BP and the Business Judgment Rule!
I just read a very interesting Blog post by Judge Bainbridge about the Business Judgment Rule. As most attorneys know, the business judgment rule protects directors and officers when they make decisions based on their business judgment that some action or inaction will benefit the company, even though the results turn out to be much different. The judgment needs to be reasonable based on the information available.
As Judge Bainbridge points out, there are some significant nuances to the rule. But for the purpose of this post, I was wondering how the rule could be applied to the officers and directors of BP. As this tragedy continues, the pressure will mount for a resolution and some serious penalties for the people responsible.
If I was a shareholder of BP, I would be very upset. I would want to be sure that the directors and management of the firm are acting in my best interest.
With respect to BP management, and for this post, I will make two assumptions, both of which I think will turn out to be accurate. First, BP had procedures about what should happen when safety equipment fails; and second, BP failed to follow its own procedures.
I have worked for enough public companies to understand how a company will react when cash flow, costs or profits are at stake. So I will go with my two assumptions until shown otherwise. (I am disappointed that during the congressional hearings, no one seemed to ask BP some of the critical questions, such as: What were the procedures that apply when a safety cutoff valve is discovered to be inoperable? What should those on the site have done once the discovery was made? What was done instead (Nothing.) Why was nothing done if the procedures were in place? How often has BP ignored their own safety procedures in order to save time and money?)
Additionally, the questions should include: Did the person in charge of the drilling platform have the authority to disregard or ignore safety procedures? If not, did that person ignore the procedures? Was the person directed by someone else in BP to ignore the procedures and continue drilling? Who were these people? What is their current status with the company?
Now, back to the Business Judgment Rule. Many companies are very conscientious about safety and they are very good at following procedures to assure safety. Some are less so. What is BP's record?
Did the directors and officers of the company intentionally look the other way when a safety rule or procedure would stop drilling at a particular site? Did senior management instruct lower level managers to ignore safety issues? Did the Board or senior management fail to exercise proper oversight? (The failure to exercise proper oversight is a little different than the business judgment rule, but it probably gets the parties to the same result, since the business judgment rule is a defense, while failing to exercise proper oversight is the other side of the same coin.)
If the shareholders brought an action against the directors and the senior management for their failure to exercise proper oversight, or their active failure to follow their own safety procedures, it would be an interesting case. I doubt that the business judgment rule would ever apply to protect the directors and officers of a company from liability if they are found to have ignored reasonable safety requirements. Ignoring safety requirements (whether in procedures or otherwise) is probably per se not excusable under the business judgment rule. The risk of a bad result is to high. The question becomes, what should the directors and officers have reasonably known, and what action did they take based on that knowledge.
BP is a British Company, so I don't know how these issues would apply in the UK. However, they have extensive US operations and there are subject to action in the US.
This will be interesting to watch as the story unfolds. Meanwhile, many lives are disrupted and changed because of the destruction caused by the poor decisions made by BP and it's contractor. Many business are destroyed, and the impact damage to the environment could be permanent. This tragedy will be with us for months and years to come.
