MELBOURNE INSITITUTE OF TECHNOLOGY

Theories behind the

voluntary disclosure
of Deepwater Horizon
Disaster by BP Plc.
This paper examines the relevant theory that explains public disclosure
by big corporations in disclosing corporate mishaps that has
environmental, social and economic consequence. We look at Deepwater
Horizon in particular and its disclosure by BP.

Gajanayagam Jeyasundram

Num

Content

Page

1.0

3-4

2.0

Introduction
1.1 BP Plc.
1.2 Deepwater Horizon Disaster
Legitimacy Theory vs. Stakeholder Management
Theory
2.1 Legitimacy Theory
2.2 Stakeholder Management Theory

3.0

Conclusion

4.0

Reference List.

4-6

1.0 Introduction
The Environmental disclosure by companies in particular raises some intriguing questions as
the motivations behind it. There are number of theory that seeks to explain it. Namely the
legitimacy theory and stakeholder management theory.
The case in point in this instance is the public disclosure of the Deepwater Horizon by BP in its
2010 Annual Report.
1.1 About BP.Plc
British Petroleum or BP is a British based oil and gas multinational. It is one of the biggest in
the world. It is the third largest energy company and fourth largest company in the world in
2011. It has operations in over 80 countries and produced around 3.3 million barrels of oil
equivalent. It is primarily listed in the London Stock Exchange and has secondary listing in
Frankfurt Stock Exchange and New York Stock Exchange.
It was formed as Anglo Persian Oil Company in 1909 , established as a s subsidiary of Burmah
Oil Company , then in 1935 as Iranian Oil Company and finally in 1954 as British Petroleum.
It was initially stated owned by the British government, but underwent privatization in stages
between 1979 and 1987.
In 1998, British Petroleum merged with Amoco and acquired both ARCO and Burmah Castrol
in 2000. In 2001, the company formally renamed themselves as BP Plc. (Wikipedia-BP.Plc
2012)
1.2 Deepwater Horizon 2010 Disaster
The Deepwater Horizon 2010 disaster in the Gulf of Mexico killed 11 rig workers and spilled 4
million barrels of oil. It is regarded one of the worst off shore spill in the U.S history and one
of the worst spills in the world. It could have avoided if BP complied with industry standard
when came to maintenance. Other oil and gas CEO such as Shell and Chevron testified that BP
did not comply with industrial safety standards. The impact was so devastating; it destroyed
marine life, economic activity of major parts of the US that relied on the Gulf of Mexico such
as fishing. Till today, the suits are still pending (Various news articles via Google Search 2013)
The incident forced BP to replace its CEO, Bob Dudley with Tony Hayward. It also announces
a USD38 billion assets sale in compensating the liabilities related to the incident. This caused
BP to fall from second largest oil company to fourth after the sale of assets.
Prior to this incident, BP has been in crisis mode for at least the past 5 years. BP have been
facing declining profits especially after the Iran revolution. It has hugely dependent on the
previous regime. Therefore, in 1995, a new management was bought in and lead by Lord John
Brown as CEO of BP. Lord John Brown expanded BP rapidly. He went on to purchase Amoco
and a couple of small companies such as Arco. Within 5 years, the company value was
quadrupled. (The Spill 2010)
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However, rapid expansion came at a cost. Cost of financing the expansion put a lot of pressure
in profitability. As a result, Lord John Brown ordered a 25% cost cut across the board in BP.
This major cost cut trickled down and affected safety management budget for their oils sites
and oil refinery.
In 2005, one its major crisis happened. Its Texas refinery exploded. 15 people died and 175
people was injured. It was later confirmed that the blast occurred because of lack of
compliance in maintaining safety and ensuring maintenance. Investigations nidificated
management failures in addressing concerns brought up by the plant
Apart from that, BP was responsible for one of the largest oil leak in Alaska. The oil leak
occurred in the Trans Alaska pipe line. Again, management oversight was cited as a reason. BP
failed to ensure the pipes are properly maintained.
There numerous other blowouts, oil leaks etc. Deepwater Horizon garnered a lot of attention
because it was one of the largest and with the constant media attention it received.
Hence, there is clear case of legitimacy crisis on BP that would lend credence that voluntary
disclosure by BP was pivot in ensuring their legitimacy in the eyes of the public. Not only
that , BP has replaced the CEO John Brown. (The Spill 2010)
2.0 Legitimacy theory vs. Stakeholder Management Theory
Legitimacy theory and stakeholder holder management theory are both system-oriented theory.
The System based perspective entail that entity is assumed to be influenced by and in turn to
have influence upon the society. They both entail usage of accounting disclosures as a strategy
to management relationship with the society or other parties. (Gray, Owen &Adams 1996)

2.1 The legitimacy theory

The legitimacy theory states that corporate firms have a social contract with the society.
The social contract is the at the core of legitimacy theory. Social contract is essential a political
concept. It essential meant that an inviduals whom enjoys absolute freedom in his natural state
,surrender part of their freedom to a central authority, namely the state in return for security for
their remaining freedom. This is because in the natural state, there is chaos as men are free do
whatever they please which means freedom to rape, plunder and murder. There is chaos or state
of anarchy. Hence men, contract with each other to establish a political community in which
they gain security. (Hobbes 1651) Similarly, corporate companies in the eyes of the state are
considered as person albeit artificial person. Hence why laws specifies the distinction between
humans as natural person in the eyes of the law.

It is therefore allowed to perform its own objectives in return for socially desirable actions to
the society. In other means, it is free to earn profit, but has to satisfy or comply with the norms
and values of the society.
A legitimacy threat there can cause serious problem especially in form of government
interference. In an ideal democracy, government essentially acts as a proxy for the society , this
is evident post Deepwater Horizon oil spill whereby there was a Congressional Inquiry and US
government agencies separate investigations into the matter and whereby the CEO of BP went
through questioning by relevant members of Congress. The President of United States even
lend his weight in pressing for greater securitizations on BP and ensuring that it would be liable
for the incident. There is a large political incentive to take stern action into Deepwater
Horizon. (The Spill 2010)
Hence, it is important that companies manage this perception. Hence, a voluntary disclosure
highlighting the steps and resources used in containing the incident presenting commitment in
addressing the issue.
Furthermore, in regards to the Deepwater Horizon which received tremendous negative press
coverage about BP.? The levels of public concerns thus were high because of this. Hence , level
of public concern increase and in tandem with legitimacy theory , this caused BP to increase
the amount of space allocated in voluntary disclosure about environmental especially
Deepwater Horizon Incident. This was similar to Deegans paper whereby environmental
disclosure of BHP increased when level of media coverage increased. He used media coverage
as a proxy to examine the level of public concern which provide motivation for companies to
voluntary disclosed environmental issues. (Deegan 2002; Summerhays&Villers 2012)
2.2 The Stakeholder Management Theory
The term stakeholder was originally introduced by Stanford Research Institute (SRI) to refer to
Those groups without whose support the organization would cease to exist.
According to Elijido-Ten(2006) , Freeman (1983) later introduced it in two modules, one being
from business planning and policy model and the other being corporate social responsibility
model of stakeholder management. The first focusing on owners, customers, public groups and
supplier. The second model another hand include external related parties that might adversarial
to the firm such as regulatory bodies, environmentalist and or/special interest group concern
with social issue. The increase level of environmental concerns has forced companies to
include this later group in their corporate plans to changing social demand.
However, the environmental disclosure used in this example does not constitute a corporate
plan nor CSR initiatives by the company. The environmental disclosure is caused by a major
environmental disaster directly caused by the company in the due course of its operations
which is largely predictable and avoidable. The Deepwater Horizon Disaster was not
inevitable. It is not an ordinary event.
However the stakeholder theories, does not necessary contradict the legitimacy theory. This is
based on the the broad definition of stakeholder that includes the society.
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In fact, stakeholder management theory presents a different dimension in articulating the

motivations behind disclosures. Because this specific example was a major environmental
disaster that was one of the worst in the world and the company less than satisfactory record in
safety management, this theory would not be sufficient in explaining the motivation behind the
voluntary disclosure.
Conclusion
There are two main theories used in explaining the motivation of companies voluntary
disclosure which are namely the legitimacy theory and stakeholder management theory.
In this particular instance of disclosure of a major environmental disaster, this paper found that
legitimacy theory is more accurate then stakeholder management theory. The application of
legitimacy theory is further enhanced from BPs less then admirable recent track record.

Reference List.
Wikipedia.Org, BP Plc, viewed 5th May 2013< http://en.wikipedia.org/wiki/BP>
The Spill 2010, documentary, PBS Videos, USA. Produced by Frontline and Propublica
Elijido-Ten, E 2006, Voluntary Environmental Disclosure of Malaysian Listed Companies: An
Application of Stakeholder Theory, Swinburne University, Victoria
Summerhays,K,Villiers,C 2012, Oil company annual report disclosure response to the 2010
Gulf of Mexico Oil Spill, Journal of the Asia Pacific Centre of Environmental Accountability.,
vol 18, No.2 , page 103-130
Deegan, C 2002, The legitimizing effect of social and environmental disclosures a
theoretical foundation, Accounting, Auditing & Accountability Journal, vol. 15, no. 3, pp. 282311.
Deegan, C, Rankin, M & Tobin, J 2002, An examination the corporate social and
environmental disclosures of BHP form 1983-1997: A test of legitimacy theory, Accounting,
Auditing and Accountability Journal, vol. 15, no. 3, pp. 312-343.
Guthrie, J & Parker, L 1989, Corporate social reporting: a rebuttal of legitimacy theory,
Accounting and Business Research, vol. 19, no. 76, pp. 343-352.
ODwyer, B 2002, Managerial perceptions of corporate social disclosure: an Irish story,
Accounting, Auditing & Accountability Journal, vol. 15, no. 3, pp. 406-436.
Milne, MJ & Patten, DM 2002, Securing organizational legitimacy: An experimental decision
case examining the impact of environmental disclosures, Accounting, Auditing &
Accountability Journal, vol. 15, no. 3, pp. 372-405.