Corporate Ethics and Restoring Public Confidence

Free Trade, Energy and Tort Reform

-- Archie W. Dunham
Chairman, ConocoPhillips and Chairman National Associations for Manufacturers. Delivered to National Press Club in Washington, D.C., October 28, 2002

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Business leaders are problem solvers. It's the nature of our job. So today I want to share one of the secrets of good management that I believe can help solve many of our national problems. That secret can be summed up in just three words: build on strength.

Every good leader knows that if you want to build a successful organization - whether it be a corporation, an athletic team, a military unit, or a nonprofit organization - you have to build on strength.

Natural leaders know this instinctively.

Those for whom leadership is a learned behavior can read about it in books - like Peter Drucker's classic treatise on management, The Effective Executive.

"The effective executive," says Drucker, "makes strength productive. He knows that one cannot build on weakness. To achieve results, one has to use all the available strengths - the strengths of associates, the strengths of the superior, and one's own strengths."

This principle applies to many of our national problems today because to a great extent we are not building on strength.

As you just heard in John's very kind introduction, I am chairman of ConocoPhillips -- the third-largest energy company in the U.S. in terms of reserves and market capitalization, and the sixth largest worldwide.

Our company is an example of building on strength.

Conoco and Phillips were two very successful mid-sized energy companies - tough, resourceful, superbly managed and profitable. We prided ourselves on "punching above our weight" - on holding our own against the super majors.

But, for all that, we were still mid-sized companies. We both knew that until we stepped up in class, there would be opportunities that would remain closed to us, and that we would never reach our maximum potential. So we decided to combine.

It's been a very successful merger, precisely because we have been able to leverage our respective strengths.

One of the most positive results of the merger is that there are now three major U.S. energy companies.

That's good news for the consumer, because these three companies will compete vigorously to meet America's energy needs.

This increases the likelihood that Americans will continue to enjoy ample fuel supplies at competitive prices.

It also ensures that when an energy crisis threatens, Americans can rely on American-headquartered energy companies to meet their vital energy needs. This is building on strength.

As John also mentioned in his introduction, in addition to being chairman of ConocoPhillips, I'm also the chairman of one of the nation's leading business organizations, the National Association of Manufacturers.

In fact, this is my first speech as chairman of NAM. So I want to briefly discuss NAM's goals because they, too, are examples of building on strength.

One of America's greatest sources of strength is our vibrant, $10 trillion free-market economy.

We sometimes forget that ours is not only the largest economy in the world, it is larger than the combined economies of our three closest rivals - Japan, Germany and the United Kingdom.

Manufacturing is a critical component of that economy.

Through the so-called multiplier effect, the nation's 17 million manufacturing jobs support an additional ten million jobs in wholesaling, transportation, construction and services.

Moreover, manufacturing gives America its critical edge in innovation. It contributes 62 percent of all research and development performed in this country, and a significant portion of this new technology finds its way into other sectors of our economy.

For example, the technology used in ATM machines originated with equipment used on the factory floor.

The real silver bullet of manufacturing is the extraordinary rise in productivity growth, which has increased over 4 percent for the five years preceding the recent recession. This is more than double the productivity growth of the rest of the economy.

It is this exceptional productivity that provides the means to achieve faster, non-inflationary growth, increased profits and significant real wage increases. In other words, productivity is the key to improving our standard of living.

Obviously, then, a strong manufacturing sector contributes to a growing economy; a growing economy raises our standard of living; and a rising living standard - all by itself - will diminish many of our national problems. Therefore, it follows that we should pursue policies that favor economic growth.

For example, free trade. We are the world's largest economy and the world's leading exporter. As such, we ought to be in the vanguard in promoting international commerce.

But of the more than 150 active trade agreements in the world today, the U.S. is party to exactly three. Clearly, we have some catching up to do.

Last year, NAM helped restore Trade Promotion Authority to the President. It's a good thing that the NAM is tenacious, because it took us eight years to get Congress to pass this important legislation.

We're going to follow that achievement by urging policymakers to continue approving trade agreements. We also want government to modernize our export controls guidelines and reconsider the use of economic sanctions as a foreign policy tool.

Unilateral sanctions are a personal issue with me.

If the world community sticks together and imposes multilateral sanctions on a rogue regime like Iraq, sanctions may do some good. But if the U.S. Congress tries do go it alone, unilateral sanctions will have no real impact.

Sanctioned countries simply do business with someone else. When they do, the economic pain that sanctions are supposed to inflict on foreign regimes boomerangs and hits American corporations and American workers.

I have a firm belief that in most cases we can do more to promote peace and understanding between peoples and nations by doing business with them, than by imposing unworkable unilateral sanctions. I'm convinced we underestimate the strength of our influence on the world - particularly on the world's youth.

There's a great illustration of this principle in Thomas Friedman's book, The Lexus and the Olive Tree. A New York Times reporter was in Tehran a few years ago, covering a demonstration marking the 20th anniversary of the Iranian revolution.

One of the people he interviewed, a young woman who was in diapers when the revolution took place, told him, "How can you shout 'Death to America' when you're wearing blue jeans?"

Exactly. Engagement is always more effective than unilateral sanctions.

Moving on to the fiscal front, NAM wants to permanently reduce the tax burden on Americans.

We want to make the tax relief measures that were adopted in 2001 - but are scheduled to expire in 2010 -- a permanent part of our tax code. Businesses and individuals need certainty if they are to commit resources and make long-range plans.

Until businesses can be reasonably sure that governments are not going to suddenly change the rules on them, they will be reluctant to make the significant long-term investments that fuel economic growth. This is as true at home as it is abroad.

Building on strength means building on a tax and legal structure that is just, reasonable and dependable.

On the subject of energy, NAM will continue to urge the adoption of a coherent energy policy for the United States.

As chairman of the nation's third-largest energy company, I speak from experience, and I say that energy policy can't be made piecemeal. It has to be coherent and it has to put America's strategic interests first.

This does not mean that we have to choose between energy and the environment. Energy development and a clean environment are complementary, not competing goals.

Again, I'm speaking from experience. Energy companies have the technology to extract the energy resources the world needs while minimizing our footprint on the environment. We have the technology to maximize production. And we have the technology to minimize energy's impact on the environment.

If we build on strength - like the strength of our superior technology -- we can maintain our high standard of living while simultaneously improving our overall quality of life.

Another priority that I will be pursuing as Chairman of NAM is tort reform.

I yield to no one in my concern for the safety of our employees and for the safety of the general public.

Conoco, the company that I led for seven years before the merger with Phillips, was recognized by the American Petroleum Institute as the safest major energy company in the U.S. for 17 of the past 23 years. It's another example of building on strength.

Companies should be held accountable when they cause actual harm, even inadvertently. But there's a big difference between holding guilty companies accountable, and using the courts to shake down reputable companies for huge sums of money - often when the plaintiffs have sustained no real damage, and the connection between the company and the purported injury is tenuous at best.

We have the most expensive tort system in the world - more than double the average cost of other industrialized nations. It drains billions of dollars from our productive capacity and does not make us appreciably safer. It's time to do something about it.

The trial bar argues that product liability suits and other liability actions make us safer. But is this really the case?

Are the workers who lose their jobs - and their health insurance - when their companies are driven into bankruptcy safer as a result?

Are we safer when hospitals close maternity wards and trauma centers because of the soaring costs of medical malpractice insurance?

Are we safer when manufacturers stop improving their products for fear that juries will regard the improvements as proof that the original products were unsafe?

For that matter, are the people who have suffered real injuries more likely to obtain speedy redress when the courts are clogged with frivolous lawsuits?

Pandering to people's irrational fears and insecurities - or worse, their greed - is not building on strength. I know it's going to be a long and difficult struggle, but we need meaningful tort reform in this country.

Over the near term, NAM is forging ahead on the related issue of asbestos litigation.

The current rash of asbestos lawsuits is another appalling example of how our judicial system is being abused.

Employees who may have had some slight exposure to asbestos years - even decades - ago are now winning multi-million-dollar judgments for the "mental anguish" they have allegedly suffered from the fear that they might develop cancer in the future.

Most plaintiffs in these lawsuits are not sick; the percentage of non-cancer claims is already above 90 percent.

By clogging the courts with alleged fears that they may someday become sick, a growing mass of plaintiffs is making it harder for the relatively few plaintiffs who have suffered real harm to recover legitimate damages. A Mississippi jury recently awarded six plaintiffs $150 million, although none of them were ill. This represented 40 years' cumulative earnings for one of the companies impacted.

To date, more than 2,000 companies have been dragged into asbestos litigation. More than 60 have been driven into bankruptcy. Over 138,000 jobs have been lost.

Questionable lawsuits are threatening up to 90 percent of our economy, given the pervasive use of asbestos in the past. Unless corrective legislation is enacted, we are talking potential costs of $250 billion and the loss of 285,000 more jobs.

The NAM is urging Congress to enact sensible reforms to bring the asbestos crisis under control. Chief among these is the establishment of objective medical criteria - based on American Medical Association guidelines -- for asbestos-related injuries. These criteria would set minimum requirements - at present none exist - for what constitutes an "injury" in asbestos lawsuits.

The sick - including all cancer victims - could pursue their claims immediately. Other plaintiffs would be able to bring their claims when and if they become sick. Even some members of the plaintiffs' bar are in our corner on this issue.

The issue, however, that I intend to make my top priority as chairman of NAM is corporate ethics and restoring public confidence in corporate America.

There are about 17,000 publicly-owned companies in America - the overwhelming majority of which are ethical. If you think about it, how could it be otherwise?

A successful free-market economy rests on millions of voluntary transactions that take place every day - transactions as ordinary as the purchase of a hot dog and as significant as multi-billion-dollar joint ventures. How could these transactions occur if the parties involved couldn't trust each other?

I recognize that TV and movie screenwriters delight in casting business executives as villains. But that's fantasy. Think of J.R. Ewing - the fictional oil executive whom millions of TV viewers loved to hate. J.R. Ewing said on one episode of Dallas, "Once you give up your ethics, the rest is a piece of cake."

That philosophy may work - on TV or in the movies, but it will not work in the business world.

I'm a real oil executive, not the figment of some Hollywood screenwriter's fevered imagination. My company does 75 billion dollars of business in nearly 50 countries. Just where do you think I would be if I had a reputation for being dishonest?

I can tell you from personal experience, that once you give up your ethics - in the energy business or any business - the rest isn't a piece of cake. It's nothing! Nobody will trust you - not even another crook - because there is no honor among thieves.

So it's always a source of shame and frustration for honest CEOs when a few dishonest executives validate the negative stereotypes and give us all a bad name.

It's not fair, but it's up to us to do something about it.

Government regulation alone can't keep the market honest, because government can't manage morality.

NAM participated in the debate over the Sarbanes-Oxley Act, to curb future corporate misdeeds. And we got a better bill because of NAM's involvement.

But Sarbanes-Oxley requires no more in the way of transparency and disclosure than most ethical companies have been providing for years. The new law should be regarded as the minimum standard for transparency and disclosure that responsible corporations owe their shareholders and the public.

We can do better than Sarbanes-Oxley.

Each of us, as leaders of our companies and business owners, should be leading our companies - through inspiration and personal example - to a higher standard.

It's idle to suppose that passing a new law will be enough to restore public confidence in corporate America.

The great majority of America's business leaders are scrupulously honest, but the activities of a few dishonest CEOs have tarred us all with the same brush. It's time to reassure the public that while individuals may occasionally fail, our overall system is sound.

Companies with strong ethics policies need to do more to tell our stories to the public. In so doing, we can help restore confidence in our economic system.

Further, we can serve as models for those companies that have not yet fully grasped that corporations must become more transparent and accountable if they wish to prosper over the long-term.

I'd also like to say a word about corporate governance, because this is another area where we need to build on strength.

If you look at the half-dozen companies that have become notorious for ethical lapses over the past year or so, you'll note that they all had something in common about the way they were managed: all of them had relatively weak boards of directors.

The CEOs of these troubled companies rarely appointed directors who had the stature and the business savvy to challenge them on key decisions. So, if you review the past annual reports of these companies, rarely do you find an active or retired CEO of a Fortune 100 company sitting on their boards.

This is a point that the media has frequently overlooked. To many journalists, a board is a board.

But that's not the case. All boards are not created equal. The quality of the people who sit on them makes all the difference in the world.

Good leaders want strong boards.

Remember the quote from Peter Drucker I shared earlier? The effective executive must use all available strengths - that includes strong board members. Because effective executives know that they are not infallible. They want board members who will push back.

I don't want a rubber-stamp board. I want board members who will stand up and say to me, "Wait a minute. Are you sure you want to spend $50 million in the jungles of Papua New Guinea at this time? I think that's a dumb idea."

No leader likes having his judgment questioned. But it's precisely this kind of challenge that will keep your company from taking a hit below the water line. A strong board can save you from making the kind of mistake that can destroy your company.

I've traveled the world for nearly 35 years. When I compare our system of corporate governance with that of any other nation, there is no question in my mind that ours is the best.

But a system doesn't maintain itself. It's only as good as the people who manage it. And that's why, once again, we need to build on strength.

So let us have faith in the fundamental soundness of our institutions, faith in our economic system, and faith in ourselves. Whatever problems we have, we can solve.

And if we build on strength, we will.

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