As Reuters has recently reported, oil production and prices worldwide are feeling the pinch. This gave me cause to reflect on whether family-owned businesses in the energy sector can step up to the plate and drive another generation of growth.
Some of the world's largest and most successful energy firms are family owned. But as I wrote recently on The Market Mogul, in the UK at least, family firms are 20% less productive than other companies. So why do they succeed in the energy sector and what, if anything, can we learn from them?
Keeping it in the family
The oil business is, of course, built on the back of family firms. America's first and arguably most famous billionaire, John D. Rockefeller founded Standard Oil in 1870 and went on to build a dynasty that lasts, in the shape of various firms including Exxon, to this day.
But more intriguing are the modern-day energy firms, some old and some new but all owned and operated by members of the original founding families. These include global industry heavyweights Koch Industries, Kinder Morgan; Reliance Industries; Phillips 66; ERG S.p.A.; Murphy Oil and Bolloré to name just a few.
So just what is it that makes these family firms tick?
Guided by values
Family firms are different. But aside from the fact that most are still privately owned, the true reasons for this difference can be hard to pin down. In a recent interview, Charles Koch, chairman and CEO of Koch Industries since in 1967, identified a few of these reasons which go to the heart of many family firms' success.
He explained that most companies hire first on the basis of talent. Koch Industries however “hire first on values.” And they work hard to ensure that they have “the right people in the right roles with the right vision and the right values.”
But possibly more importantly, he goes on: “We have ten guiding principles. Many companies have principles but we found also in many companies that there are some they stick in the drawer. It's a poster on the wall. These principles are who we are as a company. They guide everything we do including who we hire.” In Koch Industries, it's not profit that drives the business, but values.
Founded in 1940 by Fred C. Koch, after he developed an innovative crude oil refining process, Koch Industries is the second-largest privately held company in the US. It employs more than 120,000 people in 60 countries and has revenues of $115 billion per year – that's more than that of Goldman Sachs, Starbucks and Honeywell International combined. The value-driven model works for them. And it's common in family firms across the globe. In fact, many believe it's what allows these businesses to survive, thrive and succeed decade after decade.
Keeping a focus on costs
Kinder Morgan is a relative newcomer to the oil industry. But despite only being founded in 1997, it is still a giant, owning and operating 85,000 miles of pipelines and 152 terminals. It is North America's largest network operator; largest independent transporter of petroleum products and largest independent terminal operator. This family business is succeeding because the key founder made the right calls and wasn't afraid to go against the grain and cut costs.
Richard D. Kinder is something of a legend in the oil industry. The co-founder and Executive Chairman, he is the former president and chief operating officer of Enron. In 1996 he was bumped for the top job at Enron, so instead he bought $40 million of pipelines and other operations from the company and left. A few years later, Enron famously went bust.
Kinder is typical of many modern family firm bosses. He is totally focused on supply chain efficiencies, and unafraid to cut the slack to turn acquisitions around. On acquiring the Enron assets he began a systematic programme of ruthless cost cutting.
According to Fortune magazine in 2003, "while Houston's energy elite were indulging in lavish lifestyles--flying in private jets, naming ball fields after their companies, building ostentatious mansions--Kinder was pinching pennies. He was flying coach. He and his Morgan execs were staying at Red Roof Inns. He was laying people off." Kinder himself accepts: "We were tightwads."
This attitude paid off. Just seven months after founding the company, Kinder had doubled the business's market cap to $475 million. Today Kinder has 11,000 employees and is one of the largest energy infrastructure companies in North America.
Belief in a bigger purpose
The majority of family firms share the belief that business is not just about making money. It's about giving back to local communities and society as a whole by way of creating jobs and providing charitable support.
Reliance Industries is India's most profitable company – which on anyone's scale is a big achievement. India has the world's sixth largest GDP, a growth rate of 7.2% and a population of 1.3 billion people. In February 2018, the company posted its highest-ever quarterly consolidated net profit of $1.4 billion, recording 25.1 per cent growth.
Mukesh Ambani is Chairman of Reliance Industries and India's richest man. But in an interview with the Times of India he was not focused on profit: "I have always believed that the purpose of business has to be something more than only making money. The purpose of Reliance is to first create societal value, then create customer value, then create employee value, and then create sustainable shareholder value. Reliance is not about blindly chasing profit."
Profit is the by-product of this approach. Ambani continues: "I believe that if you create societal value, if you create customer value and employee value, and if you focus on these, then shareholder and economic return is a by-product."
These three examples of how family firm bosses think give us a good indication of why family energy businesses continue to succeed and grow. It's likely that these firms will play a big role in fuelling the industry's future. I believe we can learn a lot from family owned energy businesses: focus on efficiency, values and society, and the profit will come naturally.