Review: Exxon’s shareholder fetish, good and bad

May 4, 2012

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Exxon Mobil shareholders may feel a warm glow when reading Steve Coll’s history of their firm. “Private Empire” reveals the company’s single-minded devotion to investors and shows that it has helped the oil giant earn world-beating returns. But other readers will be struck by the downside of this obsession.

The most obvious manifestation of Exxon’s focus on rewarding its shareholders can be seen in the management’s favorite financial metric, return on capital employed. Until relatively recently this measure of profitability showed the Texan company towering over its rivals. In 2009 its 20 percent return was close to double that of well-managed Chevron. Exxon has maintained a narrow lead even after the ill-timed acquisition of gas firm XTO Energy, which has been plagued by persistently low prices. Coll shows how a mania for discipline lies at the heart of this achievement. In finance, management and engineering Exxon labored to create idiot-proof systems that have served shareholders well.

After the 1989 Exxon Valdez spill made it clear that safety lapses could menace returns, this zeal for detail was applied to safety. Under the watchful eye of fearsome Chief Executive Lee Raymond, Exxon’s safety systems became “deeper and more pervasive than any of its peers,” in Coll’s words. Raymond designated 13 percent of new jobs as “safety positions” and micro-managed a new drug and alcohol policy – an area of particular concern since the captain of the ill-fated tanker was drunk when the spill occured. By the time Raymond had finished, failing to turn off a coffeepot might lead to a written rebuke.

Though well paid, by the standards of some peers Exxon executives have not feathered their own beds. Even the $35 million payout to current CEO Rex Tillerson in 2011 pales compared to the almost $900 million garnered by Occidental Petroleum chief Ray Irani in his last decade in the job.

Still, Exxon’s narrow investor focus made the firm slow to respond to longer-term reputational threats and to serve broader social interests. Such dangers intensified after the $81 billion takeover of Mobil in 1999, which created a firm with annual profits greater than the GDP of more than 100 nation states. While 80 percent of the old Exxon’s reserves were in North America and Europe, Mobil exposed the enlarged firm to perilous climes in West Africa, Venezuela and Indonesia.

The new firm soon suffered a severe reputational blow when it was caught up in Indonesia’s civil strife. Records show Exxon officers were aware that government soldiers paid by the firm to protect the firm’s assets were involved in human rights abuses. The firm was also embarrassed, along with others, by revelations in 2004 that it had funneled millions of dollars to the family of the authoritarian long-time president of oil-rich Equatorial Guinea, Teodoro Obiang Nguema Mbasogo – some of it through Washington-based Riggs Bank, which was sold to PNC Financial in 2005 after a series of money-laundering scandals.

Of course, Exxon has not been the only oil firm to suffer ethical pitfalls. Energy giants often have to operate in weak and corrupt states if they want access to big oilfields. Still, Exxon refused to sign the Voluntary Principles on Security and Human Rights drawn up by the Clinton and Blair governments in 2001, which laid out best practices for operating in such hotspots. These principles seemed perfectly acceptable to peers Chevron, Shell and BP. But Exxon saw itself as almost an independent sovereign, and relied on a motley group of former Soviet KGB and CIA officials to handle such political risks.

Such moral myopia was also on view during Raymond’s campaign to discredit climate change science – again a stance aligned with the interests of shareholders only in the short term. He made no secret of his skepticism on global warming, but his strategy of also promoting this position through subterfuge and proxy groups ultimately damaged Exxon’s reputation. It has also fostered skepticism about Exxon’s later scientific conversion and support of a carbon tax.

Coll avoids high-handed moralizing in “Private Empire.” Still, his history reads like a tale of the virtues and vices of an obsession with shareholder value.

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