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Richard J. Stegemeier, Unocal Corp.

Richard J. Stegemeier, Unocal Corp.

"At Unocal we think of ourselves as a high technology, earth resources company. Although we're headquartered in Los Angeles, 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. Just last October, we 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 decisionmaking 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.

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. Shortly after I became Unocal's CEO in 1988, we began to restructure the company's board of directors. We knew that four directors would soon reach the mandatory retirement age of 71 and leave the board.

I worked closely with the other inside directors to anticipate the fields of expertise the board would need as we entered the decade of the '90s. To complement the board's existing strengths, we decided to seek one candidate with solid experience in a consumer industry; a second with strong technical credentials; a third with a good background in finance; and a fourth with extensive government experience. It was absolutely essential, however, that all candidates be broad thinkers who could bring a fresh perspective to company management.

I took this "shopping list" to the nominating committee of the board, which is composed of outside directors only. I asked for their nominees as well. We then discussed all of the possible candidates. The final decision was made by the outside directors.

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.

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.

Need for broad skills

Sometimes, it is easy to forget that these environmental problems are truly mutifaceted. They are not simply environmental problems - they are also scientific problems, social problems, economic problems, technological problems, and political problems. That's one reason why it is so important for a corporation like Unocal to have directors with broad skills and experience.

It is no secret that the petroleum industry has a terrible image problem - on the environmental front and in other areas as well. Public opinion surveys show we're rated somewhere between lawyers and drug dealers.

About a year ago, it became apparent to Unocal's inside directors that America needed new ideas, new initiatives, and new leadership from the private sector if we were to meet the environmental challenges of the 1990s. In particular, we felt that it was time for Unocal to take a leadership role on environmental matters.

We decided to launch a series of environmental initiatives that would demonstrate innovative and cost-effective solutions to environmental problems. This, we thought, was the most promising way for Unocal to gain some high ground with consumers, with regulatory officials, and with our local communities. It would also, we hoped, make a real contribution to the public's understanding of environmental issues. Perhaps our most interesting initiative is called SCRAP.

Los Angeles has the worst air quality program in the nation. It is also well known that motor vehicles are the primary source of emissions in the L.A. basin. What few people realized is that older vehicles - primarily those built prior to 1971 - were by far the heaviest polluting cars on the road. Believe it or not, more than 400,000 of these old clunkers are currently registered in the Los Angeles area. In our SCRAP program, we proposed to offer the owners of these vehicles $700 a piece for their clunkers, up to a maximum of 7,000 cars. Then we'd turn these old cars over to a SCRAP yard, which would crush them and recycle the metal.

Our market research indicated that much cleaner, post-1975 vehicles were available for about $700, the same price we'd offer for the older cars. By taking 7,000 of these old vehicles off the roads, we could help clean up L.A.'s air. To our knowledge, no one had ever tried such a program before - we were moving into unknown territory. Moreover, Unocal would not make a dime off this initiative. On the contrary, we were proposing to spend more than $5 million of our shareholders' money to pull it off.

Obviously, SCRAP was a project that merited close scrutiny by our board, particularly our outside directors. I brought it up before a meeting of the full board. The outside directors expressed a high degree of interest. They questioned me closely about virtually all aspects of the program. Would people really sell their old cars for $700? What requirements would they have to meet? Who would crush the cars? Who would drain the oil? How would the environment benefit? How would Unocal benefit?

In time, the outside directors strongly approved of the concept. They also agreed that it was high time for Unocal to take the lead on environmental issues and they encouraged us to invite other companies to participate in our program.

We launched SCRAP on June 1, 1990. It was more successful than we'd ever dared to hope. During the next three months, we scapped a total of nearly 8,400 old cars. We received support from many companies, organizations, and private individuals. First Interstate Bancorp offered low-interest loans to SCRAP participants who bought a post-1981 car. Ford Motor Co. contributed enough funds to scrap 1,000 additional old vehicles, and $700 rebates on selected new ones. Even the Air Quality Management District - our local regulatory agency - contributed $100,000 to the SCRAP fund.

To gather useful data on the results of the program, we tested the exhaust emissions of every car we scrapped. In addition, we put a representative sample of the scrapped cars through the rigorous federal test procedure to see just how dirty they really were.

The results surprised us. We discovered that these old cars were emitting on average more than 60 times as much hydrocarbon pollution per mile driven as a new car. That was twice what the experts had expected. They were also emitting 50 times more carbon monoxide, 10 times more nitrous oxide, and five times more particulates than 1990 vehicles.

As a matter of fact, fumes from the worst of the polluters were rich enough to run a Ford Taurus at cruising speed! Even the least polluting car had eight times the emissions of a new vehicle.

We estimate that the SCRAP project removed nearly 11 million pounds of pollution from L.A.'s air in 1990 alone, at a cost of about $6 million. To reduce unwanted air emissions from our Los Angeles refinery by the same amount will cost more than $150 million - about 25 times as much. I think anyone would agree that SCRAP was a very cost-effective project.

It also illustrates the way in which corporate directors can help motivate a company to action, encouraging and validating positive environmental initiatives. At the same time, our outside directors are taking a more aggressive role in monitoring the company's routine environmental performance. Let me give you an example of that.

The revised charter of the board's accounting and auditing committee - composed, of course, entirely of outside directors - includes explicit responsibility for environmental issues. The committee will meet periodically with our corporate vice president of health, safety, and the environment to review the activities of his department. It will also review with the general counsel any environmental matters or legislation that could have a significant impact on the company. Finally, it will review the findings of any environmental examination conducted by a regulatory agency.

Sometimes, however, the company's environmental activities are not routine. Sooner or later, despite every precaution, it's possible that we could face an environmental crisis on the scale of Exxon Valdez. In times of crisis, the directors' responsibilities become even more demanding.

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

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.

Board of Directors

Unocal Corp.

John W. Amerman Chairman and CEO Mattel Inc.

Roger C. Beach Senior Vice President and President Unocal Refining & Marketing Division

MacDonald G. Becket Former Chairman and CEO The Becket Group

Claude S. Brinegar Vice Chairman and Executive Vice President Unocal Corp.

Malcolm R. Currie Chairman and CEO Hughes Aircraft Co.

Richard K. Eamer Chairman and CEO National Medical Enterprises Inc.

Frank C. Herringer President and CEO Transamerica Corp.

John F. Imle Jr. Senior Vice President Energy Resources Unocal Corp.

Donald P. Jacobs Dean J.L. Kellogg Graduate School of Management Northwestern University

Ann McLaughlin Visiting Fellow and Trustee The Urban Institute

Thomas B. Sleeman Senior Vice President and President Unocal Chemicals & Minerals Division

Neal E. Schmale Senior Vice President Corporate Development Unocal Corp.

Richard J. Stegemeier Chairman, President, and CEO Unocal Corp.

Charles R. Weaver Chairman and CEO The Clorox Co.
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Title Annotation:The Chairman of the Board
Publication:Directors & Boards
Date:Jun 22, 1991
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