A Case Study in Delivering Shareholder Value – BP

BP is one of the few companies that regularly receives awards for its delivery of shareholder value. Peter Hall, the Director of Investor Relations at BP, highlights a number of key factors that keep BP near the top of the shareholder value league tables:

– The concept of shareholder value is very important within the business culture. The group actively attempts to manage and integrate the shareholder value perceived externally within the stock markets with the value created internally by the managers of the business. There is a very close link between the investor relations team and the Group CEO and CFO, who continually take a strong interest in the company’s share price. The group’s investor relations department is eight strong and has dedicated experts both in London and New York.

– The company has adopted total shareholder return as its main way of measuring shareholder value. Absolute growth in TSR is not sufficient. BP must also improve relatively against its peer group. BP has also used TSR in a sophisticated way by:

Calculating total shareholder return over a three-year period to smooth out short-term fluctuations in the stock markets;

Using a comparative peer group of companies (against whom they measure their relative TSR performance). This group includes the major six key players within the oil industry – ExxonMobil, Shell, ChevronTexaco, TOTAL, ENI and Repsol YPF.

– TSR has been adopted internally as a way of driving business performance. This has been achieved through the use of two additional performance measures, earnings growth coupled with return on capital employed. By setting business unit targets based on both of these measures, managers need to deliver growth in earnings and an increasingly effective utilization of the assets within their business. Success with these parameters should translate into improved TSR.

– The organizational structure is deliberately flat and is geared towards effective management and delivery against these key targets. There are approximately 150 business units in BP, each on average with around $0.5 billion in capital employed. This is small enough to enable the CEO, if he wants to communicate an important message, to bring together all the managers of the business units into one room if necessary.

– The business units within BP also compete against each other for capital allocation. Peer group results are regularly reported through BP’s financial systems. This internal competition also drives selective investment into business projects that generate the best shareholder value in the medium to long term.

– The remuneration of the management team is heavily dependent on their relative performance against demanding three-year TSR, earnings growth and return on capital employed targets. It is not enough for managers to deliver TSR, earnings growth or ROCE in isolation. To earn the maximum award they have to deliver all three and they have to outperform their peer group. Performance below the peer group median results in no award. The remuneration contract of BP’s executive directors ties as much as 70% of their earnings to these factors so they really do bear similar risks to the shareholders for whom they act. The contracts of all other senior managers are similarly structured to reflect both their own targets and the company’s results relative to its peers.

BP also recognizes the need to manage effectively its communications with journalists and the investment community. Peter’s team actively monitors the information that is currently available about BP within the investment community. Often analysts send drafts of their reports and models to the company for comment. The team reviews these to correct any factual errors but they do not comment on the broker’s recommendations. BP is also in regular contact with large institutional investors, such as Fidelity and Merrill Lynch Asset Management, who by virtue of the amount of their funds under management can make a significant difference to BP’s share price performance relative to its competitors within the industry.

This BP case study highlights an important truth about managing for shareholder value. It is not sufficient for companies merely to convey to investors messages about shareholder value. They must also back up those messages with a real implementation of practical measures and actions designed to create and deliver that value consistently.

Source: G. Ashworth, P. James, Delivering Superior Shareholders Value, 2001