Legacy of Disaster: Building a Safety Culture After Tragedy

S&P Global Market Intelligence
Written By: Sarah Smith and Taylor Kuykendall
S&P Global Market Intelligence
Written By: Sarah Smith and Taylor Kuykendall

Massey Energy Co. said no coal company could be successful without a total commitment to safety. BP plc insisted safety was its top priority. PG&E Corp. held up safety as a "bellwether of operational excellence."

Looking back at three energy disasters in 2010 involving the companies, prosecutors would contend that Massey Energy "embraced safety crimes as a business strategy," BP operated with a "culture of privileging profit over prudence" and PG&E was a "company that lost its way."

Although each company said it was prioritizing safety all along, the corrections they made in the ensuing years and the evidence discovered by prosecutors suggest that was not always the case. The latter two companies would be found guilty of felonies related to these disasters, and Massey's then-CEO is serving time in federal prison.

However, the companies took steps since then that yield lessons for improving safety, including changing executive incentives, bringing in outside experts to review operations, implementing measures to mitigate risks and taking other actions to change corporate culture.

The idea that a corporate culture may set the stage for decisions that lead to catastrophes is hardly unique to the energy industry. An executive's best ally, according to Eugene Soltes, a Harvard University business professor who has interviewed dozens of white-collar criminals, may be dissenters who can stop the company from getting entrenched in unhealthy norms and offer early warnings about an impending disaster. Few leaders wittingly make decisions to lead a company on a path to disaster.

Several executives told Soltes they recalled making what seemed to be inconsequential choices. Only with hindsight would they set aside instinct and critically examine their actions.

"So often, the problem in top firms is you don't have people that genuinely disagree with one another," Soltes said, noting the result can be a kind of a groupthink with its own cultural norms.

"If we humbly recognize that we might not always even notice the choices that will lead us astray, we are more likely to develop ways to identify and control those decisions," Soltes concluded in his book project, Why They Do It. "But it's only when we realize that our ability to err is much greater than we often think it is that we'll begin to take the necessary steps to change and improve."

In the wake of the San Bruno pipeline explosion and Deepwater Horizon blast and oil spill in 2010, PG&E and BP changed the way they incentivize their leadership, aiming to give decision-makers more reason to reflect on which choices could be excessively risky.

Response to Tragedies

PG&E has revised its executive performance goals related to short-term compensation incentives. An internal 2008 strategic planning presentation showed that meeting earnings targets accounted for 40% of executives’ performance metrics while achieving safety goals represented 10% of the total.

In 2012, the company made safety the single largest factor in performance goals, at 40% of the total. Three years later, PG&E went even further, increasing the weight of safety performance to 50% of the total metrics. Customer satisfaction and financial goals were each weighted at 25%.

But providing incentives may not be enough to change a culture where risky decision-making is prevalent, Soltes said. Firms often need to get out of their comfort zone to truly understand their weaknesses. Soltes suggested bringing in fresh eyes able to spot risks that may be hiding in decision-makers' blind spots.

PG&E did just that. The company hired an independent auditor to review the utility's physical asset management and safety culture in the years after the San Bruno explosion. The auditor gave the company two international standards certifications in 2014. One emphasized avoiding sacrificing long-term goals for competing short-term priorities. The other focused on continuous improvement.

The auditor later reported that PG&E had successfully begun employing certain safety practices the pipeline industry adopted explicitly in response to the San Bruno explosion. These practices encourage a strong "safety culture" and constant risk awareness.

PG&E said in its 2016 gas safety plan that safety culture helps combat "complacency, fear of reprisal, overconfidence, and normalization of deviance."

The offshore oil sector has also leaned on safety culture in its campaign to prevent another catastrophe. Jacob Raffnsøe Petz, Maersk Training's managing director in Houston, said he has seen firsthand how oil companies are changing their corporate culture.

"Culture goes top-down, and it comes bottom-up. Those two things have to be in place. If you put out guidelines that the organization or operation needs to do this and this, and the management doesn't, then it's not consistent," Petz said during an interview at an offshore oil training facility in Houston. "Incidents can happen anywhere, so it doesn't necessarily mean that because there is an incident, the management system was not good, that the leadership team was not good. It can happen in any kind of situation. But I think that a very important role is leadership."

BP's corporate culture was identified as a factor leading to the devastating Deepwater Horizon explosion and oil spill. The "greatest tragedy" of the incident was its preventability, Assistant Attorney General Lanny Breuer said in 2012, blaming the disaster on "BP's culture of privileging profit over prudence."

Within a year of the Deepwater Horizon spill, BP started a review of how the company incentivized performance, looking specifically at how to better cultivate safety. In the final quarter of 2010, individual performance bonuses were based entirely on safety targets, and Tony Hayward, who was BP's CEO at the time of the disaster, did not receive an annual bonus that year.

The year before the catastrophe, safety performance accounted for 15% of BP’s annual incentive compensation, while financial and operational targets drove 70%. By 2012, BP had boosted safety and risk management metrics to 30% of the annual bonus measures, put value creation — including cash flow and production — at 50%, and added "rebuilding trust" metrics to account for 20% of annual bonus calculations.

Incentive compensation may be the carrot that draws corporate leaders toward sounder decisions, but Warren Buffett has argued that executives should also have to face a stick when their choices pan out poorly. Buffett, in a 2010 interview, recommended that boards build in punishment as great as five times an executive's highest recent compensation.

"You need a person at the top who has all of the downside that somebody has that loses their job, you know, working in an auto factory or something of the sort. And that will change behavior," Buffett said. "They can set the terms of employment for the CEO in a way that will make him terribly risk-conscious, and if they don't do that, if they haven't done it effectively, I think there should be significant downside to them."

However, how remuneration is structured has a bearing on how executives prioritize short- and long-term priorities, experts say.

Massey Energy's then CEO, Don Blankenship, oversaw mining operations that were taking risks every day, prosecutors said. On April 5, 2010, those risks cost 29 coal miners their lives.

In 2009, the year before the explosion, despite a long list of safety violations from the Mining Safety and Health Administration at the highly productive Upper Big Branch mine, Blankenship was awarded $17.8 million in total bonuses and compensation.

Attorneys for Blankenship were aware that his compensation could sway the jury in his criminal case and wanted to keep information about the coal boss' finances out of the trial, insisting that the existence of incentive compensation did not constitute a motive for a crime.

"Needlessly telling the jury that Mr. Blankenship held millions of dollars in Massey stock is likely to invite a decision based on resentment, bias and anger, as opposed to a dispassionate assessment of the relevant evidence," lawyers wrote in one court document.

Blankenship's defense attorneys continued to argue during the case against the notion that his professional accomplishments should influence the verdict.

"He shouldn't be acquitted because he's the CEO of a huge company, just because of that, but neither should he be convicted because he's the CEO of a huge company whose employees were doing things wrong," Blankenship's attorney insisted in closing arguments in the CEO's criminal trial.

But prosecutors pointed to the fact that Blankenship's pay was tied directly to how quickly miners dug coal.

The prosecution alleged that Blankenship disregarded safety in favor of a single-minded focus on compensation, cutting costs and producing more coal with little regard for the dangers that strategy created.

"The reason that he did it was money, millions and millions of dollars for him, hundreds of millions of dollars for Massey, millions for the 'yes' men that he surrounded himself with," Assistant U.S. Attorney Steven Ruby said during closing arguments in the case, which led to a one-year prison sentence.

The perceived profit motive disturbed victims' families. "He was enriched by every single foot of coal that was mined," said Judy Jones Petersen, who lost her brother to the explosion.

Massey's financial filings showed no stock option awards granted to Blankenship in 2009. In calls obtained by prosecutors, the coal boss complained that he "can't go to the grocery store and buy groceries with options." For that, he would need to boost the metrics that the company tied to his cash bonus.

"It's like a jungle, where a jungle is the survival of the fittest; unions, communities, people — everyone is going to have to learn to accept that in the United States, you have a capitalist society, and that capitalism, from a business standpoint, is survival of the most productive," a young Blankenship said in a 1986 pro-union documentary about a United Mine Workers of America strike. "In the long term, it's going to be the most productive people who benefit."

His 2009 compensation agreement offered cash incentives for raising earnings, producing more coal, fulfilling contracts, and increasing the tons of coal his workers were producing per shift or hour. Cutting environmental violations and the number of employees involved in lost-time accidents also accounted for some of Blankenship's bonus potential.

The intention of such a metric is to keep people safe, and at Massey it seemed to work: The company reported a 13.9% reduction in nonfatal days lost the year before Upper Big Branch. However, Jeffrey Harris, a coal miner who worked for Massey, said the reduction was not based in reality.

"If you got hurt, you were told not to fill out the lost-time-accident paperwork," he told a U.S. Senate committee in 2010. "The company would just pay guys to sit in the bathhouse or to stay home if they got hurt — anything but fill out the paperwork."

Realigning incentives

David Bixby, managing director at executive compensation consultancy Pearl Meyer, said safety has become a common component of short-term incentive plans in the energy industry. Given increasingly lean operations as a result of weak commodity prices, he said, many companies are ensuring safety measures are included to provide a more comprehensive view than can financial metrics alone.

"That helps ensure the financial performance you are delivering for the year is sustainable or quality financial performance. Not just that you're making money, but you're making money and also paying attention to safety, for example," said Bixby, who specializes in the energy industry. "From the top of the organization, it's about setting the tone and stressing the importance of safety, holding the organization accountable for major incidents, and ensuring top executives put programs in place so people in the field are properly educated and trained."

To the degree that they occur, these types of shifts in mentality could be among the more lasting impacts of major catastrophes.

The 2010 disasters in California, in West Virginia and along the Gulf Coast were conspicuously physical manifestations of poor choices, but even those have begun to fade. Now, neatly landscaped new-build homes populate the San Bruno neighborhood, the Upper Big Branch coal mine has been sealed shut and Gulf communities have rebounded with the recovering coastline.

With fewer and fewer physical reminders, the legacy of these disasters shifts to the intangible. What can ultimately last, though, is a new understanding of how the mix of risk, reward and personal accountability breed success or disaster.