk management ("ERM") programs became crystal clear during an interview of former BP CEO Tony Hayward aired this week by the BBC. Here's some of the highlights from the interview.

Former BP PLC chief Tony Hayward has acknowledged that the company was unprepared for the disastrous Gulf of Mexico oil spill and the media frenzy it spawned, and said the firm came close to financial disaster as its credit sources evaporated.

In an interview with the BBC to be broadcast Tuesday, Hayward said company's contingency plans were inadequate and "we were making it up day to day."

Hayward said BP had found itself unable to borrow from international investors during the spill crisis, threatening its finances. He said that before a meeting with President Barack Obama at the White House in June, "the capital markets were effectively closed to BP." "We were not able to borrow in the capital markets, either short or medium term debt at all, " he said. "It was a classic financial crisis issue."

Hayward's successor, Bob Dudley, told the program that "these were frightening days" for BP. "With a company the size of BP, its reputation, what it does — you almost can't quite believe how close you are" to financial disaster, he said.

This interview demonstrates the catastrophic impacts of a risk event not only to the environment at large, but also to every corner of the company responsible for the event occurring. BP obviously did not have a comprehensive ERM program at the ready that resulted in improvisation and ultimately a full-blown crisis. Only a company of BP's size and resources could weather this type of event. So, how effective is your ERM program?

Risk Blindness at BP

In the pursuit of profit, sometimes a company becomes blind to risk.  This is most evident in the latest debacle of British Petroleum ("BP") with the oil spill in the Gulf of Mexico. While their recent offshore deepwater drilling posed great environmental risk, BP experienced the results of poor risk management onshore as well.  According to the New York Times, BP's current CEO faced similar challenges in 2007.  Here is what happened back then:

In 2007, when Mr. Hayward first took over as chief executive, BP settled a series of criminal charges, including some related to the explosion of BP's Texas City, Tex., refinery, and agreed to pay $370 million in fines. Admitting that the company's operations had failed to meet its own safety standards and requirements of the law, Mr. Hayward pledged to improve BP's risk management. Following the Deepwater Horizon explosion, Mr. Hayward conceded that the company had problems when he took over in 2007. But he said he had instituted broad changes to improve safety, including setting up a common management system with precise safety rules and training for all facilities.

Some analysts say the safety problems indicate that BP has not yet reined in the culture of risk that prevailed under Mr. Hayward's predecessor, who transformed BP from a sleepy British oil producer into one of the world's top explorers through the acquisitions of Amoco and Atlantic Richfield.

A strong culture dedicated to risk management is essential for companies who are looking to succeed in the long run. BP's current crisis is a prime example of the perils of ignoring the importance of strong risk management practices.