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MNG00720 Assignment 1

Stuart Cooper 21979013


Contents Executive Summary Part A External and Internal Environment Part B Managerial Ethics Part C Corporate Social Responsibility Appendix A Appendix B References

Executive Summary Texaco partnered Petroecuador in an oil producing enterprise between 1974 and 1992. This period of 18 years saw massive change in both managerial, and societal attitudes towards how a company does, and should, operate in an emerging economy. This is not only in relation to the host country itself, its people. And its environment, but in the context of the operating organisations responsibility to the global community also. The organisational culture, immediate and general environment, business ethics, and corporate social responsibility have all evolved vastly over the short period of time. Some organisations kept up with the evolution, and some fought against the change. Which category did Texaco fall into?

Part A External and Internal Environment A1 External Environment A1.1 Specific Environment The Specific external environment consists of four elements that have a direct impact on the managers decisions and actions and are directly relevant to the achievement of the organisations goals (Robbins, Bergmann, Stagg, and Coulter, 2009, page 83). The customers, suppliers, competition, and lobbyist and pressure groups all have a direct impact on the managers of organisations. The table below outlines the main characteristics of each influence, and its outcome, in relation the Texaco and its operations in Ecuador from 1974 to 1992. TABLE 1 Specific External Environmental Factors Element Customers Texaco In Ecuador Mainly USA, even in 2004 more than 3 times China per capita consumption. (Energy Information Administration, 2004) Influence Insatiable thirst for cheap oil results in exploitation of developing oil based economies

Suppliers

Equipment and Cheap labour from local areas keeps Technology USA costs lower, as opposed to Texan fields Labour Force - Ecuador in USA. Nonexistant equipment certification and compliance in Ecuador results in older equipment and methods. Mainly staterun companies from Brazil and China (Koenig, 2007) Staterun less concerned with reputation and less prone to indigenous and environmental scutiny

Competition

Pressure Groups

Accion Ecologica, Aimed at discrediting major Fundacion Natura, international oil companies publicly. CORDAVI, the Sierra (Failed to attack the Ecuadorian Club government)

A1.2 General Environment The factors that make up the External Environment of an organisation, whilst not having as greater affect as the specific environment, still affect the manor in which management must plan, organise, lead, and control (Robbins, Bergmann, Stagg, and Coulter, 2009). Although the concession agreement ultimately lead to Texacos departure from Ecuador in 1992 (Davidoff, 2010), the cessation of the agreement was fortuitous for Texaco for economic and other external environmental reasons. A1.21 Economic During the 28 years in which Texaco drilled for oil in Ecuador, there were four recessions in the USA, the end of the Viet Nam war, the 1973 and 1979 oil crisis, the increase in oil production by Saudi Arabia in 1985, and the first Gulf war (see image below, www.wtrg.com). On top of these economic events, in 1987 the Texaco applied for federal protection from bankruptcy, with debts including a single year loss $4.9 billion (Labaton, 1988). All of these events would reinforce the need for management to maximise efficiency, by keeping costs such as lining waste water pits down, whilst limiting output of oil at times of lower oil price. As the Lago Agrio fields were a joint venture with a government owned agency, this limiting of output would have to have been managed to maintain a steady flow of revenue to appease the government.

A1.22 Politico legal Since its independence from Spain in 1830, Ecuador has ebbed to and fro from military and autocratic dictatorship, to democracy, and back. During Texacos time in Ecuador, democracy was reinstated in 1979, but like many young democracies, corruption and government misappropriation was rife. Management must be careful in these situations in which organisations can benefit from the lack of proper law and administration. The lack of proper environmental planning and industrial law saw Texaco use techniques and labour policies that it would not have been permitted to use in its home country. Even after Texaco had left Ecuador, the 1995 remediation of the pollution caused, signed off on 30 September 1998, by Ecuadors Minister of Energy and Mines, President of Petroecuador, and President of Petroproduccion, suffer legitimacy under claims of fraud perpetrated by both parties(Kueffner, 2011). A1.23 Socio-cultural Robbins, Bergmann, Stagg, and Coulter (2009, pp87) state, Managers must adapt their practises to the changing expectations of the society in which they operate. Hirschmann (1999) adds that in the third world managers must be careful of a conflict of interest in this exchange, to be the party that adapts, and not party to a forced adaption by others. Just as first world multinational corporations can bring vast improvements of medicine and technology to enhance the social and cultural climates of second and third world countries, they must be cautious to integrate, and not dictate, the change for the better. Much of the change and wealth Texaco and Petroecuador brought to the country was seen by some to be an Oil Dictatorship (Bacher, 1998) under the guise of a capitalist democracy. Texaco, with the aid of the Ecuadorian Government owned oil subsidiary, were able to quash, or ignore all together, the protests of the citizens which Valdivia (2008) indicates are important in the recognition and grounding in identity of the inhabitants of a new Petro-state. A1.24 Technological The oil production industry has, like most other industry, seen massive technological change in the last fifty years (Altela Inc., 2011), through the advancement of drilling techniques and automation. The case against Texaco accuses the organisation of having the ability to avoid the environmental devastation in the Lago Agria region, but to reduce production costs, maintained production using outdated techniques. This may have been the case, but it was only in 2008 (Kueffner, 2011), sixteen years after Texaco left Ecuador, that 100% of drilling used reinjecting techniques that reduced waste water spilling or needing to be stored. A1.25 Demographic The demographic conditions can greatly affect the management of an organisation both internally and externally. Externally, the population of a country in which an organisation operates determines the make up of its employee base. Such characteristics such as literacy amongst employees can greatly affect the efficiency and effectiveness of an organisation. The literacy level of Ecuador in 1991, shortly before Texaco left, was 90.1, and rises to 92.5 in 2003 (CIA fact book, 2012).

Literacy can also have a cost effect negatively. Hollenbeck (1996) describes that the costs of education and high resultant wages may leave only small cost benefits or even net losses associated with the training. Also it may be the second generation of employees that show the greater benefit to the organisation and society in general. A1.26 Global The globalisation of markets has greatly increased competition in nearly all industries. It has created a situation in which ethnocentric (we do it our way, such as ikea), and polycentric organisations (we do it our way, often seen in emerging economies) have been successful in operation. The geocentric view is more that of the multinational company, continually analysing and reanalysing the operations world wide to do it the best way globally. This reduces duplication of roles and increases global efficiency. Texaco, in Ecuador, is an example of an ethnocentric organisation. They used methods from their own country in a foreign setting. The problems arose from not up dating those methods with technological advantages, and using Ecuadorian laws as their benchmark for environmental protection. To be successful as an ethnocentric organisation, the organisation needs to fully embrace their own methods and standards; only choosing to implement the aspects of operation that benefit them financially does not work in the long run., for either party, organisation, or country.

A3 Internal Environments A3.1 Organisational Culture and Values In Appendix A, Texaco outlines its Vision for its employees, clients, and the world in which it operates. Nearly 100 years after the birth of the company as The Texas Fuel Company, it is surely the displays the same sentiment as the founding directors intended. Unfortunately for the organisation, the Lago Agria case (from 1993 until the present), Texacos 1996 settlement of the racial discrimination case (Texaco vs. Roberts, 1996), and the 1991 sexual discrimination case (Texaco vs. Martin, 1991), have set a precedent of not living up to the standards it hopes to achieve. When Peter Bijur became CEO and Chairman of Texaco in 1996, his hope was to be instrumental in turning the Autocracy (Conant, 1990) and Commandand-control company that Texaco had traditionally been, into an organisation that engaged every mind in the business, by exciting and involving all its employees (Megginson and Casserly, 1997). Unfortunately for Bijur, one of his first tasks as CEO was to coordinate the change in culture to ensure fairness and economic opportunity for employees and business partners after the Texaco racial discrimination case. A3.2 Management Structure and Nature At roots level, the Texaco organisation seems Taylorist, with a scientific approach to achieving maximum efficiency wth a dehumanized work force. The

Dehumanization is far easier when the headquaters of a major corporation is geographically inaccessible to a large workforce. In reality, the organisation is far more closely related to Max Webers Ideal Bureaucrasy , although differences still show otherwise. This leads us to the conclusion that, like most modern organisations, a Contingency based approach to management is required. Scientific, bureaucratic (or administrative), behavioural, quantitative, and systems management approaches are used collectively, to best manage each situation on its own merits. Part B Managerial Ethics Cohen states, the concepts of integrity, ethics, morality, and honour are closely related, but they are not the same. Ethics in the context of leadership has to do with the rules, or standards governing the conduct of an individual or members of a profession. More specifically, the rules that define right or wrong conduct. Opposed to ethics, the law is defined as, a binding custom or practice of a community: a rule of conduct or action prescribed or formally recognized as binding or enforced by a controlling authority. (Merriam-Webster, 2012) The differentiation between ethical and legal goes to heart of the matter when examining the legal case between Ecuador and Texaco. B1 Moral Stages of Moralisation Examining Kohlbergs Moral stages of Moralisation Figure **, it is easiest to start at the Principled Level 6 of moralisation (that states the individual is following self chosen ethical principles, even if they violate the law), and work backwards until the most fitting description is found. In view of Texacos use of unlined wastewater pits, and the reluctance to use newer technology developed over the 28 years of oil production, level 3 (living up to what is expected by people close to you) does not seem appropriate. The most appropriate description of the level of morality is level 2 of the Preconventional level of morality, following rules only when doing so is in your immediate interest. Using Gilligans Moral stages (1982), we would still place Texacos moral development in a pre-conventional stage of Caring for oneself, as opposed to a conventional stage of self sacrifice, or a postconventional state of universal condemnation of exploitation and hurt. In this case, it is displayed by Texaco following only draconian local laws in a third world country, allowing them to operate within legal limits, without regard for the social and environmental ramifications. B2 Individual (Organisational) Characteristics The individual characteristics of morality, as described by Kohlberg, are the values, ego strength, and locus of control, of an individual or organisation. The values are determined in the internal environment of the organisation, and, as stated earlier, Texaco displayed an Autocratic controlling and commanding organisational nature, with a history of sexual and racial discrimination, as well as environmental maltreatment. The Ego strength of a first world organisation operating in a third world country, supported by the government of that country, would be considered to be of great strength. Texaco would expect and demand that all employees follow orders in

a loyal and unquestioning manner. A large potential labour force, and a finite number of employment positions inturn creates a false sense of loyalty to an organisation, following orders whether they be for or against their own moral standards. The Locus of Control would be almost arrogantly internal, believing that they control their own destiny, without hindrance from the outside world (Robbins, Bergmann, Stagg, and Coulter, 2009) . As the ethical characteristics of an organisation and society evolve over time, they can do so at a differing rate. Using the Dynamics of Business Ethics model (Svennson and Wood, 2008), we can see that when Texaco started oil production in Ecuador there would have been congruence in societal and organisational ethical stances. Most likely the companys and others views (Jones social acceptance,1991, pp375) would have been one of acceptance. Over time, and with education and technological advances, the outside view ceased to accept the production standards resulting in negative dissonance between the company and the society in which it existed. The choices to achieve congruence again are to attempt to sway societal ethical stances back to the way they had been, or to accept the new moral stance and adjust operations to suit. Table 2 Dynamics of Business Ethics Model Companys View Acceptable Others Views Acceptable Unacceptable Congruence Negative Dissonance Unacceptable Positive Dissonance Congruence

Source: Goran Svensson and Grey Wood (2009)

B3 Issue Intensity As seen in Table 2, the Issue Intensity is compromised of the consensus of wrong, the probability of harm, the immediacy of consequences, the proximity of victims, the concentration of effect, and the greatness of harm. If we compare and contrast the factors with another recent ethical, the fall of Lehman Brothers, we can see how factors differ. Ultimately, both the actions of Texaco and Lehman Brothers were both ethically wrong. A numerical value of how wrong is obviously not conceivable, the numbers of people affected by Lehman Brothers was greater, but no one was killed directly by their actions.

Table 3 Issue Intensity of Texaco vs Lehmann Brothers Intensity of Issue Characteristics Texaco in Ecuador Consensus of wrong increased as social and environmental awareness grew in the everyday life of the general public Some harm would be assumed, even if only minimal Increasing over an extended period of 2 to 3 decades Lehman Brothers Both legally and ethically wrong through theft and fraudulent activities They thought it would not happen, they were greatly mistaken Immediate and long lasting recession

Consensus of wrong

Probability of harm

Immediacy of consequences

Proximity of victims

Immediate environmental exposure via soil, air, and water In another country

Destruction of Lehman Brothers and associated companies as well as economic crisis World wide

Concentration of effect

Greatness of harm

Extreme Loss of life, population 30,000 people

Global Financial Crisis, but no immediate loss of life, population approx 7 billion people

B4 Organisational Culture During and after the takeover of Texaco by Chevron, there has been at least a vision for an improvement in ethical behaviour. This can be seen in the 1996 Texaco vision statement (Appendix A), and Chevron Texacos current vision statement (Appendix B). Each of the vision statements implies the education of all employees of a code of ethics, which is to be followed in all organisational business operations. One of the major changes that occurred during the takeover was the CEO of Chevron (a company known for full company involvement in change, and encouragement of entrepreneurship) became the CEO of Chevron Texaco. The alternative would have been Peter Bijur, the Texaco CEO of the time, who had just settled a racial discrimination case for $176 million. David J OReilly was the obvious choice as CEO for the new Chevron Texaco, as he brought less controversy with his previous role, and the chances of a successful litigation by the people of Ecuador decreased as Texaco no longer existed as such.

Part C Corporate Social Responsibility The term corporate social responsibility has been around almost as long as Texaco has been drilling for oil in Ecuador. In 1970, Milton Friedman penned a paper titled The Social Responsibility of Business is to Increase Its Profits. Since then, the term has taken on far reaching ethico-legal interpretations of his original idea. C1 Free Market View vs. Corporate Responsibility View Management splits the idea of corporate social responsibility into two main schools of thought. These are the Classical View, otherwise known as the Invisible hand(Friedmans theory of profit, 1970), and the socioeconomic view. Friedman went on to say that the managements only responsibility is to the shareholders, and that the only concern of the shareholders is financial return. Unfortunately for Texaco, this is all sounding too familiar. Increasing profits by using unlined pits versus lined pits, not replacing older cheaper methods with newer (more costly) safer ones, all fits nicely within the realm of classically viewed corporate social responsibility. The Socioeconomic view goes beyond the profits, and includes the protecting and improving (Robbins, Bergmann, Stagg, and Coulter, 2008) of a societys welfare. This can be further divided into the Hand of Government perspective, or the Hand of Management perspective. Gailbraiths Hand of Government (1969) takes the classical view, and adds to it the role of policy and legislation to force organisations to include the social good as a desired outcome. The Hand of Management assigns the corporation an important role in setting moral behaviour and developing a corporate conscience (Blythe, Zimmerman, 2005, pp358) 2 Components Carrol (1991) outlined four components of Corporate Social Responsibity in his 1991 paper entitled The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders. These components started at the base with Economic responsibilities, and worked to the pinnacle of Philanthropic responsibilities, through both Lagal, and Ethical resonsibilities. He understood that without the economic and legal basing, a company had no opportunity to reach the ethical and philanthropic heights.

3 Stakeholder Theories Ignoring Friedmans Invisible Hand theory of social responsibility, the remaining Hand of Government and Hand of Management take into account far more stakeholders than just the Shareholder (Figure 1 over page). Both views decribe how all internal, immediate or specific, and general external environments affect, and are affected by the organisation and their operations.

Figure 1 Organisational Stakeholders

To Texacos defence, the theory of Corporate Social Resopnsibility has only developed over the last 50 years, and when it started it was the responsibility to earn as much as possible, as quickly as you could.

Conclusion From a management perspective, the actions of the Texaco Company in Ecuador between 1974 and 1992, although legal within the realms of Ecuadorian law, ignored the greater responsibility to stakeholders other than shareholders. It seems that the invisible hand was the one that ruled an autocratic company, forsaking progress in foreign countries at the expense on environmental negligence, but for the reward of greater profits and share price.

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