Shell: The Case of the Missing Barrels

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The management of The Royal Dutch/Shell Group announced, in January 2004, its intention of reducing its "proven" reserves of oil and gas by 4 billion barrels and of adding such reduced figure to the category of "probable" reserves. The announcement, which concerned practically 20% of the total "proven" reserves of the company, created extensive media debate and discussion, shocked investors, and raised issues regarding corporate social responsibility and the accountability of managers of huge multinational business undertakings (Gupta, 2003). This short report attempts to investigate and discuss the various ethical and CSR issues that emerged from this development, and the implications of such issues on the actions of large business organisations, whose actions impact the actions and lives of hundreds of thousands of people, and where management is separate from ownership.

Description of case

The Royal Dutch/Shell Group, (Shell), a conglomerate whose origins go back to the early 19th century, was created by the coming together of The Royal Dutch Company and Shell in 1907. The company, whilst engaged in a range of businesses in its early years, developed into a group of companies, engaged mainly in areas relating to energy and petrochemicals by the 1950s, and grew enormously thereafter (Gupta, 2003). In 2000, the company had operations in approximately 150 countries and employed approximately 115, 000 people (Gupta, 2003). Its Anglo-Dutch management was known to be essentially conservative in nature and the company enjoyed substantial investor confidence (Gupta, 2003).

Shell's announcement regarding reserve reclassification was followed by intense and elaborate examination of its oil reserves across the globe by company executives, with the assistance of an external consultancy organisation with acknowledged experience in the area (Shell..., 2004). The examination, which covered practically nine-tenths of the company's global reserves and all oil wells with capacities of more than 10 million barrels, led to revision in the estimated life of the company's reserves, (as stated in the 2002 annual report) from 13 years to 10.2 years (Shell..., 2004). The company announced that the financial impact of the reclassification would lead to a write-down of approximately 100 million USD per annum, for the period 2000 to 2003 (Shell..., 2004).

The revision of the established oil reserves of the organisation in 2003 was followed by the release of an internal report to the media in April 2004 (Gupta, 2003). The report disclosed stated that members of the senior management of the company had been fully aware of the possibility of such significant overstatement of the company's oil reserves and had been debating at length on the provisioning of true information to the public (Gupta, 2003). The statement made by Walter Van de Vijver, then the CEO of an important division of the company, to Phillip Watts, the Executive Chairman Managing, "I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive-optimistic bookings", was flashed on televisions screens and newspaper headlines across the world and showed up the management of one of the largest global oil companies to be engaged in deceit, falsehood, manipulation of information, and in misleading its investors and other stake holders (Gupta, 2003).

The report also detailed the various corporate issues that led to the reclassification of reserves and provided specific knowledge on the existence of information on possible over estimation of reserves within the company for years (Shell..., 2004).

The actions of the company in reclassifying its reserves and the publication of the report had numerous repercussions (Gupta, 2003). Disturbance in investor confidence led to the value of the shares of the company dropping by practically 7 percent (Gupta, 2003). The senior management at Shell experienced significant reorganisation, pursuant to the giving up of office by senior people like Watt and Vijver and the removal of the company's CFO from her position (Gupta, 2003).

Ethical and CSR Issues

Whilst the announcement from Shell about overestimation in its reserves led to a significant amount of financial restatement and a write down of approximately 400 million dollars from its accumulated reserves, the much larger issue of corporate social responsibility, and the ethical responsibilities and accountability of managers of business organisations also came up for extensive debate and discussion (Gupta, 2003).

The years preceding the affair at Shell years had experienced the emergence of huge corporate frauds in organisations like Enron, WorldCom and Parmalet, which had occurred on account of extensive financial wrongdoing by the senior executives of these companies (Moore, 2004). The collapse of these companies, along with huge financial losses to thousands of investors, and the termination of numerous employee jobs had created an atmosphere of extreme mistrust in the minds of ordinary individuals of the intentions and actions of managements of large companies (Moore, 2004). Many people saw the happenings at Shell to be nothing more than a continuation of such episodes and representative of the greed, lack of responsibility and accountability, and the absence of corporate social responsibility that pervaded the top echelons of managements of contemporary business firms (Moore, 2004).

A flood of comments, in numerous media publications and television talk shows, squarely associated the managers of Shell with the high ticket fraudsters at Enron and Parmalet (Shell..., 2004). Whilst further investigations failed to establish any criminal wrongdoing on the part of members of the senior management of Shell, it came to be widely agreed by oil industry experts and financial analysts that the company had shown extraordinary aggressiveness about booking of proven oil reserves and had gone to the extent of transgressing the hazy SEC guidelines in the regard (Shell..., 2004).

Corporate Social Responsibility (CSR) is a relatively recent construct and refers to the various responsibilities of business organisations towards their many stake holders, not just to their key stake holders like important groups of shareholders and key managers, but also to others like employees, buyers, suppliers, bankers, regulatory authorities and general members of society (Voien, 2000). Business organisations in the free market system in the past had only one objective, the making of profits. Milton Friedman (1994) has famously gone on record to state that managers of business organisations were responsible only for maximising the wealth of their organisations and share holders and that all other considerations were essentially subordinate to such objectives (Voien, 2000). Such opinions are very obviously politically incorrect in the modern day Anthony Giddens influenced "middle way" environment, and all business organisations now profess to be profit oriented and socially responsible; corporate citizens with specific responsibilities towards all their stake holders, including the members of the communities with whom they are involved, and to the larger environment (Voien, 2000).

Such CSR obligations enjoin modern day business organisations to (a) desist from actions that may be directly or indirectly harmful to the various individuals and organisations in contact with them, (b) maintain the highest standards of financial and ethical probity in their dealings, and (c) preserve high levels of transparency regarding their working, within and outside their organisations (Voien, 2000).

Whilst CSR is an organisational construct and concerns the behaviour of business entities, the implementation of CSR actions very obviously occurs through the agencies of managers, working in their individual and collective capacities (Voien, 2000). CSR obligations thus call upon all responsible managers to assume high levels of professional, personal and corporate ethics in their personal and professional roles (Voien, 2000).

It also needs to be mentioned at this stage of the report that directors of business firms like Shell, in which management is separated from ownership, have both agency and fiduciary responsibilities towards their organisations (Gupta, 2003). They are expected to act honestly, transparently and for the benefit of their principals and their organisations in the conduct of their organisational responsibilities (Gupta, 2003).

The actions of the executives at Shell need to be understood and viewed from these perspectives (Gupta, 2003). Reports of the company reveal that much of the booking of such "proven" reserves had occurred at the instance of Watts, who had the reputation of being aggressive in such activity and the continuance of a tussle between him and Vijver on the quality of reserves (Gupta, 2003). Both Watt and Vijver moreover knew that the booking of reserves was not substantiated by the guidelines framed by the SEC and that the information on reserves that had been disclosed to the SEC was substantially different from the information possessed by them (Gupta, 2003).

Why, in such case, were reserves claimed as proven, when the company had information to the contrary? The answers to such questions are not pleasant (Gupta, 2003) (Moore, 2004). In the first case, the present success and future prospects of oil prospecting and exploratory companies is strongly related to the quantity of its proven reserves (Gupta, 2003) (Moore, 2004). Greater proven reserves of oil, in the case of Shell, are indicative of the quality and effectiveness of the senior management in achievement of strategic organisational objectives; handsome reserve figures can act as an important endorsement of its management policies, strengthen the position of key managers, and ensure the continuance of their power and position within the organisation (Gupta, 2003) (Moore, 2004). The presence of such reserves also bolsters the strength of the balance sheet, makes it easier for the group to borrow money from banks and helps market prices of its shares (Gupta, 2003) (Moore, 2004).

Individual greed also comes into the picture, in this case, with it being subsequently revealed that the figure of proven reserves was linked to staff bonuses (Moore, 2004).

Controlling of managerial behaviour has been an important issue since the time of the Industrial Revolution, when management started becoming separate from ownership through the appointment of employed managers; mainly because of the increasing complexity and size of business operations (Voien, 2000). Such separation has inevitably resulted in significant powers being vested in managers, the emergence of contradictions between their fiduciary and agency relationships, the frequent overstepping of their brief, the creation of self-serving power structures within organisations, and the desire to put their own interests before that of their shareholders and organisations (Voien, 2000).

Their indispensability to businesses, as also their immense contribution to the growth and profitability of their firms, has however only led to their organisational powers becoming stronger, even as multi-dimensional efforts have been and are constantly being made to moderate their behaviour through motivating, assessing, and controlling measures. Whilst they are motivated through handsome salaries and bonuses, their actions are controlled through complex systems of checks and internal audits. The spate of scandals in the early 2000s prodded the US government to include criminal penalties to erring managers in the Sarbanes-Oxley enactment. Punishments for corporate frauds have tended to be extraordinarily severe in the UK, as well, in recent years.

Conclusion and Recommendations

Corporate social responsibility is a contemporary construct and is yet to really entrench itself in modern day business operations. Business corporations have in the past constantly tried to further their own wealth oriented objectives and have paid little heed to the adverse effects of their actions on numerous individuals, now euphemistically termed as stakeholders.

Much of the dirty work of such businesses has been done through the agency of organisational managers, who are trained and socialised to spot profit opportunities and exploit them ruthlessly. It is impractical to ask managers to use every trick in the book, albeit covertly and within the ambit of law, to further the interests of their firms yet expect them to behave ethically and selflessly with regard to their own interests.

Misuse of managerial power and authority is integral to the basic functioning of market economies and is a distinct if unwholesome trait of neoliberal economics. To expect managers to give up self-serving attitudes swiftly because of the advent of CSR concepts and the development of an emphasis on managerial ethics is akin to chasing pipedreams. Selfishness among managers will stay as long as profit motives exist in business, even though its effects may be moderated with increase in consciousness about the need for CSR and ethics in business.

Capitalism, if it is not to stamp over the needs of weaker groups, needs firm regulation and control. The same logic holds good for managers. Their incentives and bonuses need to be balanced with the real prospects of severe penalties for transgressions, if they are to be brought around to meeting their CSR and ethical obligations.