06/15/2010 07:52 am ET Updated May 25, 2011

BP, Market Value and Responsible Business Leadership

What do you do if your company blows up a village in India, sells an arthritis drug that leads to heart attacks, or causes the largest oil spill in world history? As a shareholder you have to worry about your investment, and as a manager, it's also your responsibility. What is your first priority -- protect the company's value or do the right thing? The answer is not always so obvious.

Let's take a lesson from Johnson & Johnson. On September 29th, 1982, the first of seven people unwittingly took a Tylenol capsule laced with cyanide and eventually dies. The "Tylenol Scare" spread fear across the county, but it soon became clear that the responsibility for the poisonings were not with Johnson & Johnson. Investigators found that someone was taking the bottles from retail shelves, lacing them with poison and then returning them to the stores.

Nonetheless, the company reacted swiftly and decisively, launching a massive public relations campaign that urged the public NOT to use Tylenol. They recalled 264,000 bottles at a cost of $100,000,000, repackaged the product from capsules to caplets, and replaced the recalls for free. At the time Tylenol was the nation's leading over-the-counter drug, and some observers speculated that the company would never be able to recover from the disaster as the market value fell by more than $1 billion.

Instead, the company won praise for its quick and responsible action, achieved the status of consumer champion, and gained a great deal of public trust. Within a year it had recovered its full-market share and repaired its tarnished image.

What is the key lesson? Act swiftly, transparently, and responsibly. In the history of such disasters, those who don't -- like Union Carbide after the disaster in Bhopal and Ford and Firestone in the tire fiasco -- tend to lose long-term share value, while those who do -- like Mattel in its recall of toys from China and Odwalla's recall of apples in the E. coli outbreak -- tend to gain long-term share value. In fact, one of the foremost recognized studies on the impact of such disasters on share holder value by Rory Knight and Deborah Pretty (1995) showed that organizations that recovered acted swiftly, transparently and responsibly, and that effective management of the crises was more important to long term value than the impact of the actual disaster itself.

So what is going on with the leadership at BP? Is CEO Tony Hayward more concerned with stopping the oil spill or keeping his job? With doing the right thing or protecting the short-term share value of the company? In personal comments like, "I want my life back," "the environmental impact will be very, very modest" and "I am not aware of any reason which justifies this share price movement," the answer becomes obvious. So too, ironically, does it predict the result. BP has suffered a 30 percent drop in shareholder value, and its brand is very likely permanently tainted. The denial has been astounding.

Why in such crises, then, do business leaders often fail to see that they have nothing to lose and a lot to gain by just doing the right thing? The answer can be found in asking what you do and why you do it. Is your job about just about creating and protecting wealth, or is there some other greater purpose or cause that you also serve? Having spent many years in the field of leadership, it has become very clear to me that for the truly successful and admired business leader, it is about both. As Henry Ford once said, "Any business that is just about making money is a poor kind of a business."

BP's mission statement essentially says that it is a global energy supplier that serves its stakeholders "safely and responsibly." Well, if they really were to "walk their talk," perhaps they could pull out of this disaster and be admired and rewarded as a true business leader. But the opportunity for that has now passed -- too little, too late.

What should have been done? Well it's easier to say in hindsight, but BP should have made every effort to plug the leak, cap salaries and dividend payouts to protect the cash assets and escrow funds to pay for the cleanup and recovery. BP is likely to move down this road, but they clearly lack the competence for the former, and I feel they will have only been shamed into the latter. That will not make for much public trust, or add to the value of the company.