Creating Competitive Advantage

The idea of discussing business ethics today in corporate America opens up a wide range of possibilities. So while I'll say a few things about business ethics in general, I'll focus on my turf – business ethics at Marathon Oil and Marathon Ashland Petroleum (MAP).

In this article I'll explain how we strive to instill and sustain a culture of ethical performance throughout our companies – and why we place such a high value on ethical behavior. And I'll tell you why I believe that what we all do is essential – not only to high standards of conduct, but to the highest standards of product quality. Along the way, I'll share my views on practicing ethics from the perspective of a CEO who is confronted by the seemingly conflicting interests of the bottom line and doing the right thing.

But first I'd like to tell you why we are passionate – and I use that word advisedly – passionate on the subject of business ethics. Our companies are dedicated to staying sustainable; that is, building long-term shareholder value while being a responsible corporate citizen. And we believe the only way to achieve that is to incorporate economic, environmental and social codes of conduct into our business strategy. We are determined to conduct our business day in and day out, from top to bottom, and at home and abroad, with honesty, integrity and decency to our customers, our suppliers, our shareholders and one another.

To that end, we issue a report on what we call our Sustainable Global Performance. In preparing this report, Marathon has adopted the guidelines of the Global Reporting Initiative. We believe that continually improving our efforts regarding the environment and the health and safety of our employees and neighbors is an essential element of being a preferred choice among all our stakeholders: customers, employees, shareholders, communities, joint-venture partners, overseas host governments, investors and national oil companies.

In fact, not only did MAP demonstrate its commitment in this area by being one of the first companies in the petroleum industry to implement Responsible Care practices, but MAP took the additional step of becoming a Pioneer Company in the National Petrochemical and Refiners Association's (NPRA) Partnership Initiative for Responsible Care. The Responsible Care program is an industry initiative that consists of six codes and 106 management principles designed to help companies proactively seek continuous improvement in health, environment and safety performance while encouraging social responsibility. MAP, in fact, recently became the first company to be honored with the NPRA's Responsible Care Exemplary Recognition Award for demonstrating comprehensive and pioneering work in Responsible Care. We are very proud of this achievement and I think it helps demonstrate the level of commitment we are placing behind this important initiative.

Ethical Business Is Good Business

Now, I'm certain we all agree that when we use the term "business ethics" we don't mean to imply that there is one set of nine-to-five ethics and another set when dealing with family, friends and others when we are away from the office. Ethical behavior is more than a code or an act; it's a habit. In life – at home or in the office – we respect human dignity, take responsibility for our actions, demonstrate integrity, and apply moral principles in our choices and judgments. In other words, we don't lie, we don't cheat, and we don't steal.

And when I talk about "creating competitive advantage through business ethics" I'm not suggesting that ethics comprise a quick-fix business strategy, a PR gimmick, or a practice designed to fatten the bottom line. I'm reminded of the cartoon where the CEO announces, "People, this year's buzzword is •honesty'!" And his VP says, "Brilliant, chief! But risky!" Yes, good ethics can indeed yield good PR and even improve the balance sheet. But in real life, doing good doesn't always equate with doing well. And the posse doesn't always catch up with the bad guys. But honesty and integrity aren't this year's fads, like "intra-preneurship," or "management by objective," or "Theory Z." Ethics are simply the proper way to conduct business and, unlike the alternative and despite what the VP in that cartoon said, they are risk-free.

I firmly believe that ethical business is indeed good business and, when it becomes part of a company's fabric, really does pay off in the end. So, let me start by telling you a bit about what we do at Marathon and MAP to make ethics an intrinsic part of our make-up. On the surface, much of what we do is probably not much different from what you do. Our Code of Business Conduct is rooted in the principles of trust, honesty, dignity, and respect. We have a Business Integrity Office staffed with experienced professionals. It is charged with providing corporate-wide communication and education about our Code, our core values and our compliance through forums, discussion groups, training programs and an active Web site. We maintain a dedicated, confidential and anonymous "Integrity Help-Line" to answer questions, provide guidance, and accept reports of suspected wrongful activities.

Our employees are urged to view this Help-Line as a resource to help them and our companies adhere to the high standards that have served as our guide for the past 115 years. Employees call to seek guidance on conflicts of interest, external relationships, health, environment and safety issues, people issues, questions about company assets, and dealing with meals, gifts, and entertainment. And it appears we're getting through: The rate of calls in 2002 ran nearly 25 percent higher than in 2001. This increase shows that our employees are committed to doing the right thing and, therefore, they ask before acting.

Much of this may not be different from what many of you do, but with the pervasiveness of our educational and communication programs and our continual promotion of the Help-Line, people know that we mean what we say. Let's face it: A meaningfully crafted business code can be as illusory as a hologram. Go to the Web site of one particular company that has been much in the news lately and you'll find uplifting words condemning disrespect and arrogance. You'll read about the importance of working with customers openly, honestly and sincerely, and about standing by one's commitments.

Words into Action

Words can be powerful tools to convey meaning and purpose; but when they are empty, misleading, and thoughtless, they create a permanent and destructive disconnect among employees, customers, and management. So we have worked to put vigor and credibility behind our words.

Our actions may not be unique, but they have provided our nearly 30,000 employees with the clear message and belief that we're all in this together – that ethics are everyone's job. First, and perhaps most important, we developed our current Code of Business Conduct from the ground up – certainly a first for Marathon and MAP. We established a corporate-wide committee to review our Code and the codes of other companies. We invited many senior managers, including myself, to participate in lengthy interviews with experts from outside our companies to articulate our views on ethics and sound practices. Groups of rank-and-file employees throughout the company discussed ethics and what they wanted from a code, how they would like its provisions to be communicated, and what needed to be done so they could truly live and work by it. Using our internal Web site, even more employees were able to be a part of the review process. They reviewed drafts of a code, criticized it, proposed additions and deletions, and, in the end, felt that they were more than just part of the process. They were the process.

The resulting Code turned out to be more than a series of positions on policy issues and "business thou-shalt-nots." It covers areas that you would expect it to: our responsibilities to the environment and our communities, questions of safety and health, a drug-use policy, our commitment to diversity and more. But, overall, it is a positive document that reminds us of those enduring values that influence attitudes, actions, and the choices and decisions we make every day. It encourages all employees to stand up to unethical behavior and to report it. More than that, it recognizes that people will inevitably make mistakes, but the response must be to fix them quickly – not try to hide them.

Turning Difficulty into Ethical Opportunity

We all know how misguided cover-ups have exacerbated problems for presidents of countries and presidents of corporations. As one of my predecessors used to say, "When you're going to have to eat crow, it's best to eat it while it's still young and tender." Sound advice. And we've been faced with having to digest an unsavory meal or two over the past few years. Just three years ago, a distributor of our products pressured some of our people into creating sales records with inaccurate descriptions of our product specifications. To our knowledge, none of our people benefited financially from these transactions, but we terminated two supervisors involved in the incident, disciplined the other employees involved, and notified the final purchaser of the products of the problem and the corrective action we had taken.

Just as important as taking these disciplinary actions, our chief compliance officer sent an open letter to all employees acknowledging that a serious lapse had occurred in our standards of integrity. This letter went on to discuss the incident and the actions taken, and then it rallied all of us to maintain an uncompromising commitment to ethical behavior because, as we wrote, "integrity is competitive advantage." We've had more than one occasion to heed that advice since.

In another incident, propane from one of our refineries was found to contain impurities. Though they were well below levels legally reportable as either a potential health hazard or even an off-spec product, we nonetheless notified customers of our findings and test results, opting for credibility and integrity over the risk of lost business. During a comprehensive review of supplier invoices, we discovered that a vendor providing power to one of our geographic regions had neglected to bill us for $418,000. We notified them, reconciled invoices, and paid. They were red-faced, but appreciative, which brings me to why we are fervent in our dedication to maintaining the highest standards of ethics.

Making the Right Call

First, to do otherwise, as we all know, can often lead to illegalities and become extremely costly. Second, a reputation for integrity is a corporate asset that must be protected at least as vigilantly as any hard asset. And third, acting honorably in business encourages best practices, establishes credibility, even among your critics, and provides a sense of pride and satisfaction in how you earn your daily bread. Making the right call isn't always easy.

As a geologist, I find that one of the appeals of this field is the challenge of finding oil and gas – the pursuit of something elusive, but attainable, and well worth the effort. Ethics are like that. And they too require determination, contemplation and observation. At first glance, there would seem to be no difference among energy companies. Looking deeper, though, our reputation for high standards and impeccable integrity in all our practices, financial and otherwise, sets us apart and pays high dividends.

So we were pleased, but not surprised, when a syndicate of underwriters helped us raise a billion dollars in long-term debt at very attractive rates to finance our acquisition of oil and gas properties in Equatorial Guinea in early 2002.

This was the largest borrowing our company had ever underwritten, and the fact that it could be completed during the Enron/Arthur Andersen crisis as quickly and as successfully as it was reflects the capital markets' confidence in Marathon's reputation for maintaining conservative financial strategies and transparent financial reporting.

Ethics are indeed a very real business asset. What's more, many businesses – oil, chemicals, drugs, lumber, you name them – are confronted by critics with real or imagined concerns over our practices. I can tell you that I have met frequently over the years with groups quite antagonistic to the oil industry – environmental groups, and other non-governmental organizations. And while I can't say I ever changed minds, I can tell you that when I explain our actions and address their concerns, they often believe me. And more often than not, they find that their fears were unjustified.

That kind of positive outcome stems from efforts to establish relationships built on trust and credibility. In Gabon, West Africa, we have a production platform 15 miles from a wildlife preserve that is home to elephants, rhinos, hippos and other wildlife. So our Emergency Preparedness Group and International Emergency Strike Group went there to conduct an exercise to practice and apply our preparedness techniques so we would be ready if we ever had to respond to a spill or other incident. At our operations in the arid desert of southeastern New Mexico, we've developed water-conservation technology that has reduced our usage of precious fresh groundwater by four million gallons a year.

High Ethics Lead to High Quality

Efforts of that kind increase credibility – credibility among our critics as well as our customers and vendors and shareholders. More than that, it is no accident that companies and employees that care deeply about sound ethical behavior are also committed to the highest standards of quality. You can't expect to sell a product that is 85 percent good but 15 percent bad, or a book that is terrific for 200 pages and deadly dull for the last 50 pages. We have to be good all of the time.

Ethical conduct demands genuine effort, thoroughness, intelligence and originality. Impeccable ethics are the ultimate expression of optimism. They represent the faith that great expectations of the quality of work and the character of people must and will be met. To settle for anything less than the highest standards of conduct cripples current possibilities and stifles future potential.

There's a story about the great pianist, Arthur Rubenstein, who was asked to serve as a judge in a piano competition where the contestants could be rated on a scale from zero to 20. When it was over, the other judges were surprised to see that Rubenstein rated some of the participants at zero and some at 20 – nothing in between. When asked to explain, he said simply, "Either you can play the piano, or you can't." I suggest that maintaining high standards of business ethics is precisely the same. There is no middle ground. It may not be easy. You may have to "practice, practice, practice." You may occasionally hit a wrong note. But those who continually strive for that 20 rating will be well rewarded by the audience. And in our case, by the marketplace. But beyond that, we will be rewarded by the satisfaction that we are doing the right thing, the best thing, and ultimately, the most profitable thing, for our employees, for our shareholders and for our communities.

This speech was originally delivered by Mr. Cazalot at The Conference Board's 2002 Business Ethics Conference on May 21, 2002 in New York City.

Clarence P. Cazalot, Jr. is president and chief executive officer of Marathon Oil Corporation. He is a member of the Marathon Oil Corporation Board of Directors and serves as a member of the Marathon Ashland Petroleum LLC Board of Managers. Prior to joining Marathon in March 2000, he served as vice president of Texaco Inc. and president of Texaco's worldwide production operations.

Mr. Cazalot joined Texaco in 1972 as a geophysicist and transferred to the company's offshore division in New Orleans in 1974. He subsequently held a number of posts of increasing responsibility before being named assistant district geologist in 1976, district geologist in 1977, assistant division geologist in 1979, and regional manager of exploration in 1981.

In 1984 he was appointed staff geologist for the exploration and production executive committee of Texaco Inc. The following year, Mr. Cazalot was named assistant to the vice chairman and in 1987 was named general manager of frontier exploration.

Mr. Cazalot was elected vice president of Texaco Inc. and president of Texaco's Latin America/West Africa Division in 1992. In 1994, he was named president of Texaco Exploration and Production Inc., and was appointed president of Texaco International Marketing and Manufacturing in January 1997. A year later, Mr. Cazalot was named president of international production and chairman of London-based Texaco Ltd.

A native of New Orleans, Mr. Cazalot graduated from Louisiana State University with a Bachelor of Science in geology. He serves on the boards of directors of Baker Hughes, The U.S.-Saudi Arabian Business Council, the American Petroleum Institute, the National Association of Manufacturers (NAM), and the Greater Houston Partnership, the board of trustees of Spindletop Charities, Inc., the board of advisors for the Maguire Energy Institute and the board of directors of the Sam Houston Area Council, Boy Scouts of America.

He is also a member of the American Association of Petroleum Geologists, the Texas Governor's Business Council, the National Petroleum Council, the 25-Year Club of the Petroleum Industry and the All-American Wildcatters organization.