China remains one of the biggest stories there is, whether you’re on Main Street or Wall Street. We’ve been hearing for some time about the explosive growth taking place there, but the recent offer from China’s state-controlled oil giant, Chinese National Offshore Oil Co. (CNOOC), for American-owned Unocal brought the story to a whole new level.
For the better part of a month, oddsmakers were betting that Unocal would sell to the Chinese. Suddenly, in mid-July, Chevron upped its offer. Even more suddenly, CNOOC dropped its bid earlier this month after intense scrutiny by the United States.
In the midst of all this, while the CNOOC offer was the best one on the table, I got quite a few e-mails from investors asking, “Wouldn’t the sale of Unocal to the highest bidder be the best thing for shareholders?” It is true that the CNOOC bid was, at the time, some $2 billion more than the one tendered by Chevron—and $2 billion is an immense amount of money in this or any kind of transaction.
This astute question leads us to a fundamental issue: Is it the duty of a company’s board to get the best price possible, regardless of who the buyer is, thereby enriching investors as much as possible?
My answer, which may surprise you, is no.
The duty of the board is to keep the interests of the company and all of its stakeholders at the forefront of company operations and strategy. Stakeholders are individuals or groups who have a vested interest in the business. They include investors, employees, customers, business partners and the communities in which companies do business. In many cases, stakeholders don’t own stock in the company, but they do have an interest in its success, and they work to support that success.
This is a perfect illustration of why we focus on what I call the “real value” of a company. If a company favors one stakeholder group over another, it reduces that overall value. For example, if employees or customers become disenfranchised, then the company will be damaged from within and will not be worth investing in. If it ignores investors, it will collapse from the outside and be unable to maintain ongoing operations—in which case employees and customers will be forced to look to another company for jobs and products. The pieces all relate to one another, and the interests of all must be balanced. It’s why I continually drive home the mantra that value is essential to every part of a company, not just its stock price.
The question of whether Unocal should have accepted CNOOC’s bid gets to the notion of a company’s role in the community, and that may be the most difficult value to define. Many locales in America used to be known as “company towns,” as corporations not only provided jobs for the residents but also supported community causes such as local charities and the arts. It was a mutual commitment and benefit. That picture doesn’t get painted as often as it used to, with globalization, satellite offices and the Internet allowing companies to operate far from their primary location.
In the case of Unocal, this basic principle of community was no less of a consideration, even though the community was America itself.
I’ll start with the underlying fact: Unocal is a huge American corporation that could have been sold and moved to another community, that being the Communist-controlled nation of China. In scenarios like this, we need to consider what the local community (America) would lose if Unocal pulled up stakes in favor of a higher sale price.
The consequences would be serious. First, America would lose control of oil pipelines and oil storage across North America, notably in Alaska. That oil would go to China, which needs all it can get. Adding insult to injury, this would happen at a time when U.S. oil and gas prices are hitting new highs just about every time you check the news. Control of this oil by the Communist government means more energy available to China, less to the U.S. Unocal would also provide the Chinese with immediate access to, and ownership of, drilling and computer technology developed in the U.S. Given that China is seeking to improve technology in all of its industries, this would be like handing over trade secrets from one of our most critical and essential industries.
There is no doubting the growth taking place in China. It is becoming the world’s pre-eminent manufacturer of mass-produced goods. It needs more resources and is going after them. In fact, the Chinese have bought about $700 billion worth of U.S. currency, which gives them enough capital to buy every other American oil company if they wanted to.
So intent is the Chinese government on playing the economics game by its rules, that it warned Congress to stay out of the Unocal deal, which it claimed was a straight “business” transaction. It demanded this even though it prohibits foreign companies from owning energy-related assets in China. In other words, it wants to pay a premium for an American company—no questions asked—while not allowing American companies to own Chinese businesses of any sort.
Rep. Duncan Hunter (R.-Calif.), the chairman of the House Armed Services Committee, decided that questions were going to be asked. He wisely called for hearings into the CNOOC-Unocal deal to examine how it could possibly affect the U.S., from our oil reserves to our national security. In essence, he wanted to see if the needs of the community outweigh the extra cash in the pockets of investors.
I say they do. Many times a company can sell to the highest bidder and still benefit all stakeholders. Sometimes, however, it cannot. In those instances, the interests of investors should not outweigh those of all other stakeholders. It damages the company and raises serious questions about management’s judgment and ability to be good stewards of investors’ money.
Being a good corporate citizen is an important element of a company’s real value. Companies that look out for all stakeholders make good—and sometimes fantastic—investments. n