TNK-BP Corporate Governance Challenges - Essay Example

TNK-BP Corporate Governance Challenges Name: Institution: Course: Date: TNK-BP Corporate Governance Challenges With the increasing levels of globalization resulting from liberalization of markets, efficient flow of information and integration of economies, the levels of competition has increased tremendously. This mainly results from the entry of multinational companies in the local markets. These are firms with a huge financial base to segment the market and position their products strategically in the market. In the past one decade, the oil industry has been hit by various challenges which have forced the top management of the top oil firms to look for alternatives. One of the strategies that have been taken by these businesses is to form joint ventures in order to reduce the costs of operations and bring their resources together, an aspect that would create a barrier of entry to any other interested investor. Furthermore the move aims at enabling the organizations to start new oil fields in order to maximize their production (Dixon 2008). However, the coming together of TNK and BP has faced several challenges. These threatened the existence of the partnership. As a result, shareholders are selling out their shares as they are prospecting that the business is likely to collapse. This paper will therefore discuss the source of disputes and give solutions on how they could have been solved. The corporate governance of the joint venture was poor. The largest stakeholders were left out of major decisions. Currently, all stakeholders in the company should be part of the decision making process. The oil prices have been facing a great challenge from political upheavals across the world. However, lack of clear understanding between the top management of the BP and TNK has played a significant role in escalating the current situation. Although the coming together of the two firms was based on a mutual understanding, this spirit went down because of different interests between the two companies. For instance, since the dismantling of the Yukos by the government of President Vladimir Putin in 2004, BP has been interested in shifting its alliance in the country from being private to state-owned energy company (Osipovich 2013). However, this was not going well with the other partner who wanted to remain a private company. The BP decision was to reduce the vulnerability of the company because of being privately owned. However, in order for such decision to be made, TVK had to be made. Nevertheless, the firm was not ready to submit its stake to the government which was not stable and was facing several political challenges which could spread to affect the sales of the company. After successfully entering the Russian market through the joint venture with TVK, BP has gone ahead to almost form an alliance with state-owned companies, e.g. Gazprom in 2007 and Rosneft in 2011. However, the partner has sued or thrown the bureaucratic obstacles in the two occasions. This was an indication that BP was not satisfied with the profit making venture which was being smoothly run by then (Dixon 2008). This aspect created mistrust between the firms. Therefore, the top managers stopped sharing the secrets to success. In addition, each business tried to form an alliance with other firms in the Russian market behind the back of the other company. The situation even got out of hand to an extent that the organization started competing among them. Government intervention on the operations of the companies has escalated the problem. Every business yearns to operate in a free environment where there is government support. Instead of the government interfering with the work of the business, it should offer incentives to the business. However, this was not the case in Russia. The company has been hit by billion-dollar tax claims. This is despite the firms enduring tough economic times which have resulted from various sanctions from the West on Russia (Chazan 2014. In addition, the company’s subordinates have been subjected to psychological torture. For instance, the chief executive of the business, who was an appointee of the company, was forced to leave Russia. BP has outsourced a large number of employees from UK. These workers feel less motivated to work in a country that does not recognize their efforts despite the business remitting high taxes to the government. The search of BP office by the successor of the Soviet-era KGB was another blow to the business. Therefore, the top management feels demotivated to continue working in this country. In addition, despite their effort to look for justice in the court of law, Putin government has continued to suppress any effort to reinvent the company. TNK has done very little to help BP deal with the current issues. Instead, it has worsened the situation by bringing more instability in the business. TNK and BP had different investment objectives and philosophies from the initial stages of the deal. BP is accustomed to long-term explorations and production projects. However, AAR shareholders have already come of age. They have been able to amass huge wealth even during Russia’s rough and tumble 1990s. They have been able to accumulate huge fortunes in few years through snapping up cheap assets in privatization auctions. As a result, the shareholders of AAR became frustrated when the chief executive of TNK-BP who was a US citizen agitated for a costly long-term investment strategies. On the other hand, the UK managers accused their counterparts in Russia of asking for unrealistic returns, an aspect that derailed the operations of the business (Accountacy Live 2012). The AAR’S Polovets went ahead and acknowledged that the two companies were seeing things very differently. They always emphasized that they are always ready to make investments but they must always be assured that there will be returns. This indicated that they did not trust the management of the business. This put the company in compromising situation especially during a time when more funds were required to fund the expansion programs. The payment row between the companies escalated an aspect that affected the working environment. BP and AAR were embroiled in a public spat concerning the payment of the Western employees. AAR insisted that employees from the west were being overpaid and unnecessary to the company. This is the time when the Chief executive of TNK-BP was accused of meddling with Russian work permit process of application (The Economist 2012). This was to ensure that employees from Western countries were able to renew their Russian Visa, thereby, forcing them to leave the country after the expiration of their visas. TNK-BP was therefore, faced with several lawsuit concerning this matter. This affected the relationship between the employees, an aspect that was replicated in the overall performance of the company. The joint venture between TNK and BP has been a victim of success. Before the eruption of wrangles that resulted to frequent lawsuits, the firm was making immense profits. Complaints started arising concerning the division of dividends. The tension started rising as some Russians started alleging that a lot of money was being pumped to UK, an aspect that was leaving the business with no money to invest further. The problem escalated further when the chief executive announced that since the production was flattening and profits flagging, it was agreed that the dividends will be slashed further. The money collected will be shifted towards fields and equipments. This distanced the relationship between the top management and the shareholders (Bovt 2012. They even went ahead and threatened to sue the top management of the company. Due to these wrangles, the shareholders vowed to bring down all decisions by the top managers as a way of registering their dissatisfaction on the way the company was being run. The top management shifted the blame which made them take this decision on the Russian taxation policy on the foreign companies. The chief executive of TNK-BP spent most of his time dealing with a host of annoying issues such as tax complaints and even grievances that were associated with labor. In addition, he never had adequate time with internal issues that were affecting the business. For instance, he was served with a lawsuit in which sixteen executives accused him of discriminating against the employees from Russia. This slowed his response on important issues that were associated with the performance of the business in the market. It is during the same time when the company was facing stiff competition from Middle East (Thompson 2012). However, the legal claims kept on rising in numbers. The top officials in the company were spending more time in the courts rather than their offices. Various challenges started rocking the company as the turnover rate started to rise. Employees started complaining of poor working conditions and lack of support from the top management. There were complaints that the top-level managers were no longer available to address various challenges that were facing low-ranked employees. As a result, experts and other staff members who had special skills in different sectors of the company started quitting. This started affecting the returns of the business. This coupled with the sanctions that were directed towards Russia by EU and United States started taking toll of the company returns. As a result, the company started caving in, an aspect that forced the investors to rethink their investment strategy. (Dixon 2008) In the graph above, TNK-BP indicates that the level of green house emission has come down over the years. The same should be applied on oil spills. TNK-BP has been in a major showdown in trying to defend its reputation on the allegation that there has been oil spills in some of the company’s subsidiaries. According to the Russian Natural Resources and Minister Yury Trutnev, the company has experienced 784 oil spill accidents. Consequently, the minister warned that generous divided policy could be cut back in order to free up capital to be used in pollution prevention. The move created panic among the investors as it could affect the profitability of the business (Marson 2013). With the business already facing numerous internal and external challenges such a move would hurt its stability. In addition, it strengthened the position of the locals that western companies are only interested in making immense profits on the expense of the local population. Prevention Strategy Oil industry is one of the sensitive sectors in any economy. Different countries have found themselves in war due to lack of the necessary policies related to division of revenue collected from oil. The huge amount of resources that emanates from the oil sector attracts the interests of different parties. Therefore, the necessary measures should always be put in place in order to avoid any form of crisis. In this case, TNK-BP should have sought some legal advice from the expert in order to draft policies that would prevent any conflict with Russia. With the immense investment being put in place when establishing this venture, the political leaders were to be attracted into the deal (Werdigier & Kramer 2012). This is the reason why British Prime Minister and Russian President were involved. However, the company should have put in place the internal mechanisms to ensure that there was no external interference with the operations of the business. TNK-BP should have set up a conflict resolution department whose role was to address any issues that were affecting the employees. In the oil industry, the top management is always in a tag of war with competitors. These are multinational companies with a huge financial base to even use the political leadership of a country in order to bring a certain firm down. As a result, the company should have separated its external issues with those that affect the members of staff (White 2011). This is to ensure that even as the business engages the rest of the competitors and other interested parties, the operations in the company were running smoothly. However, this was not the case. The company was fighting both internal and external battles. This weakened the established structures and threatened the position of the business in the market. Issues associated with employees should be dealt with by the human resource section. This department should have employed an open office policy. This is to ensure that all employees are able to air their grievances without the use of any intermediaries. This would have prevented the internal conflicts from being taken to a court of law (Dixon 2008). For instance, the case whereby the sixteen officials took the chief executive to court for discrimination claims could have dealt with internally. Divided sharing should have included in the deal. Sharing of joint company resources has been a contentious issue over the decade. Lack of clarity in sharing of divided has seen many companies disintegrate due to lack of trust among the shareholders. As a result, the top officials should have come up with resource sharing formula in order to prevent any fallout which is related with the profit sharing. Currently, diversity in the workforce has become an important aspect towards the success of any organization. Employees emanating from different regions, cultures, and even religion are able to deal with diverse issues that affect the organization. Oil industry is very dynamic and it faces frequent challenges. However, the percentage of the foreigners to that of the locals could have been made clear during the establishment of the alliance. This is to ensure that the interests of the local population are taken into consideration in the business. Payment is a critical topic in every organization. Poor payments strategy kills the morale of the employees. This is even worse when the workers working in the same sector and doing the same job are remunerated differently just because they emanate from a different region. Equality is significant in ensuring that the mood of the working environment is positive (Dixon 2008). In order for this to have been achieved, the company officials should have sat down with the human resource department and agree on the payment formula which is sufficient for all employees irrespective of their age, color, or even background. However, different aspects such as the experience and work requirements should have been considered in determining who is supposed to earn more than the rest. This could have settled the wrangles that were experienced in TNK-BP. Consultation would have been made mandatory especially when critical decisions concerning the progress and the future of the company were being made. In many cases, the top leadership has lost touch with the rest of the stakeholders. Therefore, they end making decisions that only please very few people in the organization. As a result, the rest of the stakeholders rise against the operations of the business, an aspect that is replicated in the overall performance of the business. However, in order to avoid unnecessary tension, TNK-BP should have ensured that all stakeholders to be affected by various decisions are consulted always (Dixon 2008). This is to prevent resistance especially when crucial decisions had to made, e.g. concerning the best areas to improve or even invest. Currently, the world is crumpling with the increasing levels of global warming. Governments and non-governmental organizations are taking seriously the issues related to environmental pollution. Oil spills in different parts of the world has led to mass death of aquatic organisms (Dixon 2008). As a company that is environmental conscious, policies should have been set to ensure that any form of accident that would lead to spills is dealt with in advance. This could have played a significant role in salvaging the reputation of TNK-BP. References Accountacy Live. (2012, July 24). BP's Russian venture: A shotgun wedding? | Accountancy Live. Retrieved from https://www.accountancylive.com/bps-russian-venture-shotgun-wedding Bovt, G. (2012, June 6). BP's Good Divorce Better Than a Bad Marriage | Opinion | The Moscow Times. Retrieved from http://www.themoscowtimes.com/opinion/article/bps-good-divorce-better-than-a-bad-marriage/459951.html Chazan, G. (2014, April 10). Financial Times | Error | Akamai Error. Retrieved from http://www.ft.com/cms/s/0/4dc96336-c0ae-11e3-8578-00144feabdc0.html#axzz3KH3Pne4G Dixon, S. (2008). Organisational transformation in the Russian oil industry. Cheltenham, UK: Edward Elgar. The Economist. (2012, June 9). Russian energy: Twilight for BP in Russia? | The Economist. Retrieved from http://www.economist.com/node/21556629 Marson, J. (2013, March 21). Rosneft Completes $55 Billion Takeover of TNK-BP - WSJ. Retrieved from http://online.wsj.com/articles/SB10001424127887324103504578374184188808640 Osipovich, A. (2013, March 19). TNK-BP saga raises questions about BP's handling of political risk - Risk.net. Retrieved from http://www.risk.net/energy-risk/feature/2253578/tnkbp-saga-raises-questions-about-bps-handling-of-political-risk Thompson, S. (2012, July 30). Oligarchs knock back TNK-BP dividend plan | The Times. Retrieved from http://www.thetimes.co.uk/tto/business/industries/naturalresources/article3491614.ece Werdigier, J., & Kramer, A. E. (2012, June 1). BP to Seek Sale of Russian Venture TNK-BP - NYTimes.com. Retrieved from http://www.nytimes.com/2012/06/02/business/global/bp-to-seek-sale-of-russian-venture-tnk-bp.html White, G. L. (2011, November 14). TNK-BP Partner Relishes Conflict - WSJ. Retrieved from http://online.wsj.com/articles/SB10001424052970203503204577036000854767804 Read More