Ultimate responsibility for Samarco dam disaster will haunt BHP

With 11 Brazilian villagers confirmed dead and reports of up to 15 still missing - presumably buried under an avalanche of red mud - principles and profit at BHP Billiton have come into harsh collision with each another.

It is hard not to be left with the feeling that the BHP Billiton Annual General Meeting in Perth will mainly be about well-paid, smooth talking, business types in very expensive suits trying to provide the best possible spin on a terrible mining disaster.

This is not the first time in recent history BHP Billiton has had to defend its safety record.

The full facts of the dam burst at the Samarco mine - a joint venture between BHP and Brazilian resources giant, Vale - are not yet known. But recent corporate environmental disasters, like the BP Deepwater Horizon oil spill, have had their genesis in a culture of risk taking and cost cutting, combined with a plain old bit of bad luck.

Time will tell whether there may turn out to be similarities with the BP oil spill, which involved a contracted oil rig owned and leased by another company.

In that case the investigating US Safety Board Managing Director, Daniel Horowitz found that “BP applied lesser process safety standards” to rigs contracted out than it did to its own facilities. The safety board said when BP looked at offshore projects it “focused on financial risks, not process safety risks”.

If the Samarco incident had happened in Australia and a torrent of sludge destroyed an Australian town and killed Australians, what action would we all be demanding? If the right risk management systems where not in place then who is responsible and who should be held accountable?

Mining investments are often structured as joint ventures because it allows both partners to share both the risks and the rewards. Indications are BHP will support the Samarco joint venture to meet both its legal and importantly its ethical obligations arising from the dams bursting.

However the final legal outcome will not be known for many years to come. If the joint venture partners can simply walk away from the risks involved then the structure appears to offer mainly upside with no equivalent downside.

The Mayor of Mariana, one of the effected villages, Duarte Gonçalves, summed it up when he said he sees Samarco’s parent companies as ultimately responsible for the catastrophe. “Samarco is a fantasy name,” he said.

The Samarco JV did have an independent local management team and the local executives who are the key decision makers would clearly have the most direct culpability in the event of any wrongdoing. An interesting ethical question if any of the local key decision makers had lived in the affected villages below the dams, how might this have changed their decision making process?

If Samarco is found to be more than just an accident, does the chain of culpability extend back to senior management in Australia including BHP’s Australian CEO Andrew Mackenzie? Most corporate cultures necessarily have a hard driven profit aspect, but when does that step over the line and become unethical?

It is certainly not hard to work out who pays the price for environmental disasters. In the case of Samarco primarily it’s the people who lie dead in the mud and whose homes have been swept away. The other stakeholders include shareholders, creditors and the affected communities, some many hundreds of kilometres away.

From a purely financial perspective in many respects it is the creditors who are the worst affected because they have suffered a double loss. Samarco’s publicly traded bonds initially lost nearly 50% of their value, so the creditors lost a large portion of their capital without ever having had any prospect of an equivalent gain and with the benefit of hindsight they also accepted a rate of return that was clearly not commensurate with the risks involved.

That may turn out be a particular problem for BHP Billiton which needs to foot the damages bill and fund its dividend policy - increasingly seen by some professional fund managers as unsustainable without loading up on debt.

But whatever happens all these people will want answers.

There is an important distinction between responsibility and accountability. The CEO of a large organisation is accountable for pretty much everything which goes both right and wrong in their organisation, with the exception of events classed force majeure (or “superior force”).

The extractive industries are by definition difficult, dirty and dangerous businesses, yet they produce essential commodities we all use. In many respects it is a testament to the professionalism of the people in the industry that more people are not hurt or injured.

Responsibility is a harder thing to pin down, but corporate culture and therefore responsibility starts at the top, with the CEO. In the worst case of corporate governance failures the organisations risk management systems have simply become a rubber stamping paper trail which provides a cover for a profit at any price culture.

With respect to the Samarco incident justice or fairness to the people that lost their lives and homes demands BHP Billiton apply the same standard of accountability as if the incident had happened here in Australia.

Fiona Reynolds, the managing director of Principles for Responsible Investment has suggested that executive pay and bonuses of resource companies such as BHP Billiton and Vale should be linked to their safety record – which to some extent in the case of BHP Billiton it already is.

In 2015 a large factor in the 43% pay cut that BHP Billiton chief executive Andrew Mackenzie took was that [five workers (some Australian) lost their lives while doing their jobs. (In BHP’s annual report, Mackenzie described FY2015 safety performance as “disappointing”). An unfortunate set of circumstances that cost him 20% of his short-term bonus.

This year the dual effect of depressed commodity prices and the recent crash in BHP’s share price, helped along by the Samarco incident, is likely to almost guarantee a substantial adverse impact on the vesting of his long term performance incentives as well.

It will be interesting to see whether the Samarco incident, which relates to an independent overseas joint venture, will reduce the vesting of his 2016 short term bonus.

Whatever the pecuniary outcome of the Samarco incident on Australian-based BHP executives, it is likely to be relatively insignificant in view of the size of the remuneration packages involved. But when people lie dead in the mud it may be principles that matter the most.

Leslie Goldmann does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.