Lack of board diversity at major US oil firms contributing to denial about stranded assets – paper

Report authored by academics at Oxford and Stanford.

A new paper from academics at Oxford University and Stanford University suggests that due to their homogenous boards, three international oil companies (IOCs) – Chevron, ExxonMobil and ConocoPhillips – are susceptible to ‘groupthink’ and hence in denial about the risk of ‘stranded assets.’ As a result, they say shareholders should be putting more pressure on oil companies to diversify their boards and explain how they deal with the cognitive biases related to group thinking. Stranded assets refer to fossil fuel reserves that would have to be left in the ground (i.e. ‘stranded’) due to a global decline in demand caused by tighter carbon emissions regulation and the shift toward renewable energy. Such a scenario would curtail extraction and lead to lower oil valuations of IOCs.
Groupthink refers to a psychological phenomenon in which the desire for harmony within a group results in irrational decision-making. The paper, entitled ‘Cognitive biases and Stranded Assets: Detecting psychological vulnerabilities within International Oil Companies’ argues that such a need for harmony is greater among homogenous boards and that their failure to see the stranded assets risks is irrational.
In compiling the paper, Ben Caldecott, Director of the Stranded Assets Programme at Oxford, and Dane Rook, a Research Fellow at Stanford, discovered that the boards of Chevron, Exxon and to a lesser extent Conoco were the least diverse of the six IOCs they examined. Employing a so-called “Jacard distance score,” – where a lower value means less board diversity – Caldecott andRook calculated scores of 0.3 for both Chevron and Exxon. Conoco, meanwhile, was slightly above the average (0.44) on diversity with a score of 0.46, while BP, Royal Dutch Shell and Total were all above 0.5.
“Two dimensions on which American boards seem to especially lag their non-American counterparts is in diversity of nationality and age breadth,” write the authors, noting that Chevron’s board was entirely American while Exxon’s board had one non-American and Conoco’s two. Moreover, the age differences at Chevron and Exxon were, at 16 years, far less than the 38 years at Total.
The authors conclude: “Given that significant results in psychological research find significantly different attitudes toward risk (e.g. stranded assets) across nationality and age profiles, the homogeneity of American boards in these respects is worrying and could serve to increase the propensity for groupthink.”
Added Caldecott: “Board diversity should be a top priority for oil majors. Shareholders should demand that these companies disclose the steps and protocols they have in place to guard against cognitive biases.”
For their part, the IOCs dispute the notions that stranded assets pose an investment risk at all. For example, they say that global oil demand will remain robust as the developing world industrialises. According to the International Energy Agency’s last forecast, daily oil consumption will hit just under 100 million barrels compared with around 90 now.
Link to Caldecott and Rook’s paper