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Feature

View from the Unocal Boardroom

The corporate charter, circa 1991: Take the funds provided by shareholders and invest them wisely to increase their value.

By Richard J. Stegemeier

Editor’s Note: Last month Chinese oil giant Cnooc Ltd. offered $18.5 billion for Unocal Corp. (http://www.transactioninfo.com/cnooc is a Web site dedicated to continuing coverage of this deal). The takeover bid has stirred up vociferous pro and con reaction from Wall Street to Washington and all along Main Street. To add a dimension to this dramatic transaction, we present the following article. Originally published in the Summer 1991 edition of Directors & Boards, it is an adaptation of a speech on the role of the Unocal board of directors that Richard J. Stegemeier, then the chairman and CEO of Unocal Corp., delivered to the National Association of Corporate Directors.

The article below is an abbreviated version of the original article published in the Summer 1991 edition of Directors & Boards. A complimentary copy of the full-length article is available to e-Briefing subscribers by e-mailing your request with a fax number to Editor James Kristie.

At Unocal we think of ourselves as a high-technology earth resources company. The company’s operations virtually span the globe. We find and develop crude oil and natural gas. We’re the world’s largest producer of geothermal energy, and our shale oil project in western Colorado is the first, and only, commercial-scale oil shale venture in the nation. We also manufacture and market a wide range of petroleum products, chemicals, fertilizers, and specialty metals. We just celebrated our 100th year in business -- a record few American companies in any line of business can claim.

We operate in a business environment that’s increasingly diverse, complex, and fast changing. A typical board meeting at Unocal these days might review a joint venture proposal in our chemicals and metals group, or a natural gas exploration play in Louisiana, or a major construction project in Thailand, or political events in the Middle East, or cost implications of the Clean Air Act, or a new gasoline marketing strategy for California, or the company’s code of ethics.

To be effective, board members cannot be champions of a special interest or cause. We look for generalists, not specialists; versatility, not virtuosity. Naturally, we look for broad professional experience and decision-making responsibility, but most of all we look for wisdom, independence, and integrity. We do this because the director’s responsibility is to monitor performance, not manage the company.

Sometimes I like to compare our company to an orchestra. The CEO is the conductor, the managers are the musicians, the shareholders are the ticket buyers, and the board is a vigilant and demanding critic.

An Appropriate Balance

Our corporate charter, simply stated, is to take the funds provided by shareholders and invest them wisely to increase their value. This doesn’t mean we’re out to make a profit at any cost. We cannot afford blind devotion to the bottom line.

A corporation like Unocal really has five key constituencies. First and foremost, we have our shareholders, but we also depend on our employees, customers, creditors, and the local communities in which we live and work. Together, these five constituencies make it possible for Unocal to exist. We try to maintain an appropriate balance among them.

If we emphasize one constituency at the expense of another, the long-run profitability of the company will suffer. As a simplistic example, we could make our employees very happy tomorrow by doubling their salaries, but that wouldn’t do much for profits. On the other hand, we could make our customers very happy by cutting our prices in half, but that wouldn’t do much for profits, either.

We ask a lot of our outside directors. We ask them to challenge the company’s “common wisdom,” to make us aware of all the potential externalities that could affect our business, not just the “internalities” that we deal with every day. We ask them to help us anticipate change and to apprise us of business threats and opportunities as they see them. We ask them to test our goals and strategies, to oversee our compensation programs and succession plans, and to evaluate our corporate ethics. Naturally, we also ask them to monitor the company’s environmental performance.

A Special Responsibility

When it comes to environmental protection, those of us in the earth resources business bear a special responsibility. Our industry is essential to the country’s economic vitality and national security.

But our industry, by its very nature, disturbs the environment. We cannot drill for oil, mine minerals, or refine and transport petroleum without affecting in some way the land, air, or water. It is up to us to make sure that these disturbances are kept to a minimum. And it is up to our board of directors to make sure that we live up to this demanding standard. To underline our commitment, Unocal management drew up and signed our own set of environmental principles in early May 1990, two months before the Valdez Principles were published.

Some predict that the 1990s will be known as the “decade of the environment,” and it is easy to see why. Global warming ... ozone depletion ... toxic emissions ... oil spills ... landfills ... water quality ... the list of environmental concerns seems to go on and on.

Fortunately, Unocal has not faced an environmental crisis in many years, and we’re working hard to maintain that record.

Hostile Takeover Attempt

However, we faced a different kind of crisis five years ago, when a group led by T. Boone Pickens of Mesa Petroleum launched a hostile takeover fight against the company. The role of the outside directors during this struggle has potential applications to other difficult situations, including an environmental crisis.

Periodically, during the takeover fight, the outside directors -- and they were a majority of the board then as now -- met separately from our inside directors to discuss and evaluate the takeover fight. At these meetings, they were provided with whatever outside counsel they required, including lawyers and investment bankers who had no relationship with company management. We did this to ensure their independence and integrity. Every director studied the issues with great care.

We won that battle, handing Pickens his first major defeat in the takeover wars. As it turned out, the private meetings of our outside directors were a key condition of victory. The Delaware court considered these meetings to be strong evidence that our proxy battle was in the best interests of our shareholders, and not an effort to protect “entrenched management.”

Partly based on this experience, we’ve now established -- for the first time in the company’s history -- a special litigation committee made up of all outside directors who were not on the board when the particular event in question occurred. They have access to whatever inside or outside resources they need to review the performance of management and the full board and to make any recommendations they feel are necessary.

To Succeed in the Decade Ahead...

Should Unocal ever face an environmental crisis, I would expect the outside directors to meet in private to critically review and evaluate the company’s response.

I’d like to stress once again that society is changing and business is changing with it. To succeed in the decade ahead, corporations must become creative public citizens. The corporate director will play an integral role in this process -- monitoring performance and encouraging innovation.