Finalcial analysis oil companies

Corporate Finance: The Project

Professor: Aswath Damodaran Professor: Aswath Damodaran

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May 4tth 1998 May 4 h 1998

Part I CORPORATE GOVERNANCE ANALYSIS

The purpose of this section is to understand therelationship between managers and stockholders. A. Managers and Stockholders Due to the prevalent problems associated with agency issues, when analyzing a company it is important to understand the relationship between managers and stockholders. Information on the Chief Executive Officer and the Board of Directors allows us to discern that the incumbent managers of our oil companies are morefocussed on the pursuit of self-interests than on maximizing shareholder value. Chief Executive Officers: Amoco Name Age Years at the Company Years as CEO Studies
Laurence Fuller 58 36 6 BSCE ’61 Cornell

Chevron
Kenneth T. Derr 60 38 9 BSME ’59, MBA ’60 Cornell

Mobil
Lucio A. Noto 59 36 4 MBA ’62 Cornell

Exxon
Lee R. Raymond 58 34 4 Ph.D. ‘63 U of Minnesota

Texaco
Peter I. Bijur 55 31 1MBA’66 Columbi a

Industry Average

29 -----

CEO Compensation Salary rank out of 48 CEOs in Oil Industry Salary rank out of 800 CEOs Salary (thou) Bonus (thou) Other (thou) Stock Gains (thou) Total Compensation (thou) Stock Ownership (% of Total) Market Value (mil)

17 260 $969 $917 $121 $956 $2,963 0.02 $6.8

9 195 $1,154 $1,200 $1,533 ----$3,887 0.02 $8.5

10 210 $850 $650 $1,275$884 $3,659 0.02 $9.5

1 57 $1,550 $1,250 $638 $5,853 $9,291 0.06 $12.1

12 215 $639 $939 $43 $1,969 $3,590 0.03 $6.9 $641 $655 $338 $2,383 0.08 $5.9

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It is interesting to note that overall the CEOs have a long history with their respective companies averaging 29 years as employees and 4 years as CEOs. While it is likely that their years of inside experience amassed them sharpunderstandings of their companies it is difficult to gage their efforts in maximizing firm value. The power of the CEOs is certainly manifested by their large compensation packages averaging $4.678 mln in 1997 (which is twice the industry average of $2.383 mln). In fact, according to Forbes these CEOs rank in the top third of their industry (based on compensation) with Exxon, Chevron and Mobil ranking inthe top 10. A further study comparing the compensations of 800 top executives again places them in the top third. Their power, however, does not emanate from their stockholdings that average only 0.03%. This separation of management and ownership detracts from the power stockholders have over the CEO and suggests little incentive for the CEOs to focus on increasing shareholder value. Boards ofDirectors: Amoco 15 2 6 No Chevron 12 2 9 Yes Mobil 15 4 5 Yes Exxon 12 2 5 No Texaco 17 2 6 No

Number of Members Insiders CEO of other Companies? Related Companies?

A review of the Boards of Directors provides only minimal clear and compelling evidence that managerial interests dominate. First, none of these companies are listed on

Calper’s 1997 or 1998 watch lists. Second, we are not awareof any actions by management where stockholder’s interests were clearly violated such as greenmail, large increases in compensation while stock price was dropping, or the acceptance of low prices/rejection of high prices in takeover battles. Third, surprisingly, the Boards of Directors have very few insiders and are therefore less likely under the influence of the CEOs. For most boards, however,about half the members are CEOs at other organizations. Therefore, it is likely that their loyalties as board members of the oil companies will really depend on whether or not the oil company’s CEO sits on the board of the company they manage. Because they sit on each other’s boards, they are not truly independent monitors and cannot be fully protecting shareholders’ interests. In addition these...