Throwing caution to the wind, chief executives in the financial industry took enormous risks by placing huge bets on financial instruments based on mortgages. Abandoning common sense and basic economic principles, CEOs failed to execute proper risk management by contemplating the consequences of a downturn in the housing market.
The harm caused by incompetent CEOs extends well beyond shareholders – it also threatens the conservative principles of limited government and free markets.
Failures of this magnitude frequently result in calls for increased government control. This crisis has led to a huge expansion of government through the Emergency Economic Stabilization Act of 2008, which allows the Secretary of Treasury to purchase up to $ 700 billion of distressed assets from banks.Buying “toxic securities” is only part of the plan: the federal government recently announced it will use part of the bailout booty to take equity positions in the nation’s banks.
CEO mismanagement is not restricted to the banking industry. CEO response to global warming alarmism provides ample examples of poor judgment, naive assumptions and disregard for their fiduciary responsibility to shareholders.
ConocoPhillips, for example, the third-largest integrated energy company and second-largest refiner in the United States, is allowing its global warming policy to put its business at risk.
Because its business is fossil fuels – exploring, refining and transporting oil and natural gas to supply the energy needs of society – it is surprising that ConocoPhillips is participating in the United States Climate Action Partnership (USCAP) – a coalition of companies and environmental activists lobbying for cap-and-trade legislation to address global warming.
The profit motive for ConocoPhillips under cap-and-trade is murky at best, since the goal of the policy is to reduce the use of fossil fuels. The company’s global warming stance raises more questions, as the company is increasing its “carbon liability” by making investments in Canadian oil sands – a source of oil that generates three times as much carbon dioxide through its production than conventional oil.
In announcing a partnership with EnCana Corporation, a Canadian energy company, ConocoPhillips CEO James Mulva said, “The upstream partnership also will provide a secure and stable source of oil supplies that can be refined into gasoline, diesel and other petroleum products needed by U.S. consumers, as well as a significant market for Canada’s abundant oil sands resources.” He added, “This venture builds on our current and planned heavy-oil expansion work at both Wood River and Borger, and provides a stable, long-term supply to our U.S. refineries.”
Mulva’s oil sands strategy is a sound business strategy since it provides a stable and secure oil source from North America. Yet this strategy conflicts with his global warming policy and is meeting strong resistance from Mulva’s USCAP coalition “partners” at the Natural Resources Defense Council (NRDC). NRDC refers to oil sands as “dirty fuels” and, more important, it is putting its words to action.
In August, NRDC joined a lawsuit against the U.S. State Department to block a pipeline that would transport oil derived from oil sands to the U.S. The organization claims Secretary of State Condoleezza Rice failed to contemplate the health and environmental impacts of oil sands in the U.S. before the Department issued a permit.
NRDC also blocked the expansion of a refinery owned by ConocoPhillips and EnCana Corporation in Roxana, Illinois, by successfully challenging a permit from the Environmental Protection Agency. Citing the expansion as an environmental risk, an NRDC attorney said "It is going to cause vast increases in CO2 emissions; it's a huge issue that you have to confront."
Clearly, global warming alarmism is harming ConocoPhillips business, but Mulva – apparently taking a page from the banking CEOs’ playbook – seems disconnected from reality.
With the mortgage crisis fresh in our minds, we can’t simply assume Mulva understands or even cares about the consequences of his actions. Confusing the motivations of adversaries like NRDC and ignoring the consequences of feel-good policies are major signs that shareholders should be concerned.
While Mulva is fiddling, the board of directors is allowing ConocoPhillips’ investment in oil sands to burn. Frequently, corporate boards just rubber-stamp CEO decisions. Even worse, some boards are infiltrated with members who place a personal social agenda over shareholder interests. In fact, former EPA Administrator William K. Reilly is a board member for ConocoPhillips. He also serves as a director for DuPont.
Recent events clearly show that wayward CEOs threaten shareholders and free markets. If Mulva has his way, we will be paying significantly higher energy prices and our economy will be burdened under the weight of a massive regulatory regime to control fossil fuel emissions.
Energy companies beware. If the government can take over banks because they failed to execute their primary responsibility to lend money, it could also take over oil and utility companies if they fail to produce reliable and affordable energy.