Rethinking the Foundations of Global Corporate Success

Corporate environmental sustainability costs). In the context of formal management systems and procedures, the firm may adopt externally developed tools where possible (e.g., the climate change impact measurement tools, developed by reputable audit companies, or the standardized trading processes introduced by intermediaries as in the case of carbon emission trading schemes). Finally, in the realm of strategic planning, senior management may monitor external developments on environmental mitigation policies and competitor strategies, but outsource all non-crisis environmental stakeholder management where possible (e.g., lobbying with industry associations). Especially given the sometimes high country and regional specificity of government environmental policies, the above strategy of outsourcing, while not a conventional FSA, will give the MNE flexibility, thereby reduc- ing bounded rationality and bounded reliability challenges in the environmental strategy sphere. It is indeed sometimes difficult to anticipate correctly when and how vote-needing politicians in several countries around the world will introduce specific, new environmental regulations, and what these regulations might entail substantively. In the face of this high political uncertainty, environmental complexity, and the substantial risk associated with making non-redeployable resource investments in the environmental sphere, reliance on external markets may be a wise strategy to pursue. Case 15B.1 Shell’s environmental management strategy CASE Since the early 1990s, Shell’s reputation has been battered by corporate social responsibility problems such as the Brent Spar controversy and the Ken Saro- Wiwa trial in Nigeria. (Ken Saro-Wiwa was the environmentalist who was hanged and whose death some attributed in part to Shell.) Shell gradually realized that dismissing environmental and social issues could seriously hurt its business. It started to develop a company-wide environmental policy in the late 1990s, in spite of its heritage of being a rather decentralized firm with highly autonomous operating companies. As a result of this autonomy, environmental management approaches at Shell’s international subsidiaries varied substantially and depended on the direction chosen by subsidiary managers. Subsidiary discretion led to inconsistencies, especially between operations in developed and developing countries. As a multinational energy firm with 108,000 people operating in more than 130 countries, Shell had traditionally been viewed as being at the 435 International Business Strategy forefront of modern, corporate environmental management, but this record did not prevent the firm from becoming subject to substantial criticism in the 1990s.28 Decentralized management Shell’s history can be traced back to a small, London-based business established by Marcus Samuel in 1833 to import seashells for collectors. Marcus Samuel Jr, the son of Marcus Samuel, when searching for seashells in the Caspian Sea, identified an opportunity to deliver oil to the Far East in the early 1890s. This led to the construction of a fleet of dedicated tankers. During the same period, August Kessler established Royal Dutch in the Netherlands, to develop oil fields in Asia and to deliver oil. In the late 1890s and early 1900s, the fierce competition with Standard Oil ultimately forced Shell and Royal Dutch to merge into the Royal Dutch/Shell Group Companies in 1907, with Royal Dutch controlling 60 per cent of the shares and Shell Transport and Trading Company 40 per cent. After almost a century of development, Royal Dutch/Shell operated in over 145 countries by 2000, with the 60:40 partnership kept intact. By the late 1990s, Shell consisted of two parent companies, nine servicing companies and around 450 operating companies around the world. The two parent companies, Royal Dutch and Shell Transport and Trading Company, never engaged in operations directly, although they appointed the five members of the Committee of Managing Directors (CMD). The Chairmanship of the CMD rotated with a fixed single term. The CMD identified key issues, set strategies and exer- cised managerial control within the corporation. However, the operating companies had the operating authority and financial responsibility. With its unique structure directed by multiple executives, and with responsibilities largely allo- cated to operating companies, Shell was widely viewed as one of the most decentralized companies in the world. This decentralization was reflected in Shell’s approach to environmental management. Until the late 1990s, Shell maintained that a decentralized structure would allow operating companies to tailor corporate environmental standards/ objectives to local needs. Although the firm reviewed environmental perform- ance annually, Shell’s national companies were allowed to focus their environmental efforts according to the requirements of local environmental regu lations, even if some of those were not particularly stringent. According to James McArdle, safety and environment coordinator for Shell UK, ‘While policy guidelines for Shell as a whole are laid down by the committee of managing directors . we have the freedom to adapt these guidelines to suit local needs.’29 Shell argued that such decentralization benefited innovation. One commenta- tor noted: ‘Shell refused to set overall objectives for its subsidiaries. Instead, it 436 Corporate environmental sustainability allows individual companies to decide their own strategy, “reflecting the national and cultural background in which they work”. Shell portrays this as a strength, arguing that by putting the responsibility on local managers’ shoulders, it encourages a sense of ownership, which in turn provides the most fertile ground for innovation. “Striving for consistency”, said one Shell manager, “would be the kiss of death for continuous improvement”.’30 At the corporate level, Shell developed Policy Guidelines on Health, Safety and the Environment as early as 1977. In 1991, Shell had a policy of continuous improvement towards the goal of having no emissions of environmentally harmful substances. Also in 1991, Shell developed a few policies to ensure that products would be recycled or disposed of safely. However, implementation of these guidelines was still made subject to decision making by subsidiary managers. Environmental management practices at Shell’s operating companies In the late 1980s and early 1990s, environmental management practices varied strongly across Shell’s international operations, depending on local regulations and institutional requirements. Moreover, environmental activities at Shell were largely passive responses to external pressures, rather than proactive initiatives. For example, by the late 1980s, Shell Canada had consciously incorporated environmental management into its operations, mainly through prevention of potentially negative environmental impacts. J. M. MacLeod, Shell Canada presi- dent and CEO, stated in an interview in 1991, ‘For 20 years, we’ve been consciously managing and minimizing our emissions and our effluents from gas-processing plants and we’ve been reclaiming our drilling sites.’31 However, many of Shell’s environmental strategy actions were primarily a response to exogenous circumstances, rather than a proactive search for envir - onmental improvements. One example of this occurred at Shell’s major gas processing plant in Waterton, Alberta, Canada. Here, Shell had to manage a very difficult relationship with the local community in the early 1970s, as the prevail- ing view in the community was that the plant emitted excess amounts of sulphur dioxide. Shell Canada spent $25 million Canadian to install a new process to increase sulphur recovery, even though ‘there was no economic return in the way one would normally perceive it; that is, the additional sulphur recovered would not pay for the process’.32 Except when forced by strong stakeholder pressures, MacLeod’s view was that Shell Canada did not ‘go beyond regulations to any significant extent, no more than other companies do’.33 In the Netherlands, Shell introduced sulphur emission controls at its Rotterdam factory, supposedly signalling Shell’s commitment to the environment. However, 437 International Business Strategy critics viewed such environmentally friendly changes as, again, merely a response to external pressures (governments and environmental NGOs had been pressing for the controls for years), rather than a reflection of a proactive environmental stance. One Greenpeace campaigner, complained that ‘It (the Rotterdam factory) used to be the number one source of acid rain in the Netherlands. We had to work very hard to get Shell to improve environmental standards there. Finally, they agreed, and then, of course, they claim all the credit.’34 During the same period, Shell’s environmental management in the developing world was less than impressive, as can be seen by its oil spills in Nigeria. According to research by Greenpeace, in the ten years between 1982 and 1992, Shell’s spills in Nigeria accounted for around 40 per cent of Shell’s total spills in the world, releasing 7.3 million litres of oil in the Nigerian Delta Region. Environmental Rights Action, Friends of the Earth and others have estimated that Shell and its partners have spilled around 13 million barrels in the Niger Delta in the past 50 years. This volume is 50 times higher than the spill caused by the Exxon Valdez tanker accident off Alaska. In 2002, Shell admitted that there

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