Outlook: BP stops gushing but Browne still has a challenge

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The Independent Online

After the thrills and spills of BP's meteoric rise to pole position as Britain's largest company, it is back to the business of being a boring, if very, very large, oil company. Compared with the adrenaline-charged era of corporate deals that enabled BP to leapfrog Shell and close the gap on the market leader Exxon-Mobil, life must be a little dull these days round at Britannic House.

Not that Lord Browne, BPs chairman, does dull badly. His acquisitions of Amoco, Arco and Burmah Castrol were exquisitely well-timed, but he also seems to be managing them rather well too. BP's return on capital is on a par with a resurgent Shell, its production targets are more ambitious than those of its rivals and its ability to replace production with new reserves remains peerless.

Never the less, in a world on the edge of recession and with Opec finding it harder and harder to maintain the discipline which has kept output under control and prices above $20 a barrel, life may not be quite such high-octane fun from here on in. The stellar growth rates that BP was able to deliver by taking huge chunks out of the cost bases of newly acquired businesses are a thing of the past.

There may still be opportunities for the occasional bolt-on acquisition for the big five. But Lord Browne, along with his counterparts at Exxon-Mobil, Shell, TotalFinaElf and ChevronTexaco, knows that the days of mega-mergers are at an end. Instead, the task will be further to grind down costs and wring organic growth from a group of settled and mature businesses.

BP continues to pay more than just lip service to the concept of going Beyond Petroleum, which in some parts of the business is a reality. Millions of new customers are beginning to see BP as a food retailer that also sells petrol. But Lord Browne knows as well as the next oilman that for the next 50 years the world will depend overwhelmingly on hydrocarbons for growth and economic prosperity.

Getting the stuff out of the ground in the ever increasing quantities the world demands remains a challenge which Lord Browne insists will easily keep him focused and occupied until his retirement in seven years time. But surely even oilmen eventually tire of troubleshooting. We'll see.

Another day, another accounting scandal. OK, so yesterday's revelations – a £2.5m discrepancy at Guardian IT, which ironically specialises in disaster recovery software, and the admission by Baltimore Technologies that it has overstated revenues in its Japanese offshoot by $1.5m – look like nothing set alongside the big accounting scandals that are rocking US markets, but they none the less add to the suspicion that profits across a wide range of companies may have been substantially overstated during the boom.

As it is, Guardian iT made matters infinitely worse yesterday by refusing to elaborate on the nature of the discrepancy, other than to say that taken together with a yet to be quantified goodwill impairment charge, it would put the company in breach of banking covenants. The markets rightly assumed the worse and marked the shares down 42 per cent.

A recession, it is often said, is like a receding tide that exposes the corporate wrecks normally hidden beneath the waves, and so it is proving with the present downturn. Were it not for the business slowdown, most of the accounting fiddles and adjustments now being admitted to might never have come to light. If the stock price hadn't collapsed, even Enron might have got away with it by trading its way out of the hidden debt trap it had created for itself.

Few corporate scandals start out with deliberate dishonesty. Overly optimistic and aggressive behaviour in the business upswing and a natural desire by ambitious executives to flatter their performance in the eyes of the capital markets are generally the start of it. These ambitions find a ready market among clever financiers and accountants, and in the go-getting environment of a boom, rarely does anyone stop for long enough to consider the big picture of what might happen if things go wrong or how it might look to the outside world if it were fully understood what was going on.

Then as the downturn begins, the next phase all too often kicks in – the cover up. What was already a perilous position can quickly turn to outright deception and fraud, as indeed seems to have occurred at Enron, an affair which has been given an altogether new dimension by the apparent culpability of the firm's own auditors, Andersen, in Enron's accounting deceptions and the subsequent cover up.

Auditors often find themselves the subject of negligence claims after a company goes belly up, but to be placed right at the centre of the affair by first advising on the offbalance sheet finance, pronouncing it basically sound, and then shredding the evidence is something of a first. At the end of every boom it invariably transpires that standards of transparency and disclosure were not nearly as good as everyone had assumed.

And though a veritable army of regulators is already on the march determined to plug the gaps, 10 years from now it will all be forgotten and there will be a new generation of Kenneth Lays ready to test the outer limits of accounting acceptability in the unrelenting pursuit of money, fame and power.

It is one of the longest goodbyes in British corporate history. Anita and Gordon Roddick keep taking final bows at the Body Shop empire they founded a quarter of a century ago but they just can't seem to leave the stage, and it is not entirely clear that yesterday's decision to give up all executive duties really amounts to the final curtain either. The pair remain on the board and Anita has a two-year consultancy deal which she is sure to love, since it ought to give her influence without responsibility.

What's more, the Roddicks still control the company, with more than half the votes once the 23.5 per cent stake held by their long time friend and passive shareholder Ian McGlinn and the voting rights to the 3.5 per cent stake held by Adrian Bellamy, the new executive chairman, is taken into account.

This holding is a huge stumbling block to any takeover bid, and as long as Anita controls it, any such bid will always have to be more than about just price. Gordon Roddick admitted as much yesterday when he said he had no desire to sell out to a company which may not share the Roddicks eco-friendly philosophy. That's fine for them but not such great news for other shareholders, most of whom would take the money and run from the devil himself if he was offering a half-way decent price.

Body Shop is a business with a strong brand and an impressive history but a questionable future. The new management team were making encouraging noises yesterday about improving product development, making marketing more innovative again and improving the implementation of ideas.

But Body Shop remains an over-complicated business with 1,850 stores in 50 countries. Even for a big business, this would be a huge management headache but for one as small as Body Shop, it may not be viable in the long term at all. Perhaps the most disappointing pronouncement of the new executive chairman yesterday is that he sees no need for a major change in strategy. Nor is such change at all likely until the Roddicks properly exit, stage left, pursued by a bear.

j.warner@independent.co.uk

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