BP agreed to pay $7.8 billion to individuals and businesses who were damaged by the Deep Water Horizon explosion in the Gulf. That is on top of $8 billion in claims already paid for damages by BP and $14 billion that it spend on clean up. BP has yet to settle with federal, state and local governments. That amount may exceed the amount paid to private litigants.
BP and its contractors have still not agreed on how to allocate the costs associated with the accident. Its clear, however, that BP and its contractors were negligent. BP has had a reputation in the oil industry for cutting corners on accident prevention, and for taking large risks. Its management, and its shareholders, benefited from the risky behavior as long as nothing went wrong. The cost of this settlement will exceed whatever value that BP's shareholders received in return for cost cutting and risky behavior that BP had employed to increase past profits. This is another example of how the incentive system, that rewards management for increasing short term profits, ends up harming shareholders in the long run. Ironically, increasing shareholder value has been the stated objective of BP management.
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