Final Word: Oil prices and business illiteracy

If you are a business person or at least possess the basics of business literacy you no doubt looked on with some amusement this fall as the talking heads in the big media raged about the oil companies’ windfall profits. Trouble was none of those talking heads specifically reported the one number that every business person knows is the only number that matters – the profit expressed as a percentage of sales.

About three weeks into this phony crisis I finally found that number, though not in the mainstream media, but on an obscure website. The average profit as a percentage of sales for the big oil companies during the second quarter of 2005 was 7.9 cents on the dollar. By comparison McDonald’s, during that time, earned 13.8 cents per dollar and Microsoft hauled in a whopping 33 cents of profit for every dollar spent.

A profit of 7.9 percent is OK, not great, but nowhere near “windfall” levels, especially considering the costs and supply disruptions from two years of destructive hurricanes. Even more damaging evidence of the big media’s business illiteracy was revealed by George Will, one of the few columnists who understand something about business. Writing in a December issue of Newsweek, Will pointed out the six largest oil companies gave back $31 billion of their profits (34 percent of their cash flow) in the form of dividend payments to stockholders – and that includes just about everybody who has a 401K plan, all the major university endowment funds, the pension plans of nearly every state and municipal organization and unions, most insurance companies and just about anybody with a mutual fund.

If you haven’t figured it out by now, the truth is there are a lot of journalists, especially in the television arena, who don’t know the first thing about business – who graduated with a liberal arts degree and a vague impression that all business is somehow suspect. And business illiteracy is not just limited to journalists. Business basics are not taught in any high school I know of and unless you’re studying for a business degree, you’re not likely to learn anything about it in college.

For a country with the strongest economy in the world, for the nation most associated with capitalism and economic progress, this is troubling. What do we do about it? If you are a business person you can do a lot to educate those around you. After all, half the art of leadership is persuasion and communication. If you have kids, talk to them about the business. If your kids are going to college insist that they take at least a few business courses as electives.

You might also consider open book management practices with your employees. Jim Schier, the head of Schier Construction in Houston, Texas, and one of our Contractor of the Year finalists last year, has had great success in doing this. His supervisors are given an itemized budget on each project and if they come in under budget, the savings are given back as a bonus to be distributed to the crews as the super sees fit. You can bet these guys keep their pencils sharp.

Funny isn’t it? There are ordinary guys running around Houston in blue jeans and mud spattered boots, driving pickups and hauling backhoes, who know more about what keeps the economic machinery of this country going than all the network news media stars put together. The talking heads stir up resentment and anger, but you can exert a positive force in the opposite direction by making sure everybody in your company knows the basics about the great game of business.