By Gbolade Okeowo
The discussion in my previous article: OCCIDENTAL PETROLEUM CORPORATION: Why is it the Most Admired Company of 2011? -about the nature, capabilities and achievements of Oxy, is a springboard for me to analyse the organisation looking in particular at its stakeholders and objectives.Stakeholders are any group with an interest in the activities and results of an enterprise (Macmillan and Tampoe, 2000). For Oxy the most obvious stakeholders are shareholders, employees, local governments and customers. However, suppliers, auditors, bankers, pressure groups, competitors and the society at large are also significant stakeholders for Oxy.
Relating the concept of stakeholders to issue under discussion, all the groups mentioned above are significant to Oxy’s operation and performance. This analysis however focuses on the stakeholders who wield crucial influence and have the most interest in Oxy’s activities and performance. To arrive at such a juncture, this article briefly explains the relevance of significant stakeholders to Oxy’s operations and then classifies these stakeholders using Mendelow’s power- interest matrix. This part of the analysis also identifies Key Performance Indicators (KPI’s) for each of the stakeholders.
Oxy’s Stakeholders and Relevance to Operations and Performance
The long serving CEO and Chairman of Oxy, Ray Irani, often reinforces the fact that maximization of shareholder value is Oxy’s number one priority. This ranks shareholders as the most important stakeholders (at least from Oxy’s management point of view). Without their capital input corporations like Oxy would not exist. Shareholder importance has recently crept into Oxy’s corporate governance, now shareholders wield higher influence in electing the company’s board of directors. The recent global financial crisis has also wedged the power balance further in favour of shareholders. This is expressed in many ways including the recent ‘say on pay’ policy adopted by Oxy’s board, giving shareholders an advisory vote on the compensation of the highest paid executives in the company (Reuters, 2009). This is a big but not conclusive step towards shifting the leadership and direction of the company’s operations from the autocratic style applied by late Armand Hammer, the 33 year Oxy boss before the current chief executive, to give more influence to the shareholders (New York Times, 1990).
The trend of maximization shareholder value as the key mantra in Oxy’s strategy is not new for most of its counterparts on the S&P index or industry competition quoted on the NYSE. The attitude of profitability as a key driver is within the classical perspective on strategy. This is where the organisation’s strategy is deliberate to achieve an outcome of maximized profit. This is true of traditional British and American corporations in contrast to their Japanese and German counterparts who espouse a more pluralistic outcome based on profit through growth (Whittington, 1993).
It is obvious that no enterprise can function without its staff. In Oxy’s case, it cannot function to capacity without the proper orientation and input of its 9000 strong workforce. The Piper Alpha disaster is arguably the most high profile employee practice fiasco Oxy has been tangled in. The response of the local Scottish media and trade union officials opened doors to criticism of Oxy’s lack of concern to the pay and working conditions of its contractors employees (like those on the Piper Alpha Platform). Employee relations academics claim this led to a demoralized work force on the platform which unfortunately spawned into lacklustre attitude to safety guidelines and measures (Gallie, Penn and Rose, 1996). The tragedy led to a much needed revamp of Oxy’s working guidelines now found in the Health and Safety policies and procedures all overseen by an active Environmental and Social Responsibility Committee (Oxy Proxy Report, 2009).
Because of their regulatory powers they are very important stakeholders for Oxy’s operations. Local governments award mining, production and general operation licenses, concessions and acreages. Local governments are also in charge of tax and royalty regimes in respective regions. The significance of the governments of the countries where Oxy operates is in line with the strategy concept of macro factors that affect any organisation (Duncan’s PEST analysis). The P in the acronym stands for ‘political’ external factors. In Oxy’s case the domestic political climate of where it operates is crucial to its operations and bottom line. The ongoing dispute between the Ecuadorian government and occidental over an alleged $75 million tax refund and unauthorized sale of an oil block is a typical illustration of the importance of local governments to Oxy’s operations. The dispute initially led to Oxy’s assets in the country being seized and production (that used to be 100,000 bpd) halted. Oxy claims it lost up to $1 billion in the process (Reuters, 2007).
In contrast to Oxy’s reduced fortune with the volatile Ecuadorian political climate, in the Middle East, the local governments and Oxy have more amicable partnership. The Mubadala Development Company of Abu Dhabi and Oxy entered into a 20 year EPSA with the Ministry of Oil and Gas of the Sultanate of Oman. This is not Oxy’s first high profile partnership with Mubadala Development Company, as Oxy owns 24.5% of Dolphin Energy Ltd with Total of France and MDC (Zawya News, 2008). Depending on the priorities of the local government in question this part of stakeholder interest is usually closely tied to the effect of Oxy’s operations on the environment and the climate.
Apart from air, soil and water impacts this includes organisations concerned with urban landscape, commercial and industrial traffic. The nature and sheer size of Oxy’s global operations makes its environmental record prone to controversy. Oxy was ranked 48 in the top 100 corporate air polluters in the United States (Political Economy Research Institute, 2002). The KPIs for Oxy’s environmental stakeholders are more about standards and practices. Buttressing the point in the previous paragraph of the sub section above (Local Governments), leaders of indigenous communities in the Peruvian Amazon imposed an ultimatum for Oxy to clean up its toxic waste or face legal action. (EarthRights International, 2006) In this case Oxy is alleged to have dumped 9million barrels of untreated “formation waters” into the pristine tropical rain forest territories between 1971 and 2001. It was also alleged Oxy used substandard technology to store crude oil and by products (Oxy Proxy Statement). The important question to ask is how much impact does heat from environmental stakeholders have on Oxy’s corporate strategy? According to the interesting 2009 Oxy Proxy Statement, a group of shareholders (Institutional Fund Managers: Custodian for the New York City Employees, including police and fire department pension fund) raised a proposal to attack the board of directors’ actions in the Peruvian Amazon.
Under the umbrella of a review of the Oxy’s attitude to laws of host countries, this situation paints a very important picture of how morality and empathy for the environment are a common denominator that holds environmental stakeholders, local governments and shareholders together. This stakeholder overlap situation is unique to the extractive industries, although with varying degrees of intensity depending on the model of corporate governance and outlook of the corporation (Macmillan and Tampoe, 2000).
Oxy’s main competitors are U.S based oil and gas companies. According to Fortune 500’s annual ranking of America’s largest corporations in the extractive industry, Oxy ranks 9th below Pemex, BHP Bilton and Rio Tinto. This analysis pays particular attention to Oxy’s operations in the Oil and Gas industry; exploration, production, refining and marketing. In this regard, Oxy’s competitors are EI DuPont de Nemours & Co., Royal Dutch Shell and Exxon Mobil to mention a few (Yahoo! Finance, 2009). To fully understand how competitors can be interested in the performance and operations of Oxy as significant stakeholders (following the definition at the beginning of this analysis) and vice versa, Porters concept of 5 Forces that shape industry competition is a good illuminator. According to Michael Porter, one of the economic forces that shape the industry competition is the “intensity of rivalry amongst competitors”. In the Oil and Gas industry this refers to the rate of industry growth, the tendency for over supply to occur and the strength of brand identities. (Porter, 1985) Fitting this proposition into the remit of this business report means that Oxy’s competitors are significant stakeholders, although they wield little or no authority with management, they are of high interest to management.
It must also be mentioned that Oxy has on several occasions implemented collaborative strategies with competitors for asset optimisation and to increase profitability. For example, in 2007, Oxy’s second quarter earnings were up $1.41 billion compared to $860 million the last year. This was due to asset reshuffle (swap and sales) with competitors like BP and Lyondell Chemical Co. (Reuters, 2004)This further explains the relevance of competitors as stakeholders and again an overlap has occurred between Oxy’s competitors as stakeholders and that of shareholders priorities.
Other internal stakeholders
This includes its auditors, lawyers, consultants and the like. Internal stakeholders are significant stakeholders because of the professional duties they owe to the financial, legal running of the corporation and its subsidiaries. These groups of stakeholders usually fall in line with Oxy’s management’s priorities because they are selected, hired and remunerated by Oxy. KPMG LLP Los Angeles serves as independent public auditors for Oxy. Their activities with Oxy are overseen by the Audit Committee (Oxy Proxy Statement, 2009).
Oxy’s Stakeholders: the Power Interest Matrix
(Adapted from Power/ Dynamism matrix, Gardener et al, 1986)
Fig 3
The diagram above illustrates the power interest matrix for Oxy’s stakeholders as identified and analysed in the previous subsection.
Local governments wield high power and influence in Oxy’s activities, the however do not have internal or management interests in the day to day running of the corporation hence their position on the matrix; high power, low interest.
Shareholders do wield high power through corporate governance; they also have high influence on the selection of board directors (day to day management). They have high interest on the performance and financial results of Oxy. Shareholders priority is to maximize the value of their investment. For the fact that Oxy operates a performance based system for its top level management and directors this makes shareholders influence more critical as stakeholders. (Oxy Proxy Statement, 2008) Thus, they are positioned on the matrix as high power, high interest.
Environmentalists wield higher than average power, for two reasons; their ability to influence the media and the public’s image of Oxy, and secondly their increasing ability to influence the shareholders as exhibited in the recent Peruvian Amazon case. On the matrix they are moderate power and low interest in the day to day running of Oxy.
Employees are very important to any organisation. The sheer size of Oxy’s global operations and the absence of one global union to represent the 10,400 strong work forces reduces their power in the matrix. Employees of any firm always have a high interest in their employers activities and performance, hence the position on the matrix; low power, high interest.
The red arrows and blue annotations in the matrix, offers this illustration more clarity and makes the organisational stakeholder analysis more intelligent. The arrows and annotations show how each stakeholder’s priorities might be linked and what exactly the gelling forces are. The local governments are inextricably linked to the shareholders. Dr. Ray Irani over the years has created competitive advantage for Oxy by personally nurturing relationships with the heads of relevant governments to acquire exploration and production assets that have translated into a strong financial performance for the shareholders. (Oxy Proxy Statement, 2009) The Peruvian Amazon case aforementioned shows how shareholders priorities can be influenced and thus linked to the priorities of environmentalists. The keywords in the Shareholder-Environmentalist link are morality and empathy with the environment. Employee’s priorities for better pay and safer working conditions can be shared with the local government depending on the sophistication employee protection law and level of trade union activism in the operating community.
NUTSHELL:
In his first article- OCCIDENTAL PETROLEUM CORPORATION: Why is it the Most Admired Company of 2011?, Gbolade gave us a brief overview on the reasons for the corporate existence of Occidental (and perhaps a taster as to why the company is quite admired). In this discussion he has been able to make some points on 'who' Oxy exists for and how significant they are. His next article will focus on some scrutiny of the performance of the company. Gbolade makes one or two statements that I think are cause for debate on this one. Do fish them out and let us discuss. For more information on this article and to view Gbolade's professional profile, Click here -->
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