In Swell Oil we trust

John Kay
6 February 2003

Your excellency the Life president, ladies and gentlemen, I am taking this opportunity to describe to you the nature of our business and the principles on which we conduct it and its role in society – both your society and the different society from which I come. I am doing this because I need to provide you with good reasons why you, the people of Couldbericha, should consent to our company operating within your borders. I was already conscious of that necessity, but forcefully reminded of it by the thud of stones hitting the armour-plated limousine that brought me from the airport.

Some of my colleagues who occupy senior positions in large companies in Britain and the United States argue that I should not have to deliver speeches of this kind. They deny that companies have responsibilities to the communities in which they operate. They accept that companies must observe the regulations laid down by the legitimate governments of the countries concerned, such as the regime led with such distinction by my good friend, General Onthetake. They believe, as we all must, that individuals within these companies should conduct themselves according to the standards of honesty and transparency to which we aspire in Europe and North America. But, subject to these restrictions, they say, my responsibility and that of my fellow employees in Swell Oil plc is to generate the largest possible returns for our shareholders. In Milton Friedman’s famous words, the social responsibility of business is to maximise its profits.

Other friends of mine, who are members of the Business Round Table tell me that I should deliver a different kind of speech, on the joys of capitalism, the morality of freedom of contract and the reality of how business works. They have drawn my attention to a treatise on the subject by Professor Dryden Freepeople, of the University of the Great Lakes.

But I am not going to deliver that lecture. Declarations of this kind do indeed go down well at investor presentations and meetings of the Business Round Table. But I have found that they do not go down well anywhere else. Not in the shantytowns through which I passed between the airport and the city; not among the demonstrators who jostled me as I entered the Palace of the True Democrats to deliver this speech; not in intellectual circles in the continent from which I come.

Why we exist?

The towering figures who created the Swell Oil Company did not set out to create shareholder value. They wanted to build a great oil company. And they succeeded. Swell Oil is one of the world’s most successful corporations. It delivers high-quality products in almost every country in the world. If Swell Oil had a single objective that would be it; but Swell Oil does not have a single objective. Swell Oil also delivers good returns to its shareholders, and investors, and has done so on a consistent basis. It provides rewarding and fulfilling employment for around 100,000 people around the globe. And it is a huge contributor – one of the largest contributors – to national exchequers, including the one in which General Onthetake has an intense and continuing interest.

Success in all these dimensions is the measure of Swell’s achievement. We are a great oil company because all the people who are touched by our activities – the people it is today fashionable to call our stakeholders – benefit from them.

But surely, I have often heard it said, profit is still the overriding objective? Even the most committed advocate of shareholder value maximisation recognises that Swell Oil must, if it is to continue to earn profits, satisfy its customers, build a committed workforce, and reach an accommodation with the governments and people of the countries in which it operates. As the greatest businessman of the last century – Henry Ford – observed, business dies without profit, but business with no objective other than profit also dies, because it has no reason to exist.

Good managers have always known that, and recognised its implications. If we have ever doubted it, the experience of our own company and of the business world as a whole in the last decade has reinforced our certainty. We are today seeing the consequences of years of inappropriate preoccupation with financial markets in the boardrooms of our major corporations. I am not just referring to the incidents of fraud and greed, which have filled the headlines of the business press in recent months. If that were the only issue, public confidence in business could indeed be restored, as many people hope, by sending a few greedy executives to prison – throwing a few members of our expedition to the wolves to save the lives of the rest of the party.

But the problems we face go much wider. The process of foolish excess, which overtook the corporate sector in the 1990s, has undermined the legitimacy of capitalist business organisation and cast doubt on both the integrity and competence of those who were entrusted with its management. It is for these reasons also that I will refrain from delivering that lecture on the morality of capitalism.

Trust me: I can make you richer

These events remind us again that we have many goals and, if we try too hard to pursue any one of our goals, we risk failure in all of them. When we say we intend to bring benefits to the people of Couldbericha through our activities, we mean it. Bringing benefits to the people of Couldbericha is one of our business objectives. There is no subtext that says, ‘We intend to enrich the people of Couldbericha (although by as little as we can get away with) because otherwise they will stone the cars of our managers, sabotage our activities, and support politicians who are inimical to our interests.’

If there was such a subtext, you would not trust us, you would be right not to trust us, and I expect you would throw stones at my car anyway; if I were a citizen of Couldbericha, I might well be among the stone throwers. Mistrust of instrumental motivation is well founded. The paradoxical consequence is that companies with genuine concern for the welfare of the communities in which they operate may actually be more profitable than those whose motives are purely instrumental. Just as the person who is honest by nature may (but need not) be more successful in life and business than the person who is not honest by nature, but who feigns honesty when it appears advantageous.

We do not, in my company, engage in debate as to whether honesty is the best policy. We seek to be honest. And similarly, when I say to you that one of our objectives – not our only objective, but one of our objectives – is to ensure that our activities benefit the people of Couldbericha, I say it to you in that spirit.

Serving all of the interests all of the time

To repeat, successful businesses must satisfy all their stakeholders. If they focus too much on serving the interests of one group, or fail to meet the needs of another, they put the success of their whole business in jeopardy. It is as simple, but also as subtle, as that. I am not arguing that the goals and interests of our different stakeholders never conflict with each other. It is obvious that sometimes they do. Nor do I claim that the pursuit of one of our goals necessarily leads to the achievement of the others – it may, but it may not.

But we rarely think of our business in terms of trade-offs between our different objectives – we do not say ‘let us sacrifice a little of our reputation but improve our staff training’, or ‘let us improve our relationships with governments because we estimate that the additional value of the licences and lower taxes we will secure will compensate for the costs’. We do sometimes say ‘we have devoted too much attention to public relations, and too little to the skills of our people’ or ‘we have neglected the government relations side of our business’. There is a difference between making trade-offs, and recognising that we have given too much attention to one of our goals at the expense of others.

We are all very familiar with this style of thinking from our own everyday lives. We seek success in our working lives, and enjoyment from our leisure activities. We try to achieve fulfilment in our personal relationships and respect in our dealings with our peers. We know that if we focus too much on any of these goals, and neglect the others, we ultimately jeopardise them all. Success in life entails – indeed it is defined by – a balance of all these aspects of our interactions with other people.

That is why we in Swell Oil do not judge our success by a sign in Reception which shows our constantly changing share price. Instead we employ a balanced scorecard designed to measure what we are doing for each of our stakeholders – our investors, our employees, our customers, our communities. We constantly monitor our financial performance – our profits, our cash flow, the strength of our balance sheet, and the assessments of analysts and rating agencies. We measure the skills of our employees and the calibre of our new recruits; we look carefully at staff turnover; we ask our employees to tell us, honestly and anonymously, what they think of our company. We look at our prices, absolutely and in relation to our competitors, and measure regularly and carefully our customers’ opinions of our products and the service they receive from our company. We take surveys of what the public think of us as a corporation, and prepare regular reports on the current status of our government and community relations.

Some of this information we publish; much of it, for good commercial reasons, we keep to ourselves. My most important job as chairman of this company is to review all that information, to see how the various elements of our balanced scorecard are moving. I will be concerned about large changes in any direction. A former Master of my old Oxford college reportedly reviewed the termly bills of all students and interviewed those whose spending on wine seemed too high – or too low. There was wisdom in that: a balanced scorecard means exactly that, and a sharp movement in any indicator, in whatever direction, demands attention.

This balanced scorecard is not the same as the so-called ‘triple bottom line’, which has recently become fashionable among advocates of corporate social responsibility. I shall say more about this concept later. There are two large differences. One is that our balanced scorecard is an internal management tool, not a means of external reporting. It is the product of our internal accounting and audit systems, not our corporate relations people.

Moreover – this is a closely related point – our balanced scorecard is concerned exclusively with matters relevant to our goal of being a great oil company. It does not measure our contribution to social goals – such as the advancement of disadvantaged groups. These ends may be – are – worthy in themselves but are not central to the business of a great oil company. Nor should they be central to our business. If they were, we would not be a great oil company, and I am not sure what kind of organisation we would be; or what would give us legitimacy in performing that different role. Of course, this does not mean that we do not acknowledge responsibility and obligations to disadvantaged groups. A great company, like anyone who occupies a prominent role in society, must acknowledge such responsibility and obligations. But this is not what we are about. It is not part of our ‘bottom line’ in the sense in which people ordinarily use that term – the features of our business on which we cannot compromise and by reference of which we judge ourselves and look to be judged.

Survival of the fittest

There is an issue here that extends widely, and is fundamental in its implications. We are and seek to be a great oil company. We are not a mobile phone company, or a bank. We are not a government, nor an organisation for the promotion of environmental causes or gender equality. Other institutions exist to perform these tasks. Modern economic and social organisation depends on this division of function – the extension to organisations of division of labour, which Adam Smith rightly recognised as the cornerstone of economic progress. Our role as an oil company is a function of our capabilities as an organisation, and vice versa – the things we do will evolve over time as new applications of the capabilities of our organisation emerge, and these capabilities will develop as the requirements of the businesses we are in develop. This match between capabilities and functions will sensibly be the subject of relentless incremental development, not the transformational change beloved of management consultants and heroic chief executives.

A match between capabilities and functions is the key to all successful businesses. It is best achieved through an evolutionary process, and the analogy with other forms of evolution may be helpful. For centuries, people agonised over questions such as ‘what is a cat for?’ until Darwinism relieved them of the burden: a cat is simply a creature well adapted to the environment in which a cat lives. The purpose and the function are not sensibly distinguishable and this is true of Swell Oil as it is true of the cat. Our purposes are defined by the things we do and the search for some deeper defining purpose is not helpful in understanding the nature of our organisation.

Swell Oil is, and seeks to remain, a great oil company. This is both its purpose and its function. Profit is necessary for that function but it is not its purpose just as we must breathe to live but do not live to breathe. The achievement of a great oil company is measured by the satisfaction of all its stakeholders with its performance. That is how we measure our performance internally and how we expect to be measured externally.

The value of our values

It is a theme of all that I have said that our organisation exists for people. It is also true that the behaviour of an organisation is the sum of the behaviour of its people. But nevertheless – and I know in today’s individualistic society some people find this difficult to accept – organisations have values as well as individuals. The values we prize within Swell largely reflect the values of the Northern European countries in which our company is based. But operating around the world as we do, we often find that these values conflict with those of local cultures in the countries in which we operate.

Our overriding principle is to behave well, by reference to our own values, within the context of local standards. We are motivated by our perception of our own goals rather than by abstract argument. Within our company we do not begin to engage in debate on cultural relativism or moral absolutes. We employ many highly intelligent people who enjoy these debates, but resolving them would not reflect our competitive advantage. We know only that we cannot function as an organisation if we do not respect and maintain our own values, and that we cannot function within a community if we do not respect the values of the people of that community – even if we disagree with them.

Let me illustrate what this means. I personally deplore the poor treatment and status accorded to women in many Islamic states, and so do most of my colleagues. But our employees, male and female, are instructed to take care not to offend local sensibilities when they work in these parts of the world. The pay and conditions of our employees in poor countries is always good by local standards, but we do not maintain common pay and conditions around the world. To do that would not be consistent with operating effectively as an oil company in the interests of all our stakeholders. It would also disrupt the local economies in which we work.

I am here today sharing a platform with General Onthetake, although I know that if he behaved in my country as he has in yours he would be in prison, not the presidential palace. Some of our values are absolute: we do not employ young children anywhere or allow our staff to use violence. To allow this kind of behaviour would begin to corrupt our whole organisation. Sometimes the gulf between our values and local values is so large as to be unbridgeable: we do not operate in these environments.

We invite those who work in our company to apply the test: would you feel embarrassed or uncomfortable describing your actions to your family and friends? If you would, you should probably not be doing it. This last has implications for whom we recruit and promote. There are many people, for example, who find it difficult to admonish someone they have come to know well, still less to fire them for inadequate performance. I admire the sensibility of these people, but they cannot occupy managerial positions within Swell Oil, just as those admirably sympathetic teachers who cannot bear to tell pupils that they have failed cannot be employed as examiners. Conversely, people who enjoy confrontational situations are not suitable Swell managers either.

Thus our purpose, our function, and the capabilities of our business and our people are all bound together. Not only the capabilities, but the people required to develop these capabilities. I have indicated some of the characteristics required of a successful manager in Swell Oil. These characteristics are different from the characteristics required of a successful teacher, or investment banker. Whether these characteristics, and the purposes and functions they serve, are better or worse is a matter of opinion – personal opinion. None of these is an activity whose ethical nature is such that any serious body of opinion suggests it should be prohibited in a modern economy, but different people can reasonably hold different views about their worth. As an individual, I do not wish to run a tobacco company, and one of the many reasons why Swell will not acquire a tobacco company is that many of its executives feel as I do. But this does not prevent me having respect for those who do run a tobacco company. Nor do I see any hypocrisy in this stance; there is no contradiction in believing that activities are properly undertaken by other people, while oneself preferring not to engage in them.

No right to interfere

As a corporation, we must respect the moral standards and preferences of the community in which we operate. But, as I shall elaborate in a moment, we not only do not have an obligation to arbitrate on these moral standards, we actually have no right or competence to arbitrate on them. Our job is to be a great oil company. This simple maxim helps us cut through a great many issues.

Our overriding moral principle then is that our people should not apply moral standards in their business life that are significantly different from those they would apply in their everyday activities in the communities in which they live. Any other position would display a lack of respect for the values of these communities.

We do not therefore have an instrumental morality. Once again, the point here is not that discreditable actions could never be in the long-term interests of the stakeholders of Swell Oil. The claim that good business is profitable business is superficial. Sometimes, discreditable actions benefit those who commit them; if this were not true, there would be no ethical issues, and moral philosophers would have spent two thousand years wrestling with questions that do not arise.

I have emphasised that we seek – genuinely, not instrumentally – to benefit the communities in which we operate. I cannot pretend that oil exploration and production does not harm the environment. Our facilities are ugly, our product is prone to leak and pollute. We need to ensure that our actions are nevertheless beneficial to the communities in which we operate. Often, we can achieve this by working through the government of the countries concerned. This has not been our experience in Couldbericha, where – let me put it as delicately as you would expect me to – the government does not appear to have the role and functions we associate with government in the countries from which we come. This means that in countries such as Couldbericha we in Swell Oil have a wider range of responsibilities – responsibilities for the security of our plant and our people, for the welfare not only of our own employees but the inhabitants of the areas of the country in which our operations are located. We do not seek or enjoy these responsibilities and would be delighted to hand them over to a legitimate and effective democratic authority.

We perform these tasks in pursuit of our role as an oil company. Other than that, we have no proper political purposes and no proper political role. We are not for, or against, higher taxes or Britain joining the euro; we do not support recycling campaigns, or oppose them; we do not contribute to political parties or support political candidates. We do not engage in political lobbying, even to reduce taxes on our own operations or to protect our activities from competition, although we do seek to provide factual information on these matters; the boundary here is hard to define but it is obvious that most corporations cross it. We do not do these things because in a democratic society we enjoy no legitimacy in doing any of them. We are an oil company.

Beyond the discussion

It follows from what I have said that I have a mixed view of the current discussion of ‘corporate social responsibility’. I have no difficulty in agreeing that profit, or share price, is an inadequate measure of the performance of our business. But the so-called ‘triple bottom line’ does not measure the important things that are left out of a purely financial analysis of our affairs. I have acknowledged that we are in a business that has the potential to do great damage to the environment. I am not going to hide behind the argument ‘we can do as much harm as we like to the environment so long as we observe the rules’. I don’t think that position is acceptable in Britain or the United States. It is certainly not acceptable in a country ruled by General Onthetake. We have a responsibility to minimise the damage we do, and to compensate for the damage we inescapably do. We achieve this through the taxes we pay and through our participation in other environmental projects. I am proud of what we do in both these respects.

But we are an oil company, and our environmental responsibilities do not go beyond those obligations to minimise damage and make good. Our purpose, our function, is to be an oil company, not to benefit the environment. Doing good to the environment is not one of our goals; it is therefore not part of our ‘bottom line’. Nor should it be. We do not have an obligation to promote a better environment; indeed, we have no right to promote a better environment. What exactly is meant by a good environment is something on which reasonable people may disagree and it is not for us in Swell Oil to resolve, or even consider, that issue. Our legitimacy within society is both defined and limited by our success as an oil company, and we should never forget that.

This applies, equally, to actions to promote social objectives such as the advancement of minority and disadvantaged groups. Like all decent people, those of us who work in Swell are anxious to promote access to education and jobs and to redress past inequities. As a company, we support charities with these objectives – as part of our contribution to the welfare of the communities in which we work – and we support and implement policies to bring these outcomes about. But the promotion of a different, and perhaps better, order of society is not, and cannot be, one of our corporate objectives. Once more, not only do we have no such obligation, we have no such right.

Making sense of the muddle

It is easy to explain how this muddle came about. At Swell, in common with some other oil companies, we came to understand that we would get nowhere continuing to deliver Professor Freepeople’s lecture on the joys of capitalism. For us to say that freedom of contract was a moral imperative cut no ice with the people who were stoning our cars and boycotting our products. We left our office towers, and went out to embrace our enemies.

And when we did so, the people we found coming the other way were articulate protesters expressing the conventional and well-intentioned concerns about discrimination and the environment, which preoccupy, even obsess, intellectuals of the centre left today. And we found it convenient to express our interest in their concerns. It did not cost us very much. Our corporate relations people put together some breast-beating propaganda. It has very little impact on what we actually do, and has genuinely improved our corporate image with an influential section of society.

None of this had, or has, anything at all to do with the real problems and dilemmas of contemporary capitalism. Nor is it relevant to the difficult questions of how to structure modern and robust corporate organisation in the 21st century. The view of the role of corporations which I have defined requires us to refocus managerial attention on building strong competitive advantages in operating businesses, and away from creating transitory shareholder value through deal-making and financial reconstruction. We in business need to reconcile the innovativeness, pluralism and experiment which is the key characteristic of a market economy, and which often generates a skewed distribution of rewards and opportunities, with the motivation of public service.

This motivation has been as important to the success of our – private – business as it has been for the delivery of traditionally caring activities such as health and education. People have worked hard for Swell for a hundred years, not because they cared about the creation of shareholder value, nor because they were incentivised to care about the creation of shareholder value, but because they believed they were engaged in an activity which was rewarding and worthwhile in its own right. And if we forget that – when we forgot that – we ceased to be a good business in any sense of the term. We who lead business need to restore a climate which gives executives freedom to manage without licence to steal.

Nor does the agenda of corporate social responsibility have much to do with the real ethical dilemmas which do surround the world oil business. Most of them concern, in one way or another, the problems which arise when valuable resources are discovered in countries which lack the social, political and economic infrastructure to deal with the problems which these discoveries create. The corruption which almost inescapably follows was described a century ago by Joseph Conrad in Heart of Darkness, and the issues he raises are as apposite today as then. By no means for the first time, it is essentially these issues that threaten to involve the major powers in a war which will be costly in material and human terms.

It is time to begin a serious debate about the role of business in society. I hope that today I have made an initial contribution to that process.

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