First let me assure you that today’s post will not be yet another column castigating BP, its board, and its CEO for runaway executive compensation.
We could spend lots of time talking to that point, certainly. What happened at BP’s annual shareholder meeting last week was appalling. In 2015 BP racked up the largest loss in company history: $6.4 billion, and that’s from a profit of $4 billion in 2014 and $23.7 billion the year before that. At the same time, the board increased the compensation of CEO Bob Dudley by 20 percent, to a total of $19.6 million in salary, bonus, pension, and other perks.
Shareholders hated that idea, so when BP’s (non-binding) shareholder say-on-pay vote happened last week, the vote was 59 percent against. The board promptly said it will stick with Dudley’s pay increase anyway.
Now, you can find plenty of other articles about the shameful corporate governance failure here by BP’s board, since this was a failure of the highest order; we should all hope the directors on BP’s compensation committee are sent packing immediately. But we should also be realists, too: CEO compensation is a matter largely beyond a compliance officer’s hands. You don’t get to set compensation policy or, usually, to tell the comp committee that your boss is not worth the money.
You can, however, warn the board that carelessness with executive pay can have devastating effect on your efforts to nurture a culture of compliance. Because it does.
Remember that one main message from regulators this year has been the board’s responsibility for corporate governance and ensuring that a “culture of compliance” exists at the business. The compliance officer plays a crucial role in supporting that culture, and in facilitating conversations among other parts of the enterprise so that culture thrives—but the board is the group with ultimate responsibility for putting the right elements in place.
What are those elements? Strong leaders (foremost, the CEO) who demonstrate a commitment to integrity and ethics; commitment to hiring and keeping other staff who believe in integrity and ethics as well; clear lines of reporting and authority so the business has a working system of compliance; a determination to hold people accountable. That’s what makes for a strong culture, and the board’s job is to ensure all of them exist at the company.
Remember Your Framework
If those elements sound familiar, that’s because they are all the same principles that go into the control environment of COSO’s framework for internal control. And that’s the key point here: a strong culture of compliance is a strong control environment. They are the same thing. Like any environment or any culture, they surround all the specific actions that transpire at your company every day. If they are rotten, all those actions become less effective.
That’s why BP’s actions last week are such astonishingly bad judgment. Technically, Dudley was entitled to the compensation increase because he met all the operational goals the board set for him—it’s not his fault, the board reasoned, that oil prices collapsed and led to BP’s losses. You might even twist the logic behind COSO Principle 5, “hold people accountable,” to the absurd extreme that Dudley is entitled to more compensation even as the firm fails, because that’s what his employment agreement requires.
That’s not leadership. That’s hiding behind the letter of a contract to avoid difficult questions about the spirit of an organization. I can’t help but look at COSO Principle 1, “demonstrate a commitment to integrity and ethical values.” The word “integrity” traces its origin back to the Latin integra, meaning “whole” or “complete.” The entire organization of BP should be moving as one toward its goals, and all should be treated equally. That’s what a commitment to integrity looks like.
Now tell that to the thousands of employees losing their jobs at BP. The crash in oil prices wasn’t their fault either, yet their compensation is getting cut to zero. The remaining employees at BP will see two standards for performance: one applying to them, that they lose their jobs when times get tough; and another to senior leaders, that they get more compensation. That is what rots away at culture, and encourages the employee cynicism that ethics & compliance officers work so hard to fight.
Is it fair to Dudley that he should have relinquished this pay increase even though he met all the goals laid out for him? Nope. But leaders are expected to sacrifice more, and to sacrifice even when the circumstances aren’t particularly fair. That is the sign of integrity that employees recognize, and that inspires them to be ethical even when times are hard—which they certainly are for BP.
Unfortunately, the board is doing itself no favors to make surviving these tough times any easier.