Top Management: Standard Oil Trust

The formation of the Standard Oil Trust on January 2, 1882, provided the members of the powerful Standard Oil alliance with a central organization to supervise and coordinate the operations of their constituent companies and to make investment decisions for the group as a whole. Such central direction could not be achieved through a cartel, either formal or informal. Members of the alliance, like those of any pool, cartel, or trade association, could do little more than set price and production schedules and make joint shipment and purchasing arrangements.

In setting up the trust, its creators expected the new central office to administer a group of subsidiary companies. They did not intend to eliminate legally the major companies and then to merge them into a single operating enterprise; Some smaller subsidiaries were amalgamated into the larger existing ones or into the two new state-chartered companies, Standard Oil of New York and Standard Oil of New Jersey. The functions of the trust were to coordinate, evaluate, and plan the activities of operating subsidiaries, whose number grew as the trust moved into new functions and new markets and obtained new sources of crude oil.

The largest processing subsidiaries were those that operated the three great new refineries that together produced two-fifths of the world’s supply of kerosene. Standard Oil of New Jersey managed the Bayonne refinery, Standard Oil of Ohio the one in Cleveland, and Atlantic Refining the Philadelphia works. Subsidiaries operating the twenty or so smaller refineries—many of which produced lubricants, paraffin, vaseline, and other specializations—included Pratt, Devoe, Stone & Fleming, Thompson & Bedford, as well as Standard of New York, all located in the New York area. Camden Consolidated had refineries in Baltimore and in Parkersburg, West Virginia, and Central Refining and Acme had refineries in western Pennsylvania and on the seaboard.1 And from the start the trust relied on the National Transit Company to supervise and plan pipeline activities.

As the trust integrated forward into marketing and backward into crude oil production, it enlarged the number of its operating enterprises. It set up new marketing companies, including Standard Oil of Kentucky, of Iowa, of Illinois, and of Minnesota, and Continental Oil. It also obtained control of the two largest wholesalers in the United States—the Waters, Pierce and the Chess-Carley companies.2 In the east the trust turned the marketing functions over to existing refining companies—to Standard of New York, of New Jersey, and of Ohio, and to Acme and Atlantic Refining. Abroad the marketing and distribution came to be handled by Anglo-American (a British corporation), American Petroleum (a Dutch corporation), and Deutsch-Amerikanische Petroleum Gesellschaft and some smaller national companies. Each of these subsidiaries was allocated its own marketing territory. Then with the move into crude oil, Standard Oil formed several producing companies—Ohio Oil, South Penn Oil, North Penn Oil, Union Oil, Forest Oil, Midland Oil, and some smaller ones.3

To supervise and coordinate the activities of these many functional subsidiaries, the trust relied on committees consisting primarily of senior executives from the larger of these enterprises. These committees, in turn, had the advice and assistance of a permanent staff housed at the trust’s central office at 26 Broadway.4 This system of committees supported by a central staff evolved to meet pressing and continuing needs. It was not the result of any thought-out organizational plan.

The use of committees was a natural way to coordinate the work of managers in different companies carrying out similar functions or activ- ities. Even before the formation of the trust, members of the alliance had representatives on an informal committee on transportation, which re- viewed and proposed changes in freight rates negotiated with the railroads. Another early informal committee helped to coordinate the shipping and selling of kerosene in Europe. With the formation of the trust these committees were formalized as the transportation and the export trade committees. As the trust was being organized, its founders formed the manufacturing committee to reorganize and then to supervise the refining capacity. Then came the case and can committee and the cooperage com- mittee to centralize purchasing and to assure uniform specification in the trust’s basic packaging materials. The lubricating oil committee appeared in 1885 when the trust decided to centralize the sale of lubricants in New York. Then, as it took on marketing activities, its top executives created in 1886 the domestic marketing committee. In 1889 with the move into crude oil production came the production committee.5

Members of these committees found that they required the services of a permanent staff to provide essential information and to check on the implementation of the committee’s decisions. By 1886 there were eleven staff departments with offices at 26 Broadway. Five dealt with sales.6 Two handled domestic trade, one for the east including Ohio and the other for the south and west. A third was responsible for foreign sales. The two others were responsible for lubricants, again one for the west and one for the east. Two other departments were concerned with packaging materials both at the refineries and, after 1886, at a growing number of bulk stations. Still another handled inspection and quality control. In 1886, before Standard began to produce its own crude oil, a “crude stock department” assisted National Transit and the Joseph Seep Agency (the company’s purchasing organization) in the buying and shipping of crude oil. The two remaining staff units were the auditing and legal departments. All the staff offices provided information to the operating subsidiaries, the top managers on the board of the trust, and coordinating committees.

Each of these functional committees normally consisted of the senior staff executive for its function, together with a member of the trust’s board and the heads of two or three of the major subsidiaries involved in the activity that the committee was to coordinate. In theory, their role was advisory. The subsidiaries and the central board of trustees could reject their advice and decisions. In practice they rarely did.

From the start the most important of these committees was the one responsible for the supervision and coordination of refining operations. The manufacturing committee was expected, according to Ralph and Muriel Hidy, “to assure a regular flow of petroleum through all plants of the combination and to coordinate all manufacturing activities with changing supplies of crude and fluctuations in world-wide markets.” In this task it worked closely with the Seep purchasing agency. In addition to the responsibility for coordinating product flow, the manufacturing committee was given the authority “to consider all subjects relative to construction” as well as manufacturing. That is, it became responsible for reviewing proposed expenditures and for keeping an eye on the construction of new facilities and the repair of old ones, once proposals were approved.

As Standard’s marketing network and crude oil production expanded, the domestic trade and the crude oil committees appeared to have acquired comparable responsibilities. For pipelines the senior executives of National Transit had the same duties. In this way, then, the functional committees assisted by the staff departments reviewed basic proposals on the allocation of resources and coordinated flow from one basic function to the next.

The responsibility for overall management rested with an executive committee of the nine-man board of trustees. As it worked out, that com- mittee consisted of all trustees who were at 26 Broadway on any given day.10 From the start the trustees considered their tasks to be evaluating the performance of the operating units, selecting top managers, and making final decisions on long-term plans and allocation of resources to carry them out.

In evaluating performance the trustees relied on accounting and statis- tical data provided by the operating units. All subsidiary companies were expected to show a profit, with profit defined as a margin between sale price and costs. And in order to have comparable figures on costs, the executive committee ordered, shortly after the formation of the trust, the development of uniform accounting procedures to be used by all subsidiary companies. To assist its members in the evaluation of performance and also to help them keep an eye on output, flows, and sales, the committee also received a constant stream of reports from staff departments. The crude stock department provided a daily “crude oil report” with statistical data on total production in the United States, stocks in storage, Standard’s total inventory, runs from tanks and wells, deliveries, new purchases, and information on new wells.11 The cooperage department had its monthly “barreling and marketing reports” on shipment and sales. The several sales departments sent on information on deliveries and sales, not only of Standard’s products but also those of competitors. In addition, the manufacturing committee forwarded monthly cost and yield reports for each of the refineries.

The introduction of uniform accounting procedures, so central to overall evaluation and control, proved, as historians of the enterprise point out, a slow and sometimes painful process. In time, the trust did develop accurate and detailed data on prime manufacturing costs but little on sales, administrative, and other overhead costs. Until well into the twentieth century, earnings, defined as the difference between income and operating costs, continued to be the accepted standard for financial performance. Assets were written down in unsystematic, ad hoc ways. The manner of computing depreciation varied from subsidiary to subsidiary. Efforts “to inaugurate a uniform method of depreciation” were only beginning in 1905.12 In most cases such write-downs were charged to the subsidiary’s profit and loss account. Even with these weaknesses, the trust’s control systems were as effective as any used by industrial enterprises of that day. The members of its executive committee, coordinating committees, and staff had more detailed knowledge of operating activities than had the senior executives of entrepreneurial firms.

The executive committee carried out its central task of planning and allocating resources for future production and distribution more system- atically than did the top managers of the entrepreneurial enterprises. The committee had to approve all appropriations made by subsidiaries over $5,000 and any salary changes for managers receiving more than $600 a year. These requests came from the manufacturing, sales, and other committees or from the subsidiaries themselves.13 Such procedures gave the executive committee a regular and continuing review of the size and nature of capital expenditures and the activities and performance of managers, particularly middle and top managers.

Nevertheless, in allocating resources and rewarding personnel, the executive committee acted largely as a ratifying body. It rarely took the initiative and developed its own plans for capital expenditures. The subsidiaries, committees, staff departments, and executive committee itself did not develop capital budgets, or apparently even operating budgets. Nor did they define specific criteria for capital allocation, or forecast for financial needs, or devise a rate of return expected from an investment. No person or unit made long-term analyses of changes in demand, supply, and technology.

This lack of systematic procedures in making appropriations does not mean that the trustees and the heads of operating units did not have long, often heated discussions over the allocation of funds. Nor does it mean that as a ratifying body, the trustees did not have real power. It means rather that long-term investments continued to be determined primarily by middle managers in response to immediate developments in changing markets, sources of supply, and actions of competitors at home and abroad rather than as a result of a long-term plan or strategy.14

The primary reason that the executive committee at Standard Oil, the first of the great integrated industrial consolidations, failed to devise systematic procedures for capital allocation and other top management functions was that the trustees were too busy handling other pressing matters. As presidents or senior executives in subsidiary companies, they had to concentrate on the day-to-day operating details of these enter- prises.15 At the same time, as members of functional coordinating commit- tees at 26 Broadway, they had to become specialists in one or another functional activity. Moreover, many of the key trustees became involved in outside business activities. For example, Rockefeller himself in the 1890s purchased large areas in the Mesabi range, helped to start the Colorado Iron and Fuel Company, and obtained a financial interest in American Linseed Oil and other industrials. Henry M. Flagler became increasingly involved in railroads and Florida real estate, H. H. Rogers helped to organize major copper and lead and mining companies, Oliver H. Payne assisted in financing Duke’s transformation of the tobacco industry, and Edward T. Bedford became a leader in the corn products refining industry.16 Too often these men at the top had little time, information, or even inclination to concentrate on Standard Oil’s long-range situation. More- over, the continuing high profits from their existing worldwide business lessened the pressures to systematize procedures for capital allocation or for recruiting senior managers or to define more precisely the activities handled by the subsidiaries, the central staff, and the trustees.

Nor, as time passed, did the trustees make any special effort to improve their top management procedures or their company’s overall operating structure. Indeed, as the enterprise’s activities expanded, its organization became increasingly complex and even illogical. One reason was that the trust was dissolved in 1893 after it was declared illegal by the Ohio Supreme Court. The holding company, the Standard Oil Company (New Jersey), that legally took its place was not formed until 1899.17 So for seven years the consolidation had no legal superstructure. Such legal maneuvers had little direct effect on administration. They meant only that the executive committee and the advisory coordinating committees met informally rather than formally. Yet the lack of an overall legal framework did discourage administrative reform. And as the consolidation grew, subsidiaries became larger, more integrated, and more autonomous. In the 1890s Anglo-American Oil, with its affiliate Imperial of Canada, acquired control over the flow of supplies in their regional areas. Then after 1900 with the opening of new fields in the south and far wêst, Standard of California and Standard of Louisiana developed similar integrated operations.18 As these subsidiaries became increasingly independent of 26 Broadway, the manufacturing committee ceased to be responsible for coordinating the flow and making capital preparations for the refineries for the enterprise as a whole. It now did so only for subsidiaries in the American northeast. As the committees and staff department became larger, their functions became less clear. In the 1890s, as the Hidys point out:

The staff at 26 Broadway, upon which all executives relied for aid, was an uncom- monly heterogeneous mixture. The organization, having developed over time, continued to reflect the melange of companies based on historical precedent, personal predelictions, state corporation requirements, and tax laws. Even such an orderly mind as that of S. C. T. Dodd [the enterprises’s general counsel] did not have a complete picture of it. In addition to directors, all the principal manufacturing companies and many of the lesser ones had sales agents at headquarters for refined oil in domestic trade, for refined oil in export trade, for lubricating oil in the West, and for lubricating oil in the East and for export… Similarly, other men and units effected economies by performing a specialized function for several corporations . . . The staff departments were not all logically assigned to the parent company . . . Personal preference, historical evolution, and inertia undoubtedly all contributed to the seemingly haphazard arrangement.10

Not until the mid-i920S, over a decade after Standard Oil had been dis- membered by a Supreme Court decision, were the operating units, the top executives, and the central staff structured in a systematic and rational way.20 Even then, the massive reshaping of Standard’s organizational struc- ture came in an evolutionary, ad hoc manner.

From its very beginning, the central office at Standard Oil was much larger than any of the entrepreneurial enterprises of its day. It had many more top managers and a larger central staff. This was precisely because these offices were created to coordinate, evaluate, and plan for the activ- ities of many subsidiary companies. And the size of the central office, in turn, increasingly required the employment of salaried managers. From the start the central staff was made up of salaried personnel. Before the end of the century, many of the top executives—that is, the trustees (who, after 1899 were directors)—were salaried officials who owned only a very small amount of the securities of the trust or its subsidiaries. Alexander M. McGregor, Thomas C. Bushnell, Frank Q. Barstow, James A. Moffet, A. Cotten Bedford, Orville T. Waring, Lauren J. Drake, and Henry C. Folger were all in this category.21 At the same time the large stockholders —Oliver H.Payne, Henry M. Flagler, Charles W. Harkness, and John D. and William Rockefeller—were spending less and less time at 26 Broadway. In a period when nearly all American industrial enterprises were still managed at the top in a personal or entrepreneurial way, Standard Oil was rapidly becoming run by salaried employees.

Standard Oil, first as a trust, later as a holding company, created the administrative structure that came to be called the functional holding com- pany form. The employment of subsidiaries to carry out different economic functions and the use of committees and staff departments to coordinate and control the activities of these subsidiaries was a natural and rational way to organize a giant integrated consolidation of many small companies. And although this form was widely used in Europe, surprisingly few American companies followed Standard’s example.22 Two other of the largest oil companies—Sinclair and Pan American—acquired similar structures. The United States Steel Corporation operated through functional subsidiaries (and two or three integrated ones), although it never developed a central staff and coordinating committee comparable to that of Standard. Other companies with assets of $20 million or over (see Appendix A), who were using the functional holding company structure form in 1917, were three other primary metals firms, three mining en- terprises, New Jersey Zinc, and an agricultural company.

One reason the new consolidations failed to follow Standard Oil’s lead was that they had an even more obvious model, the railroad. During the railroad expansion and reorganization of the 1880s and 1890s, system- builders usually eliminated as legal and administrative entities the com- panies brought into the system by consolidating them into a single, highly centralized, administrative structure. The new systems did not rely on coordinating committees. They were administered through functional departments, using the line and staff distinction to coordinate activities at the several levels of management. The investment bankers and other financiers who played such a critical role in the final legal and administra- tive reorganizations of these systems preferred this centralized structure to the more decentralized one of large, self-contained regional divisions.

Even those early trusts that followed Standard Oil’s strategy of con- solidation, rationalization, and integration looked more to the railroads than to their sister trust in setting up their administrative procedures. At American Cotton Oil this could be expected, for railroad financiers played a major role in financing the merger. There Charles Lanier, of the investment house of Winslow, Lanier & Company, became the chairman of the board, and a junior member of the same house, Edward D. Adams, became its president. They legally eliminated the constituent companies and then transformed the holding company into an integrated, centralized, functionally departmentalized operating company.23 By 1890 Adams had organized departments at the company’s central office at 29 Broadway for domestic sales, foreign sales, purchasing, transportation, and three for processing—the manufacturing, refining, and the cake and meal depart- ments. To meet legal requirements, Adams did set up subsidiaries in the southern states where the company operated over seventy crushing mills, but these mills continued to be administered from 29 Broadway. In addi- tion, in the 1890s the board expanded its chemical laboratory, formed in 1887, into an independent research department.24 Following railroad prac- tice, the heads of the operating departments reported directly to the presi- dent, and the treasurer and the auditing department reported to the finance committee.

At National Lead the adoption of this type of structure was less likely, for there the influence of outside financiers was minimal and its president, William P. Thompson, was a former Standard Oil executive.25 Thompson began with subsidiaries and coordinating committees, but soon set up a centralized, functionally departmentalized structure. Like Adams, he placed research and development under a separate central department. For some years he retained two formal committees. One, the linseed, linseed oil, and linseed cake committee, coordinated the flow of basic raw mate- rials, which were not only used in the production of paint—its major product—and other final products but also sold directly to wholesalers and retailers. The other, the committee on construction, repair, and man- ufacturing, became in time the company’s capital appropriations com- mittee.

In adopting this structure Thompson and his managers may have been influenced by the example of the new entrepreneurial enterprises as well as the railroad, for by the late 1880s those firms were beginning to work out their departmental structures. However, the experience of Singer, McCormick, Armour, and Duke was little known outside of their own companies, whereas nearly all American businessmen involved in promot- ing and carrying out mergers dealt with railroads and were aware of their organization. In any case, National Lead, like American Cotton Oil, found the railroad model more relevant to their needs than that of Standard Oil.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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