Bill Moyers once said that Texas politics is the art of personal persuasion, and if that is true then Amarillo oilman T. Boone Pickens, Jr. might someday make an outstanding Texas politician. Where the medium-sized man with the giant-sized ambitions has made his real mark recently, however, is in corporate America, where his company, Mesa Petroleum, has come into prominence through its repeated attempts to take over such energy conglomerates as Gulf Oil and Phillips Petroleum. Al though Pickens, Mesa's chairman, has not been successful in seizing control of a major oil company, he has forced many Big Oil corporate chieftains to rethink management practices. While some consider Pickens a pirate in a three-piece suit, that challenge to corporate chieftains has won him praise from various corners. Whatever Pickens has done, he has not suffered from want of personality. His easy-going manner stems from the Texan's sense of extended family, where no one is considered a stranger, and is combined with a deadly seriousness which could prove an unbeatable mixture should he enter politics. In this interview with Forum editor Bill McKenzie, Pickens discusses that possibility, along with a number of other issues such as entrepreneurialism, corporate bureaucracy, the future of the oil industry, and the state of Texas.
Ripon Forum: Corporate takeover specialist Carl lcahn says that "Unfortunately, many of today's chief executives have spent the first 20 or 30 years of their business careers studying how to please their boards rather than concentrating on how to increase their corporation's profitability." In an age of corporate giant-ism, has risk-taking become passé?
"Risk-taking is related to the management of a company."
Pickens: Risk-taking is related to the personality of a company's management. We certainly don’t think it has become passé at Mesa, and I think our record proves that. On the other hand, if you look at the deals we've made, we've assessed risk very well. A lot of times I'm characterized as a person who just steps up to the crap table and says "hand me the dice." I don't see myself or our management like that. At a crap table, your odds are 50-50. We operate with much better odds than that.
Ripon Forum: You've argued that Big Oil is mismanaged, and that the executives of some energy giants "have no more feeling for the average stockholder than they do for baboons in Africa.” If this is true, to what extent is it due to the fact that some energy executives are minimal shareholders in their companies, and to what extent is it due to the nature of corporate structure?
Pickens: I don't think there's any doubt, even among the chief executive officers (CEOs) of major oil companies, that those companies are bureaucracies. Some are more efficient than others, but they're still bureaucratic in structure. There is no question that increased ownership will cause managements to be more sensitive to stockholders' interests. The more ownership managements and boards of directors have, the more they will try to maximize stockholder values. I've said many times that I work for our stockholders. That's who pays me. I am an employee and proud of it.
I know from experience that the CEOs and directors of major oil companies generally feel that they have taken care of the stockholders with a dividend. Many managements have not accepted the fact that they are also responsible for the price of the stock, although we have made some inroads in that respect through our takeover attempts.
Ripon Forum: Let's return to the idea of risk-taking. What makes an entrepreneur? What creates the entrepreneurial spirit?
“An entrepreneur is someone who doesn't need seven pieces to figure out a seven-piece puzzle.”
Pickens: You can't imagine how many young people have asked me, "How do I know if I'm an entrepreneur?" An entrepreneur is someone who doesn't need seven pieces to figure out a seven piece puzzle. There are some people who just need two pieces, and they know where the other five should go.
It is my feeling that there are only a few entrepreneurs in the legal profession, the accounting profession and the engineering profession. The reason is that their education imposes a certain discipline on them. They have to have almost everything in place before they decide to make a deal. But there are exceptions. Hugh Liedtke, Pennzoil's CEO, is a true entrepreneur, and he's a lawyer. David Batchelder, Mesa's chief financial officer, is an accountant and one of the best entrepreneurs in the country. The list goes on.
Ripon Forum: Does modem corporate structure encourage entrepreneurialism?
Pickens: No, because it's bureaucratic in design. Even in my own organization, it has been hard work. We operated for a long time with people who were good, solid performers, but not entrepreneurs. Today, we have a more aggressive group. We started in 1956 with $2,500 paid in capital, and went public in 1964 with less than $2 million in assets. We have assets today of more than $4 billion.
In the 1970s, some of the major oil companies were kicked out of foreign countries. They were forced to come back home and compete, so they decided to see how the independents were operating. Texaco became a partner of ours in 1980. They wanted to find out how we operated, if there was something to be learned. But I don't think you can just say, “Let's go see how somebody else does something and do it that way.” That doesn't always work.
Probably all of us in America have some degree of entrepreneurship. In some, it may be just a slight flicker, but in others, it might be a roaring fire. Where people land will determine what they'll do. The person with the roaring fire probably will not last very long unless he lands in an environment that promotes entrepreneurialism. And the flicker in someone else may be snuffed out in a short time if it isn't nurtured.
Ripon Forum: Let's assume that you become chairman of an energy giant. What would you do differently?
Pickens: I love that question. About 15 years ago, a friend who was in line to ascend to the top of Gulf Oil remarked that he probably would not be able to make any meaningful changes in the company because by the time he succeeded, he would be 60 or 62 years old. Quick changes would just not be possible, he thought. I guarantee you that if you are the CEO of a company and you want to make a change, you can make it. I've heard remarks, and you have too, that the president of the United States is stuck with a bureaucracy and can't really make changes. That's wrong. We've already seen that. We see a man making changes continually. It all comes from one concept: leadership.
Ripon Forum: So what would you do if you were in charge of an energy giant?
Pickens: The first thing I'd do is cut out the insulation around the so-called decision-makers. I'd force them to make decisions in a timely manner. People become tired of waiting to get decisions. That's what happens to so many of these companies, they fail because they can't get timely solutions to their problems. I still give a 90-minute orientation to new employees at Mesa. The first thing I tell them is that the stockholders come first, and the employees and management will do just fine if they perform well for stockholders. If we don't perform well, then we're vulnerable to a lot of things: losing our jobs, being taken over, going bankrupt or whatever. I also tell them all employees should want to own more stock. Ninety-five percent of Mesa's employees are stockholders, and ninety percent of my net worth is in Mesa. People sometimes say to me, "I've got a drilling rig. I'll cut you in for a half interest if we can do business with Mesa." We've never done that. It's incredible the temptations managements have. You've got to decide at an early stage that you will not submit to temptation.
Ripon Forum: You'd cut insulation, give more of a personal touch to employees, and increase employee stock ownership. What else would you do?
Pickens: I believe that everything will fall into place once you get the momentum going.
Ripon Forum: You've made the argument that the oil industry needs restructuring. What is the T. Boone Pickens plan for doing this?
"The oil industry is faced with poor fundamentals. First, the price of oil is uncertain. Second, successful exploration today is likely to involve natural gas instead of oil."
Pickens: The oil industry is faced with poor fundamentals. First, the price of oil is uncertain. Second, successful exploration today is likely to involve natural gas instead of oil. Most of the oil in the United States has been found. That's terribly important and often lost in discussions of industry conditions. Unfortunately, our natural gas markets are severely curtailed. Mesa is currently producing about 250 million cubic feet of gas per day. We are capable of delivering 500 million cubic feet.
That is severe curtailment. It doesn't lend itself to aggressive exploration, since "success" probably would be another shut-in gas well.
The larger companies have huge cash flows, but they have limited investment opportunities. If you are going to produce more oil and gas than you replace, then you need to place the assets within the most efficient structure to deplete them.
Ripon Forum: And what would that be?
Pickens: A master limited partnership allows you to distribute cash flow to shareholders while fundamentals are poor, but it leaves you with a flexible structure in case the industry comes
Ripon Forum: ...Why do you think the oil industry will come back?
Pickens: Because we'll have shortages again, probably after 1990. But I don't want to endure five or six years of very stagnant conditions and deplete our reserves in the poorest possible structure. I'd rather deplete them within a master limited partnership, which will maximize values for stockholders.
Ripon Forum: Some people make the argument that mergers and acquisitions have become a relatively routine part of American business. But do they really create new jobs? Do they really expand the economy? And perhaps more importantly, given our trade deficit, do they make us more competitive with foreign companies?
Pickens: I believe they do. Dr. Gregg Jarrell, the Securities and Exchange Commission's chief economist, and Michael Jensen, a professor at the Harvard Business School, have done studies demonstrating that mergers and acquisitions make management more accountable. If you can build efficiencies into the system, then it will be good for the consumer and the economy.
"The total merger proceeds of [Gulf and Chevron] were $13 billion, and that went into the hands of 400,000 stockholders."
Some managements have become concerned that their common stocks are selling at huge discounts to their underlying value. They realize they are vulnerable, and they are trying very hard to enhance market prices. This is beneficial, because increasing market values makes money for the owners. Let me give you an example. When we first tried to take over Gulf Oil, their price was $37 per share. During the preceding twelve years, Gulf had not replaced its oil reserves. During the preceding five years, it had lost the equivalent of 634 million barrels from its reserve base. It was being liquidated at a pretty fast clip. The stock had hit an all-time high of $53, and we didn't think the price would ever go above $40 again, even if the price of oil recovered. Just think about the additional losses shareholders would have suffered if Gulf had proceeded on the same disastrous descent. Shareholders would never have received the $80 per share offered by Chevron. If you assume that the average purchase price paid by all stockholders was $40 per share, which I'm told is probably conservative, then another $40 per share was made as a result of the merger with Chevron. That represents $6.5 billion in profits for the stockholders of Gulf. The total merger proceeds of $13 billion went into the hands of 400,000 stockholders. That $13 billion went directly back into the economy. Of the $6.5 billion in profits, over $2 billion was paid in federal income taxes.
Ripon Forum: But take your attempted takeover of Cities Service. Before you tried to buy it out, Cities Service had 18,000 employees. Then Occidental Petroleum came in, bought Cities Service, and reduced the number of employees to 5,000. The Cities Service stockholders might have made good on the deal, but what about its employees?
Pickens: I don't remember the Cities Service employment figures, but let's consider the Phillips and Gulf deals. Gulf had already eliminated 15,000 employees before we showed up as a stockholder. Phillips had eliminated about 10,000 before we became involved. Due to the industry's deteriorating fundamentals, these companies were overstaffed. Look also at Arco. They just put into early retirement more than 6,000 people, and it had nothing to do with a takeover attempt.
By combining Occidental and Cities Service, a more efficient operation was created. I don't want to see the oil industry going the way of the steel industry. After Ian MacGregor took over British Steel a few years ago, he told me that they cut their workforce considerably in one year. He asked what effect I thought it had on his production. I said I bet it was off 10 percent. No, he said, it was up 50 percent. The point is, it pays to work with a force of people that are fully occupied and challenged.
Ripon Forum: John Y. Brown, the Kentucky Fried Chicken executive who later became governor of Kentucky, once made the claim that "everything lends itself to business analysis." Can you really run a government like a business?
"[Government] is like business. The taxpayers are like stockholders . . . it makes no sense to hear politicians tell constituents that they'll give them something. Politicians shouldn't be allowed to give anything."
Pickens: Sure you can. It's a business to start with. Taxpayers are like stockholders, and both are entitled to a full day's work for a full day's pay. For a dollar spent, taxpayers ought to receive a dollar back in value. It bothers me to hear politicians tell constituents that they will give them something. Politicians shouldn’t be allowed to give away anything.
Ripon Forum: But let's compare the dynamics of political and business decision-making. In a democracy, there are many competing voices which make the process of making a decision slow and tedious. There are a whole host of people, from environmentalists to business lobbyists, who make their presence known on Capitol Hill. So how can you expect to run a government like a business?
Pickens: You can if you adopt the philosophy that the funds are going to be used for projects that make economic sense. You mentioned environmentalists. I'm not for producing something in an irresponsible fashion just because it makes economic sense. That would be very shortsighted because the environment should always be protected.
I come from a very frugal background. My mother, aunt and maternal grandmother were all very frugal people. I believe that all of us have to be accountable, and I think the same principle should apply to government.
Ripon Forum: But my point is that the accountability you can exercise as chairman of Mesa Petroleum is different than what you could as, say, governor of Texas.
"The governor of Texas can't fire everyone in an agency because they didn't handle the taxpayers' money in the way he'd like . . . But through leadership a lot of things can happen."
Pickens: I agree with that. You don't have nearly as much control in government. The governor of Texas can’t fire everyone in an agency because they didn't handle the taxpayers' money the way they should have. But he can start an investigation and cause some things to happen.
Through leadership, a lot of things can happen. At Mesa, for example, we have no company cars. We did until January I, 1985, but with tax changes it was not prudent to continue to have company cars. We never have had a hunting camp or fishing lodge to entertain ourselves or others. It just isn't part of our philosophy. By setting an example and exercising leadership, I think you can establish the same accountability in business as well as in government.
Ripon Forum: Why is it that more business leaders don't make the transition from business into politics?
Pickens: Most business leaders are private people. They don't want the exposure required by government service. I've been more willing than most CEOs to be questioned by the press because I believe that you should be willing to answer questions if you are going to get out front. Also, some business leaders would not like to contend with the disclosure laws. It's not that they have anything that would be embarrassing. They just feel it's not anyone else's business. Disclosure doesn't bother me. The deals that I have been in have been fully investigated. There have been full-time detectives from the other side going around checking me out. If I entered politics, they couldn't ask any more piercing questions than I'm asked now.
"Most business leaders are private people. They don't want the exposure required by government service."
Ripon Forum: Is there a way to draw business people out into the public arena?
Pickens: Encourage them. I think I have caused some business people to be more responsive to the press. The press has an obvious distrust of corporate executives because the insulation is too thick and they can't get access to them. One reporter told me he had to send a list of questions to an executive, who then told the reporter which questions he could ask and how long the interview would last. Naturally, that gave the reporter an uneasy feeling.
Ripon Forum: Business people understand the workings of capitalism then, but not necessarily the workings of democracy?
"It's interesting to me that some business people will tell you about the free enterprise system until someone acquires a large block of their stock."
Pickens: It's interesting to me that some business people will praise the free enterprise system until someone acquires a large block of their stock. That's when they start crying foul. Their corporate empire is being shaken, and that makes them extremely uncomfortable. The power syndrome is the biggest problem in corporate bureaucracies.
When you asked earlier whether executives play up to boards of directors, I didn’t respond. I don't see that very often. What I see more frequently is that directors are beholden to the chairman, because the chairman selected them . When I look at a list of the members of a board of directors, I always check to see how much stock they own. That's important. The lowest ownership among Mesa's directors is about 10,000 shares. Not counting mine, the figure increases to more than 500,000 shares.
Ripon Forum: But is there an awareness in the business community of the different dynamics between private and public decision-making, such as the pluralism of constituencies and the glare of the press?
Pickens: I don't see that much difference.
Ripon Forum: It's been said that too many business people ignore the social implications of their actions. Is there a social responsibility in the creating of wealth?
Pickens: Social responsibility is akin to protecting the environment. We shouldn't pollute anything just for the sake of making money. We don't have that right. There's always a responsibility to society for what we do. On the other hand, we have to look after the stockholders' interests.
Ripon Forum: You haven't discouraged rumors that someday you may run for office. Why would you want to enter politics? And what sort of political vision do you have?
Pickens: I think I have a pretty good feel for how things fit together, and I've been able to predict a lot of things well in advance. This has enabled me to do well as a CEO. Our record is quite good at Mesa, not only in enhancing the value of our stock but also in building an unusual cadre of people. I'm very sensitive to our employees. They also know I expect a good job, and that they will be rewarded for providing it.
Ripon Forum: But why would you want to enter politics?
Pickens: If I thought I could contribute something. I had no interest in getting into politics in 1986 because I felt like I had an unfinished job at Mesa. It was easy to make that decision. I don't know what will happen between 1986 and 1990.
"I had no interest in getting into politics in 1986 ... I don't know what will happen between 1986 and 1990."
Ripon Forum: Let's assume that you do become governor of Texas. What would you want to accomplish?
Pickens: Texas is facing some very tough problems. When the price of oil increased during the 1970s, the state had a budget surplus. But during the 1984 special session, the Legislature passed the biggest tax increase ever. We've almost gone full circle to the 1960s, when every legislative session addressed taxes. Some real leadership is going to have to surface to solve these problems. For example, we've got a huge water problem, both in the metropolitan and rural areas. Higher education is going to have to be changed because it's become too expensive for the taxpayers. Efficiencies need to be developed throughout the system, and even the educators are aware of it.
"Texas is facing some really tough problems . . . Some real leadership is going to have to surface . . . Yet Texas is also blessed with more entrepreneurs than any place in the world . . . It will rebound."
Let me cite a statistic that will surprise you. The last time the state of Texas replaced its oil reserves was in 1955. If we had not had the OPEC oil price increases of the 1970s, the state and the oil companies would have been in terrible shape before now. Another interesting statistic is that in 1972, the state of Texas produced three times as much oil as it did in 1984. The implications of these statistics on future state finances are substantial.
Yet Texas is also blessed with more entrepreneurs than any place in the world. That's not something you necessarily have to encourage. You just have to be sure that you don't develop a detrimental atmosphere. People are willing to stick their necks out and put their money up and take their chances. They'll be there if you give them the right kind of business climate. Texas is an exciting place, and unusual in the way it rebounds. And rebound it will.