Category — Corporate Governance

[Ed. note: This post is taken from Robert Bradley's conclusion in chapter 18 of Oil, Gas and Government: The U.S. Experience. In this series, Part I summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry; Part II critically interpreted rebates and other 'unfair' practices of Rockefeller's Trust; and Part III critically reviewed other complaints about unfair practices against Standard Oil.]

The Standard Oil Trust of John D. Rockefeller qualifies as a free market company, not a political one. The major mistake of Standard Oil in its distinguished history was not a failing of economic performance. It was underestimating the need to present information to explain to the public and critics the virtues of integration and scale economies, particularly in petroleum. (This was an intellectual problem of critics too–see the Appendix below.)

By following an explicit policy of secrecy until the late 1880s, Standard allowed opponents to get the upper hand in a public debate that for Standard would worsen at almost every turn, culminating in the 1911 Supreme Court dissolution decree.

Successful consumer service was considered by the company as its best strategy; it was not understood that competitors would be dissatisfied by the very fact that the public was so well served by Standard Oil. Given the precedent of intervention at all government levels, offense would have been the best defense.

Prior to the onslaught of state antitrust activity, political action by Standard was occasional and defensive. Eminent-domain rights, tailored to the needs of Standard’s pipeline competitors, and rate regulation of company pipeline and storage facilities, prompted Standard’s entrance into state politics in the 1880s in Pennsylvania, Ohio, Maryland, and elsewhere to financially support friendly politicians. In the late 1890s, federal politics became important to Standard, and company pesident John Archbold made large contributions to favored candidates until a 1907 law prohibited corporate political contributions.

By this time, Standard regularly spoke for the public record, but it was too late. Numerically powerful producer interests, who blamed their cyclical difficulties on Standard, joined by hard-pressed independent refiners and marketers, inspired muckraking journalism that nudged the public to the “little man’s” side.

Ida Tarbell’s standard of goodness was not superior consumer service but “the right to do an independent business” and “free and equal transportation” for all. The idea that consumers decide the structure and form of business and that in a free market less efficient firms – which she realized existed in the independent sector – must conform or perish had no part in her ethics, understanding or sympathy. [Read more →]

[This post by Guillermo "Billy" Yeatts (see profile at the end of the post) originally appeared at MasterResource on April 30, 2010. It is reprinted in response to the move of the Middle East toward more open, democratic, and modern societies. Can private ownership of oil and gas assets be far beyond?]

The history of oil and gas production in Latin America has been characterized by a continuing tug of war between the state as owner of the subsurface (Spanish colonial tradition) and private producers in pursuit of profits. Private participation in the industry has been limited to brief periods and restricted to specific phases of oil and gas production.

The typical pattern is that foreign oil and gas companies are allowed into a country to locate and initiate production. Once oil is flowing, governments nationalize the companies’ facilities – with or without compensation – and hand them over to government-owned and operated monopolies.

Whether the oil or gas is produced by private corporations or by a government monopoly, it is almost always the government that receives most of the profits. All too often, the money is used to keep the heads of state in power.

In the United States, by contrast, individuals own and control much of the nation’s subsurface rights to energy and other minerals. The results are starkly different. While the oil and gas industry in the United States expanded quickly, bringing prosperity to many areas that were once underdeveloped or deserted, oil revenues in other countries have propped up corrupt governments with little or no benefits to the general welfare.

State ownership of the subsurface removes incentives for risk-taking, investment, and technological innovation. Farmers and ranchers are pitted against oil development. In Latin America, the prospect of an oil or gas discovery is a farmer’s worst nightmare. They reap no financial benefit from the discovery, but they do suffer land damage and the disruption to their lives from drilling and production operations. Consequently, a landowner’s incentive is to hide any mineral wealth his property might have and to fight any attempt to exploit such wealth. [Read more →]

[Editor note: This article first appeared in the October 2010 issue of Discovery, the quarterly newsletter of Koch Companies, Inc. This company's values include an adherence to free-market capitalism, in opposition to political capitalism or rent-seeking, currently the fashion at a number of major U.S. corporations. (Also see "The Future of  Economic Freedom"). ]

We live in an era when many people–including policymakers and media celebrities–view businesses and corporations with disdain or intense suspicion. Their way of thinking begs a simple question: What is the primary role of business?

Is it to create jobs and provide benefits?  Help advance a social agenda?  Or just to make as much money as possible, by exploiting customers and employees?

As a matter of principle, Koch companies believe there is only one reason for any business to exist: creating value.

“Value creation,” says Charles Koch, “involves making people’s lives better.

“It means contributing to prosperity in society.  If a company’s not doing that – enhancing the well-being of society – then it needs to go out of business.

“We all tend to pursue our own interests, but in a true market economy we can only prosper long-term by providing others with what they value.”

History and sound theory have both shown that the only way to consistently create value for society is to faithfully follow a set of reality-based principles.

For Koch companies, those are the 10 MBM® Guiding Principles, which include integrity, compliance, value creation, humility and respect. [Read more →]

[Editor note: Robert L. Bradley Jr.'s book review of Charles Koch's The Science of Success (New York: John Wiley & Sons, 2007) appeared in the August/September 2008 issue of The New Individualist (Atlas Society). It is reprinted below to better publicize the worldview of the individual who has been behind a number of free-society initiatives across the country for several decades--and is now a target of Al Gore and the anti-free-market Left).

In 1859, the first treatise on “best practices” appeared: Self-Help, With Illustrations of Character, Conduct, and Perseverance, by Samuel Smiles. Motivational self-improvement books were not new, but Smiles’s 400-page opus was persuasive. Profusely illustrated with stories of men-made-good in industry, engineering, the arts, and music, Self-Help combined age-tested wisdom with knowledge of the industrial present.

From Self-Help to Organizational Success

Nearly 150 years later, the most recent addition to the self-help literature is The Science of Success by Charles G. Koch: businessman, philanthropist, and applied intellectual. Koch’s book has all the earmarks of a classic, but not because it is a tome (the 166-page main text is quite brief for the material covered) or because it is the last word on the subject (it is really just the beginning, despite two monographs published by Koch disciples a decade or more ago). The book’s seminal potential is that it presents what could be the most logical, systematic framework for organizational success articulated to date.

Applying primarily to business but also to nonprofits and government, the book offers the outlines of a tested framework for organizational success. Koch draws upon his forty years of experience in building what Forbes calls America’s largest privately held business (80,000 employees, $90 billion in annual revenue), studying and applying what is called “The Science of Liberty,” and founding and nurturing dozens of libertarian-related nonprofits.

Charles Koch deserves an audience. The family company he took over in the 1960s that had an enterprise value of perhaps tens of millions of dollars (inflation-adjusted) is worth, again according to Forbes, tens of billions. Koch Industries has never suffered a yearly loss. And in relative terms, a dollar invested in Koch in 1967 (the year Charles took over from his father) would be worth $2,000 today, outdistancing the same investment in the S&P 500 index ($500 today) or Warren Buffett’s Berkshire Hathaway ($1,400). [Read more →]

My post last week evaluated the claim that wind generation can save money for power pool customers.  It was found that the supposed savings could be realized only if the elephant in the room – the above-market feed-in tariff – was ignored.  In other words, consumer payments for electricity from a power pool was half of the story; the real price had to include the consumer-qua-taxpayer funding of the feed-in-tariff (FIT).

And with this two-part scheme, games are played. Wind generators can bid a low price into the pool only to receive a higher FIT, which gives them an incentive to underbid. This might reduce the pool price but not overall cost to Germans for electricity.

Investing in New Generation: What Makes Sense?

If a generation resource is a good investment for its developers then it must return a profit to them.  In a normal electricity market this profit comes from supplying a segment of the demand (peak, intermediate/cycling, baseload) from a plant that is efficient technically and financially.

For existing plants and determinations of electricity costs in the here and now we can figure out the average cost of supplying electricity by calculating the weighted average cost of supply for each time period in the market every day.  If the addition of one generation source raises this weighted average without improving service quality or reliability, then it is not economical and would generally not be chosen in a well-functioning market.

But what about the future?  Electricity suppliers must invest large sums in new generation plants with the expectation that these plants will meet demand at the least cost.  This cannot be known with certainty, and mistakes are made all the time, especially when government policy and rent-seeking drive investment choices.

Transmission network operators – those in charge of the “natural monopoly” part of the power business – try to reduce the risk attendant to future supply by figuring out the least costly way to supply power and energy to their customers in the future, including the wires to transmit the electricity.  They have to take account of a long list of considerations: investment cost, fuel supply, emissions and licensing regulation, proximity to existing load centers and transmission nodes, transmission congestion – you get the idea.

The transmission system operator also has to pay attention to public policy – renewable energy mandates (“portfolio standards”), federal tax incentives (producer tax credits for wind and solar), feed-in tariffs, powerful politicians who do not want their vistas impaired – in a host of ways that directly impact their views of an optimal future generating system.

What Does the Wise Transmission Operator Do?

A wise investor in generation will first figure out what is economic to build? what are the physical constraints on the system? and finally, what limitations will public policy put on otherwise least cost generation choices?

A Case Study of “Germania”[i]

Let us imagine that we have a rather large and wealthy country to play with, one that currently has about 129 GW of installed generation capacity.  Further, we can imagine that this wealthy country, responding to its powerful environmental movement, has decided to

(i) phase out nuclear power;

(ii) limit future coal power-plant operations;

(iii) build a lot (a lot!) of wind generation plants; and

(iv) bring in most of its gas supply from Russia at prices linked directly to refined oil products and crude (i.e., high and volatile). [Read more →]

“The BP incident highlights big differences in how socially responsible funds prioritize various causes. Some of these managers considered BP’s stance on climate change a strong positive. ‘BP was the first to break the logjam on climate change policy’ and had been a leader on alternative energy, says Mark Regier, director of stewardship investing for MMA Praxis.”

- Quoted in Eleanor Laise, “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP,” Wall Street Journal, July 17–18, 2010.

The greenwashing strategy of BP and Enron has been the subject of three recent posts at MasterResource:

They Loved BP and Enron: Climate Alarmism as the Great Environmental Distraction (Part I: Worldwatch Institute quotations)

BP’s ‘Beyond Petroleum’: Climate Alarmism as the Great Environmental Distraction (Part II: Why the ‘greenwashing’?)

Harvard Business Review Article: BP as Environmental Role Model (Part III on global warming as the great environmental distraction)

Don’t believe that “Beyond Petroleum” BP fooled the politically correct after Enron and even all the way up to the Deepwater  Horizon explosion/Gulf spill of May 2010? Then consider the Wall Street Journal’s “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP” (reprinted below as Appendix A). [Read more →]

[Editor note: Part I in this series reviewed the praise for BP and Enron from the Worldwatch Institute. Part II delved into the reasons that BP tried to rebrand itself as "beyond petroleum."]

“Such [progressive] leadership [on climate change] may give BP Amoco better access to government-controlled oil deposits and more operating flexibility.”

- Kimberly O’Neill Packard and Forest Reinhardt, “What Every Executive Needs to Know About Global Warming,” Harvard Business Review, July/August 2000.

The Worldwatch Institute sang the praises of BP’s it’s-a-problem, we-can-solve-it approach to climate change. Far Left environmentalist Joe Romm featured John Browne/BP in his book Cool Companies as a leading example of corporations going green for profits and virtue.

Both Worldwatch and Romm were wrong–dead wrong–about BP, just as they were also wrong about climate-alarmist Enron and Ken Lay.

It turns out that a lot of political profit-making and greenwashing was going on at both rogue companies. Remember what Jeff Skilling told one of Enron’s coal executives who complained that the company’s greenwashing was hurting his division:

“We are a green company, but the green stands for money.” [Read more →]

Today, the House Energy and Commerce Subcommittee on Energy and Environment will hold a hearing on the Blowout Prevention Act of 2010. A draft of the legislation and other pertinent documents are available on the Subcommittee’s Web site.

Although the draft legislation and hearing documents address serious problems brought to light by the Committee’s ongoing investigations, the Blowout Prevention Act would throw the baby out with the bath water.

To restate the obvious, although oil spills are bad, oil is good. Without oil, there would be no modern commerce and no mechanized agriculture. Life for most people would be “nasty, brutish, and short,” and many of us would not even be alive. Another obvious point — British Petroleum (BP) is to blame for the worst environmental disaster in U.S. history, not the oil industry as a collective entity.

Yet the draft legislation that Chairmen Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) will promote at today’s hearing could shut down all offshore drilling in the United States.

The draft text says the federal government “shall not issue a permit to drill for a high-risk well unless the applicant for such permit demonstrates . . . and the appropriate federal official determines that . . . the applicant has an oil spill response plan that ensures that the applicant has the capacity to promptly stop a blowout in the event the blowout preventer and other well control measures fail.”

Sounds innocent enough. However, the bill defines as “high-risk” any “offshore oil or gas exploration or production well,” not just ultra-deepwater rigs. In addition, at both the June 17 Oversight and Investigations Subcommittee hearing and the June 15 Energy and Environment Subcommittee hearing, Chairmen Waxman, Markey, and Bart Stupak (D-Mich.) emphasized that none of  the major oil companies, individually or in combination, could have stopped the spill after the blowout preventer failed:

• “BP failed miserably when confronted with a real leak, and ExxonMobil and the other companies would do no better.” — Chairman Waxman, June 15
• “It could be said that BP is the one bad apple in the bunch. But unfortunately, they appear to have plenty of company. Exxon and the other oil companies are just as unprepared to respond to a major oil spill in the Gulf as BP.” – Chairman Stupak, June 15
• “Yet when you’re asked can you stop the massive quantities of oil that are now ruining the beaches and marshland, killing the wildlife, and devasting the economy, you [BP, ExxonMobil, Chevron, Shell, ConocoPhillips] say no. You say you’re not well equipped to deal with it, and these catastrophic impacts are simply unavoidable.” — Chairman Markey (hearing transcript, pp. 220-221), June 15

The implication is obvious: The federal government ”shall not” issue any more permits for offshore drilling, because nobody knows how to “promptly stop a blowout in the event that the blowout preventer and other well control measures fail.” Rep. G.K. Butterfield (D-N.C.) put it this way: “BP ignored a very simple rule. If you can’t plug the hole, don’t drill the well.” But, as the BP disaster shows, some holes cannot be plugged, at least not in time to prevent gigantic spills. Logically, the bill implies that no permits to drill should be granted and that existing permits should be revoked.

How might Chairmen Waxman, Markey, and Stupak reply to this criticism? [Read more →]

[Editor note: Part I in this series examined praise for BP and Enron from the Worldwatch Institute. Part III examines a Harvard Business Review article linking BP's 'beyond petroleum' strategy to special government favor, including drilling on government domain.]

Consumer boycotts of Shell and pressure from Greenpeace … [and] speculation that Shell might shift its position on climate change led BP CEO John Browne to look more closely at climate change. He decided to set a new company policy that would set BP apart from the competition—the product differentiation strategy.

- Gary Gardner, “Accelerating the Shift to Sustainability.” In Worldwatch Institute, State of the World 2001 (New York: W. W. Norton, 2001), p. 101.

With great big blobs of oil washing up on the shore, it is almost comical—no, it is comical—to see some of BP’s erstwhile friends in academia and other centers of high-minded thought running for cover. To cite one example, thanks to BP sponsorship, 300 researchers in white lab coats at Berkeley are busily searching for ways to make green fuels that will reduce our dependence on oil. In 2007, BP set up the Energy Biosciences Institute, saying it would spend $500 million over the next ten years to support research into plant-based fuels at Berkeley and two other universities. This is the largest corporate donation ever for university research.

- Andrew Wilson, “Beyond Pathetic.” The Weekly Standard, June 28, 2010.

For more than a decade, Left environmentalists and trendy business ethicists have touted BP’s “beyond petroleum” mantra as an example of public-interested corporate progressivism.

For example, Joe Romm in Cool Companies: How the Best Businesses Boost Profits and Productivity by Cutting Greenhouse Gas Emissions (Island Press: 1999) devotes several pages near the end of the book to “climate leadership at British Petroleum.”

Romm refers to John Browne’s “remarkable May 1997 speech at Stanford University” (p. 206) before describing this episode:

Browne noted in a February 1998 speech that immediately after the Kyoto conference, he wrote to all 350 leaders within the BP group, the people who run BP’s business units, to get their ideas on how BP could reduce carbon emissions. Browne said, “Two weeks ago I got the response and I was stunned by it. It consisted of 200 pages of the most detailed and serious proposals…. Every single one reflected the view that we were doing the right thing in trying to tackle our own emissions and to make a positive constructive contribution to the public debate” (p. 207).

Romm continues: “One of the primary messages of this book  [is what] Browne has learned… ‘It is clear how frequently environmental logic and commercial logic coincide” (p. 207).

BP’s Misdirection

But now we know what happens when a corporation gets distracted and tries to be all things to all people. It happened to Ken Lay and Enron, and it happened to BP.

Tony Hayward cut back BP’s renewables push, which put pressure on the company’s ‘beyond petroleum’ greenwash. But evidently Hayward did not or could not do enough to reverse the unfocused corporate culture toward safety and true environmentalism. [Read more →]

[Editor note: Part II in this three-part series delves into the reasons that BP tried to rebrand itself as "beyond petroleum." Part III examines a Harvard Business Review article linking BP's 'beyond petroleum' strategy to special government favor, including drilling on government domain.]

“A growing number of corporations are moving beyond denial to acceptance and action on climate change, some seeking competitive advantage by anticipating rather than responding to future policy changes.”

- Seth Dunn and Christopher Flavin, “Moving the Climate Change Agenda Forward.” In State of the World 2002 (New York: W. W. Norton, 2002), p. 25.

Just imagine if John Browne had used the time and resources BP spent on climate alarmism and ‘beyond petroleum’ on real safety and environmental issues.

BP might still have a capitalization of $150 billion and not face a potential worst-case scenario of bankruptcy and ruin. And more importantly, the U.S. Gulf would not be in an environmental crisis.

Just imagine if Enron’s Ken Lay had used the time and resources spent on climate alarmism and forced energy transformation on accounting, risk control, and the real things that promote business sustainability. (Lay was a big Christopher Flavin/Worldwatch fan too.)

Enron might still be with us today.

Diverted management attention has an opportunity cost. Left environmentalists lobbied and praised BP and Enron for putting form over substance. A few shouted ‘greenwashing’, but most applauded their coveted split within the fossil-fuel industry on climate and energy.

Enron is no longer around. Instead it has become the poster child of political capitalism run amuck. And the Deepwater Horizon accident–for which, in an effort to save about $5 million, BP will pay tens of billions of dollars–may sink BP as an independent company.

What an irony: fake environmentalism driving out real environmentalism. Climate and energy reality, anyone?

A sampling of quotations from the mainstream Left Worldwatch Institute praising BP, Enron, or both follows. [Read more →]