a case study of shell

Volume 9 2011 Otago Management Graduate Review

This assignment was for MANT435 Advanced International Management 1 Supervised by Assoc. Prof. Andr Everett 93-113

Sustainability Issues in the Petroleum Refining Industry: A Case Study of Shell Asma Naimi Introduction The petroleum refining industry faces many sustainability issues due to the nature of its operations. The main issues for this industry will be identified in this paper and some examples will be given. Sustainability issues have an effect on the reputation of these multinational and their approach towards these issues is often criticized. There is increased public awareness of the effects that operations of oil companies can have on the environment and communities. Socially responsible behaviour is expected of these firms by society. It demands a clear approach and communication towards these issues. The different theories and approaches possible in handling sustainability issues from a company perspective will be discussed in this paper. Furthermore, a case study of Royal Dutch Shell is discussed focusing on their current approach towards sustainability issues. This company has had several controversial events that created international outrage in the past. At that time no clear strategy towards sustainability issues was in place at Shell. One of these main events has been the Brent Spar case. In 1995 Shell planned to sink one of its oil platforms in the North Sea. A large media attack by Greenpeace followed and eventually led to the disruption of these plans. Folding under public pressure Shell stored the platform for possible disposal on land in Norway. Even though, Shell had the support of the British government and the scientific evidence that sinking the platform in the sea would be least damaging for the environment. Their lack of strategic action towards this media attack and communication on its approach focusing on public opinion was almost non-existing (Bakir, 2005). This event shows the need for companies in the petroleum refining industry to have a clear approach and communication towards stakeholders and the public in general. The Brent Spar case and other controversial events have led to changes in Shells approach towards sustainability issues and are discussed in this paper. The focus of the case study will be on the current approach adopted by Shell. Also, Shells performance on these issues will be assessed. Finally, an analysis of Shells current approach will be given and linked with the theory. This paper will end with some concluding remarks on the possible approaches towards sustainability issues, the approach adopted by Shell and the effect on its performance and reputation. Sustainability Issues In the following section the sustainability issues facing the petroleum refining industry in general are identified. The concept of sustainability is defined by the United Nations (2011) as: development that meets the needs of the present without compromising the ability of future generations to meet their own needs. This is a broad definition of the concept and can be interpreted in different ways by different actors in society. To narrow down the concept of

Otago Management Graduate Review Volume 9 2011

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sustainability and make it applicable for the private sector the definition given by Dow Jones is more suitable: A business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental, and social developments (DJSI, 2011). This also represents the main division of sustainability issues as economic, environmental, and social. The guidelines adopted by multinational firms in recent years to set up sustainability reports also make a distinction between economic, environmental, and social dimensions of sustainability. Examples of such guidelines are the ISO 14000 series, which focuses on environmental management; the Social Accountability 8000 Standard, focusing mainly on human rights; and the Global Reporting Initiatives (GRI) Sustainability Guidelines (Lozano, 2009). The vision of the GRI guidelines is formulated as: A sustainable global economy where organisations manage their economic, environmental, social and governance performance and impact responsibly and report transparently (GRI, 2011). This standard is adopted by most companies in the petroleum refining industry and clearly defines the type of issues at hand.

Oil companies face sustainability issues in each of the main areas mentioned. These issues can also be divided as environmental, development, and governance issues (Frynas, 2009). This distinction is similar to the general division in economic, environmental, and social issues mentioned before. Yet, it also entails political issues. Firstly, environmental issues arise due to the nature of operations in the oil industry. It can cause environmental damage in various ways, such as water and soil pollution, disturbance of communitys flora and fauna, greenhouse effects, and waste problems. This is mainly caused by upstream activities, such as drilling in areas with high biodiversity, or by downstream activities, such as emissions into air, water, or ground (Frynas, 2009). Secondly, the development challenge mentioned by Frynas (2009) focuses mainly on international development and the ability of the private sector to reduce poverty and improve education by following socially responsible practices. Development issues are part of social issues in general faced by oil companies. Other social issues can be the negative effects of operations on local communities in developing countries, human rights and health and safety issues (Jenkins, 2005). The governance issues can be divided into economic and political issues. An important economic issue is called the Dutch disease: large foreign exchange inflows generated by extractive industries exports lead to the appreciation of a countries currency exchange rates, which make it more difficult to export agricultural and manufacturing goods (Frynas, 2009, p. 134). This is also called resource dependency or the resource curse (Sachs, 1999). Corruption levels are high in resource rich countries and political stability is negatively related with resource dependency (Frynas, 2009; Leite et al., 1999). The exports of natural resources could undermine good governance and political accountability in developing countries. The main issues affecting the petroleum refining industry are often seen as separate and contradictory. Yet, both Crew (2010) and Lozano (2009) stress the interdependence of these issues. Economic, environmental, social, and political issues are interconnected and complex. It should also be noted that economic sustainability entails long term profitability and existence of the firm. The generals aspects of the organisation need to be respected next to the sustainability issues mentioned (Baumgartner, 2010).


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Bekefi (2008) suggests that political, social and environmental risks should be integrate in the corporate strategy and investment decisions of oil multinationals as they could have an impact on its social performance. A definition of corporate social performance (CSP) is given by Wood (1991, p. 693), a business organizations configuration of principles of social responsibility, process of social responsiveness, and policies, programs, and observable outcomes as they relate to the firms societal relationships. Social performance is often measured by company rankings (e.g. KLD ratings) and can have a negative effect on its reputation. Therefore, reputational issues are identified as key issues for companies facing large public interests. It should also be considered in strategy decisions of oil multinationals.

A final issue that transcends from all the other issues mentioned and the reputation of the company is the issue of trust. Social trust can avoid communication crises as shown by the Brent Spar case (Bakir, 2006). Also, legitimacy issues that arise when there is a low level of trust can counteract operations. The principle of legitimacy is stated by Davis (1973, p. 314) as: society granting legitimacy and power to business. In the long run, those who do not use power in a manner which society considers responsible will tend to lose it. The approach towards sustainability issues adopted by oil companies impacts its reputation. Subsequently, reputation will mainly determine the level of trust in that company and the legitimacy granted by society.

The large companies that are members of the World Business Council on Sustainable Development agree that corporate responsibility should be defined in the main three dimensions: economic, environmental and social (Watts & Holme, 1999). In this paper political, reputational and related legitimacy issues are added to these main dimensions of sustainability. The economic, environmental, social, and political sustainability issues can be regarded as input factors in the approach of oil multinationals. While reputational and related legitimacy issues are seen as an output factor of the approach of these firms towards the sustainability issues faced. The different theories on these issues and approaches possible are discussed in the following section. Theory Review After defining the sustainability issues an oil company can face, the different theories setting out the approaches of firms to these issues are discussed. These possible approaches to sustainability issues are mainly based on the perceived role of the organisation. Theories on the social responsibility of the firm imply different responses to these sustainability issues. The concept of corporate social responsibility (CSR) is important in this field. Different viewpoints of CSR exist and it is often used as an umbrella term for different theories and practises. This research paper adopts the general definition of CSR given by Frynas (2009) that recognises the following: (a) that companies have a responsibility for their impact on society and the natural environment, sometimes beyond that of legal compliance and the liability of individuals; (b) that companies have a responsibility for the behaviour of other with whom they do business; and (c) that business needs to manage its relationships with wider society, whether for reasons of commercial viability or to add value to society. In the petroleum refining industry there



has been an increase in CSR approaches and communications towards society. Yet, the extent and form of CSR differs between organisations in the same industry. The different theories, models, and strategies towards sustainability issues will be discussed in this section.

First, the agency theory perspective states that social responsible behaviour should not be part of firms practices and sees this as the responsibility of the government. According to Friedman (1970), it is a misuse of corporate resources and implies an agency problem within the firm. Financial resources should increase shareholder value or be reinvested in the firm. The agency theory perspective implies that a companys response towards sustainability issues faced by the petroleum industry should be minimal and not extend regulations. Secondly, institutional theory states that institutions shape consensus within the firm on sustainable behaviour (Jones, 1995). This theory finds institutions to be key in a firms strategy development (Tsai et al., 2005). Firms need a certain level of legitimacy to survive and therefore adapt to social norms of its business environment. According to this perspective, firms approaches to sustainability issues will become similar in a given industry. This because similar firms face similar social expectations. The emphasis of this theory is on conformity to institutional context and no choice behaviour (Frynas, 2009). The stakeholder theory of Freeman (1984) is a third perspective on CSR. It states that a firms response should not only be to the shareholders, but also to other stakeholders (e.g. workers, customers, suppliers, and local community). A stakeholder is defined as any group or individual who can effect or is affected by the achievement of organisations objectives (Freeman, 1984, p. 46). The stakeholder theory is also mentioned by Frynas (2009) as it can explain different responses of firms to social pressures in the same industry. CSR activities are predicted by external pressures from stakeholders and their importance. The importance of a stakeholder is defined by the firms resource or power dependence. From this perspective a firm is seen as dependent on its stakeholders and as having limited choice in behaviour. Therefore, the approach towards sustainability issues in this view is to adapt firm strategies to stakeholders that they are most dependent on for resources (e.g., consumers, suppliers) or stakeholders with the most power (e.g., governments, institutions).

While stakeholder theory and institutional theory suggest limited or no choice behaviour of firms, there are also several theories suggesting a more active approach towards sustainability issues. The theory of the firm applies the classical economic theory to CSR as a function of supply and demand for social and environmental activities in the market place. From the perspective of game theory CSR is seen as a trade-off between present costs and future benefits. The right level of CSR for a firm can be determined by cost-benefit analysis (Frynas, 2009). It is also used to attract socially responsible consumers and can be part of a firms differentiation strategy (McWilliams, 2005). Another important theory suggesting a more active approach towards sustainability issues is the resource based view of the firm. It suggests that firms can create sustainable competitive advantage by engaging in CSR (Hart, 1995). Also, specialised skills or capabilities arise from investment in CSR. Several implications of this approach are mentioned by McWilliams (2005). Firstly, CSR can be an integral element of a firms differentiation strategies and can be used for reputation building. Secondly, it is possible to predict patterns of investment across firms and industries when applying


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resource based view to CSR. Yet, CSR-based strategies do not always lead to advantages or increased returns when it is imitated by competitors or when competitive strategies are observable (McWilliams, 2001). Firms can also use CSR strategies politically. For example, to use government regulations to impose CSR on competitors who do not yet use the appropriate technology and therefore raising their costs compared to the initiating firm (McWilliams, 2005). Austrian economics is presented as an alternative perspective towards CSR by Frynas (2009). It regards individual action, not external factors, as fundamental to decision-making. Social and environmental issues are seen as opportunities for the firm to engage in entrepreneurial behaviour to shape and change institutional structures. This perspective focuses on future opportunities instead of current demands. By engaging in active entrepreneurship future investments are identified (Mises, 1963). It recognises that information is interpreted differently by different actors and can therefore explain strategic choice and outcome (Lewin et al., 1999). In its approach towards sustainability issues entrepreneurial behaviour is suggested to change the business environment strategically. Finally, the stewardship theory on CSR poses a proactive approach towards sustainability issues (Donaldson, 1991; McWilliams, 2005). It sees the responsibility of the firm as to do the right thing regardless of the affect on firms financial performance. This implies to go beyond regulations and implement sustainable measures that benefit all stakeholders. This approach can be at the expense of shareholders and firms profitability.

Besides the main theoretical perspectives explained so far, there are other leading concepts that give more insight in the possible approaches for firms towards sustainability issues. The three-tier model developed by Sethi (1975) has been an important contribution to the theory. The first tier is social obligation (a response to legal and market constraints) and is comparable with the concept of licence to operate. The second tier is social responsibility (congruent with societal norms) and recognizes and internalizes societal expectations. The third tier is social responsiveness (adaptive, anticipatory and preventive) and can be described as stakeholder engagement. The companies operating at a third tier level create economic and social value at the same time and engage effectively with external stakeholders (Wheeler et al., 2001). Multinational firms dealing with sustainability issues can adopt each of the three tiers described and act accordingly. Another three dimensional model prevailing in the assessment of sustainability issues is the triple bottom line. It consists of an economic, social, and environmental (biophysical) dimension. The ideal of sustainable development is to create win-win solutions for all three pillars. Yet according to Sadler (2000), trade-offs are unavoidable in practise and lies at the core of decision-making. Several approaches are possible in dealing with the uncertainty that arises from these dilemmas faced. Sensitivity analysis establishes best and worst case prediction. Adaptive management seeks more flexible options to deal with uncertainty. Scenario analysis considers the different possibilities and broadens a firms perspective. The precautionary approach requires is more strategic (Hacking, 2008). As mentioned in the previous section the trade-off perspective neglects the interdependence of the three pillars. The three dimensions can also be seen as complementary and a synergetic approach can be adopted. This process is called stakeholder symbiosis, where value is created in exploring how a firm can achieve benefits for all (Crews, 2010). Continues dialogue with each stakeholder is



needed to address cross-pillar concerns. Examples, such as representation on the board of directors from each community and among senior management, are given by Crews (2010) to create this dialogue in practise. Also, creating an organisational culture where sustainability is a core value, by setting codes of ethics and making the commitments of the firm explicit to all stakeholders, contributes to an integrative approach towards sustainable development (Crews, 2010).

Colbert and Kuruez (2007) found that companies generally have two approaches towards stakeholders. Sustainability issues are considered as risks or as opportunities. The risk management approach considers the three pillars mentioned above as separate and mutually exclusive. There is a need to balance trade-offs and mitigate risks. It is often considered in the context of reputation management and brand value (Boele, 2001). On the other hand sustainability issues can be seen as an opportunity to adopt an inclusive stakeholder view and create broad value for society (Crew, 2010). Building brand identity and trust and maintaining committed relationships with stakeholders can have a positive effect on a firms sales and overall performance (Reicheld, 1996). Different strategies are formed according to the perspective adopted by the firm. Baumgartner (2010) distinguishes four strategies that can be adopted by a firm according to the level of maturity towards sustainability. The introverted strategy takes a risk mitigation perspective and focuses on conformity and compliance to rules and guidelines related to sustainability. The extroverted strategy emphasizes legitimization and can be divided into conventional and transformative. A conventional extroverted strategy focuses on external presentation of sustainability. It communicates its efforts to differentiate itself from competitors and increase credibility. A transformative extroverted strategy has a higher maturity level towards sustainability than the conventional approach. It aims to be a driver for corporate sustainability and therefore gain higher credibility. The conservative strategy focuses on cost efficiency and well defined processes. Measures are derived in order to analyse corporate sustainability. A visionary strategy is divided into conventional and systemic strategies. Both strategies have a high level of commitment towards sustainability. Conventional strategies focus mainly on its impact on the market, while systemic strategy combines outside-in and inside-out perspectives based on internalization and continues improvement inside the company (Baumgartner, 2010). These four strategies adopt a risk or opportunity perspective and give a practical approach towards sustainability issues. Finally, a quantitative approach to risk management is suggested by Bekefi (2008). Social and political risks have been hard to measure and have mainly been discussed in the footnotes of company reports. Failure to integrate these risks can have a negative effect on earnings, shareholder value, and brand value. The first step in this approach is to identify the most relevant issues by learning from the past, learning from others, and scenario planning. Next, a nine step process is presented to measure social and political risks for inclusion in the return on investment (ROI). The last step is managing social, political, and reputational risk by insuring against these risks when possible, avoiding risks, mitigating risks, or a combination. It is noted that risks can also be seen as an opportunity to innovate and can be managed to increases growth (Bekefi, 2008).

The main theories and strategies towards sustainability issues have been discussed so far to give insight to the possible approaches for


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companies facing these issues. In practise different approaches are suitable for different issues and a distinction between global and local issues can be made. A distinction can also be made between global and local CSR. The key difference is the community that demands it. This is stated by Husted (2006, p. 840) as: local CSR deals with the firms obligations based on the standards of the local community, whereas global CSR deals with the firms obligations based on those standards to which all societies can be held. The theories and approaches presented in this section can be adopted at both levels and needs to be assessed on a case to case basis. The aim of this paper is not to discuss the accuracy of the different theories, but to give an overview of the possible approaches that have emerged from the literature. The theories and approaches discussed are summarized in Table 1. This can be used to assess company specific behaviour in managing sustainability issues and will be applied to Shell in the following section.

Case Study Shell Royal Dutch Shell plc. is an oil and gas company that was created in 1907 by a merger between a Dutch a British petroleum company. It is headquartered in The Hague (Netherlands) and has a registered office in London (United Kingdom) (Shell, 2011). Shell is the second largest company in the world, after Walmart, according to its revenue over 2010 of 285 129 million dollars. Its profits in 2010 were 12 518 million dollars and in this regard it is the third largest company in the petroleum refining industry, after Exxon and BP (Fortune, 2011). So far Shell is operating in 90 different countries. Due to the nature of its operations Shell faces different sustainability challenges (Shell, 2011). The current approach adopted by Shell and its performance in dealing with these issues is discussed in this case study. Firstly, the general approach as communicated by Shell towards sustainability issues is described. Next, its actual approach is assessed by evaluating Shells behaviour over time. Finally, the companys performance on these issues is evaluated by both internal and external measures. General Approach Shell stresses economic, environmental, and social responsibility in their business practises and has several approaches in communicating its core values of honesty, integrity, and respect for people. The Business Principles adopted in 1997 integrates short and long term interests in the decision making process. Shell recognizes that by contributing to sustainability it enhances its business values, appeals to customers, business partners, and employees, and reduces operational and financial risks (Shell, 2011). All Shell companies are expected to comply with the eight General Business Principles and Shell aims at influencing their business partners to do the same. The principles focus on long-term profitability, fair competition, business integrity, responsible political activities, standards for health, safety, security, and the environment, manage social impacts, dialogue with stakeholders, and compliance with regulations (Shell, 2011). Another approach towards communicating its values is the code of conducts set. It clarifies the standards set for the behaviour expected from its employees. It covers areas such as corruption, trade, health, safety and the environment, and safeguarding information and communication. Also, a code of ethics is set for executive directors and financial officers of Shell to govern how it conducts its



affairs. A global help line is set up for all stakeholders to report non-compliance with its code of conduct. Next to Shells own initiatives it also voluntarily supports other initiatives on human rights, transparency, and bribery. Shell has all of the following CSR policies and multi-stakeholder initiatives in place; reductions in CO2 emissions, community development projects, government revenue transparency, United Nations Global Compact (UNGC), voluntary principles on security and human rights, Extractive Industries Transparency Initiative (EITI), and World Business Council for Sustainable Development (WBCSD). This makes Shell one of the leading companies in its industry on its approach towards sustainability issues (Frynas, 2009).

Table 1 Approaches Towards Sustainability Theories Agency theory

Institutional theory Stakeholder theory Theory of the firm Resource based view Austrian economic Stewardship theory

Not the responsibility of the firm (shareholder value) Conform to social norms (no choice behaviour) Adapt to most important stakeholders (limited choice) Depends on cost-benefit analysis (classic economic theory) Create sustainable competitive advantage (differentiation) Entrepreneurial behaviour (change business environment) Do the right thing (beyond regulations)

Models Three-tier model Triple bottom line

Social obligation (first tier) Social responsibility (second tier) Social responsiveness (third tier) Issues are seen as... Trade-offs Complementary

Strategies Risks versus opportunities Introvert versus extrovert Conservative versus visionary Quantitative approach Global and local CSR

Mitigating risks or Creating broader value Conformity to rules or Create legitimacy Cost efficiency or High level of commitment Inclusion of risks in ROI Standards of local communities or Global standards

The general approach of Shell in implementing practices that promote economic, environmental and social sustainability starts with adopting standards and principles. As mentioned by Watts (2002), these principles of sustainable development grew in part of its practices of scenario planning. This is described as: looking at possible economic, business, environmental, and political changes to assess their possible impact on the company and its best potential reaction (Fletcher, 2002, p. 2). The standards and principles set help the company anticipate future problems and protect its reputation by balancing economic, environmental and social issues (Watts, 2002). Stakeholder engagement is key in Shells approach towards sustainability


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issues. This is achieved by creating a dialogue with moderate NGOs, such as Earthwatch, to assess the changing demands in society (Shell, 2011). Finally, performance on sustainability issues is monitored. Shell defines social performances as an ongoing process that incorporates all the different ways Shell operations contribute positively and negatively, directly and indirectly to the communities and societies where Shell operates (Moser, 2005: 1). Shells strategy is dominated by rational thinking and this can be seen in its reliance on control systems. These systems contain well separated management accountabilities and performance metrics (Boele et al., 2001). Its progress is communicated to stakeholders in sustainability reports each year since 1997. To select the content of its reports it applies the selection matrix to the different issues depicted in figure 1. External and internal information is used during the selection procedure.

Figure 1 Selection Matrix (Shell, 2011) Shells sustainability reports are in accordance with the external guidelines of the Global Reporting Initiatives (GRI). An external review committee evaluates the report on its relevance and responsiveness to stakeholders. This committee consists of six independent experts (Shell, 2011). Shell recognizes the strong business case for enhancing its social performance and includes the notion of risk management. It gives the company a license to operate, reduces costs, gives access to project finance, and enhances its reputation (Boele et al., 2001). Practise Shells approach towards sustainability issues changed from 1995 onwards. Former chairman Phillip Watts (2000) declared the changing point for the company being the case of Brent Spar and the death of Ogoni leader Ken Saro-Wiwa. The company went through some important alterations from then on. In 1996 Shell started to engage in a stakeholder dialogue with different organisations like Amnesty International. It also changed its Business Principles in 1997 to its present form. In 1998 its first statement on social and environmental performance was released. In this period Shells strategy shifted from internal to external. It has gone towards a more emergent and incremental approach of strategy formulation. The proactive approach towards sustainability issues adopted was unique in that time (Boele et al. 2001). In encouraging a more accountable and dynamic set of relationships with key stakeholders Shell has placed itself in a leadership position among



corporations that are moving beyond notions of license to operate (Carroll, 1999).

A well-known example of Shells approach towards sustainability is given by the case of Nigeria. Shells operations in Nigeria account for 14% of their world-wide oil production and only 7% of total profits. It considers their operations in Nigeria to be arguably Shells largest and most complex exploration and production venture outside North America (Shell International, 1995). Shells commitment towards its principles and codes of conduct can be seen in the companys behaviour. According to Boele et al. (2001), Shell has gone beyond compliance in numerous ways in the Nigeria case, but has not always been effective. Despite large investments in community relations in this area the perception of the Ogoni community has not changed (Boele et al., 2001). As mentioned before, the Business Principles state to create more value for shareholders, society, and the natural environment. Yet, Shell has been more successful in driving out inefficiencies (like gas flaring) in accordance to the business case for sustainability. In the end, creating more sustainable shareholder value. Therefore, Shell has been accused of not balancing their practises with their principles (MOSOP International Secretariat). Boele et al. (2001) tested the level of integration of Shells business strategy with sustainability. It found that on corporate level it embraces notions of market sensitivity and internal and external accountability at an exceptional level. Yet, the challenge remains in translating this approach to sustainability and stakeholder responsiveness at business unit level in Nigeria (Boele et al., 2001). Wheeler et al. (2000) also states that there is a disconnect between Shells CSR policy and economic and operational reality. NGOs place a lot of emphasize on the Nigeria case and the inconsistencies with Shells practices and their communicated values. This can damage the reputation of the company. As Sharp et al. (1999) stated it: Brent Spar was a big wake-up call. Nigeria keeps us awake all the time Friends of the Earth is one of the largest NGOs following Shells behaviour over the years. After the release of Shells sustainability reports in 2002 and 2004 Friends of the Earth released a complementary report on Shells performance. The 2004 report states that despite Shells public commitment to CSR and promises to communities little has changed in its practices. Examples are given of Shells effect on the environment and societies around the world and the unaccountability for their actions (FOE, 2011). This report is a useful complement to Shells own sustainability reports, because a different perspective is given on Shells approach. Yet, it is still a subjective measure of Shells performance. Therefore in the following part more objective internal and external measures are discussed to assess Shells performance. Performance Shell To analyse the performance of Shells approach towards sustainability issues data on its social and environmental progress will be evaluated. Data on the social and environmental performance of Shell is retrieved from its Sustainability Report 2010 and reflects the years 2001 till 2010. All non-financial data are on a 100% basis for companies and joint ventures where Shell is the operator. There are limitations to the accuracy of internal environmental and social data. Yet, the data is subject to controls and the sustainability reports are reviewed by an external committee every year.


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Also, external measures will be discussed in this section that assesses the companys overall performance on sustainability issues and reputation.

The elements that are measured to asses Shells environmental performance are greenhouse gas emissions, flaring, energy intensity, acid gases and VOCs, ozone-depleting emissions, spills and discharges, waste disposal, and freshwater use. Data on all of these elements are presented in Appendix I. The developments in direct greenhouse gas emissions, operational spills, and waste disposal are further elaborated on. Figure 1 shows that the amount of direct greenhouse gas emissions is 25% lower compared to the 1990 level. In 1998 a voluntary target was set 5% lower than the 1990 baseline and has been met as well. A 9% increase is seen in 2009. The reason for this was business growth across the company.

Figure 2 GHGs Emission (Shell Sustainability Report, 2010)

Operational spills have decreased considerably from 275 in 2009 to 193 in 2010. Yet, the volumes of the spills have increased as can be seen in Figure 2. The operational spills in Nigeria have a major impact in the total volume of operational spills. This figure excludes the sabotage and theft in Nigeria, which remains a significant cause for spills. Overall the volume of operational spills in the world (excluding Nigeria) has dropped from 2001 to 2010.

The total waste disposal can be divided into hazardous and non-hazardous and are presented in Figure 3. The peak in 2006 has significantly declined in 2007. Overall there has been an increase in total waste disposal over the recent year. Yet, this can be due to the growth of business.

The elements measured to assess the social performance of Shell are fatalities, injuries, illness, security, gender diversity, regional diversity, staff forums and grievance procedures, child labour, contracting and procurement, integrity, and social investment. Data on all of these elements are presented in Appendix II. Child labour prevention procedures, integrity, and social investments will be further elaborated. Data to measure the percentage of total countries implementing procedures to prevent child labour are obtained by an internal survey completed by the senior Shell representatives in each country. Figure 4 shows that child labour preventions procedures for its own



operations, contractors, and suppliers have almost reached a level of a 100% in recent years.

Figure 3 Operational Spills (Shell Sustainability Report, 2010)

Figure 4 Waste Disposals (Shell Sustainability Report, 2010)

Figure 5 Child Labour (Shell Sustainability Report, 2010)


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Integrity is measured in three different ways and is shown in figure 5. First, through code of conduct violations. This decreased till 2009 and then increased from 165 to 205 in 2010. Shell states that it has ended its relationship with 77 employees and contractors as a result of this. Secondly, integrity is measured by the number of contracts cancelled due to incompatibility with Business Principles. This has decreased in recent years. Thirdly, integrity is measured by joint-ventures divested due to incompatibility with Business Principles. This not happened from 2001 till 2010.

Figure 6 Integrity (Shell Sustainability Report, 2010)

Figure 6 shows the amount of social investment by Shell in millions of dollars. Lower-income countries are countries that according the UNDP Human Development Index 2010 have a gross domestic product (GDP) of less than $15 000. The social investment in these countries has increased to 61$ million in 2010 compared to 54$ million in 2009. The estimated voluntary social investment has decreased from 132$ million in 2009 to 121$ million in 2010. This can be explained by investments in countries such as Nigeria and Brazil that has gone up and investments in countries such as Canada and the US that has gone down.

A comparison of Shells social and environmental performance to its competitors can give a better understanding of the data presented. Yet, it can be concluded so far that Shell is increasingly committed to sustainability and puts effort into managing the different elements compared to previous years. The petroleum refining industry does not have an excellent reputation in dealing with sustainability issues compared to other industries. This is also due to the nature and complexity of its core business. To gain more insight into Shells overall performance in dealing with sustainability issues compared to its major competitors several important sustainability indices and company rankings will be discussed.



Figure 7 Social Investments (Shell Sustainability Report, 2010)

First, the Dow Jones Sustainability Index which performs company assessments on sustainable practices. It is a credible manner to analyse a firms performance on these aspects. An assessment on the three sustainability dimensions, economic, environment, and social, according to a set of criteria is made. Then companies are ranked within their industry and the sustainable leaders are selected for the Dow Jones Sustainability Index (DJSI, 2011). Shell has been included in the Dow Jones Sustainability Index since 1999 as remaining in the top 10% of the oil and gas industry. In 2010 Shell was not included. Another index regarding companys sustainable practises is FTSE4Good Index Series. This index measures the performance of companies in meeting globally recognised corporate sustainability standards (ftse, 2011). To be included companies must meet the indexs criteria on environment, relationship with interested parties, supply chain labour, bribery, and human rights. Shell has been included in this index every year since its start in 2001. Third, the GS SUSTAIN ESG developed by Goldman Sachs is defined as: a unique global equity strategy that brings together ESG (environmental, social, and governance) criteria, broad industry analysis and return on capital to identify long-term investment opportunities (goldmansachs, 2011). Companies are rated on 25 indicators within categories such as corporate governance, leadership, labour, communities and investment, and environment. Shell was ranked second within the energy industry in 2010 on best managed company around the globe that will succeed on a sustainable basis (goldmansachs, 2011).

The World Most Admired (WMA) companies, by Fortune Magazine ranks companies on key reputation attributes rated on scales from 0 to 10. The attributes included in this program are; leadership, ethics and governance, customer focus, quality, social responsibility, performance, management quality, and employee skills. This ranking is commonly used by academics and practitioners to get an overall understanding of the perceptions of stakeholders and assesses a firms reputation (van Riel et al., 2007). However, there are several limitations; a financial bias; a stakeholder bias; and a lack of theory behind attribute selection. Also, the attributes are treated as if they are independent from one another. Fortune recognizes this and no longer provides the single attribute ratings (van Riel et al., 2007). In 2006 and 2007 Shell ranked 4th most admired company within the petroleum


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refining industry. In 2008 and 2009 Shell ranked 3th most admired company. In 2010 Shell ranked 2nd most admired company in the petroleum refining industry. Thus, according to Fortunes ranking Shells reputation has improved in recent years. To put this into perspective and example of BP as one of the main competitors of Shell is given. BP ranked 4th most admired company before the oil spill in 2010 and after it ranked 16th out of a total of 16 (Fortune, 2011). This shows the impact of a companys behaviour and approach towards sustainability issues and the effect on its reputation.

Reputation can also be measured by KLD ratings consisting of AAA (highest) to C (lowest). KLD objectively rates firms on nine dimensions, five of which we will discuss in this section. Each dimension provides a score for strengths and concerns, which is averaged to compute the firms final score. The objectivity of these ratings is high in contrast to some of the other indices and rankings mentioned. It is therefore a reliable measure of a firms reputation (Turban et al., 1996). The overall rating for Shell in 2011 is CC and is depicted in table 2 below. A summary of the company report can be found in appendix III. Table 2 KLD Global Socrates Summary 2011 Shell Industry Overall CC Environment CC CCC Community & Society CCC CCC Customer CCC BB Employee & Supply Chain CC BB Governance & Ethics A A

The lower score on the environmental dimension is due to the companys interest in energy intensive projects and serious pollution incidents and controversies at Shells worldwide operations locations. The anti-competitive practices of Shell contributed to the lower score on the customer dimension. Yet, Shell outperformed the industry on product quality and safety. Shell also outperformed the industry on the supply chain and workforce diversity attributes. Shell underperformed on employee safety mainly due to employee kidnapping in Nigeria and health and safety problems in its North Sea operations. On the governance and ethics dimension the company outperformed the industry on sustainability reporting & engagement, governance structures, and political accountability. The rating summary given by KLD states that: Shell faces serious environmental problems and ongoing community protests at many of its global operating sites. While the company has demonstrated an understanding of the serious issues it faces by implementing programs and addressing issues at a systemic level, its history of past controversies and failure to adequately resolve legacy issues has undermined its current ESG record (KLD, 2011).

The environmental and social performance of Shell shows progress on the different elements discussed. Shell is also included in several indices regarding sustainability except the Dow Jones Sustainability Index 2010. The Fortunes WMA ranking also show progress in Shells overall reputation in recent years. Yet, it can be concluded that despite the efforts made so far by the company its performance is not adequate. The KLD report shows that



there is a long way ahead and Shells communicated principles and ethics need to be implemented more thoroughly in worldwide operations. An analysis of Shells current approach and performance with the different theoretical perspectives will be given in the next part.

Analysis The current approach adopted by Shell towards sustainability issues can be identified by several theories and perspectives. Both agency and stewardship theory are not applicable to Shells approach. Shell is going beyond regulations set by the government. Yet, it does not do the right thing in all cases. The Austrian economic perspective is also not applicable to Shells approach since it does not see sustainability issues as opportunities to shape and change institutional structures. Rather, it sees these issues as risks and tries to mitigate for them. Institutional theory has a limited purpose in assessing Shells approach towards sustainability issues. Shell has indeed adapted to changing social norms. Yet, it has been proactive in its communication towards and collaboration with stakeholders and has deliberately chosen its strategies. This is not congruent with the institutional theory perspective which implies no choice behaviour. Also, the resource based view can only explain Shells approach to a certain extend. Shell aims at differentiating itself from competitors by using CSR as a source for competitive advantage. Yet, its lack of implementation in practices eliminates this possibility. The case study of Shell shows a disconnection between its communicated approach and actual approach towards sustainability issues faced by the company. Its communicated approach is most in line with the stakeholder theory perspective. Shell recognizes its responsibility to all stakeholders and not just shareholders. The changes made in its approach since 1995 are mainly due to pressures from external stakeholders that are important to the company. It has moved from the lowest tier of social obligation to the highest tier of social responsiveness mentioned by Sethi (1975). It suggests to be adaptive, anticipatory, and preventive in dealing with sustainability issues. An important mechanism for Shell in achieve this is scenario planning. It also engages in a continuous dialogue with its stakeholders to assess the approach needed towards sustainability issues. Shells communications show commitment to an integrative approach and creation of an organizational culture where sustainability is a core value (Crews, 2010). This is affirmed by the set of code of ethics in place and its explicit commitment to its stakeholders. Shell states that by being proactive it aims to create value for society as a whole. As mentioned by Carroll (1999, p. 9), the more accountable and dynamic sets of relationships with key stakeholders places Shell in a leadership position among corporations that are moving beyond notions of licence to operate. This will be an advantage to Shell in building stakeholder loyalty and trust internationally. The actual behaviour of Shell towards sustainability issues shows a different approach. It is most in line with the theory of the firm (e.g., classical economic theory). The level of CSR activities is determined by a cost-benefit analysis (Frynas, 2009). Present costs are incurred by engaging in CSR. Yet, by differentiating itself from competitors this can lead to future benefits. This is an instrumental approach and does not show full


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commitment towards sustainable behaviour as is communicated by Shell. Its approach towards sustainability issues is mostly technical and rational and can be seen by the control systems in place. Shell identifies the most relevant issues by engaging in stakeholder dialogue and using scenario planning. The control systems in place are then used to quantify the risks for the company. Shell insures against these risks by avoiding them, mitigate them or a combination. Therefore, the quantitative approach of Bekefi (2008) is also applicable to Shells actual approach. This clearly shows a risk perspective towards sustainability issues and an approach that considers these issues as trade-offs. Even though, Shell takes a proactive approach it believes it is the responsibility of the government to create a level playing field and measures should be effective and economically feasible. The difference in Shells actual and communicated approach shows its focus on external presentation of sustainability to create legitimacy. It communicates its efforts to differentiate itself from competitors and increase credibility. This can be identified as the conventional extroverted strategy mentioned by Baumgartner (2010). The disconnect mentioned also shows the recognition between global and local issues by Shell. Therefore, its global communication on these issues and operational reality differs. The internal measures of sustainability assessed in the previous part show progress on several aspects of environmental and social performance. It shows Shells increased commitment towards implementing sustainability in its operations. Yet, this is mainly based on the business case for sustainable development that poses a win-win situation for all stakeholders involved. More efficient and sustainable operations can create shareholder value and to a certain extent stakeholder value. It also achieves a licence to operate for the company. Shell has also internalized almost all existing CSR and multi-stakeholder initiatives and therefore shows proactive behaviour (Frynas, 2009). Yet, a pro-active approach as communicated by Shell is not yet seen in the practise of sustainability issues that are more complex. Also, the reputation of Shell has increased in recent years as can be seen by the external measures assessed. It can be concluded that Shells communicated approach has been the main cause for these improvements. The inconsistency with Shells actual approach in more complex environments shows that the changes made in its communications has been mainly due to bad reputational effects and external pressures. While the overall reputation of Shell has improved in recent years it is still not very good and performs poorly on several aspects.

The overall approach of Shell shows an understanding of the sustainability issues facing the company and the measures needed to increase sustainable behaviour. Shell recognizes its responsibility within these issues and has internal and external accountability mechanisms in place. Yet, its past approach and still existing controversies undermine its communication efforts. Despite Shells efforts to improve social and environmental performance, its failure to resolve main controversies around its Nigerian operations affects its reputation and decreases trust from society. It needs to take advantage of the mechanisms in place to create opportunities on operational level (Boele et al., 2001). It can be concluded that Shell has well-articulated strategies, systems and process in place to describe its commitment to sustainability and CSR. Yet, overall it does not have a very good reputation. There is lack of consistency between corporate leadership and local leadership and operational behaviour. The challenge for



Shell is to resolve the inconsistencies between its communicated approach on international level and its local operational behaviour. The communicated and actual approach of Shell towards sustainability issues should be more aligned to enhance its reputation and gain legitimacy and trust from society. Conclusion The aim of this paper has been to create an overview of the possible approaches towards sustainability issues as emerging from the literature. The interconnected nature of sustainability issues shows the need for an integrated approach towards them. The case study of Shell shows that to create trust in society a communication strategy alone is not enough. It should be accompanied with stronger commitment and implementation in practice. More research is required to assess the impact of the different approaches on a companys overall performance and reputation in the petroleum refining industry. A comparison of Shell with other competitors in the same industry will contribute to a better understanding of the effects of a firms behaviour in dealing with sustainability issues. The focus of this paper has been on the approach and mechanisms adopted internally by a company. Including external mechanisms that influence a companys approach towards sustainability issues can also be significant. Society increasingly demands firms to take responsibility for all stakeholders involved and it is therefore important to have a better understanding of the different approaches possible and their effectiveness. References About GRI. Global Reporting Initiative, (2011). Retrieved on 11 April 2011

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a case study of shell

Documents

handling sustainability

main issues

concept of sustainability

clear approach

shells approach

petroleum refining industry

public pressure shell

brent spar case