Enbridge had a “culture of deviance” according to a report released just two weeks before Friday’s 1,000-barrel spill in Wisconsin. A culture in which not adhering to required procedures had become normalized (one such procedure was for a pipeline to be shut down after 10 minutes of uncertain operational status). This is perhaps the most damning conclusion from the National Transportation Safety Board’s report.
The Calgary-based oil company failed to train staff, failed to have an adequate integrity management program and failed to have sufficient public awareness and education, according to the regulator, which allowed 843,444 gallons of crude oil to pour into Michigan’s wetlands for nearly 17 hours after the first notification to local emergency response agencies went out. That was back in 2010. Friday’s spill in Wisconsin surely isn’t helping mend the company’s battered reputation. In short, Enbridge had—or still has—inadequate risk management and a culture of non-compliance.
Risk management oversight and “tone at the top” is the responsibility of the board. Companies will try to avoid spending money where there’s no profit incentive. It’s up to the board to know and understand the risks, to direct resources and expenditures to mitigate them, and to ensure proper reporting and action is taken. And a good board will have zero tolerance for a culture of deviance.
Many boards fail and many companies have wholly inadequate risk management. Some have no internal controls whatsoever for the very activity that is putting the company at risk. Why would a company spend money on risk to control itself? Risk is not a profit centre and internal controls to mitigate risk are, well, “controls.” Management has a vested interest in not controlling itself. This is where the board must step in and lead.
How does the Enbridge board fare? The Enbridge board is large, “busy” and “dated.” It has a total of 13 directors. A majority of them (11 of 13) hold multiple board seats (generally three or more). A number of its directors (including the chair of the board and chair of the committee overseeing the environment, health and safety) have been on the board for 10 years or more. According to Stanford researchers, larger boards tend to provide the worst oversight (when company size is held constant). Additionally, companies with busy boards tend to have the worst long-term performance and oversight, which is why term limits of nine years are now being instituted by regulators in countries like the U.K.—to guard against a board being captured by management.
The CEO of Enbridge, Patrick Daniels, is serving on seven other public and private boards. This is highly anomalous. More than half of S&P 500 companies limit CEO directorships, say Stanford researchers. In addition, not a single Enbridge director sitting on the committee overseeing environment, health and safety lists “sustainability” (or the equivalent) as an area of expertise.
So what about management? Every asset management company will claim it does inspections and has escalation procedures, so why don’t they work? BP’s defects in this regard were known, as several audits and prior deaths had shown major weaknesses were being ignored by the board and management. For Enbridge, the probable cause was corrosion fatigue of the pipeline, which raises the question: did they have internal auditors? Did they audit maintenance procedures? Did they report it? And what did management and the board do about it?
Bad risk management and compliance failures are ultimately costly. Just ask BP. Or Enbridge, for which cleanup costs now exceed US$800 million for the Michigan disaster, making it the most expensive on-shore spill in U.S. history.
The job of risk management oversight and setting company culture rests with the board. The best boards take risk very seriously. Unfortunately, they appear to be in the minority.