The Art of Corporate Success

The Story of Schlumberger

Ken Auletta

• Publisher: Open Road Media
• Year: 2015
• ISBN:
  9781504018593
• Topic: Commerce
• Subtopic: Histoire des affaires

A revealing portrait of one of the world's finest, yet most opaque, companies—and the quiet genius who made it thrive Ken Auletta set out to locate one of the world's most prosperous businesses and explain its formula for success. He searched for an enterprise with a vivid chief executive and found that company in Schlumberger Limited, a multinational oilfield services firm with skyrocketing profits and a reputation as one of the best-managed global corporations. Auletta also found his fascinating CEO in Jean Riboud, a man who had eluded media attention even though he had guided Schlumberger for 2 decades. In this compelling portrait, Auletta brings the notoriously low-profile executive to life, detailing his unique style of management and the unusual corporate culture he nurtured. A self-proclaimed socialist from France, Riboud fought in the resistance during World War II, was captured by the Nazis, and was held prisoner at the Buchenwald concentration camp. He joined Schlumberger as an assistant and quickly rose through the company's ranks. Although he was admired for his fierce drive for perfection and eye for long-term planning and expansion, Riboud distanced himself from his corporate cohorts and instead socialized with a diverse group of artists, writers, and politicians. Brilliant and paradoxical, Riboud makes for a fascinating subject in Auletta's comprehensive and illuminating book.

1

THE QUIET GIANT

From the windows of Jean Riboud’s New York office, on the forty-fourth floor at 277 Park Avenue, one can see the buildings that house the headquarters of such corporate giants as Warner Communications, Gulf + Western, Citicorp, International Telephone and Telegraph, Colgate-Palmolive, United Brands, Bankers Trust, CBS, RCA, and International Paper. All of them are better known than Schlumberger Limited, the company that Riboud is chairman and chief executive officer of, but none of them can match Schlumberger’s profits. In stock-market value—the number of outstanding shares multiplied by the price per share—only three companies were worth more than Schlumberger at the end of 1981. They were AT & T ($48 billion), IBM ($34 billion), and Exxon ($27 billion). Schlumberger was then worth $16 billion. In 1982 it was worth about $17 billion.

Riboud has offices in New York and Paris, and both are rather ordinary except for the art on the walls—works by Picasso, Klee, Max Ernst, Magritte, Jasper Johns, Victor Brauner, Janez Bernik. His New York office is a snug corner—sixteen feet by twenty—with beige walls. An adjoining conference room, seventeen feet by eighteen, has one couch and a round wooden table with six chairs. Riboud’s office has a single telephone with just two lines, and no private bathroom; there are white blinds on the windows, and a simple beige sisal carpet on the floor. His desk is a long, rectangular teak table with chrome legs; on it are a few memorandums but no “in” or “out” box and no books. His personal New York staff consists of one secretary, Lucille Northrup, to whom he rarely dictates; memorandums and paperwork are frowned upon at Schlumberger, and when Riboud wants to send out a memorandum he first writes it in longhand. His Paris office is equally uncluttered.

Riboud is sixty-three years old. He is five feet ten inches tall and slight of build, with wavy gray hair combed straight back. His nose is long and thin, his lips are narrow. His suits come in conservative shades, and his shirts are usually quiet solid colors. He speaks softly, sometimes almost inaudibly, in accented English, rarely gesticulates, and is an intense listener, usually inspecting his long fingers while others speak. Everything about Riboud conveys an impression of delicacy except his eyes, which are deep brown and cryptic. He arrives at work around 10 A.M., and he takes at least six weeks’ vacation annually. Yet he is no figurehead; rather, he believes in delegating authority—a principle that no doubt accounts for the calm of Schlumberger’s offices in New York and Paris. Schlumberger employs 75,000 people, and of that number only 197 work at the two headquarters.

In many respects—some obvious and some not so obvious—Riboud is not a typical business executive. As a young man in Lyons, he flirted with Communism and railed against Franco, Fascism, and the French establishment, including the Roman Catholic Church. During the Second World War, he joined the Resistance; he was captured in 1943 and sent to Buchenwald. Almost two years later, when he emerged, he had tuberculosis and weighed ninety-six pounds. Riboud will talk about his wartime ordeal only with great reluctance. He has never discussed it with his wife, Krishna, who was born in India, or with his closest friends, who, over the years, have included the writers Lillian Hellman, A. J. Liebling, Jean Stafford, and Langston Hughes; the artists Max Ernst (Riboud is the executor of Ernst’s estate), Victor Brauner, Saul Steinberg, and Roberto Matta; the photographers Henri Cartier-Bresson, Robert Capa, and David (Chim) Seymour; the composer John Cage; the filmmaker Roberto Rossellini and the film historian Henri Langlois, who founded the Cinémathèque Française, the world’s first film museum; and a procession of important political figures on the French left, including former Prime Minister Pierre Mendès-France, the writer and editor Jean-Jacques Servan-Schreiber, and President François Mitterrand. The one friend he has discussed his wartime experiences with is the American poet and critic Charles Olson, who dedicated his 1950 prose poem “The Resistance” to Riboud, and who also served as best man at Krishna and Jean Riboud’s wedding.

As the chief executive of a multinational corporation—Schlumberger does business in ninety-two countries—Riboud (pronounced “Ree-boo”) has a somewhat surprising talent for avoiding publicity. He is a stranger to most other corporate executives, deliberately keeping his distance from them. He sits on no other company’s board of directors. He seldom ventures from his office for lunch or from his home for dinner. If he does accept a dinner invitation, his host may find him sincere, solicitous, charming—and realize later that he has volunteered virtually nothing about himself. When he goes on business trips, he prefers to stay with friends rather than at hotels. Riboud sometimes vacations at a house he owns in the Arizona desert and, more frequently, at his family’s estate—a château near the village of Ouroux, in the Beaujolais region.

Riboud, who says that he remains loyal to the Socialism of his youth, has been the chief executive of Schlumberger for almost nineteen years. Because the corporation does no mass advertising, of either the consumer or the institutional sort, because it retains no lobbyist in Washington and no public-relations agency in New York or Paris, and because it has never been involved in a public controversy, Schlumberger (pronounced “shlum-bare-zhay”) remains one of the world’s quiet giants. It is a high-technology company that generates the bulk of its income from the oilfield-service business—making tools that enable oil companies to find and drill for oil with great precision. The information gained and the techniques learned in oilfield services have helped the company to expand into such fields as electric, gas, and water meters; flight-test systems; transformers and semiconductors; automatic test equipment for integrated-circuit chips; electronic telephone circuits; computer-aided design and manufacturing processes; and robotics. On Main Street, those who’ve heard of Schlumberger sometimes think of the jewelry firm of the same name (no relation). But Schlumberger is recognized on Wall Street as one of the world’s best-managed multinational companies, and financial analysts can point to a number of facts to document its success. Its net income has grown by about 30 percent in each of the past ten years up to 1981. Its earnings per share rose by more than 30 percent annually between 1971 and 1981, even though the price of oil remained stable or declined in several of those years. Its net profits in 1982 totaled $1.35 billion on revenues of $6,284 billion, for a profit as a percentage of revenue of 21 percent—higher than that of any of the thousand other leading industrial companies in the world. Its return on equity in 1981 was 34 percent, while the median for the Fortune 500 companies was 13.8 percent. Schlumberger has relatively little long-term debt: it amounted to just $462 million at the end of 1982, or 8 percent of the company’s total capitalization. And while the profits of most oil and oilfield-service companies fell sharply in 1982, Schlumberger’s net income rose by more than 6 percent.

Science is the foundation of Schlumberger. Science is the link between the various corporate subsidiaries, for the task of most of them is collecting, measuring, and transmitting data. Science, and particularly geophysics, was at the core of the careers of Conrad and Marcel Schlumberger, the company’s founders. Both were born in the town of Guebwiller, in Alsace—Conrad in 1878 and Marcel six years later. They were two of six children of a Protestant family that owned a prosperous textile machine business. Their mother, Marguerite de Witt, was a feminist who was head of the International Woman Suffrage Alliance after the First World War. Their father, Paul, was a visionary with a rocklike faith in science and in projects like the Suez Canal, in which he was an early investor. A great-grandfather, François Guizot, was prime minister of France from 1840 to 1848, during the reign of Louis Philippe.

Conrad Schlumberger, who fought in the First World War, read the letters of dead German soldiers and was so moved that he became a lifelong pacifist; he identified with Socialists, and was a financial backer of the French Socialist—now Communist—newspaper L’Humanité. His great passion, however, was science, and in 1893 he left home to study physics at the École Polytechnique, in Paris. After graduation, he taught physics at the École des Mines, in Paris, while trying to figure out how to use electricity to make measurements of the earth’s subsurface—something that had never been done. His brother Marcel was more an “adapter” than an inventor—a tough-minded, pragmatic man with absolutely no interest in politics, who went to Paris to study civil engineering at L’École Centrale des Arts et Manufactures. Conrad was outgoing and passionate, and a scientific genius. Marcel was shy and cautious, and a shrewd businessman. Still, the two brothers were very close.

Paul Schlumberger, seeing his sons’ complementary talents, and frustrated because the textile machine factory had sidetracked his own scientific ambitions, abandoned the business to his brothers, packed up his family, and moved to Paris to be near Conrad and Marcel. He persuaded them to merge their talents and form a partnership with him, to pursue Conrad’s theory about measuring the earth’s subsurface. He would provide as much as half a million francs to support the undertaking. On November 12, 1919, the three men signed an agreement, written by Paul Schlumberger, that said:

For their part my sons agree not to dilute their efforts by working in other areas … In this undertaking, the interests of scientific research take precedence over financial ones. I will be kept informed of, and may give my opinion on, important developments and the necessary expenses required. The money given by me is my contribution to a work primarily scientific and secondarily practical … Marcel will bring to Conrad his remarkable ability as an engineer and his common sense. Conrad, on the other hand, will be the man of science. I will support them.

Over the next several years, relying on Conrad’s scientific creativity and Marcel’s practical engineering skills, the Schlumberger brothers pursued Conrad’s theory that by charting the electrical resistivity of various rock formations and then comparing the patterns, they would in effect be able to draw a picture of what lay beneath the earth’s surface. The theory proved correct, and the brothers made the first discoveries by surface electrical measurement of iron ore, copper, and an oil-producing salt dome. In the mid-twenties, however, there was no demand for their services, so the partners took no salary, lived modestly, and counseled their employees—they had five when they started—to be patient.

Their breakthrough came in 1927, when a director of the Péchelbronn Oil Company, in Alsace, asked whether their technique could be used in searching for oil, which usually migrates through such porous rocks as limestone and sandstone until it is trapped by impermeable rock. Ever since the first oil well was drilled, in 1859, oil companies had longed for a technology that would help them find oil. Initially, prospectors had to painstakingly extract core samples and drill cuttings from rock formations, haul them slowly to the surface, ship them to a laboratory, and await a chemical analysis. This tedious, expensive process enabled the oil companies to determine whether there was oil in a given area, and even to determine its quality; but not its precise quantity, or the exact shape of the well, and it did not enable them to pinpoint where to drill. Conrad, having discovered a new geophysical principle, assigned the job of fashioning a tool and testing it to Henri Doll, who was a brilliant young engineer and also the husband of Conrad’s daughter Anne. Doll’s task was to chart the electric current as it encountered various kinds of rock, water, and oil. By comparing the actual current coursing through the earth with records showing the electrical resistivity of each substance, the brothers and Doll hoped to produce what amounted to the world’s first X ray of an oil well. Their site was selected—a small oilfield at Péchelbronn, not far from where the Schlumbergers had grown up. The crucial test took place on a clear day in late summer. In a battered station wagon, Conrad Schlumberger, along with Doll and two other engineers, went to the site. They attached a measuring device called a sonde to a cable and snaked it down into a fifteen-hundred-foot hole. In an oral history of Schlumberger prepared by the company in 1977, Doll described the device that was to transform the oil business:

We made a sonde by connecting four meter-long sections of Bakelite tubing together by means of short lengths of brass tubing, fastening them to each other with brass screws. The electrodes were wired to the Bakelite tubes. We contrived a weight, or plummet, for the bottom of the sonde, making it of one meter of brass tubing, four centimeters in diameter, and filling it with lead pellets like those used in duck shooting. It was plugged at both ends and weighed about twenty-five pounds. The whole assembly looked like a long black snake with five joints.

The cable, if you could call it that, was three lengths of rubber-insulated copper wire, like the kind used on spark plugs in cars. It had a tensile strength of about eight pounds per wire. The wires weren’t spliced together, as was done in later surveys, but were allowed to wind onto the winch drum loose from each other.

The winch had an X-shaped wooden frame; the drum was made with wooden flanges and the core of a large Bakelite tube. It was assembled by long brass bars and nuts. To turn the drum, we had a big pinion connected to a smaller pinion by a motorcycle chain. The moving axle was steel, with a bicycle pedal mounted at either end. One of us would get on one side and one on the other, and turn the pedals. There was a ratchet to keep the drum from unwinding.

We had no collector. Instead, we had a plug, much like a common wall plug, at the side of the winch flange. When the winch had to be turned, the cable connection to the potentiometer was unplugged so the turn could be made. Then the cable was plugged back in so that we could make the readings.

The sheave was made of wood with an eccentric axle. It had a long tail as a counterbalance. This served as our strain gauge. We were very worried about the wires breaking, and by watching the rise and fall of the tail, you could tell what kind of pull was being exerted on the wires. For depth measurement, we had a counter on the sheave wheel like the mileage indicator on a car. We planned to take readings at intervals of one meter.

We made our measurements with a standard potentiometer mounted on a tripod like those we used in our surface exploration work.

To take the measurements, one of the men unplugged the connector, one turned the winch, one ran up on the rig floor to inspect the counter on the sheave. Doll wrote down the measurements and depth readings on a pad. They hurried to unplug, roll up the cable, and rush to the next point, where the process was repeated—one meter at a time. At the end of the day, exhausted and caked with mud, they went to a nearby village to bathe and celebrate. Doll returned to Paris, where he plotted the various readings on graph paper. On September 5, 1927, Doll produced the first electrical-resistance log.

Doll and the Schlumberger brothers were ecstatic, expecting oil companies to line up for the services of their company—the Société de Prospection Électrique, know as Pros. That did not happen. French oil companies were wary of turning over their secrets to an outside service company, and non-French companies suspected that these three unknown Frenchmen were quacks. Two fallow years passed before the Schlumberger brothers captured their first major client—the Soviet Union. For Conrad, it was like a dream come true. He had believed in the Socialist Revolution, and now he felt vindicated. A Communist government—the only one in existence—was looking ahead, unsuspicious, unparochial. Several years later, American oil companies began to follow suit.

Today, the tools are more refined, but the basic process—wireline logging, as it came to be known—is a measurement taken on just about every oil or gas well drilled in the world. And today, without benefit of a patent on its basic logging process, Schlumberger—as the original partnership was renamed in 1934—has a near-monopoly on this business, logging some 70 percent of the world’s wells. In the United States alone, in 1981 the company hired 1 percent of all the engineers graduating from American colleges.

Over the years, Schlumberger’s oilfield business has expanded beyond logging measurements to include a broad range of other services: drilling, testing, and completing wells; pumping; cementing. The company’s Forex Neptune subsidiary, formed in the 1960s, is now the world’s largest oil-drilling company. The Johnston-Macco and Flopetrol subsidiaries provide an assortment of testing and completion services after drilling has started. A subsidiary called The Analysts provides continuous detailed logs of oil wells from the moment drilling begins, in contrast to wireline logs, which are prepared only before drilling begins or after it ceases. The Dowell Schlumberger company, which is jointly owned by Schlumberger and Dow Chemical, offers pumping and cementing services. Together with the Wireline division, these companies make up the Oilfield Services—one of two major parts of the Schlumberger empire. The other major part is known as Measurement, Control & Components. Its subsidiaries include the world’s largest manufacturer of electric, gas, and water meters; a leading manufacturer of transformers; a producer of valves and safety controls for nuclear power systems; and a manufacturer of flight-control and signal-processing systems for aerospace and military use. The Fairchild Camera & Instrument Corporation, a California-based semiconductor company that Schlumberger acquired in 1979, manufactures, among other products, integrated circuits such as microprocessors and memories; advanced bipolar microprocessors for the F-16 fighter plane; and electronic telephone circuits. Applicon, another subsidiary, is among the pioneers in computer-aided design and other efforts to automate factories.

Schlumberger has a total of forty-three major subsidiaries, most of which rely on science and technology. The jewel in Schlumberger’s crown is the Wireline, which in 1982 generated 45 percent of the company’s $6,284 billion in revenues and about 70 percent of its $1.35 billion in net profits. Many of Schlumberger’s subsidiaries rank at or near the top of their various industries. The investment banker Felix Rohatyn, who serves on the boards of eight major corporations, including Schlumberger, and is a close friend of Riboud’s, says, “By the standard of profit margins, return on investment, compound growth rate, of remaining ahead of the state of the art technically and having an efficient management structure, over the last twenty years—until the recent drastic change in the energy environment—Schlumberger might well have been the single best business in the world.” Rohatyn’s enthusiasm is shared by independent analysts at the major Wall Street brokerage firms, and their judgment has been reflected in research reports issued by, among others, Morgan Stanley, Merrill Lynch, Paine Webber, Wertheim, and L. F. Rothschild Unterberg Towbin. An analysis issued by Barton M. Biggs, managing director of Morgan Stanley in January of 1982 reads, “Here is this immense, superbly—almost artistically—managed company booming along with a 35 percent compound annual growth rate in earnings and 37 percent in dividends between 1975 and 1980 … Our analysis of earnings variability from growth trend shows Schlumberger as having the most consistent, high-growth track of any company in the 1400-stock universe of our dividend discount model.”

2

JEAN RIBOUD: THE EARLY YEARS

Even though Schlumberger is a competitive company devoted to ever-higher profits, over the years its executives have shown a predilection for the politics of the left. Paul Schlumberger urged his sons to share the profits of their company with employees. He financed his sons only on the condition that “the interests of scientific research take precedence over financial ones.” Conrad was a pacifist and a romantic socialist until Stalin’s Russia disillusioned him. René Seydoux, the husband of Marcel’s daughter Geneviève, who ran Schlumberger’s European wireline operations, and to whom Riboud reported after Marcel’s death, in 1953, was an ardent and active supporter of the French Socialist Party. Jean de Ménil, who supervised all South American operations in the period after the Second World War, supported various liberal causes in the United States. His wife, Dominique, a daughter of Conrad Schlumberger, became an important financial contributor first to the American civil-rights movement and later to black and Hispanic candidates for office. And in 1981 Jean Riboud, as an intimate of President Mitterrand, supported the Socialist government’s proposed nationalization of forty-six enterprises.

Riboud is a man of contrasts. He is a hugely successful capitalist, with an annual salary of $700,000 and Schlumberger stock worth about ...