What we should learn from catastrophic incidents

What we should learn from catastrophic incidents

A cleanup worker uses high pressure, high temperature water to wash crude oil off the rocky shore of Block Island in Alaska after the Exxon Valdez spill in 1989. (AP Photo)

Big established companies do have their day of reckoning every now and then. These instances are usually related to issues of health, safety and the environment (HSE).

For Exxon it was the accident of Exxon Valdez, which released crude oil into the unpolluted waters off Alaska. For Shell it was the decommissioning of its Brent Spar rig that angered environmentalists. These incidents highlighted that companies should look at full lifecycle costs of assets rather than merely at what it takes to build and operate them. The blowout of BP’s Macondo well brought the importance of operational excellence to the world’s attention. The accident released an estimated 3.19 million barrels of crude oil into the Gulf of Mexico.

For Boeing the day of reckoning came when flight ET 302 of Ethiopian airlines crashed minutes after take-off. This was the second such incident. In October of last year Lion Air had a similar accident in Indonesia. On both flights all passengers, 348 people, died because the anti-stall mechanism on two Boeing 737 Max 8 and 9 planes malfunctioned.

Such incidents happen at times. Apart from devastating pollution and/or tragic loss of life, they are a sign that the company in question has deeper rooted operational problems relating to its HSE processes. In the case of Boeing it also came to light that the relationship between Boeing and its regulator in the US, the Federal Aviation Authority, was far too cosy.

These incidents are also bad for business. The share price of BP fell by 51 percent in the 40 days following the Deepwater Horizon incident. In the case of Boeing the share price fell more than 14 percent in the 11 days following the crash. It has recovered some since then.

A tragic accident does not only have potentially devastating effects on the environment or loss of life, it also affects the valuation of the company. It may tie the company up in years of costly litigation with big sums to be paid in damages, which will affect the bottom line for years to come. It will also command a lot of senior management attention that could be spent on more productive endeavours.

This is one of the reasons why institutional investors such as the big sovereign wealth funds of the GCC need to pay close attention to the internal HSE processes of these companies and their relationship with the regulators. One of the most important questions to ask is whether these companies are “walking the talk” in their HSE policies.

In the case of Boeing the ramifications are even bigger for some GCC countries. Let us not forget that three of the best airlines in the world are based in the GCC. They have great safety records. It is in the national interest of these nations that their flag carriers remain the airline of choice for as many travelers as possible.

A tragic accident does not only have potentially devastating effects on the environment or loss of life, it also affects the valuation of the company.

Cornelia Meyer

Exxon, Shell and BP recovered from their respective disasters and came out stronger. They are big, essentially well-run companies that were able to learn from what went wrong. As Jack Welch, the former CEO of General Electric and guru on all things management never tired of saying: “Never waste a crisis.” The outcome of a crisis, however, is not always positive. Union Carbide did not survive its Bhopal incident of 1984, where highly toxic gas escaped from its plant, killing 3,787. It was the largest industrial accident in modern history.

Boeing will no doubt learn from the problems with the 737 Max. The company has deep pockets and will throw whatever resources and money its takes to fix the issue with its anti-stall mechanism. The industry as a whole has also learned that it is not a good thing when the relationship between regulators and the companies they oversee is too cosy. Flying might become safer as a result of these tragic accidents.

There are roughly 5,000 planes of this type on Boeing’s order book. Some airlines have canceled their orders, but most of them will still buy the planes once the problems with the anti-stall mechanism is sorted, which they will be.

These incidents should have served as a wake-up call to investors and customers alike that they do need to pay attention to HSE processes and corporate relationships with regulators for the sake of the environment and safety, but also as a means of preserving their investments.

  • Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources
Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view