Business Governance and Corporate Social Responsibility - Assignment Example

Business Governance & Corporate Social Responsibility: Royal Dutch Shell Plc. Introduction: Companies such as Enron, Starbucks, Merrill Lynch, British Petroleum as well as the Royal Dutch Shell Plc., have grabbed headlines and attracted widespread public attention, albeit for all the wrong reasons. These companies have been accused and held guilty of indulging in fraudulent business practices, rigging product prices, evading taxes, causing environmental devastation in many parts of the world, and in general fooling the public and its stakeholders despite glorious and articulate CSR policies and claims, advertised on their websites, company brochures and annual reports. There has been a drastic change in the corporate environment over the years, and owing to the increasing technological development, people across the globe are not only more connected to one another but also have become aware of the negative consequences of irresponsible corporate governance on the part of giant multinational organizations. As a result, firms today are increasingly under pressure to perform not only financially, but also ethically as well. The managers and leaders are of organizations are now increasingly expected to address a range of social and environmental causes and problems including climate change, poverty, and even HIV/ AIDS. It is due to this changing facet of corporate governance and the increasing popularity of concepts such as Corporate Social Responsibility, Business Ethics and Ethical leadership, that the organizations are now required to be increasingly responsible and transparent in their approach in order to maintain their credibility, brand image and public trust in the industry, or risk facing wide scale public backlash and pay millions of dollars in fines and compensations. This study focuses on the concepts of corporate governance, business ethics, leadership and CSR with regard to the Royal Dutch Shell Plc. Business Ethics, Corporate Social Responsibility & Corporate Citizenship Business ethics refers to "the study of business situations, activities, and decisions where issues of right and wrong are addressed" (Crane & Matten, 2010, p. 5). This definition is used in this study to discuss the ethical stance of the Royal Dutch Shell Plc., and the various key issues surrounding the company. With regard to organizations, the concept of ethics refers to the transparency in its corporate activities, accurate reporting of accounting and financial statements, and honest disclosure of its health and safety policies as well as the likely impact of its activities on the community and the environment at large. Business ethics and ethical reporting of business activities by companies has assumed increased significance over the years. Hence it has become imperative for organizations involved in business such as Oil & Gas sector, which are likely to cause environmental damage to ensure that the key stakeholders are clearly informed about the dangers and risks involved as well as the precautions taken to prevent them. The term corporate citizenship which is alternatively referred to as corporate responsibility is defined as "the ways in which a companys strategies and operating practices affect its stakeholders, the natural environment and the societies where the business operates" (Kolb, 2008, p. 466). The key feature of the concept of corporate citizenship is that it recognizes the social, cultural, ethical as well as environmental responsibilities of the organization to the community in which it operates and at the same time accepts and acknowledges its responsibilities toward the shareholders as well as stakeholders alike. Carol (1993) defined the term Corporate Social Responsibility as "the conduct of a business so that it is economically profitable, law abiding, ethical, and socially supportive. To be socially responsible then means that profitability and obedience to the law are foremost conditions when discussing the firms ethics and the extent to which it supports the society in which it exists with contributions of money, time and talent"(p. 608). Figure: The Pyramid of good Corporate Social Responsibility (Carroll, 1999) Royal Dutch Shell Plc: Company Overview The Royal Dutch Shell Plc., is a global energy and petrochemicals company headquartered in The Hague, the Netherlands and the parent company is incorporated in England and Wales. The multinational giant runs over 30 refineries and chemical plants in more than 70 countries, employing an average of 92,000 employees worldwide. The key objective of the company is to meet the ever-increasing energy demands across the globe in a way that causes minimal harm to the environment and the society at large. The company is involved in investing in technology and supports technological developments with a view to ensure energy efficient ways of conducting business and to reduce emissions arising due to production of liquid products and natural gas (Shell Global, 2014). Current Issues: The key issues concerning ineffective corporate governance and the failure of CSR policies at the Royal Dutch Shell Plc., include: Price fixing scandal Harmful environmental practices: Dumping of toxic substances Price fixing scandal: Recently, investigators for the EU Commission carried out a series of raids on Oil and energy companies including Shell Plc. These surprise inspections carried out by the commission were a part of the on going debates and uproar caused in the markets due to persistent increase in oil and fuel prices across several markets in the EU. The raids carried out by the EU Commission in May 2014, revealed that companies including BP, Shell Oil and Statoil were involved fraudulent activities that led to oil price manipulations (Donovan, 2014). Shell Italy SpA was recently held guilty in a price fixing scandal in Italy and was convicted of abusing its dominant position in the industry to carry out discriminatory practices with regard to distribution of fuel in the markets resulting in fluctuation in retail fuel prices. The company was involved in a lawsuit and was condemned by the court for its fraudulent and highly unethical and questionable trade policies, and particularly the use of unfair and discriminatory approach to business, which significantly affected and favored one section of the population over the other (Donovan, 2014). Harmful environmental practices: The oil giant has been held responsible for causing irreparable damage to the environment across various regions due to its negligent attitudes and lack of stringing corporate governance policies in place. In 2010, the Royal Dutch Shell Plc., reported a spillage of over 14,000 tons of crude oil into the creeks of Niger Delta. The company has been at constant loggerheads with the local environments ever since 1995 when it first established its plants in the region, due to its lackluster approach to environmental protection. However the company blamed the oil spillage on the local thieves and militants and assumed no responsibility for the damage caused (The Guardian, 2010). However the company was held partly responsible for the oil spillage in the Niger Delta in a ruling by the Dutch district court. The suit was filed by Nigerian farmers who accused the company for polluting their lands due to oil spills that occurred four times during the period 2004 – 2007 in the Delta villages of Goi, Oruma and Ikot Ada Udo. The company was accused of a total of 161 cases of oil spills of which 37 incidents were found to be caused due to operational failure. However although the company accepted to pay the compensation for the damage caused, it refused to acknowledge its role in the oil spills but instead continued to insist that the spillage was on account of sabotage, denying its role in the disaster till the end. In another case, the company has ongoing lawsuits in the UK court for spilling 500,000 barrels of oil in 2008 of which it has accepted responsibility for only 2 of them (McCarthy, 2013). In yet another case the company was accused of systematic and consistent dumping of its wastewater in the bayou Trepagnier, one of Louisiana’s most polluted waterways, for more than 60 years. The Shell oil Co, was accused of causing release of toxic chemicals and metals in the once scenic waterways in the state and causing irreparable environmental damage in the process (Donovan, 2012). The Royal Dutch Shell Plc., was also involved in causing environmental damage, caused due to leak of water used in refining process in its plants, into Sarnia a tribal area in Ontario, Canada. The company has been running its operations with impunity causing significant environmental damage in an industrial complex, which is now nicknamed ‘Chemical Valley’ mostly comprising of the tribal population of the country. The extent of damage can be estimated by the fact that Sarnia is now identified as one of the three most polluted spots in Canada, according to reports made available by the World Health Organization (Macdonald, 2013). Critical Performance Evaluation: The analysis of the CSR performance of Royal Dutch Plc. for the purpose of this study shall be based on the following key performance indicators: CSR is embedded in the companys mission & vision statement or as its key aim or objective ✔ The availability of the companys Code of Business Conduct /Ethics to the general public / stakeholders ✔ The availability of the companys Conflict of Interest Guidelines to the general public x A clear assignment of an officer specially entrusted with the responsibility of overseeing Ethics & Compliance department or a similar job role ✔ A clear and specific whistleblowing process incorporated in the company ✔ Regular publishing of the companys CSR report explaining and detailing key areas of concern ✔ Governance & leadership The key objective of the very concept of corporate governance is to ensure good practice in corporate management and to establish a definite and clearly defined set of principles or guidelines describing the rights and responsibilities of the various stakeholders in the firm (Akoi & Jackson, 2007). The concept of corporate governance is centered on ensuring transparency in all its business practices; ensuring compliance with its ethics and social responsibilities, and making themselves accountable for acting irresponsibly and /or indulging (Parkinson, 1993) in actions that bring harm to the company, its key stakeholders as well as the community and environment at large. Ensuring effective functioning of the organization and adhering to it’s CSR strategies entails effective and persistent monitoring and control on the part of the leaders, and ensuring strict adherence to the company policies of environmental protection and the protection of the interests of the communities at large, and simultaneously ensuring overall growth and profitability in the process. The failure of corporate governance has been accused as a prime culprit in a series of scandals involving several companies including the Royal Dutch Shell Plc. The corporate scandals that rocked the corporate world and alarmed the environmentalists as well as citizens alike include the BP Oil Spill, Enron financial scandal and the booking reserves scandal of the Royal Dutch Shell Plc., in the year 2004 that compelled the then CEO of the company Sir Philip Watts to not only come forward and issue a public apology for the mismanagement and deceit, but also resulted in his forceful resignation from the company and his position (Mueller, 2006). Ineffective corporate governance has often been accused of playing a key role in the failure of the management to adhere to its ethical responsibility guidelines and maintain a high degree of transparency in their organizations. Despite the significant rise in the popularity and hence the need for corporate governance and corporate social responsibility, the problems and scandals involving mismanagement and misappropriate of funds by companies keep pouring in. Such failure on the part of the organizations is often attributed to the very foundation on which corporate governance theories are founded; these include the agency theory, the stewardship theory and the stakeholder theory in particular. Hence, these theories are discussed in brief, hereunder, to offer a better insight and understanding into the key concept of corporate governance and its role and impact and influence on the organizations, the stakeholders as well as the environment and community as a whole. Agency Theory: The agency theory was introduced and developed by Jensen & Meckling, which refers to and deals with the conflict of interests and control between two parties interested in the management, ownership and control of the same asset. The theory posits that there are two key parties to a contract i.e., the agent and the principal, whereby the principals, in this case the shareholders /owners of the organization engages the other party, in this case the board of directors, to carry out certain activities on their behalf in exchange for monetary consideration (Jensen & Meckling, 1976). However due to conflict of interest, where one party is interested in the achievement of the company goals while the other is interested in maximizing their own revenues, the organization is often exposed to moral hazards due to extreme action such as hiding of vital information or misappropriation of funds, or inflating the revenues / profits; on the part of the directors (Donaldson & Davis, 1991). This was observed in case of The Royal Dutch Shell Plc., whereby the company was not only involved in fraudulent price fixing scandals and misappropriating its asset statements but also in a series of litigations accusing the company of causing widespread environmental damage in the U.S., Canada, and Nigeria. Such conflict leads the organization toward a disaster such as those listed above with negative repercussions on not only the management which is faced with legal action but on the community as a whole, which is made to suffer due to environmental damage or loss of investments made. Hence it is imperative for the organizations to ensure that good governance prevails and the conflict of interest is minimized to a bare minimum to ensure minimal damage to the environment or the community at large (Donaldson & Davis, 1991). Stewardship Theory: This theory is similar to the agency theory in the sense that it also emphasizes on the relationship between the principal and the agent, however unlike the agency theory this theory posits that the board of directors is interested in achieving the organizational goals and is interested in the betterment of the company rather than their own personal goals. The theory posits that the directors are interested in maximizing the benefits for the shareholders, since it is the key responsibility of the stakeholders to promote organizational development and strive for minimizing of conflicts (Donaldson & Davis, 1991). This theory argues that the activities of the directors need not be controlled or supervised since they are expected to and are involved in the benefit of the company as a whole rather than on promotion of self-interests, as put forward by the agency theory. Most of the corporate governance guidelines of firms operating in the western world are based on the stewardship theory to ensure improved congruence between the key players in the top management and faster and successful achievement of the organizational goals (Fauziah, Yusoff, & Alhaji, 2012). The study indicated that the leadership was unethical and the leaders not only refused to accept the charges leveled against them despite mounting evidence against them, but also were observed to evade the issue by feigning ignorance. This was observed in multiple instances. For instance in the price fixing scandal, the chairman of the company, Sir Phillip Watts, not only brushed off the allegations as untrue but also appeared unapologetic about the wrongdoings of the company (The Economist, 2004). In another similar incident where the company was held guilty for causing oil spills and environmental damage in the Niger Delta region, the Vice President for Environment, of the company, Allard Castelein, refused to accept its role in the oil spills by openly stating that the oil spills were not caused on account of operational failure (McCarthy, 2013). Shell was also accused of being involved in heinous crimes including murder for silencing its opponents and suppressing the voices that were raised against them. One such known instance include, the executions of activist Ken Saro-Wiwa and other civilians in 1995 (The Guardian, 2010). Suggestions for improving future business performance: The Royal Dutch Shell Plc., has been mired with controversies off late and has suffered substantial loss of credibility and goodwill among the general public as well as among the stakeholders as well. In order to overcome the challenges faced by the company with regard to lack of effective corporate governance policies, lack of ethical leadership and commitment to environmental causes the following key measures / suggestions are recommended which includes adoption of a CSR policy that addresses three critical areas affecting the company, i.e., ‘value creation’, and ‘risk management’: CSR as value creation: Various organisations today have adopted and developed bespoke CSR activities that help accentuate their inherent business practices and support them. In order to generate positive outcomes, it is imperative for the management to ensure that the CSR policies adopted by it are not far removed from the companys core business. In case of Shell, the company must adopt CSR strategies that are highly visible. This can help in reinforcing the companys renewed stance on increased environmental awareness and communicate its strong commitment to the community. It must embed its CSR activities with all its products and emphasize the steps taken by it to mitigate the damage caused. The marketing of its products for instance must focus on its positive environmentally friendly aspects. CSR as risk management: The company is involved in products that can prove to be environmentally damaging, and cause irreparable damage to the natural environment. Hence, it must ensure to communicate and develop its CSR policies by taking into consideration the risk management aspect of business. Conclusion: The collective concepts of business ethics, CSR and corporate governance have recently emerged as some of the most significant and inevitable aspects of corporate management / activities. Companies particularly in the oil and energy sector which are involved in the dangerous activities of oil extraction and which entail potentially harmful effects caused due to oil spillage, are now at the center of heated debates where their ethical and moral leadership are questioned and their existing CSR strategies are challenged in the courts of law. As the expectations of the stakeholders and the community continue to rise, companies are finding themselves cornered into submission and are now faced with two key alternatives, those of either participating actively in the environmental and social aspects of their business or risk global public backlash and millions of dollars worth of lawsuits. It is hence imperative for oil companies to take positive action and incorporate effective CSR strategies, ensure good corporate governance and ethical leadership in order to yield positive results. Bibliography Akoi, M., & Jackson, G. (2007). 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