Of the 350 companies in the FTSE350 index I suspect that Royal Dutch Shell probably spends more on corporate advertising than most. Over the past few years there was been a steady stream of advertising messages which seek to persuade, in particular,Â that Shell is driven to a large extent by its commitment to Corporate Social Responsibility (CSR). However the result of the recent study by the (London) Observer newspaper together with â€œCo-operative Asset Managementâ€ shows that the rhetoric in no way matches the reality.Â Â
Shell finishes in 111th place in the Observer study a position that suggests that the much hyped CSR and Business Principles imperatives are subordinate to the drive for earnings. The great economist Milton Friedman once provocatively said â€œThere is but one â€˜social responsibilityâ€™ for corporate executives – they must make as much money as possible for their shareholdersâ€ and whilst this is perhaps a slight overstatement in Shellâ€™s case it is not that far from the mark. The study ranks companies on social, environmental and ethical criteria â€“ all subjects that Shellâ€™s â€œBusiness Principlesâ€ declare that the company is committed to. You can read the Business Principles in full here Â and there you will see the following pretty unequivocal statement:
We believe that oil and gas will be integral to the global energy needs for economic development for many decades to come. Our role is to ensure that we extract and deliver them profitably and in environmentally and socially responsible waysÂ
Note the use of the word â€œRoleâ€. It is not Shellâ€™s aspiration or duty it is their declared role to do these things. But the reality, which causes Shell to performs so badly in The Observerâ€™s survey, is very different. It is arguable (most environmentalists would argue it) that Shellâ€™s exploitation of oil sands is seriously damaging to the environment and that as the percentage of oil sands in Shellâ€™s energy mix grows then they will gradually become even more not less a threat to the planet.Â If it really was Shellâ€™s role to put the environment first then they would walk away from oil sands projects.
I have argued that the oil companies are ill equipped to be their own judges as to whether a particular project or business enterprise meets â€œSustainable Developmentâ€ criteria.Â As in the recently disgraced financial sector you frankly just cannot trust the top men in the oil industry to act responsibly. They have a terrible track record â€“ from Enron through to Shellâ€™s reserves mendacity – and especially when we look at the shameful neglect of Health and Safety matters.Â Self-regulation just does not work.
The Observer survey proves Shell lags behind the true ethical leaders like BG who despite being in the same sort of hydrocarbon extraction business as Shell still manage to finish a highly creditable 14th in the survey list.Â Shell is also a full fifteen places behind BP who are themselves hardly paragons of virtue.
Nobody should pretend that the formulation of a proper energy policy all the way from production to consumption and with due regard for the environmental and sustainability is easy. Oil companies like Shell can have important roles to play at every stage in the chain but you just cannot leave it to them to decide strategic energy priorities in the public interest – and you certainly cannot believe their rhetoric. Much of Shellâ€™s expensively produced corporate advertising, and their whole mass of speeches and PR material, places a huge emphasis on those areas of Shellâ€™s business which are more environmentally friendly. Hence the plethora of messages about the â€œclean fuelâ€ that is Natural Gas and how Shell is expanding its Gas and its Gas to Liquids businesses. But the truth is, of course, that no matter how much the somewhat more environmentally friendly (although still not â€œsustainableâ€) businesses like Gas expand it is utterly misleading to suggest that the driver for this is altruistic. Shell does not have a business preference for Gas because of any environmental predisposition â€“ it has that imperative because their analysis is that it is good business.Â It may be that in many countries governmentâ€™s energy policies favour Gas over the alternatives partly for environmental reason â€“ nothing new there, that has been the case for many decades. But for Shell to claim that it is they who are prime movers in this decision making, as some of their corporate communications does, is nonsense. Shell is the provider/supplier when earnings are acceptable, and only when. Shell did not get out of coal because they judged that it was a less environmentally acceptable energy source â€“ they did so because they couldnâ€™t make their coal business work profitably. The same applies to the withdrawals from Forestry and some of their wind energy and solar power initiatives.
There is not that much to be critical about in respect of Shellâ€™s overall business strategy. Shell is the most cautious of the oil majors and in many ways this has been a source of strength â€“ they do tend to concentrate on things that they can do well. It is self-evident that this no longer includes the consumer businesses such as retail marketing where the focus is lacking and where the decision making has become far too centralised in recent times. Shell should dispose of its downstream businesses (the refineries possibly excepted) and under the Swiss bean counter Peter Voser I predict that they will. But the rest of Shellâ€™s core business in Oil and Gas looks both manageable within Shellâ€™s core competencies, as it always has been, and from a shareholder perspective it is fairly robust for the long term.
Shell people should be true to their skills and their history. That history comprises a commendable track record in upstream oil and gas and in the transportation and processing of these commodities.Â That is the knitting to which Shell should stick. And they really should pull the plug on the mendacious corporate advertising that seeks to persuade that Shell is something more than a big, but bog-standard, oil and gas company. Shell doesnâ€™t have any special insights into the energy future so they should stop claiming that they do – and, oh yes, there are plenty of these arrogant and self-promoting claims in much of Shell’s communications. And they should stop implying that they are a public-spirited and altruistic player in the Renewables world as well. It isnâ€™t true and it never will be â€“ certainly when Mr Voser looks closely at the P&L!
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