Shell shocked: is Shell a case of ‘ethical epiphany’ or ‘lessons not learned’?
This case looks at the how Shell made efforts to develop new ways of managing business ethics in the aftermath of major problems in its international operations in the mid 1990s, only to be mired in further controversy during the 2000s. The case provides an opportunity for assessing the substantial challenges involved in business ethics management, and in particular for examining the benefits and drawbacks of various components of ethics management discussed in the chapter.
Operating in over 135 countries, and employing more than 90,000 people, the UK-Dutch oil giant Royal Dutch Shell is one of the world’s largest companies. In recent years, Shell has been at the forefront of developments in social reporting and stakeholder engagement, and looked to be finally overcoming the reputational crisis that overwhelmed the company in the mid 1990s when it became a prime focus of attack from environmental campaigners and other critics. However, the firm’s turnaround came off the rails in 2004 when a major accounting scandal erupted over its overstating of oil reserves. This, and the continued challenge posed by campaigners over its alleged ‘hypocritical’ approach to sustainability and social responsibility, has raised questions over the firm’s ethics at a time when it would have hoped to have finally converted the sceptics. So, whilst the firm has won prizes and plaudits for its actions, for many, the question still remains whether its attempts to marry profits with principles is just window-dressing for an essentially unsustainable approach to business.
For any multinational company, one huge blow to the corporate reputation in a year is a major cause for concern. However, two massive public relations disasters in the same year is about as close to out-and-out corporate catastrophe as you can get. That though is exactly what happened to Shell in 1995 when the firm attracted international vilification for actions which, in many respects, were little different from what it had always done. In the event, though, almost overnight Shell found itself turned into a symbol of all that was wrong about multinational companies.
Two key events crystallized Shell’s problems in the 1990s. First, Shell UK’s plans to dispose of its aging oil platform Brent Spar in the North Sea became the subject of international news headlines when the platform was dramatically occupied by Greenpeace activists. Playing on the David and Goliath imagery of its fight against the multinational, Greenpeace denounced Shell’s ‘toxic timebomb’ and mobilized protests across Europe, most notably in Germany. This included a major consumer boycott and even vandalism, firebombing and gunfire at Shell service stations. In the wave of such criticism, and despite continuing to have the full support of the UK government, Shell capitulated and abandoned its decision to dump the Spar. Greenpeace hailed the decision as a ‘victory for everybody, a victory for common sense and a victory for the environment’. Shell meanwhile continued to maintain that sea disposal was the best environmental solution (as did the UK government), suggesting that the affair was a matter of ‘the power of emotion [and] fear’ over ‘scientific reason and careful judgement’.
More problems surfaced for Shell later in the year when its operations in Nigeria came under fire following the execution of Ken Saro-Wiwa and eight other campaigners for the Ogoni people. The Ogoni had long protested against Shell’s drilling activities in their homeland in the Niger delta, arguing that not only had Shell’s operations devastated the local environment, but that few if any of the benefits of the multinational’s lucrative operation in Ogoniland had found their way back to the Ogoni people. International condemnation of Shell’s implicit support of the Nigerian military regime exploded when the company failed to use its influence in Nigeria to try and revoke the death sentences passed on the nine environmentalists for their anti-Shell protests.
The road to recovery?
Regardless of the rights or wrongs of Shell’s actions, these events constituted massive shocks to the firm. In 1996 the Group undertook extensive market research and stakeholder consultation to discover how it was perceived. Stunned by the resulting picture of public antipathy and stung by its image as a corporate villain, Shell experienced what some have dubbed an ‘ethical epiphany’ and sought to change direction. Beginning with a very public acknowledgement that it had erred in its approach to Brent Spar and Nigeria, the company virtually re-invented its strategy.
Realizing that it had to operate in a very different world to the past, with radically new expectations and challenges, the Group revised and updated its General Business Principles to take account of a broader range of ethical issues and constituencies – and even committed bosses to report directly on efforts to live up to them. Perhaps more remarkably, though, the once insular company committed itself to a level of stakeholder consultation and engagement unthinkable even a few years previously. Shell argued that reliance on its traditional modes of scientific decision-making and justification was no longer appropriate for dealing with the social and human problems it faced, and the multiple actors and viewpoints involved. Shell, its leaders claimed, had to learn how to listen. In the words of its 1998 report, the company decided it had to move from a ‘trust me’ world to a ‘show me’ world.
These changes had significant impact on the Brent Spar decommissioning decision. The cold rationality of cost-benefit analysis and ‘best practicable environmental option’ was supplemented with a series of stakeholder dialogue meetings where Shell would listen to the views of key stakeholders and opinion formers – including even their critics. In 1999, following an extensive consultative process that included its former nemesis, Greenpeace, the Spar was eventually recycled as the base for a quay in Norway – at twice the cost of sea disposal. Stakeholder consultation and engagement was also rolled out to other areas of the firm’s operations, including well-publicized programmes in Peru, the Philippines, and Canada. As Shell put it, its decision processes had been transformed from DAD – decide, announce, deliver – to DDD – dialogue, decide, deliver.
In Nigeria, whilst improvements were made, the new approach appeared to have been more difficult to implement. This stemmed from a number of factors, including the legacy of the past, the profusion of factions amongst the Niger communities, and certain differences in management competence and culture in Shell Nigeria. Despite making various commitments, instituting new policies, and activating stakeholder responsiveness strategies, Shell struggled to engage successfully with local communities and establish mutual understanding with the Ogoni. Problems have persisted, and reconciliation has been only partial. Indeed, it has emerged that Shell’s problems in the Niger delta extend far beyond those just with the Ogoni people. Militant groups from across the region have continued to demand a greater share of oil revenue and compensation for environmental damage, even leading to kidnapping of Shell employees and sabotage of company property. A further blow to the company came with a 2006 Nigerian court ruling that ordered Shell to pay a1.3bn compensation to communities in Niger delta for polluting the region – a decision that was seen as a major victory for the Ijaw people in particular.
Whilst Nigeria remains a major thorn in the ethical reputation of Shell, more successful has been the company’s introduction of social accounting. Appearing initially in 1998 under the title ‘Profits and Principles: Does There Have to be a Choice?’, the Shell Group’s annual social report has publicly committed the company to sustainable development. With sections on the triple bottom line of economic, social and environmental performance, the report includes an impressive array of data and discussion on virtually all issues relevant to the business. Developing a credible approach to social auditing and reporting has not been easy, although the process appears though to have benefited from an on-going commitment to consultation, learning, and continuous improvement in developing indices and reporting methods. Claiming that to some extent it has had to ‘write the book [on social reporting] as it has gone along’, Shell has also been involved in multi-lateral efforts to improve systems and standards, such as the Global Reporting Initiative. Indeed, Shell’s progressive approach to reporting has been widely praised and has consistently garnered awards from bodies such as the UK Association of Chartered Certified Accountants (ACCA).
Accompanying the new approach to accounting and engagement has been the Tell Shell programme. This gives anyone who is interested an easy means of communicating with the company through the company’s uncensored web forum. This represents to some quite a brave attempt to acknowledge critics, rather than attempting to simply silence or discredit them. Comments on the web forum are incredibly diverse, both in subject matter and in their level of appreciation for Shell’s efforts. While some think that ‘you guys are doing an excellent job’, others suggest they are ‘disgusted’ or that the site is ‘bullshit’!
The Tell Shell programme feeds into the company’s social report, with the document liberally sprinkled with quotes, both positive and negative, under the heading ‘You Told Shell’. In this way, Shell is able to indicate the breadth of views relevant to a particular issue and to point to how it has listened to its stakeholders and responded to them.
Such developments, coupled with a global advertising campaign to demonstrate the firm’s new values, sought to rebuild Shell’s tarnished corporate image. As a result, even former critics began to soften their stance on the company, identifying Shell along with BP as the progressives in an industry otherwise still dominated by ‘business as usual’ companies such as Exxon and TotalElfFina. However, when it emerged in 2004 that Shell had overbooked oil and gas reserves by more than 20 per cent – or something like 4.5 billion barrels of oil – all the good work seemed to be undone.
Overstating reserves (i.e. the amount of oil and gas that the firm expects to extract in the future) can mislead the stock market about a firm’s performance since reserves indicate potential future income. Hence, overstating can artificially inflate share prices, with all the obvious benefits that this brings to the firm. Understandably, then, Shell’s shares dived when it was forced to downgrade its reserves. Shell agreed to pay about a130 million in fines to the US Securities and Exchange Commission and the UK Financial Services Authority to settle charges that it misled investors about its reserves – though without admitting or denying wrongdoing. And although the causes of the scandal remain unclear, Shell appeared to have developed a more aggressive approach to accounting along with its new approach to business ethics. Internal documents suggest managers would inflate reserves to meet ambitious targets, egged on by a new bonus scheme and a culture that increasingly encouraged risk-taking and unconventional thinking.
The scandal rocked the once cautious and conservative company and led to the departure of chairman Sir Philip Watts, oil and gas chief Walter van de Vijver, and finance chief Judy Boynton. The company also moved to simplify its twin board structure and implemented substantial remedial action, including retraining its 3,000 engineers and technicians in compliance.
Although the share price recovered (mainly due to escalating global oil prices), Shell’s critics returned with a vengeance. The accounting scandal provided the opportunity for campaigners to suggest that the firm had exaggerated its social and environmental performance in the same way as it had overstated its oil and gas reserves. The company’s 2006 AGM saw campaigners queuing up to attack Shell’s apparent ‘hypocrisy’ on a range of social, ethical and environmental issues, whilst Friends of the Earth continued to dispute facts contained in the Shell social report with its annual ‘alternative Shell report’. The 2005 release, titled ‘Lessons Not Learned’ presented a very different picture to the one promulgated by Shell, providing critics with yet more ammunition to attack the beleaguered oil giant. Whichever version is true, it seems that Shell has still got some way to go before its ethical makeover is complete. As The Times newspaper recently commented, ‘Can Shell rebuild its reputation? It will take time, ingenuity and luck – all sadly lacking at present.’
1. Which elements of business ethics management has Shell introduced?
2. How would you describe Shell’s overall strategy to business ethics management? To what extent are each of the elements used by the company complimentary to this strategy?
3. Describe the different stakeholder relationships revealed in the case. Using the instrumental perspective on stakeholder importance described in this chapter, how would you rate the apparent importance of each of Shell’s stakeholders here? In what ways does this differ to their importance from a normative perspective?
4. How important do you think Shell’s culture is to its approach to business ethics? Can or should Shell change its culture?
5. Do you feel that Shell has gone far enough in its attempts to turnaround its approach? What more could or should it do – or should it not have even embarked on this course of action in the first place? Will it ever satisfy its critics sufficiently?