A Study of Shell Oil and its Stakeholders in Nigeri - Research Paper Example

?A Study of Shell Oil and its Stakeholders in Nigeria Table of Contents Chapter 3 1 Introduction 3 2 Aims & Objectives of the Paper 4 3 Scope of the Paper 4 2 Chapter 2 5 2.1 Introduction & Discussion of Theories & Models from the Literature 5 2.2 The Stakeholder Theory 5 2.3 Business Ethics 8 2.4 Shell’s Corporate Social Responsibility 8 2.5 Perspectives of Shell’s Stakeholders 9 3 Chapter 3 11 3.1 An Examination of Various Approaches to Leadership 11 4 Chapter 4 15 4.1 Findings 15 4.2 Conclusion 16 4.3 Recommendations 16 Reference List 18 1 Chapter 1 1.1 Introduction This paper presents a study on the Anglo-Dutch oil exploration firm Royal Dutch Shell plc and its response towards the oil spills in Niger Delta and its effects on the company’s major stakeholders. Shell is a vertically integrated company where in upstream, it is engaged in exploration of crude oil and natural gas reserves, and development of projects through new technology. In downstream, it is engaged in refining, supplying, trading and transportation of crude oil worldwide. It manufactures and markets a range of petrochemical products for industrial customers. The company is also engaged in delivery of technology solutions through research and innovation. Shell operates in 90 countries, employs approximately 93,000 people worldwide, 43,000 service stations, and has more than 30 refineries and chemical plants including 3.3 million barrels of gas and oil production per day. In 2010, the company spent $2.1 billion in development of alternate energy sources and carbon emission controls, $13 billion on purchases from companies from lower income countries, and more than $21 million on voluntary social investments (Shell, 2010). Shell Group is involved in the on-shore production of oil and gas in the Niger Delta. It is also involved in the offshore production of oil and gas in Gulf of Guinea and Nigeria’s first ever deep-water project. The energy from the Shell-operated Nigerian ventures is used for the country’s industrial and domestic use. The remaining is exported to Europe, US and Asia. Shell Petroleum Development Co. under the Shell Group employs about 90% of Nigerians in the region and provides 95% of the profits from on-shore production in the Delta to the Nigerian Government. The company also employs around 35,000 third party contractor staff (Shell-a, n.d.). The Niger Delta is considered one of the most polluted regions in the world with around 6,800 recorded oil spill incidents in the last 50 years since the beginning of oil production in the region (Purefoy, 2010). In 2009, Shell’s Nigerian subsidy spilled around 14,000 tons of crude oil in Niger Delta, which were twice the 2008 figures and four times the 2007 data. The major reason is that many pipelines of Shell are corroded and old. The company has taken the responsibility of the clean-ups but blames the thieves and militants for majority of the environmental damages (Guardian, 2010). Since 1999, when Nigeria became a democracy, Shell has been trying to improve its image in the country by issuing the environmental reports every year. 1.2 Aims & Objectives of the Paper In the light of Shell’s operations in Nigeria and environmental issues associated with it, the aim of the paper is to: Identify and discuss the effects of the environmental issue on the major stakeholders of Shell in Nigeria, and the way each of the stakeholders responds to the problem. Compare and contrast the different approaches to leadership in bringing resolution to the problem based on several perspectives. From the discussion on the stakeholders’ perspectives and leadership perspective, it is expected to arrive at a practical solution to the environmental issues faced by Shell and Nigeria. 1.3 Scope of the Paper This paper has explored various stakeholder theories and models related to the case of Shell. Extensive analysis in stakeholder theory through numerous publications has been devoted to the understanding of the impact of Shell’s Nigerian operations on its three major stakeholders. The study of ethical practices and CSR activities of Shell has been supportive to the analysis. The paper has also discussed the various approaches to leadership in order to identify an appropriate solution to the problem. 2 Chapter 2 2.1 Introduction & Discussion of Theories & Models from the Literature The three major stakeholders of an organization are shareholders, government and social community. The notion of balancing the preferences of different stakeholder groups is known as stakeholder approach. An organization frequently faces the situation of simultaneously satisfying demands of different stakeholders (Daft, Murphy & Willmott, 2010, p.23-24). An effective organization is the one that satisfies all of its stakeholders. In order to satisfy its shareholders, it needs to follow proper accounting procedures, provide timely and appropriate information regarding its financial performance and protect their interests by managing the organization efficiently. The customers of an organization expect quality and cost effectiveness of the products and services, which the organization provides. An organization that is responsible for its customers, treat them honestly and fairly. Socially responsible organizations treat their employees with dignity and respect. They train and promote qualified employees, and treat them as a significant part of the organization. An organization strives to at least satisfy the interests of its stakeholders. Any failure in doing so invites loss of reputation and disruption of profitable growth. 2.2 The Stakeholder Theory The stakeholder theory has its origins in the discussions over whether an organization has a moral obligation towards the interest of its stakeholders. Freeman has taken the concept of stakeholder approach to be a way to blend each of the business concepts with ethics (Freeman, 1994, p.1). Donaldson and Preston in their article on stakeholder theory view the three aspects of the theory i.e. descriptive accuracy, normative validity and instrumental power, to be mutually supportive and the most fundamental base is the theory’s normative validity (Donaldson & Preston, 1995, p.65). The descriptive basis offers a description of the organization such as corporate behavior and characteristics. It describes the nature of the firm, ways of managing the firm and the behavior of board members towards the interests of stakeholders. The instrumental basis provides the relationships or lack of relationships between stakeholder management and achievement of corporate goals such as profitability and growth. The instrumental aspect of stakeholder theory doesn’t explore the relationships between the causes and effects i.e. stakeholder management and corporate performance. Jensen argues that it is not possible to maximize the organization’s value in more than one dimension. There should be a single valued objective for purposeful managerial behavior. He has criticized the traditional stakeholder theory for not specifying the basis of trade-offs between the competing interests of the different stakeholders that leaves managers without purposeful decisions. The theory according to him works well for the interests of the directors and managers. He has given his own version of stakeholder theory, which he calls ‘Enlightened Stakeholder Theory’ in which he has identified long-run value maximization of a firm to be a criterion for making trade-offs between the stakeholders’ interests (Jensen, 2001, p.297-298). The normative aspect identifies the corporate function including recognition of moral and philosophical guiding principles for managing the corporations. In normative terms, the association between organization’s performance and stakeholder management is not a significant issue rather the attempt is to interpret the guidelines to publicly owned corporation on the basis of philosophical and moral principles (Donaldson & Preston, 1995, p.72). According to Donaldson and Preston, there has considerably been less analysis over the stakeholder concept than it is required (Donaldson & Preston, 1995, p.73). The significance of distinctions between descriptive, instrumental, and normative basis of stakeholder concept can be understood by taking the case of controversy over Shell’s operations in Niger Delta. Worldwide there have been comparisons of oil leaks in Nigeria with that of the incident of Deepwater Horizon spill in Gulf of Mexico, which involved BP, despite the magnitude of the latter being larger than Niger Delta incidents. The criticism has emanated from the fact that in case of BP, there was a huge amount of interests as the affected party was U.S. and here much less attention has been paid to the Nigerian condition (Reuters, 2011). The oil spill from Bonga oilfield off the Nigerian coast led to decline in Shell’s market value but the effect was for a brief period as investors considered little reputational risks for the company. This contrasts with BP who lost billions of its market value. Shell has taken the responsibility of cleaning and the incident is not considered the worst kind by its stakeholders except the Nigerian environmental and health service associations (Ezigbo & Bassey, 2010). If this is true that Shell hasn’t suffered despite being a means to serious environmental degradation in this African region for the last 50 years, then it is descriptively accurate that the company’s few stakeholders’ interests have priority over its other stakeholders including the Nigerian public and customers. Even if it is correct that self-serving interests of Shell (to continue irresponsible oil exploration activities for profits only) has not affected the profitability of the company (therefore meeting the instrumental criteria), the normative justification from the environmental pollution affecting the society’s health would never follow. As per Donaldson and Preston, the three aspects are nested within each other, with the external level being the descriptive aspect, the instrumental aspect being at the second level, and the normative aspect being the innermost core of the stakeholder theory. 2.3 Business Ethics In order to conduct its business in an ethical manner, Shell has issued statement of business principles in which it has stipulated the code of ethics for senior financial officers and executive directors of the Group. Any breach of such principles by executive directors, Chief Financial Officer, Executive Vice President-Controller, and Chief Internal Auditor can be reported to the chairman of the audit committee. In case of other Code of Ethics (COE) addressee the Executive Vice President Controller can be contacted. Every COE addressee is accountable for fully complying with the code. Audit Committee holds the right to sanction any waiver of provisions under the Code. All these measures taken by Shell are to avoid any conflicts of interest between the company’s business and the private financial activities of its management team (Shell-b, n.d.). 2.4 Shell’s Corporate Social Responsibility Shell Petroleum Development Company (SPDC) has set-up a public website to report on oil spillage incidents from its facilities. This has facilitated the company in tracking the response to every spill, whether a result of operational inefficiency or a result of sabotage or theft. Shell has set-up sustainability standards and requirements in HSSE & SP, which is to be complied by all of the Group’s companies and joint ventures. The Corporate and Social Responsibility Committee is responsible for assessment of policies and performance regarding the code of ethics, HSSE & SP standards, and General Business Principles as well as certain major public issues. The committee consists of 4 non-executive directors who periodically visit Shell’s facilities and held meetings (Shell-c, 2010, p.2). From the company’s sustainability report on Nigeria, it is clear that in addition to bursting pipelines Shell faces many challenges such as theft of oil and sabotage of its employees by the criminal gangs, and gas flaring. The company has claimed that these gangs steal oil from its pipelines at estimated rate of 100,000 barrels per day and more than 80% of the spill volume is due to theft and sabotage. In 2010 it has completed $1.1 billion replacement pipeline and estimates the costs of controlling gas flaring to be additionally $2 billion (Shell-c, 2010, p.18). For all these efforts, the company relies heavily on support from Nigerian Government. Shell realizes the importance of contribution from each of its stakeholders to overcome the deep-rooted problems in Niger Delta. The company has accepted its mistakes in the past regarding the operations but seek to learn from those mistakes and improve. 2.5 Perspectives of Shell’s Stakeholders The three major stakeholders of Shell i.e. shareholders, Nigerian Government, and Niger Delta communities are likely to view the Nigerian situation from different perspectives as per their interests. The shareholders have not lost faith in the company due to the oil spilling incidents in Niger Delta. This is evident from the company’s increasing stock prices after a slight downward movement after the news of oil spill in Bonga oilfield. The shareholders see their investments secured and reputation of the company intact (Lawler, 2011). The Nigerian Government has got $31 billion of revenues from SPDC from 2006-2010. 95% of the profits from each barrel of oil produced by SPDC go to Nigerian Government. The company also contributed $161.1 million and $71.4 million to Niger Delta Development Commission and community development projects, respectively (Shell-c, 2010, p.18). The government receives substantial revenues from the company’s operations but it has chosen to ignore the public’s needs of cleaner and healthier environment. The Niger Delta communities’ expectations from the organization are two-folds. Firstly, they expect the organization to provide employment opportunities. The industrialization in their regions, with prevailing poverty, is a means of earning livelihood. Secondly, they also expect Shell to behave in a socially responsible manner and make efforts in minimizing the environmental degradation. The second expectation hasn’t been met. The regular oil spills in the region have destroyed the Delta’s eco-systems and forced the residents to look for sources of livelihood somewhere else. There has been criticism of Shell by these communities for continuing the drilling activities without properly following the international standards for oil exploration and avoiding industry’s best practices. They also blame their government for not having proper policies towards the multinational companies’ operations in the region. The government hasn’t even conducted proper investigation regarding the Bonga oil spill (Hassan, 2012). The Delta region communities demand for actions to be taken against Shell similar to what the U.S. government did in case of BP oil spill. Even if Shell claims that it is not fully responsible for the oil leaks and gas flaring, Shell and the Niger Delta communities expect the government to support by checking the criminal gangs and drafting strong institutional framework to check on oil multinationals, respectively. However, this partially contradicts with the shareholders’ interests because they might view the rising costs of Shell affecting their dividends and returns. The opinion about Shell’s clean-up act is contradictory. The Nigerian Government and Shell have claimed that the company has made significant progress towards removing oil from ocean’s surface but the affected communities including fishermen do not believe if Shell has actually made efforts n removing the oil from ocean. 3 Chapter 3 3.1 An Examination of Various Approaches to Leadership Leadership is a social process, rooted in the skills, knowledge, values and thinking pattern of both the leaders and followers. It is a continuous practice of building relationships and sustaining them between those who lead and those who follow (Gallos, 2008, p.3). The stakeholder perspective asserts that for stakeholder management, the leaders ultimately rely on either personal or organizational guidance. As per the needs and situations, different types and characteristics of leaderships are required such as: Structural Leadership: Involves occupying specific position in the group and identifying tasks to be carried out. Transitory Leadership: Involves moving around the group as per the stage in the process. Informal Leadership: Involves influencing attitudes and choices. Transformative Leadership: Here the leader has the capacity to transform situations. Enable Leadership: Involves encouraging the participation, inviting members for decision-making, and identifying limits. Skills & Knowledge Leadership: People with special skills and knowledge contribute towards the group’s efforts. Authoritarian Leadership: Involves making decisions but also inviting questions from the followers. Consultative Leadership: Involves presenting the situation, getting input but making decisions (Diamond & Liddle, 2005, p.89). The two traditional theories of leadership are attribution theory and the psychodynamic approach to leadership. The attribution theory of leadership deals with individual opinions about a particular event or observation. In everyday life, people try to form opinions about the reasons for incidents and form cause and effect relationships. The attribution theory in leadership is used in two perspectives- first, attribution of leadership qualities by the member groups based on their observation of the leader and second, the superior’s attribution by observing inferior’s behavior (Winkler, 2010, p.9). The psychodynamic approach refrains from comparing the personality types and need to match the leader’s personality with his/her subordinates or situations. Rather, it emphasizes the transformation of leader’s insights into psychological behavior and emotional reaction to motivate the followers to do the same (Beerel, 2009, p.66). Another approach to leadership is the contemporary approach to leadership which address the weakness of the traditional approach to leadership i.e. ignoring the importance of communication in leadership. Communication to influence others’ views and understanding is known as framing. Through this the leaders inspire others to think and act beyond their self-interests. Two theories, which are based on this contemporary approach to leadership, are charismatic leadership and transformational leadership. In charismatic leadership, the followers perceive different attributions of extraordinary and heroic abilities of the leader when they observe specific behaviors (Robbins, 2010, p.180). Over the years there has been debate over whether the charismatic leaders are born or made. Majority of the thinkers believe in both with minority of those people who think that the charismatic personality is inherited and therefore, cannot be learned. The charismatic leaders have a vision and ability to articulate that vision. They are willing to do self-sacrifice and take high personal risks. Sensitivity to the needs of the followers and novel, unconventional behavior are some other characteristics of the charismatic leaders. However, historically, the charismatic leaders haven’t acted in the best interests of the organizations. The leadership qualities like those of Jack Welsh (GE), Michael Eisner (Disney), and Hank Greenberg (AIG) lead to many organizations demanding charismatic CEOs. This has been seen as an opportunity by the CEOs to leverage higher salaries, despite their mediocre performances. The success of an organization depends upon an effective leadership but that success is inevitably linked to the leader’s vision. If the vision is in the best interests of the organization’s stakeholders then charismatic leadership can be an effective tool in stakeholder management. Another contemporary theory is transformational leadership. Transformational leaders transcend their own interests for the sake of their followers and are capable of extraordinary influence on them. They have to pay attention to each stakeholder group’s concerns and development. There are seven characteristics that are found to be common in all the approaches to leadership- sincerity, bonding through personalized relationships, concerns about the growth of individuals by remaining accessible and maintaining social relationships, participation and consultation, promotion of teamwork, innovative, role model, and empowerment & support (Robbins, 2010, p.184). Shell’s business practices guidelines and code of ethics is a signal to its various stakeholders that the company desires to contribute towards society by being ethical. However, the conflicting interests of stakeholders can become challenging in integration of their expectations. In the case of Shell, the conflicting interests of shareholders, Nigerian Government, and regional communities is quite challenging for the company to meet their expectations. The shareholders view the Shell’s problem in Nigeria with respect to increased operating costs. The daily loss of around 100,000 barrels due to theft and sabotage and the consequent costs in repairing the pipelines increases the costs for the company and therefore, the shareholders’ dividends. The environmental impact cannot be taken as direct interests of the shareholders in the short-run unless they are the affected party. However, the increasing global environmental awareness might have the impact on the organization’s value in the long run and affect the shareholders’ returns. The Nigerian Government’s short run interests in Shell operations seem to be the revenues. However, the long-term interests vary with the political environment of the country. In order to survive, the government will have to amend its policies towards the multinational companies and the Nigerian communities. The Niger Delta communities are expected to or have boycotted the company to make their voices heard by their government and international communities (Muhammad, 2011). The possible way of integration of stakeholders’ expectations is to engage them in the process of resolving conflict. The discussion should be transparent about the critical differences in their needs and values. The leader from each stakeholder party can transcend his or her personal interests and try to understand the limitations of the other two parties. The vision of the leaders will play an important role in the conflict resolving process, which is the most desired trait of a leader. The leaders from the organization, government and the communities, have to make sure that right stakeholders are on the discussion table so that the reflections include those whom the decisions would impact. If the conflict resolution process is fluid and the issues have been forgotten or overlooked, the leaders need to bring together the stakeholders together again to reassess and deliberate the process and resolve issues successfully. This is required because the conflict resolution cannot be achieved in a short span of time. The leaders of Shell, Nigerian Government and the Niger Delta communities need to assure each other that appropriate processes and priorities reflect the common set of criteria, which all of them have contributed. Apart from the vision, another required trait of leaders is communication of that vision. If Shell is not able to communicate to the various social working groups and environmentalists regarding its efforts in minimizing the environmental degradation, then its efforts might not bring the fruitful results. Similar is the case with the Government and affected communities. They need to discuss their issues openly with Shell and Government, and also propose solutions to the problems for mutual benefits. 4 Chapter 4 4.1 Findings Following are the important findings after careful analysis of Shell’s presence in the Niger Delta region: 1. The three involved stakeholders of Shell are shareholders, Nigerian Government, and Niger Delta communities who have been affected by the oil exploration activities of Shell in the region by varying degrees. 2. The shareholders are least affected and do not view the oil spilling incidents in Nigeria to be a major reputational threat for the company. 3. Nigerian Government is facing criticisms from the Nigerian communities for lack of appropriate policies with regard to oil exploration multinational firms and ignoring the health issues of the affected public. 4. Niger Delta communities have boycotted the company’s operations time to time. Their habitat is destroyed due to continuous water pollution. They have lost their livelihoods and their health is affected from consuming contaminated food. 5. Shell takes responsibility of some of the oil spills and clean-up but has refused to take the whole blame and asserts that the theft and sabotage by criminal gangs in Nigeria are mainly responsible for the flaring incidents. 4.2 Conclusion An effort has been made in this paper to analyze the Nigerian operations of Anglo-Dutch oil exploration firm Royal Dutch Shell plc, its response towards the oil spills in Niger Delta and the effects of the operations on the company’s major stakeholders. Overall, the analysis of the environmental issue and Shell’s major stakeholders shows that, historically, the company has not been able to manage its stakeholders properly as the interests of its stakeholders are not considered in an equitable and socially justifiable manner. However, understanding the tarnished image of the company in Nigeria, the company has recently started making efforts such as honestly reporting the incidents and its views regarding the oil spills in its annual sustainability reports. The company has Corporate and Social Responsibility Committee to look into the matters related to company’s code of ethics and HSSE & SP. However, there is lack of communication between Shell and its stakeholders. Also, there is a conflict of interests between the company’s stakeholders. The leaders of Shell and its stakeholders lack a clearly defined vision to bring the conflict resolution process on the discussion table. 4.3 Recommendations The possible way of resolving the conflicts of interests of the stakeholders is to engage the leaders from every group involved, in the process of conflict resolution by being transparent about the critical differences in their needs and values. The leader from each stakeholder party can transcend his or her personal interests and try to understand the limitations of the other concerned parties. Shell should communicate its efforts to the Nigerian communities and social working groups in order to better understand their needs and maintain its reputation. The affected communities need to discuss their issues openly with Shell and Government, and also propose solutions to the problems for mutual benefits. 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