Business impact and ethical considerations of Exxon

Business Impact of Exxon and Ethical Considerations

When discussing business ethics, one corporation, in particular, often comes to mind Exxon.

Since the late 1980s, Exxon has been the poster child for unethical corporate conduct.

The ecological disaster that occurred in Prince William Sound following the Exxon Valdez's running into Bligh Reef and spilling millions of gallons of oil is infamous. The scandal at Grand Bois, Louisiana further exacerbated the organization's poor ethical reputation.

Good people, acting as corporate agents, can make harmful decisions. By understanding the ethical implications of their decisions, senior executives may be able to avoid making these harmful decisions in the future. In addition, presenting the ethical and business implications of the experiences of Exxon can reiterate the importance of raising ethical concerns, in the minds of mid- and lower-level managers, as well as their employees, and facilitate the removal of barriers in the workplace to raising these concerns (Hamilton & Berken). The following literature review looks to investigate the business impact of Exxon and the ethical considerations that evolved from these instances.

Business Impact of Exxon and Ethical Considerations

Introduction:

When discussing business ethics, one corporation, in particular, often comes to mind Exxon.

Since the late 1980s, Exxon has been the poster child for unethical corporate conduct.

The ecological disaster that occurred in Prince William Sound following the Exxon Valdez's running into Bligh Reef and spilling millions of gallons of oil is infamous. The scandal at Grand Bois, Louisiana further exacerbated the organization's poor ethical reputation.

Good people, acting as corporate agents, can make harmful decisions. By understanding the ethical implications of their decisions, senior executives may be able to avoid making these harmful decisions in the future. In addition, presenting the ethical and business implications of the experiences of Exxon can reiterate the importance of raising ethical concerns, in the minds of mid- and lower-level managers, as well as their employees, and facilitate the removal of barriers in the workplace to raising these concerns (Hamilton & Berken). The following literature review looks to investigate the business impact of Exxon and the ethical considerations that evolved from these instances.

The research included the qualitative review of relevant literature. Identification of relevant literature was conducted through the use of an electronic search for published articles or reports, in scholarly journals, concerning Exxon and business ethics. The author used a list of Boolean conditional keyword phrases to perform the literature search. These search terms allowed the author to quickly and easily identify the literature that was most likely to be relevant to the topic at hand. Bibliographies from these identified literature pieces were then searched for additional references to appropriate pieces of literature.

Grand Bois, Louisiana Overview:

Cutting costs is an important part of any business. In order to remain competitive it is critical to produce a product with cost efficiency in mind. It was this desire to cut costs that would lead to the unethical management decisions made by Exxon, at Grand Bois, Louisiana, in the early 1990s.

Exxon management had decided in March of 1994 to seek lower cost disposal, for their oilfield wastes that had been declared hazardous in Alabama.

Eighty-one trucks of exploration and production waste were moved from Big Escambia Creek, Alabama to the Campbell Wells-U.S. Liquids disposal facility, located next to the small community of Grand Bois (Hamilton & Berken, 2005; Moberg & Moberg, 2005).

Although the Resource Conservation and Recovery Act exempted all exploration and production wastes from being classified as hazardous, it allowed state governments to regulate the disposal of these wastes within their boundaries. In Alabama, Exxon was required to dispose of these wastes in a certified facility.

Louisiana, however, allowed the waste to be "be pumped into large shallow open pits or cells surrounded by low earth dikes and mechanically stirred so the water and other volatile compounds would evaporate. The dried residue would be hauled to a disposal site and buried. Disposal in Louisiana was estimated to have saved Exxon $515,200, at $92 per barrel for the 5,600 barrels of waste" (Hamilton & Berken, 2005).

When the waste arrived at the disposal facility, it was pumped into cell number 11, a location less than 500 yards from the nearest dwelling.

Toxic fumes spread through nearby homes. All children in a nearby school were assembled in the gymnasium, in hopes of reducing their exposure to the toxic fumes. Although none of the air monitoring equipment at the site demonstrated dangerous concentrations of chemicals, no testing was done for benzene or hydrogen sulfide, despite these chemicals being listed on the shipping manifests of the trucks carrying the waste.

A renewed interest in closing the facility ensued and the community enlisted the help of a local physician who had treated the residents for complaints of headaches, sinus problems, and respiratory difficulties, all of which he deemed related to the disposal plant. However, neither he nor a toxicologist from Louisiana State University was able to show a causal linkage between the health complaints and the plant. Private concerns of oil company executives were that Grand Bois was one of the best run disposal sits in the state, and if it was determined to be an environmental hazard, more problems would be had at other facilities as well (Hamilton & Berken, 2005).

Lawsuits were filed and for more than a year the turmoil in Grand Bois was national news.

The government was accused of protecting the petroleum industry at the cost of their citizens. However, in response, the state began to reevaluate the exploration and production waste problem.

A series of blood tests on citizens, conducted by a Louisiana State University toxicologist, revealed a significant amount of abnormalities, when compared to blood tests with another community in the region (Hamilton & Berken, 2005).

During the trial of the first eleven cases against Exxon and Campbell Wells-U.S. Liquids, the defense utilized was not that they had not exposed citizens to toxic materials, but that they had followed all of the regulations and laws, set forth by the United States and by the State of Louisiana, and therefore should not be required to pay damages. They surmised that they did not break any laws and that the plaintiffs couldn't prove that they had suffered any damage, nor was their a causal link between the disposal site and the health problems the citizens were having. A wife of an injured worker, from Alabama, read about the trial online, and his testimony was given, just prior to the end of the trial, showing that the waste had indeed caused real medical injuries. It also ruined the credibility of the Exxon medical expert who had cast doubt on the residents' claims of injuries.

In addition Exxon's legal team was accused of deliberately failing to produce a letter about the injured man, during discovery, to Exxon company managers. Denying this claim, Exxon's legal team claimed that the letter had been lost somewhere in the company (Hamilton & Berken, 2005).

During deliberations, Campbell Wells-U.S. Liquids reached a settlement with residents, making an unspecified payment as well as agreeing to close off cell #11. Exxon did not offer a settlement, and the next day, the jury returned a verdict of not guilty, finding no long-lasting medical effects from the residents as a whole. The majority of the jury felt that although Exxon had been wrong in producing and dumping the waste, they were abiding by the law and therefore could not be punished for following established regulations. However, there was still remaining concern regarding the failure to disclose information about the key witness during discovery. The trial judge held a private conference with Exxon regarding the company's internal investigation into why these documents had not been turned over to the plaintiffs. The "(p)laintiffs' attorney then received a letter from Exxon attorney admitting that Exxon's senior in-house attorney knew of a letter from the injured Alabama worker. Also, the defendants' physician failed to mention during his testimony that he had examined the injured worker" (Hamilton & Berken, 2005). With these facts presented the judge fined Exxon $325,000, to cover the cost of legal fees, for not providing these pertinent documents to the plaintiffs. Yet, no new trial was granted.

Analysis of the Factors that Led to Grand Bois:

In investigating the events of Grand Bois, Hamilton and Berken (2005) constructed a timeline of events based on contemporaneous television and newspaper accounts. The researchers did not have direct access to the decision makers at Exxon, and their analysis was based on evidence from outside the company.

Although public companies', such as Exxon, actions are open to public scrutiny, the motivation behind these actions are not.

As such, they strove to provide the best plausible account possible of how these actions may have come about, by using the mainstream business press to connect the recent history of the company to their account.

Hamilton and Berken (2005) applied three levels of analysis to the case, and re related to research on stakeholder theory and corporate social responsibility, organizational structure and design, and corporate culture. One set of concepts from each area was utilized to explain how the situation at Grand Bois may have come about. The end goal of the authors was to "provide business practitioners, ethics teachers, and readers interested in corporate conduct with insights useful in understanding why managers may act the way they do."

It could be argued, according to Hamilton and Berken (2005), that Exxon managers had made a sound business judgment, based on facts that were not known, at the time. The industry still contends that the majority of exploration and production waste contains no harmful compounds, and that for this reason the disposal techniques that are used at the Grand Bois facility were not only cost effective, but also environmentally safe.

Just because the exemption of this waste for hazardous materials was brought about by political lobbying does not mean that it is not scientifically or justified.

Oftentimes, political lobbying, when conducted within ethical restraints, can be socially beneficial.

Yet, there were costs incurred by the residents, Exxon, and the industry as a whole. Certainly Exxon's actions were legally sound, and may have been a good business decision, at the time, however, it does not make it an ethically sound decision. Not only was harm done to the residents, but there were significant costs to Exxon in: administrative time, legal defense, loss of customers, damage to their reputation, damage to employee morale, and increased governmental regulation of the industry. Hamilton and Berken (2005) theorize that it may have been a mistake that any large organization, operating within a highly competitive and environmentally challenging industry, could have made.

An alternative explanation is given that perhaps "Exxon was an evil corporation with a bad environmental record, a company made up of bad people hiring other bad people and turning them loose on society and the environment" (Hamilton & Berken, 2005).

The researchers go on to explain that it was perhaps greed for money and power that caused Exxon's management to ignore the ethical implications of the actions they undertook. However, they note that this goes against the history of the company, as an efficient operator and a leading competitor in the energy industry, that has been successfully been able to cut costs and generate greater profits for their shareholders.

They provide good product and services to its customers, profits to their shareholders, jobs for their employees, and wealth to countries around the globe through their business activities, not the typical portfolio of a sinister corporation.

The fact remains that along multiple ethical standards, including a Kantian concern for treating others as ends rather than means, the fact that harm was done to innocent people, by Exxon's actions, indicates that these actions were ethically wrong.

Therefore, by understanding how and why Exxon managers could have made these unethical decisions when it is most probable that they didn't consider them as such, at the time, can help differentiate the unknowing decision maker from the coerced decision maker.

Several factors may come into play when making this decision, without the benefit of hindsight the critics have following an event. Corporate objectives and an overly bureaucratized decision-making chain resulting in disconnect between the decision and the end result may prevent the decision maker from fully understanding the moral implications of the decision at hand.

As Hamilton and Berken's (2005) analysis demonstrates, it may not have been a simple decision between profits and ethics.

The three levels of explanation Hamilton and Berken (2005) utilize to explain the ethical failure, at Grand Bois, is as follows.

The first is that Exxon's senior and implementing managers may not have understood the evolving social mandates for business -- the new standards of conduct which society expects them to meet in carrying out their contract to do business. A second is that organizational structures, policies, and processes within the company may have blocked ethical action in the name of efficiency. A third is that the rules of behavior that individual Exxon managers had to adopt to have successful careers with the company may have made it unlikely that they would raise ethical questions.

Exxon Valdez Analysis:

The events surrounding the Exxon Valdez oil spill are a second ethical dilemma that has plagued Exxon.

On March 24, 1989, the Exxon Valdez ran aground on Bligh Reef, 25 miles south of Valdez, Alaska. Exxon began offloading the 42 million gallons of oil that remained in the tanker, but a two-day absence of effective containment equipment resulted in the largest spill in U.S. history. (...) By May 15, 1989, it was estimated that between 2500 and 6000 square miles of ocean and from 300 to 800 miles of shoreline had been tainted" (Sellnow, 1993).

11 million gallons of crude oil were released into Prince William Sound (Carson, Mitchell, Hanemann, Kopp, et al., 2003; Merrick, van Dorp, Mazzuchi, Harrald, et al., 2002). It was a major twentieth-century disaster (Picou, Marshall & Gill, 2004). This spill would, once again, throw Exxon in the unpopular limelight of questionable ethics.

Key and Popkin (1998) use the Exxon Valdez oil spill incident as an example of poor ethical decision-making.

A review of the incident shows a "chain of strategic planning and corporate decision making that ignored fundamental ethical aspects of decisions." The company, once again, was focused on cost efficiency in its operations, much like the Grand Bois incident. di Norcia (1994) uses the Exxon Valdez as an example of corporations not fully analyzing the back-end risks of their decisions, and the ethical implications that come with it.

The implementation of new electronic maritime navigation systems, grafted onto single hull oil tankers was a cost effective solution, in place of additional personnel, in the eyes of Exxon. For this reason, there were a reduced number of key personnel onboard the tanker, as well as limited availability of clean-up equipment. Exxon had overlooked charges against Captain Hazelwood, for driving while intoxicated, so that they could continue to use existing personnel, again as a cost-savings measure (Key & Popkin, 1998). "To implement plans for higher efficiency within the company, some Exxon executives followed the common Japanese practice of finding and achieving maximum productivity through pushing work systems to the point where they begin to crack and workers can no longer handle the load" (Bowen & Power, 1993).

The social contracts that Exxon had with the people of Alaska are noted by Key and Popkin (1998) as one of the ethical factors the organization should have considered when making decisions regarding the cost of its personnel and equipment. In addition, Exxon failed to predict the costs of having reduced personnel on staff, as well as insufficient clean up equipment, in case of a problem.

For this reason, Exxon made their decision with insufficient data. What appeared, at first, to be a sound business decision, turned into a decision that cost the company, again, in time, money and reputation.

Bowen and Power (1993) go beyond the typical blame of Exxon's ethical culpability. They note that there were three junctures that led up to the incident that were of significant moral value. The first occurred long before the Exxon Valdez set sail and was during the debate over where and how to build the pipeline and shipping terminal. The second juncture occurred during the negotiations over the level of safety precautions that would be required as well as the cleanup preparedness.

The third was in response to the spill itself. Interestingly, Bowen and Power do not name the decision to reduce personnel onboard the Valdez as ethically critical decision.

These researchers agree that many commentators and analysts have blamed the Valdez oil spill on the managers of Exxon, and their greater concern for profit over the welfare of the environment. Yet, Bowen and Power (1993) suggest that in so doing, these critics are assuming that Exxon managers knowingly failed to adhere to ethical norms that were clearly defined and accepted. Although they acknowledge that this may very well have been the case, and the Exxon managers may have knowingly endangered the environment while seeking corporate profits, while also lying to gain advantages in hearings and negotiations, they surmise that reducing this case to such clear-cut moral failure is missing a more interesting point. The more interesting and important issue is what managers should do when a conflict arises with moral norms and when they cannot accurately foresee the consequences of their decision.

For analysts to derive simple moral lessons from the Exxon Valdez incident, Bowen and Power (1993) note that they are typically committing the 'retrospective fallacy'. The retrospective fallacy occurs when a person implies that judgments that are made in hindsight have been made with nearly the same clarity as at the time of decision-making.

This is a common fallacy in management theory and practice when managerial mistakes are identified and blame is assigned, with the belief that the mistake must've occurred due to bad judgment.

Exxon's Pipeline from Chad to the Atlantic:

More recently, Exxon's ethical decision making process has come into question once again. Exxon constructed a 650-mile pipeline, from Chad to the Atlantic.

Critics claimed that it was unethical for Exxon to work with the government of Chad, when they had so little concern for human rights. Exxon Mobil's Chairman and Chief Executive Officer, Lee R. Raymond, responded that there was a greater social mandate they were following.

The biggest thing this company can bring to some of these countries is the opportunity to see capitalism and the free market work. Am I comfortable with everything the government of Chad does? No. Am I comfortable with the concept that we're now going to give the Chadian people an opportunity to improve their lot through economic development? Extremely comfortable (cited in Hamilton & Berken, 2005).

Despite the ethical challenges of dealing with the Chadian government, Exxon seems to have learned some valuable lessons from their previous errors. As Hamilton and Berken further note, Exxon teamed up with the World Bank and NGOs for this project to ensure that the environment was protected and that the benefit of the project when to the Chadian people, as opposed to their government.

Industry Specific Impact of Exxon's Ethical Dilemmas:

Although Grand Bois residents were not successful in their suit against Exxon, the extensive media coverage of the story had a significant effect on future handling of exploration and production waste.

Public awareness had increased and communities began to speak out against the other waste treatment facilities near residential areas and water sources.

Finally, Louisiana's State Department of Conservation issued new regulations for safer handling and storage of oil field waste that took effect in November 2001 (Hamilton & Berken, 2005).

Minimum buffer zones between public areas and waste pits were increased. Other procedural safeguards were included in the new regulations. Companies that had a history of noncompliance would not be able to obtain permits, and all waste sites had to develop a management plan.

Although conservation officials touted these new regulations as being the most advanced in the nation they did allow means of disposal, which were still practical for waste generators and disposal sites.

An ethical conclusion had been reached thanks to the controversy experienced at Grand Bois (Hamilton & Berken, 2005).

The incident of the Exxon Valdez also had long-term impact on the industry. For Exxon, as a corporation, the company incurred a loss of goodwill with the public, stock devaluation, litigation costs, clean up costs, penalties, fines, and monies paid to the government as well as injured parties. But, the effects go beyond just Exxon's corporate doors and touch the entire industry as well. "(T)he entire industry (has) suffered from the long-term effects of the public distrust created by this event. In the U.S., this has translated to cancellation of drilling projects in advanced stages as well as increased scrutiny and difficulty in getting permits and agreements for additional expansion" (Key and Popkin, 1998). In response to the Exxon Valdez oil spill specifically, Congress passed the Oil Pollution Act of 1990, requiring all tankers operating within U.S. waters to be converted to double-hulls, by 2015 (Helvarg, 2003).

Business Impacts of Exxon's Ethical Dilemmas:

As Hamilton and Berken (2005) note, "Business activities have positive or negative impacts on society and on the businesses themselves. Since both businesses and society seek to manage these impacts for mutual benefit, it is important that the causes of harmful business activities be understood to insure that they do not happen again."

Society grants business a contract to operate, with a requirement that they fulfill not only the organization's goals, but those of society as well.

There is an understanding that businesses will behave in a responsible manner. If this power is used unwisely, society takes it away.

These social mandates for businesses change from era to era, and even differ dependant on the society the business operates within. In the United States, over the course of the last century, companies have been expected to produce high quality, lower cost products and services. Fair wages and safe working conditions became part of that mandate.

By the mid-twentieth century, environmental responsibility also became a command to American corporations.

Exxon's experience with Grand Bois gave renewed vigor to this requirement for American business, and as Hamilton and Berken (2005) note moves beyond Milton Friedman's argument from the 1970s that corporate philanthropy without profit was a form of taxation without representation. "Businesses today are called upon to recognize obligations to a much wider list of stakeholders than simply stockholders and customers" (Hamilton & Berke, 2005). The Grand Bois incident fueled society's reduced tolerance to corporations who didn't understand this increased social mandate. An organization's responsibility lasts the full life-cycle of their product or service, not simply when it leaves their doors and is delivered into the hands of another.

Society is also now more in tune with the differences between legal ramifications and ethical ramifications. Legal considerations of an action provide only a limited stakeholder consideration, today's businesses are required by society to look beyond that limited viewpoint and consider the ethical considerations, all stakeholders concerns must be considered, including society in general and the environment. The argument that a corporation has not broken the law does not make it any less culpable for harm it has done, ethically.

Corporations have a social responsibility to have a "smart management" that both prevents the organization from doing harm to the corporate image, and also helps improve the organizations' reputation. Beschorner (2006) theorizes that it is profit maximization that is the ultima ratio, and that businesses only take ethical issues into account, if there is some cost associated with it.

For Exxon, the company's recent actions seem to indicate that they are beginning to recognize the new social mandate they must operate within.

Resources must be developed not just for economic benefit, but also for the benefit of the environment and society as a whole.

Hamilton and Berken (2005) cite one industry analyst that sums up the impact on business quite succinctly, "It's a whole new ball game for Big Oil. The traditional way of doing business -- getting the oil out of the ground without getting involved in politics, human rights, and the environment -- just isn't tenable anymore."

Wood (1991) notes that the implementation of ethics into an organization's strategic goals should be done simply because it is the 'right' thing to do. However, in today's society, following the occurrence of unethical situations, such as Grand Bois, ensuring ethics is incorporated into organizational strategic goals is also the profitable thing to do (Key & Popkin, 1998). This theory is supported by Waddock and Graves (1997).

Businesses that conduct themselves in an ethical manner enjoy increased financial performance, while those who conduct themselves unethically realize reduced financial performance. As Key and Popkin note, to be a beneficial part of strategic management, ethical consideration must be had before profit decision-making, not after. This was a powerful lesson demonstrated by Exxon.

Mender (1992) agrees that it is only through crises, like that of the Exxon Valdez or Grand Bois or the questionable situation with Chad, that the public becomes aware of corporations and how greatly they affect the lives of the public and the natural world. Even though corporate names are ubiquitous, most people simply accept their existence without question. They do not receive the attention as the primary players that they are, until a crisis occurs.

The incident with the Exxon Valdez highlighted the importance of ethical decision-making for organizations, and further cemented the desire for corporate social responsibility in the minds of the public.

Although Exxon has been well-known for its after-profit philanthropic donations, the refusal to consider the ethical implications that led to the Exxon Valdez, before-profit, resulted in a tarnished corporate reputation and poor financial outcomes (Key and Popkin, 1998).

Gert developed an ethical theory that is based on what he refers to as a common morality. Moral rules make up the central part of this theory and builds upon the theory that all moral agents understand what common morality requires, forbids, encourages, and allows.

This common morality must be discovered (Carson, 2006).

The Exxon incidents have not only helped Exxon with this discovery process, but other businesses as well.

In addition, di Norcia (1994) notes the lessons of pushing a project forward without fully considering the ramifications, in an effort to realize cost savings as quickly as possible, were demonstrated by the Exxon Valdez. Thanks to the Exxon Valdez incident, businesses have begun to understand that although rushing a project may yield short-term gains, but in the end, the true costs may spiral out of control. In the instance of the Exxon Valdez, this effort to save the organization money ended up costing the company an estimated $2 billion in clean up, plus a $5 billion fine.

Although in 2001, a U.S. federal appeal court ruled that the $5 billion fine for punitive damages was excessive, in light of the fact that Exxon had already spent $2.2 billion on clean up and $300 million in compensation, against $287 million in actual damages ("U.S. appeal court," 2002). However, in 2002, environmentalists called on then Alaska governor Tony Knowles and President George W. Bush to utilize a 're-opener' clause, in the settlement, that would fine Exxon an additional $100 million if unanticipated damages were discovered ("Call for an extra," 2002).

Sellnow (1993) explores the effects of the Exxon Valdez in a different manner. He notes that for many organizations, the key to survival lies in scientific research and development. However, he theorizes that following a crisis experienced by an organization can also be the catalyst to research and development within the industry.

The research question the author posed was "to what extent can organizations adhere to the norms of scientific ethos when defending their products and procedures during times of crisis?" In an effort to answer this question, Sellnow utilizes a case study to test the ethical norms for the scientific community, as they're applied to a sample of scientific arguments that were offered by Exxon following the Valdez incident.

It is discovered that profit-seeking organizations, like Exxon, are able to position themselves as resources of scientific knowledge. However, in some instances, they may violate the ethical norms of the scientific community. In these instances, the public is then misinformed and then has to rely on the judgment of other parties. Society must turn to government agencies, advocacy groups and the media to refute the scientific knowledge presented by the company's unethical use of scientific evidence (Sellnow, 1993). As a result, the public becomes more skeptical of this knowledge that could, in fact, be very beneficial.