This article was inspired by Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow
By the time John D. Rockefeller turned forty on the 8th day of July 1879, he could have counted on his fingers, the number of men who were richer than him. He’d earned his position as a deity in the oil and gas industrial firmament. His company Standard Oil Co. Inc. seemed omnipotent in American Oil. Through it, he owned the largest oil refinery in the world of its time. As if this was not enough, he controlled most of the remaining pipelines and refineries. If you owned a refinery back then, you had to either join him or die. He’d come in as a partner and give you some considerable degree of autonomy in operations. But he would be watching from a distance, and come in if things were not running as he deemed fit. If you refused to join him, he’d buy you out, force you to sell to him or drive you out of business. Either way, you had to kiss the ring.
Standard Oil’s operations were massive: Its 20000 oil wells poured their output into 4000 miles of Standard Oil pipeline. The black gold was then carried to the coast or drained into 5000 standard oil tank cars that lay in wait. The entire process employed over 100,000 people and oversaw the export of 50000 barrels of oil to Europe Daily. In 1874, a traveler had reported seeing Standard Oil Kerosene lamps flickering in the ancient quarters of Babylon and Nineveh. By 1882, sampans bearing standard oil products were floating up rivers deep into China’s interior.
It was the biggest, the richest, the most feared and the most admired business organization in the world.
But how exactly did this colossal entity run at a time when federal incorporation law didn’t exist?
Like other businessmen of his time, Rockefeller faced some restrictive laws that hindered him from expanding Standard Oil’s influence. The federal government back then made every corporation created by one state foreign to every other state. If you wanted to do business in a different state from which your business was located, you had to circumvent the law. Standard Oil too had to adapt. But Rockefeller didn’t want to bribe politicians and corrupt the legislature like everyone else. He had to find a way through the antiquated legal framework.
The Trust Agreement of 1879
Under its charter, Standard Oil of Ohio, which was the original company, couldn’t own properties outside the state. Rockefeller still needed to purchase or drive out of business, refineries across the United States.
To solve this problem, an ingenious trust agreement was executed privately in 1879. Three mid-level employees were appointed to serve as trustees who held stock in a score of subsidiaries outside the state. These trustees would then received dividends and distribute them to the thirty-seven investors of Standard of Ohio, as individuals. Each investor received an amount proportionate to the shares he held in the parent company. It is this crude structure that gave Rockefeller audacity to swear under oath, that Standard Oil of Ohio didn’t own property outside the state, despite the fact that it controlled most of the pipelines and refineries in Pennsylvania, New York, New Jersey, and Maryland. Technically speaking, the trustees ‘owned’ these properties.
That was a smart move at the time, right? But this too didn’t last for long.
In 1881, the State of Pennsylvania poked the bear: It tried to tax the property of Standard of Ohio within its borders. Rockefeller feared that other states would try to do the same and hold him hostage. At the same time, Standard Oil was hitting a rut: After absorbing too many new refineries and oil pipelines, it was struggling to coordinate policy among the many scattered units. It was time to streamline operations and attain new efficiencies.
Business also dictated that Rockefeller move to the East Coast, where Standard Oil’s export traffic was flourishing. It was during this period that Standard Oil’s headquarters moved to 26 Broadway, New York.
Enter the Wizard of Organizational Structure
A lawyer named Samuel Dodd, who was also a Presbyterian Elder, was the brains behind this next stage of development. He was a man so fat that one wag claimed he was the same size in every direction. When Rockefeller hired him, he only wanted a relatively small salary($25000 per annum), to guarantee his integrity. Despite Rockefeller’s plea he also refused to take Standard Oil stock, arguing that it might compromise his legal judgment. For this reason, he never became a Standard Oil director. He was the man Rockefeller looked to during antitrust hearings and would only answer the questions that Dodd nodded to.
Dodd was a wizard at engineering strategies that obeyed the letter but found a way around the spirit of the law. After studying how to improved Standard Oil’s organizational structure, he figured out a way to allow it to expand business while still controlling everything from 26 Broadway.
A separate standard oil company had to be set up in each state where it had significant business interests. Since the major directors lived in separate cities, this was easy to set up. The Standard Oil of New York was set up on August 1, 1882, headed by William Rockefeller (younger brother). Standard Oil of New Jersey was set up four days later headed by John himself. This way, each state could not tax any Standard Oil property beyond its borders.
However, Dodd realized that separate companies needed separate Boards of Directors. To prevent fragmentation of power, he proposed that each company have ‘a common name, a common office, and common management by means of a common executive committee.’ The stock would be handled by trustees who would eventually issue certificates of interest to the Trust Estate. This way there was a union of stockholders, rather than a union of corporations. A board of nine trustees to whom the stock was swapped would assemble daily for lunch at 26 Broadway. Rockefeller owned more than one-third of the trust certificates, a block worth $19 million at the time.
The executive committee in each Standard Oil subsidiary held considerable power. It controlled the expenditure in the subsidiary. Under it, were several specialized committees dedicated to transportation, pipelines, domestic trade, export trade, manufacturing, purchasing and so on. Managers of these committees could swap insights with one another and align their operations.
In most cases, when monopolies don’t face any competition, they lapse into slow monoliths. This was not the case at Standard Oil: The committees encouraged rivalry among various local units by circulating performance figures and setting up competitions for records and prizes. This led to aggressive competition, such that the system could run itself.
To foster cooperation within this empire of unfathomable complexity, Rockefeller was smart enough to see the need to submerge his identity in the organization. He always reminded everyone that they were partners. “Don’t say I ought to do this or that, “he preached to his colleagues, “Say we ought to do it…whatever is done is for the good of us all.”
At board meetings, he would yield the Chairman’s seat to the eldest of the trustees despite owning more stock than anyone at the table. He welcomed differences in opinions as long as they were not personal. When any shareholder wanted to dump stock, they all came to him first and he readily scooped it up at a bargain. But when he had to, he used his unequal shareholding to give his opinions extra weight.
Employees were also encouraged to buy shares in this Byzantine structure. More people gradually bought shares, with employees receiving huge capital gains and dividends. This way, the organization became a tight-knit entity of people with the same objectives.
Standard Oil became a holy crusade and a model for populist capitalism. John D. Rockefeller wanted every man, his wife, and their child to be a capitalist. He wanted everyone to save his earnings and not squander it. And through his holy crusade, they would own the industries, own the railroads, own the telegraph lines or anything else their father in heaven deemed fit for them.
As I was reading Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow, this plan unraveled itself and I admired how Samuel Dodd came up with the above structure. There’s more details about Rockefeller, his humble roots, his first job, the growth of Standard Oil and the competition it faced overseas. I’ve loved the book so far, but am still yet to finish it.
Also,Standard Oil was eventually broken into seven successor companies following the Supreme Court ruling of 1911.
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