A revolution in stakeholder oriented corporate disclosure – case study: The Shell Report

News categories: the New Economy Economics, enterprise and business strategy, investor and stakeholder relationship management

Today, market forces and large corporations often have a bigger impact on people’s live than government or regional and international institutions. That makes corporations increasingly a target for activist groups and non-governmental organizations (NGOs). As corporations have emerged as perhaps the most influential institutions of modern society, creating and distributing a large part of its wealth, yet at the begin of the new millennium, corporate managers, are in most countries one of the least trusted constituents of society.

Why ?

Virtually every decision to create value for shareholders has positive or negative consequences for other stakeholders like employees, communities, customers, people on a mission and the public at large. Closing a large manufacturing plant in a small community might improve manufacturing efficiency and create shareholder value, but is would also create a lot of pain for the people who lose their jobs and for the communities in which they live. A major investment in new manufacturing capacity, however, might add value for shareholders, create new jobs, and bring additional revenue into the community’s economy. It is virtually impossible today, to create shareholder value without creating consequences, good or bad, for other stakeholders. So managers today must increasingly address other stakeholders’ concerns, through both their actions and the information they provide on the consequences of those actions.

And according to a survey of 1000 U.S. consumers conducted by The Conference Board, companies are today judged more by image and reputation and business ethics than by economic or financial factors or size. Consumers agree that the goal of making a profit and obeying the law are necessary but insufficient for business success in this decade. They say that they hold firms accountable for doing business in a way that does not harm the physical environment, promotes workers health and safety, and ensures a fair and non-discriminatory work environment. According to the survey, a large number of these consumers also say that their perception of a company led them to consider rewarding or punishing it by purchasing or not purchasing its products, or by speaking up for or against it.

And the Royal Dutch Shell Group of Companies, the oil giant also named just “Shell”, experienced that quite painfully in the midst of the 1990s with the case of the Brent Spar oil platform in the North Sea, that Shell no longer used or needed and that it had planned to dispose of at sea. Shell, on the basis of two years’ consulting and preparation, firmly believed that its planned method for disposal satisfied all concerns, including the environmental ones. Greenpeace thought otherwise. Protesters occupied the platform and so successfully galvanized public opinion that senior politicians in several European countries publicly intervened. Soon, consumer boycotts hit Shell’s retail business and, in Germany, Shell gasoline stations came under violent attacks.

Shell’s Sustainable Development Management Framework (SDMF) and the Shell Report

At that time, Shell had already embarked on a vast corporate transformation program and was questioning all its fundamentals and its vision of the future. The Brent Spar case as well as the human right discussion about Shells engagement in the Niger Delta around the same time made it clear for the company, that it had to commit itself to taking on new and sometimes unfamiliar roles and responsibilities, not only in its industry, but also in society at large. It sought the views of others through an extensive, worldwide program of stakeholder consultations in an attempt to understand the changing responsibilities of multinational companies. Shell embodied these new responsibilities in its Statement of General Business Principles. For Shell there was now only one way to create value in the long term, as chairman Sir Mark Moody-Stuart put it the Shell Report 2000: “My colleagues and I are totally committed to a business strategy that generates profits while contributing to the well being of the planet and its people”.

And Shell embedded its new business principles firmly into all aspects of its operations and to convince stakeholders that the company takes its impact on society and the environment serious: Shell introduced the SDMF to ensure that the new business principles become part of the day-to-day business worldwide and it began in 1998 to issue the first “Shell Report” to inform shareholders, stakeholders and the public alike about its economic, environmental, and social performance and to establish a “triple bottom line”.

The SDMF

One central lesson Shell took to heart from its experience with Brent Spar and in Nigeria was that the company needed a different approach to corporate decision making. In 1998 the company presented a road map of how it planned to integrate sustainable economic, social and environmental development into how the company will do business over the next few years. Shell foresaw the need for a management structure to help it to achieve this. At the time it was called a Social Responsibility Management Framework. This has evolved into Shell’s Sustainable Development Management Framework (SDMF). The framework is built on Shell’s values and principles and brings the necessary structure and consistency to the companies efforts to balance economic, environmental, social and other stakeholder expectations. Shell’s SDMF is a management system that the company makes available to its managers and other practitioners to help them introduce sustainable development into the way they conduct their business.

A diverse team from across the Group designed the SDMF to include best practice and existing systems to minimise the need for new procedures. It is essentially a standard management process adapted to embody sustainable development. It consists of eight key inter-linking steps. Key features include: integration of the economic, environmental and social elements in the company’s everyday business; engagement; open reporting and verification.

Shell’s sustainable development management framework to ensure sustainable development of the corporation for the benefit of shareholders, society, employees and other stakeholders

The framework can be applied over any time frame and to everything the company does, including business planning, project management and daily activities: For example the framework makes it clear that for project proposals to succeed they must take into account environmental and social considerations as well as financial ones. The SDMF provides a structure to identify systematically all areas for improvement while stimulating new relationships and opportunities. Supporting the framework is an extensive toolkit of best practice and procedures to help users apply it in their own activities

A Sustainable Development Council exists to steer the implementation of the SDMF across the Group. The Council, comprises senior business executives from each of the five core businesses and the heads of the corporate centre directorates. The Council is accountable to the Committee of Managing Directors. The SDMF has been distributed by the businesses to over 3000 of their senior managers worldwide. The Group commitment to Sustainable Development has been brought actively to employees' attention through the business line in 121 countries.

The SDMF is designed to help Shell achieve the necessary integration and create the conditions for building long-term value and a strong brand in line with its business principles and society's expectations. Engagement is a critical activity and driver of the SDMF. Other elements ensure that company can derive value through four key levers:

· Reducing costs - in the short-term by becoming more eco-efficient (doing more with less) and in the long-term working with others to ensure that nothing is wasted

· Creating options - anticipating new markets driven by people who want a more sustainable world, and evolving business portfolios and supply chain relationships to match

· Gaining customers - enhancing the brand by providing services and products built on sustainability thinking to create customer loyalty and market share

· Reducing risk - managing risks better by understanding what represents responsible behavior. Focusing on managing existing assets in the short-term and evolving the business portfolio longer term. Achieving recognition from financial institutions for success in this area.

Management believes that matching these levers to the strengths of Shell’s businesses, in ways that show commitment and responsible performance, will enhance corporate reputation and in turn attract and retain talent and capital. By these actions - which are aligned with and support the wider conditions required for sustainable development – Shell intends to generate short, medium and long- term value, not just for shareholders but for society at large.

The Shell Report

To monitor and measure in the context of sustainable development, Shell must develop metrics for performance across the triple bottom line. Shell’s management set out to identify those measures that really matter to their businesses and their stakeholders. In developing these KPIs (key performance indicators), Shell held 33 meetings with stakeholders and also involved shareholders. So these metrics range from economic measures like “return on average capital employed”, over environmental measures like “greenhouse gas emissions” or social measures like “critical health and safety data”, to governance and value measures like “stakeholder perception of quality of engagement”. Shell plans to introduce these KPIs over a five year period ending in 2005 and they will become part of the Shell report.

With the Shell report the company started in 1998 to seeks to portray a balanced picture of the impact Shell has on society in economic, environmental, and social terms. And because Shell sees it as an important part of transparency the publication of data was verified by respected independent organizations. Beyond assuring accuracy and reliability, verification increases stakeholder confidence that what is being reported is a fair picture of performance. As an additional effect, it also improves the company’s ability to monitor and manage it’s business. Management believes, that Shell has made good progress on the verification of critical health, safety and environmental (HSE) performance data and parameters. They are now looking at ways to give the same level of assurance on the rest of the social information the company publishes. The company is actively supporting the development of standards and guidelines governing corporate sustainable development reporting together with consultants from PricewaterhouseCoopers and KPMG. With the Shell report 2000 Shell went further and put the report already during year 2000 on its website and added continuously actual information and news.

To learn more about the Shell report, take a look at The Shell Report 2001 (pdf).

To Shell , transparency is an ongoing conversation with shareholders and other stakeholders alike. It is more for them than just sending out information in the hope of influencing stakeholders. For example, in its yearly sustainability report, Shell includes “Tell Shell” response cards inviting comments, both positive and negative, from readers and then prints representative examples – both negative and positive – in the following years report.

Shareholder Value and Stakeholder Value are not necessarily contradictory

Like Shell many other companies believe today, that corporate citizenship enhances corporate reputation and increases trust in a company. Research is also shedding new light on the actual or perceived conflict between corporate pursuit of shareholder interests alone, as opposed to the pursuit of societal as well as shareholder interests. Research by the Corporate Governance Research Center at The Conference Board reveals that with respect to shareholder value and corporate citizenship, there is no conflict between shareholders and stakeholders. According to The Conference Board’s research, corporate citizenship on business economic performance is not harmful to shareholder value and, in specific instances, is actually helpful to it.

Today the largest bloc of social and environmental reporting practitioners is located in Europe, particularity in the U.K. There a significant group of companies have adopted the triple bottom line of reporting, through which firms like Shell commit to report not only on their economic, but also on their environmental and social performance. The UK was also the first country to install in April 2000 the government’s first minister for corporate social responsibility, Mr. Kim Howells. He has set up a ministerial committee designed to ensure that the values of corporate social responsibility are injected into all sectors of government activity.

Corporations will have to accept their new role in society as value generators for all stakeholders and a much greater degree in corporate transparency. It is not enough to behave responsible. Companies must be seen and believed to be doing so. This means companies finding out what it is people want from them (customers, investors, society, business partners etc.), how they will be judged, and what they need to do to be believed. They have to develop consistent ways of monitoring, measuring, and reporting performance in a manner aligned to the expectations of investors and society and its own business principles.

You can read more about how this topic and how companies in the new more intangibles based digitized economy will be managed successfully in my new upcoming book.

More about about New Economy Economics and Management Best Practice in general, and about other related topics will be continued here in this new New Economy Analyst reports. To subscribe for Juergen Daum’s free-of-charge e-mail push newsletter click here.

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