North Coast Energy's Yonel: 'Free market' corporate culture a path to success

Sam Fletcher
Senior Writer

North Coast Energy Inc. (NCE), Twinsburg, Ohio, which ranked third on OGJ's list of the fastest-growing independent oil and gas producers in 2002, started this year by setting up interlocking boards of supervisors and workers that give all of its 155 employees a say in determining corporate policy.

The company also initiated a program to turn each of its departments—even the in-house support sections—into a "profit center" that must learn to market itself competitively to other corporate departments and even outside the company if it can.

The mainspring behind this change is NCE's dynamic young CEO, Gordon O. Yonel, 39, an advocate of fundamental changes in the way the corporate workplace is designed and organized and how companies are managed.

Niche market
NCE explores, develops, and produces primarily natural gas in the Appalachian and Illinois basins. It's active in Ohio, West Virginia, Virginia, Kentucky, and Pennsylvania, with an average 37% working interest in some 4,000 producing wells and operator of 3,800.

NCE owns and operates 1,523 miles of gas gathering systems with access to northeastern US gas markets. Its proximity to large US gas markets and access to numerous interstate and intrastate pipelines are primary keys to the company's success. "Because we're so much closer to the burner tip, Appalachian gas commands a premium price," said Yonel.

In 2002, the company participated in drilling 115 gross wells—101 net—all of which were productive. Reserves discovered totaled 19.2 bcfe at an average finding cost of $1.22/Mcfe. Its proved reserves at the start of 2003 totaled 182 bcfe, including 174 bcf of natural gas and 1.3 million bbl of oil, with net production of 30 MMcfde.
At that time, the company held leases on 415,515 gross (320,736 net) acres, including 230,270 gross (172,232 net) undeveloped acres.

In NCE's 2002 annual report, Yonel reported across-the-board company records in production of 10.3 bcfe, revenues of $37.4 million, operating cash flow of $23.8 million, and earnings of $9.8 million.
Those records "were attained by a seasoned, professional management team and dedicated employees at all levels of the company," said Yonel. "Our corporate mission statement calls for the company to provide an environment of participative decision-making that nurtures entrepreneurial action. Much of our success in 2002 is attributable to that environment in our corporate culture—and to the enthusiasm with which our employees have embraced it."

His goal is to increase NCE's oil and gas reserves to 500 bcfe and its production by 200% to 30 bcfe over the next 5 years. The company plans to drill 91 wells in 2003—a smaller, but more aggressive program with emphasis on drilling deeper, more costly exploration wells with greater potential, compared with development drilling in 2002.

Academic influence
Yonel is a disciple of Russell L. Ackoff, the Anheuser-Busch professor emeritus of management science at the Wharton School of the University of Pennsylvania and former president of the Operations Research Society of America and the Society for General Systems Research. Ackoff is author or coauthor of 21 books on business management, including Re-creating the Corporation and The Democratic Corporation. He espouses a stakeholder theory of modern corporations, in which employees, suppliers, customers, investors, creditors, debtors, and government all play a role in helping a company to grow and develop.

Yonel, a graduate of the advanced management program at Wharton, brought Ackoff in as a consultant to help set up the new corporate system at NCE and to "warn of possible problems."

International background
A Dutch citizen who was born in Turkey, Yonel has worked in the Netherlands, Saudi Arabia, Turkey, Denmark, and the US. He now is focusing lessons learned from both his international business experience and academic studies into what he sees as an evolution of modern corporations

"Everywhere I've lived and worked, I've been a foreigner, an outsider. To compete and succeed in each new environment, I've had to rely on my powers of observation," Yonel told OGJ. "Through observing others and how they resolve similar problems in different ways, I've come to question some of the (western) business practices and issues that we often take for granted." That experience also convinced him that an understanding of local culture must precede international commerce in the 21st century.
Yonel sees little difference between the economic fundamentals of nations and those of corporations. In fact, he claimed, "Eight of the 20 largest economies in the world are corporations."

He said, "On the international economic level, capitalism with its innovative entrepreneurial approach to business has proven superior to centrally planned communist and socialist economic systems. But most companies today still operate like the communistic model through central planning exerted by an autocratic, dictatorial bureaucracy, with some corporate departments subsidized as overhead at the expense of other more productive units."

He claims business is on the verge of "dramatic change" within the next 50 years that will move corporate organization from the current concept of central planning and administration to a "free market concept" of departments as individual profit centers.

Corporate evolution
It's all part of an evolutionary process that has already moved the corporation from its old "mechanical" concept, epitomized by the assembly-line approach popularized by automotive pioneer Henry Ford, in which essentially unskilled or semiskilled workers performed the same routine tasks day after day, Yonel said. Under such a system, he said, the desired corporate outcome is "determined and dictated" by the top authority, and a company's various departments "have no purpose," or at last no marketable application, separate from the corporation as a whole.

From that, publicly traded companies evolved into "an animate system" by which "ownership of a business is separated from its management" in a manner similar to "the separation of the body from the brain," Yonel said. In speaking of such companies, he said, people tend to use "biological terms, such as 'the head of the corporation,' or 'that company is sick.'" But here, too, he said, the various divisions within a company have no justification outside the corporate whole, because they exist only to serve and support other departments of the same company.

Under the new "sociological system," however, the corporation and its various divisions all have a business "life" in which they must compete successfully against third-party contractors that can provide the same goods or services to their target clients, said Yonel.
That means all support segments of a company must develop "internal markets" —and, ideally, external markets as well—for their goods or services. Under that concept, said Yonel, support units such as payroll, information technology, and employee relations are no longer carried as overhead.

Department profit centers
Instead, each department becomes a profit center that must justify its existence by competitively marketing its services to the company's other divisions and even outside the company if it can. To do this, each department head must determine a competitive rate for the goods and services that it provides and track the amount of time it works for each of the other "client" departments within the company.

At the end of the year, each client department will compare its "costs" for in-house services against what it would cost to buy those same services from an outside contractor. If a department head can obtain as good or better service at a lower price elsewhere, she or he can opt to contract outside the company for those services. If the support department loses its business to outside contractors and can't turn a "profit," it will be eliminated.

In this fashion, the decision is made on solid market fundamentals "rather than the CEO making that call," said Yonel. "This is common sense. I don't know why other companies are not doing it, but it will come."
So far, the buying and selling of in-house support services at NCE are just paper transactions within the company to determine if it is feasible. But by the end of this year, Yonel said, "If it works, we'll change to that system."

Yonel said NCE executives and employees worked all last year developing the concept and mechanics of this organizational change, with Ackoff's help. And because the roles of corporate executives also are evolving, he said, they set up boards of workers and executives to address policy issues.

Formerly, executives spoke of their need to be "on top of things" at the office, said Yonel, but that has now changed to a need to be "in the loop—in the know," informed about what is occurring at various corporate levels. That involves understanding how different departments and their employees are working together to meet common goals for the corporate good. It means providing workers more insight into corporate objectives, goals, and challenges while giving them more opportunity to express themselves individually in shaping the outcome.

Policy participation
Yonel claims executives at every level in a company should have opportunities to make decisions affecting their operations and to take responsibility for the decisions they make.
To give lower level employees "a greater voice" in shaping company policy, Yonel said, "We've set up internal 'boards of directors' for every manager with two or more subordinates." His reasoning: "In most public companies today, a CEO runs the company and a board of directors oversees his performance. If that is good for a CEO, why wouldn't it also be good for lower-level executives to have similar boards to oversee their performance?"

These boards consist of the department manager, his or her immediate supervisor, and the subordinates who report directly to the department manager. "The manager chairs the board at each level. His boss is just a board member," said Yonel. Depending on the size of the organization, he said, "This structure provides for direct and indirect communication five levels up and down" the full chain of authority.

Because NCE is a relatively flat organization to begin with, Yonel's "corporate democracy" model creates "a top-to-bottom information chain that greatly enhances the decision-making process at all levels of the organization. That in turn results in more flexibility and the ability to react more rapidly to investment opportunities."

Since some executives serve both as subordinates on higher-level boards and as supervisors on lower-level boards, they can transmit information as to what decisions are being made at different levels and why. They also provide continuity, in that a lower-level board cannot approve a policy that conflicts with a decision by a higher board, Yonel said.

In addition to the prescribed board members, each manager is free to invite outsiders from business, academia, environmental organizations, or other groups to join the board "either as voting or nonvoting minority members," he said, notign that such additions help broaden the board's perspective.

The issues addressed by the director and his board are policy issues, "not day-to-day operations, so as to avoid chaos," Yonel said. "Operation responsibilities and accountabilities still lie with the manager, but his board can address issues of policy."

He said, "All decisions for improving the quality of the work life among constituents can be taken within a board, as long as it doesn't conflict with a decision of a higher board."

The system gives employees at all levels a means of airing both ideas and problems in their daily work. "People are empowered because they can voice their dissatisfaction at any level," said Yonel.
He said it also provides a means of determining if a supervisor has poor "people skills" in dealing with subordinates and for correcting the problem by setting certain goals for the supervisor and a timetable for accomplishing them. However, Yonel said, "An internal board can't fire its managing director—that's a decision that must be made at a higher level."

A wide variety of issues can be raised and addressed in the various board meetings. One board decided to limit bonus payments this year to a maximum 10% of the person's regular pay. Another voted for the company to pick up half of the costs of employees' music lessons.
Although a policy decision on music lessons might seem frivolous to some, Yonel doesn't have a problem with it. "We think people who devote time to outside interests make for better employees," he said. Helping workers accomplish their personal goals builds a bond between employees and the company.

Besides, said Yonel, being a company that people want to work for pays off through the retention of valuable employees. "We had one department that used to have 100% turnover," he said. But by working to improve job satisfaction, Yonel said, "There was zero turnover in that department last year."

So far, NCE's unorthodox approach to corporate business "is working wonderfully," Yonel said. "In 2050, we'll probably look back at this change and wonder how we ever managed to run a corporation before this."