Shell scandal raises reservations about CSR

May 01, 2004

The Anglo-Dutch oil major has been at the forefront of the corporate social responsibility and sustainable development debate since the movement’s explosion in the late 1990s. Ellen West asks what Shell’s reserves crisis tells us about CSR’s poster child and – more importantly – what it reveals about the CSR movement itself

The face of Sir Philip Watts still smiles out from the Shell Report 2002 on the company’s website along with the words, “in these difficult times it becomes even more important that Shell companies live up to the highest standards . . .”

According to Sir Philip’s Chairman’s Message: “the corporate scandals of the past year underlined that good financial performance must be accompanied with the highest standards of governance.” Those words ring hollow in the wake of Shell’s admission in January 2004 that it had overstated its proved reserves on Sir Philip’s watch.

The most damaging revelations, which led to Sir Philips’ resignation in March 2004, were in a report by Davis Polk & Wardwell, acting as independent counsel for the Shell Group Audit Committee. The report details the efforts of Walter van de Vijver to raise the issue of the overstated reserves, beginning in mid-2001 when he succeeded Sir Philip as CEO of Shell’s Exploration & Production unit. An explosive email from Mr. van de Vijver to Sir Philip in November 2003, captures his frustration at the Chairman’s refusal to confront the issue after more than two years:

“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.”

We might shrug this off as yet the latest in a series of corporate scandals involving dishonesty by senior executives if it weren’t for the fact that Shell and Sir Philip have been such visible champions of corporate social responsibility (CSR). Sir Philip was the chairman of the World Business Council on Sustainable Development in 2002-2003, a co-author with Stephan Schmidheiny and Charles Holliday of Walking the Talk, The Business Case for Sustainable Development and a frequent speaker on corporate social responsibility at conferences around the world. Under Sir Philip’s leadership, and that of his predecessor, Sir Mark Moody-Stuart, Shell had played a leadership role in the development of sustainability reporting and corporate social responsibility.

Not the first time

The last major corporate player in the field of corporate social responsibility to be hit by scandal was Goran Lindahl, the former president and chief executive of ABB. Lindahl was serving as a special adviser to United Nations Secretary-General Kofi Annan, with responsibility for recruitment of companies to the UN Global Compact, when a scandal erupted over pensions paid to him and former ABB Chairman Percy Barnevik.

Mr. Barnevik had received a tax-free, lump-sum pension worth $87 million when he stepped down as the chief executive of ABB in 1996. Mr. Lindahl, Mr. Barnevik’s successor as CEO, received a severance and pension package worth $50 million when he left the company at the end of 2000.

Although there were no allegations of illegal behavior, the company’s board was unaware that the two men had arranged such substantial pensions for themselves. Mr. Barnevik was forced to resign as Chairman and make restitution of part of the money received. Mr. Lindahl’s pension was reduced and his contract with the United Nations was allowed to lapse in February 2002, after he had been with the Global Compact for a little over a year.

“Where is the outrage?”

Apart from activist group Corporate Watch, which called for Mr. Lindahl’s resignation from the UN Global Compact after the ABB scandal erupted in February 2002, there was little comment on the incongruity of a man campaigning for corporate responsibility while walking off with a sizeable pension without board approval. There were a handful of articles about the irony of Mr. Barnevik, long a champion of improved corporate governance, arranging an $87 million pension for himself. The CSR world, however, remained mostly silent.

Silence seems to be the overwhelming response to the new allegations against Sir Philip Watts. An article in The Guardian reported on a conversation with the director of the Shell Foundation, Kurt Hoffman, in which he admitted that the reserves scandal had left the company open to accusations of hypocrisy. Hoffman was quoted as saying:

“The bigger problem with CSR is people tend to focus on the negatives – responsibility and guilt – rather than concentrating on how to harness more corporate power to bring social change.”

John Elkington, in his weblog entry for March 13, 2004, notes in regard to the situation at Shell:

“It will be interesting to see what impact all of this will eventually have on the corporate social responsibility and sustainable development agendas, which Shell had embraced so wholeheartedly . . . However close in you get to a company, and Sustainability has been working with Shell since 1997, it’s impossible to know everything that’s going on.”

It is hard to accept that the field does not call for a little more self-reflection when one of its most visible proponents seems to have behaved contrary to the very principles on which the field of corporate social responsibility was built.

What does it mean?

  • What were they thinking? A cynic might say that the Shell and ABB scandals prove that CSR is really nothing more than a sophisticated exercise in public relations. In this view, CSR provides relatively easy cover for executives whose own behavior would not hold up under scrutiny. It is a more personal version of the “greenwashing” or “bluewashing” that many NGOs claim is the real motivation for companies’ espousal of CSR.

In some ways, however, it is more worrying if Sir Philip and Mr. Lindahl didn’t make any connection between their roles as CSR champions and their own personal behavior. How deep a commitment could they have had if they didn’t understand that personal ethical behavior and adherence to proper corporate governance are the very foundations of corporate social responsibility? What does that say about how well the CSR movement has managed to convey its core values?

  • We won’t get fooled again? Whilst we will never really know what relationship, if any, there was between personal ethics and CSR in the minds of these executives, we can reflect on what lessons the scandals might offer about the field of corporate social responsibility.
  • Are we aiming too high? A common refrain at CSR conferences is that the movement will really take off only when a critical mass of senior corporate executives displays sufficient leadership on CSR. Even the most committed chief executive, however, will devote only a fraction of his or her time to CSR.

The reality is that senior executives are overwhelmingly concerned with their companies’ earnings results and share prices, which directly affect their own compensation. For real commitment to CSR, a company must make a broad and deep range of management

  • Are we too polite? The CSR world is swimming in events and initiatives that compete to attract chief executives as speakers or signatories, with the World Economic Forum and the UN Global Compact two of the more notable examples. Most of these are polite gatherings of peers in which there is no real challenge to those professing support for CSR at the highest levels within companies.

The CSR movement seems instead to be so grateful for the notice and support of these executives that we aren’t willing to risk asking tough questions.

  • Are we too amateur? As a field, we don’t understand business well enough. How many of those who have repeatedly cited the recent corporate scandals in speeches and articles in the past year could actually explain exactly what each company did wrong? How many could intelligently read SEC filings – a 10-K, a proxy statement, a merger document and understand them? By and large, corporate governance and business ethics have been the ugly stepsisters of the corporate social responsibility movement.

Most CSR practitioners don’t seem to want to spend time mastering the intricacies of securities regulation or the proxy voting process. We won’t be taken seriously by focusing on CSR and sustainability reports in a vacuum, without acquiring a basic understanding of companies’ business operations and financial performance.

Corporate Citizenship Briefing, issue no: 75 – May, 2004

Ellen West is an independent CSR consultant based in New York. Email: