$87 million/$3.14 billion <3%

Fines for corporate violations have to be large enough to hit the bottom line.

$87 million  is what BP may pay in fines for failing to clean up the egregious safety violations after 15 workers were killed in an explosion in Texas.

$3.14 billion was BP’s second-quarter earnings, considered “disappointing” since they were down 50% from the year-earlier level.

Is it any wonder so many corporations are chronic scofflaws, when the penalties even in extreme cases are barely material to their operating results?   Since the explosion, four more workers have died at the same refinery.

It’s time to start computing corporate penalties as fractions of equity.    A penalty of 1% of equity per quarter until the plant runs right would get BP management’s undivided attention.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

16 thoughts on “$87 million/$3.14 billion <3%”

  1. Who is among the "so many corporations" that are "chronic scofflaws" with respect to plant safety? I'd like to see the names of a few, and since there are so many it shouldn't be too much trouble.

    And since there are so many scofflaws, there must be an epidemic of workplace fatalities of the same type as the BP incidents. As the title of this blog allows, one must consult the facts. According to the Bureau of Labor Satistics http://www.bls.gov/iif/oshwc/cfoi/cftb0232.pdf, there were 6 fatalities as petroleum refineries in 2008. For the entire NAICS code related to Petroleum and Coal Products Manufacturing, there were 11 (which includes the 6 for refining only), 3 of which were transportation accidents. For Chemical Manufacturing, there were only 18 — three of which were due to workplace assaults. Thus, if every fatality in the chemical and petroleum manufacturing industries were to vanish tomorrow, we're talking about fewer than 30 deaths per year. By the way, "Educational Services", which includes the 11 deaths in "Colleges, Universities, and Professional Schools" had 17 deaths.

    There is no doubt that each one of these deaths is a tragedy, but this is an area in which tremendous progress has been made. So, while it seems likely that this particular BP plant may have safety problems, and perhaps BP might have company-wide problems, it seems that workplace death is quite rare in those occupations that have hot and heavy operations. In fact, 40 people died in the "Performing Arts, Spectator Sports and Related Industries" — more than all the refineries and chemical factories combined.

    Contrary to what Prof. Kleiman suggests, the problem of workplace fatality does not appear to be rampant among publicly traded industrial companies with high equity values. For example, 119 people died in the "Landscaping Services" industry — which I suppose is mostly comprised of one guy with one or two trucks — what kind of massive profits are derived from that high-margin industry? 34 people died in the highly profitable "Religious, Grantmaking, Civic, Professional, and Similar Organizations" — again, more deaths than the refineries and chemical factories combined — how are you going to punish them?

    Is there any evidence that the primary motivation for plant safety is government fines, rather than say worker compensation rates, tort liability awards or something else?

    We may have a lot of problems in this country that deserve billion-dollar fines or worse, but a plague of workplace deaths due to industrial accidents in highly profitable heavy industries isn't one of them.

  2. If you want to get management's attention, fine or imprison them personally. The lack of personal liability for management misconduct is very much a "heads I win, tails you lose" problem of bad incentives and is at the root of much corporate misbehavior from lax compliance with safety standards to the financial sector meltdown. Managers shouldn't be able to use their employers as a liability shield for decisions they personally have approved. Make management personally liable for the consequences of their actions and corporate behavior will improve very, very quickly.

  3. I suppose this is somewhat of a digression, but.

    This is something that I've wondered for a long time. In fact, it occurred to me when I was a little kid, after being in the car when my mom got a ticket.

    If it is the case that penalties short of imprisonment are supposed to modify behavior, why is it that monetary penalties are absolute, and not indexed against income? That NJ $500 fine for not having proof of registration hits a blue collar worker a hell of a lot harder than an ibanker.

    Of course, if it is about financing the state, well, that's obviously different.

  4. So your point is, what? That my life is worth relatively less because I work for a smaller company?

    I think the root problem here is actually that the Prof fails to appreciate that people aren't immortal. That perfect safety is impossible. (Knows it, maybe, on an intellectual level, but doesn't feel it.) So, he ends up kin to the witch hunters of Africa, seeing every industrial death as murder, not an accident. Thinks that if we just punish the corporation harshly enough every time one of their employees dies on the job, they'll rescind that accidental death quota that they're deliberately filling each quarter.

    1. No, Brett, my point is that for a deterrent threat to be effective it needs to be big enough to hurt. What hurts a company is measured by the size of the company. It's remarkable how many people who support the death penalty for individuals who kill oppose doing anything substantial to killer corporations. Murder victims weren't immortal either, but most of us care about when we die and would prefer a later date if possible.

      And I'd like to thank Horseball for gathering statistics to help me make my point. Given how rare refinery deaths are overall, the total of 19 deaths in a single refinery over four years suggests a complete outlier.

      Curmudgeon, I'm not opposed to personal liability for managers, but it's the very nature of a bureaucracy to so distribute decision-making that it's tough to identify individual culprits, especially to a criminal-law standard of proof. But sufficiently high penalties aimed at the organization will encourage senior management, the board, and major investors to pay attention.

  5. "One" explosion killing 15 people quite possibly could be an outlier; You can't plot a line through one point. An excess of deaths in one plant aside from that one event would tend to indicate some systematic problem… but it's one plant in a large corporation with many plants; Wouldn't that tend to indicate that the systematic problem is at that plant, rather than corporation-wide? So, at worst, you should be concerned about the management at that plant. That being the case, it makes no sense to scale the fine to the size of the entire corporation.

    But, having worked at a company where an industrial accident came close to killing somebody, it strikes me as just as likely the problem is a local cultural problem among the employees, not management.

  6. "Wouldn’t that tend to indicate that the systematic problem is at that plant, rather than corporation-wide?"

    Guess what? If that plant made a lot of money, the corporation gets to keep it. Cuts both ways.

    And if the corporation's senior excecutives thought that changes needed to be made at that one plant, and were motivated, they'd d*mn well make them. In this case, it's clear that they don't, even *after* bad stuff happened.

  7. Ah, I see, you're positing that management is in complete control of what goes on in a company. That explosion, costing who knows how much, must have been intended.

  8. The 2005 Census of Fatal Occupational Injuries reports 3 fatalities in the Petroleum & Coal Products Manufacturing Industry (the superordinate category that includes Petroleum Refining as a subcategory). This admirably low number would seem to suggest that Horseball’s 2008 number isn't atypical. But we already know that 15 workers were killed in one event alone, the 23 March 2005 explosion at BP’s Texas City refinery. So there's an obvious discrepancy.

    See Lise Ilsen, "Murky Stats Mask Plant Deaths: Government Safety Figures Are Misleading on Contract Workers at U.S. Refineries," Houston Chronicle, 16 May 2005. (Google “refinery deaths.” It's the third hit.)

    One factor: the people who get burned alive are often contract workers, as in the Texas City case, & so don't show up in the data Horseball cites. They're "Special Trade Contractors, Not Elsewhere Classified."

  9. "But, having worked at a company where an industrial accident came close to killing somebody, it strikes me as just as likely the problem is a local cultural problem among the employees, not management."

    I have to admit to having some sympathy for Brett's point here. It is an undeniable fact that employees frequently scoff at safety issues and refuse to play ball. There was a famous Australian case from the 60s involving construction where workers fell, the company was sued for not providing safety harnesses, and it provided proof that its employees continually refused to wear the harnesses. What do you do in this case? Fire everyone and hire new people (who will be even less safety conscious)?

    On the other hand, of course, there are plenty of cases in the other direction — management insisting on cutting corners, establishing the baseline of work expected per day as only feasible if short cuts are taken, providing nominal safety equipment, but refusing to go the extra mile to make it that much more compatible with work practices, etc.

    I'd have to say that, given simply what we've heard here, and the patterns over the past few years, I find it difficult to be as certain as Mark that this was the fault of management. Reading the article referenced doesn't provide much help either, in that it doesn't make clear to me whether the safety violations were due to management or labor, what the incentives in place were, etc. (ie yet another newspaper article big on factoids and light on any facts whereby one can actually contextualize and judge the factoids — what a surprise)

  10. On the good news side, a friend in a US Attorneys office tells me that environmental crimes prosecution have gone way up since Jan. 20th. If you can prove criminal intent by a corporation, I think you should probably be able to find individual managers who find the same level of intent, or you can flip managers who are suddenly willing to be much more forthcoming with this prospect over their heads.

    I think Democrats have underutilized a "soft on crime" wedge against Republicans who are uninterested in environmental crime prosecution against their buddies, and the Republicans who are against using DNA evidence to find the guilty criminals living free while innocent people rot behind bars.

  11. After so many semesters of corporate law classes, I have become tired of listening to so many professors talk about how small penalties and limited liability are essential to our system, and that any alteration of expansion of penalty or liability will stifle innovation and cause the whole system to come crashing down. The problem is that it seems that the opposite is true; that an overt lack of accountability brings out the worst aspects of human nature.

    In our officer training, we were taught that accountability is the (welcome) price that one pays for authority and responsibility: Rank hath its privileges, but rank too hath its responsibilities. If a ship's captain is asleep when the ship runs aground, the captain is still accountable, if not for issuing the orders, then for failing to properly train his crew. If a Marine is accidentally left behind during a field training exercise, that Marine's commanding officer is accountable for the death.

    It is bizarre to me (though not too much so) that this fundamental notion of accountability has never really taken hold in the corporate world. Poor decisionmaking leads not to ignominious dismissal, but to golden parachutes; negligent oversight (because yes, employers have both a duty to their employees and a duty to control their employees) leads not to harsh, swift punishment that will deter future mismanagement, but rather to fines that companies can easily shrug off.

  12. "Ah, I see, you’re positing that management is in complete control of what goes on in a company. That explosion, costing who knows how much, must have been intended."

    Well, if they aren't responsible for what is going on in the company, just what are they getting paid for?

    I also like Bellmore's honing in on the 'intention' aspect, as if killing on the way to make money is not as bad killing for other reasons. Another example of conservative's lack of interest in consequences.

  13. Brett Bellmore says:

    "Ah, I see, you’re positing that management is in complete control of what goes on in a company. That explosion, costing who knows how much, must have been intended."

    Wrong again – as usual.

  14. Josh says:

    (part about officer's training and military authority=responsibility=accountability snipped)

    "It is bizarre to me (though not too much so) that this fundamental notion of accountability has never really taken hold in the corporate world. Poor decisionmaking leads not to ignominious dismissal, but to golden parachutes; negligent oversight (because yes, employers have both a duty to their employees and a duty to control their employees) leads not to harsh, swift punishment that will deter future mismanagement, but rather to fines that companies can easily shrug off."

    Well, I really question how often that command accountability was really in effect in the military (aside from the obvious principle that somebody's got to take the fall when the brass are embarrassed). We've just seen in the Iraq War that jail is for SSG's and below; the upper NCO ranks and officers will suffer at most having their careers terminated. Which might suck, if one was a major having to resign with 15 years of service, but Lyddie England would probably trade places with that major in a heartbeat. And, of course, Col. or Gen. Joe Schmoe who had to retire and take a job with a defense contractor isn't suffering at all.

    I do agree with the paragraph I quoted; if the punishment is light, then the cost-benefit analyses will generally say to go ahead and commit the crimes. The only real crimes would be either foolishly documenting personal responsibility, or unluckily having a big, headline-making outcome.

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