How To Punish Leadership Negligence

In any sensible system of institutional governance, negligence would be sanctioned. So why is it that leaders of major corporations often seem to escape punishment for negligent conduct? Why is it that Tony Hayward, the head of BP, can publicly admit that it was "probably true" that the company should have done more to prepare for deep-water drilling emergencies and still keep his job? This is a company that as recently as March 2010 defined itself as the leading deep-water drilling company. It's also a company that has demonstrated a pattern of questionable conduct related to safety as exemplified by the 2005 Texas City refinery explosion and the criticism leveled by the Baker Report as well as the lack of care that contributed to the 2006 Prudhoe Bay pipeline leak. Why are heads not rolling up and down the leadership chain at the company?

So long as we fail to hold business leaders to an appropriate standard of care, we can expect these sorts of disasters to continue. The heads of corporations are seldom held personally accountable for the negligent acts of their organizations. BP and its contractors have caused, at the very least, hundreds of millions of dollars to damage to the Gulf of Mexico. Deep-water drilling is a core competence. The CEO admits the company should have done more, which is tantamount to an admission of negligence. But the very worst that can happen to Hayward is that he will lose his job ... along with an attractive financial package to ease the pain. And he may even get to keep his job!

How could we hold corporate leaders responsible for negligence? We would start by defining a standard of care. Negligence is "conduct that is culpable because it falls short of what a reasonable person would do to protect (others) from foreseeable risks of harm." That's a straightforward standard. If you fail to do what a "reasonable person" would do and someone gets injured, you are subject to being sued and having to pay a penalty. For corporate leaders, this would mean establishing a "reasonable leader" standard. Given that BP was specializing in deep-water drilling, and given prior experience of devastating underwater oil spills in the Gulf of Mexico and elsewhere, it was reasonably foreseeable that these sorts of problems could occur and the company's leaders did not do what a "reasonable person" would have done to prevent these problems.

Having established a standard of care, we then need two additional elements: penalties and a fair way to judge conduct. The former could be addressed by writing specific provisions concerning negligence into executive compensation contracts. "If you are judged to have been negligent as a leader, you will forgo some or all of your severance payments." The best predictor of what people do is what they are incentivized to do. If there aren't penalties for leadership negligence, we are encouraging leadership negligence.

Finally, we would need a fair way to judge negligence. This couldn't be credibly done by Boards of Directors or other interested parties. One answer would be to create a special panel to render judgments, consisting perhaps of highly respected retired executives.

Would this be easy to implement? Of course not. It would require a great deal of thought and careful design. But if we fail to fundamentally transform the incentives companies offer their executives, we should expect more of the same.
- Harvard Business Review: May 19, 2010