TEACHING NOTE for SHELL OIL

TEACHING NOTE
for
SHELL OIL IN NIGERIA
This case illustrates the following themes and concepts discussed in the chapters listed:
Theme/Concept Chapter
Stakeholders: primary and secondary 1
Public relations and crisis management 2
Corporate social responsibility 3
Corporate codes of ethics 6
Corporate culture and ethical climate 6
Ethical reasoning 6
Doing business in a diverse world 7
Government regulation of business 9
Global environmental issues 12
Community relations and responsibility 17

This case focuses on the crisis facing Royal Dutch/Shell, the international oil company, following the execution of Nigerian novelist and environmental activist Ken Saro-Wiwa in November, 1995. Saro-Wiwa had been president of the Movement for the Survival of the Ogoni People (MOSOP), an organization representing an ethnic group in the Niger River delta. MOSOP had demanded greater political autonomy and cultural freedom for the Ogoni people. It had also charged Shell with extensive environmental degradation of the Niger River delta and had demanded reparations from the oil company. In 1995, Saro-Wiwa was convicted by a special military court of what many observers thought were trumped-up charges that he had ordered the murder of political opponents. Following his execution, many criticized Shell for failing to pressure Nigeria’s military regime for clemency. A number of environmentalists, human rights organizations, and political leaders called for an international boycott of Shell’s gasoline and other products, and some called for the company to withdraw completely from Nigeria. This case describes this situation, closing with Shell’s dilemma over how to respond to a growing chorus of criticism.

The objective of this case is to help students think broadly about the ethical obligations of multinational corporations doing business abroad, especially in repressive or undemocratic regimes. Specifically, students may be challenged to consider: Did Shell do anything unethical in Nigeria? What, if anything, could or should it have done differently? How should Shell respond to its critics now? What are the ethical obligations of multinational corporations that choose to conduct business in undemocratic nations? Under what circumstances, if any, do multinationals have an obligation to withdraw from repressive regimes? More generally, what standards of ethical conduct are appropriate for multinational corporations, and how should these standards be promulgated and enforced?
Discussion Questions

1. Did Shell Oil do anything wrong in Nigeria? To pose the question somewhat differently, what arguments did Shell make in defending its actions in Nigeria? How would Shell’s critics counter these arguments?

In defending its actions in Nigeria, Shell made three main arguments.

Shell had always obeyed the law and complied with all relevant regulations in Nigeria.

PRO: Evidence in the case supports this contention. Shell paid all royalties and taxes required by law, even though the company may have believed them to be excessive, and complied with existing environmental regulations.

CON: No democratic process existed in Nigeria; so the laws themselves may be viewed as illegitimate. Nigerian laws requiring that all oil revenues go to the federal government (controlled by northern ethnic groups), with only 1.5 percent returned to the oil-producing states (in the southeast), violated ethical standards of distributive justice and were demonstrably unfair.

Although Shell complied with Nigerian environmental regulations, these were much less strict than those to which the company was subject in Europe and North America; the company had an obligation to bring all its operations up to its highest international standard. Moreover, because of the government’s conflict of interest, Nigerian regulations were not strictly enforced.

It would have been inappropriate for Shell to become directly involved in politics or in a criminal proceeding.

PRO: It is a well-established principle in most international codes of ethics that corporations should not seek to influence or interfere with the internal political process or legal proceedings in countries in which they do business. Shell’s actions were consistent with this principle.

CON: Despite its disclaimers, Shell was in fact deeply involved in Nigerian politics–on many levels. These involvements included:

* its commercial joint partnership with the Nigerian National Petroleum Corporation, an arm of the federal government;

* its extensive financial support of the federal government, in the form of taxes and royalties that supplied perhaps as much as 40 percent of the federal budget;

* its extensive collaboration with the Nigerian police and military apparatus in planning and providing security for Shell installations.

Under these circumstances, the argument that Shell needed to “stay out” of politics was dishonest and disingenuous. The company was already deeply “into” the political process in Nigeria. The issue was not whether to exercise political influence, but how to exercise political influence. Arguably, Shell “stayed out” of politics in Nigeria only when it was expedient to do so.

When Shell installations and employees were criminally attacked, the company was completely justified in asking the police for assistance.

PRO: Attacks on Shell installations were clearly criminal, and they resulted in injuries to Shell personnel and extensive losses to the company in damaged property, spilled oil, and lost production. It is normal practice in all countries to request police assistance when private property is threatened. Although Shell’s provision of handguns and logistical support to the police and payments to police personnel would be unusual in Europe or North America, it was an expected and normal part of business operations in Nigeria. It would have been inappropriate for Shell to have provided its own armed security. Shell had a fiduciary obligation to its shareholders to protect its capital investments on the ground and a moral obligation to protect the safety of its employees.

CON: When Shell called on the mobile police force for assistance, the company was well aware of the MPF’s history of violence against civilians. The company should have insisted that the MPF refrain from the indiscriminate use of violence against civilians, and if this proved impossible, should have withdrawn from the area rather than continue to cooperate with the MPF. Direct payments to the police are a form of corruption and should never be condoned, even in societies where they are common. Any involvement with Okuntimo’s “task force,” with its avowed policy of terror against civilians, was unconscionable. By provisioning and financing the police and paramilitary units deployed in Ogoniland, Shell bears moral responsibility for the murder of innocent civilians that resulted. Shell should not continue to operate in any region where it can only do so through the exercise of terror against a civilian population. Other, more effective and less violent methods could have been used to deal with vigilante attacks.

2. What could or should Shell have done differently in Nigeria?

It is possible that Shell could have done nothing to prevent this crisis. However, several steps might have lessened its severity. Shell could have:

Used its influence with the Nigerian military authorities to seek a negotiated settlement with the Ogoni.

The Nigerian authorities were clearly extremely eager to please Shell, as the company’s activities supplied a very significant proportion of the federal budget. Shell thus had considerable leverage over the regime. It could have used its influence, publicly or privately, to pressure the regime, for example, to increase the share of oil revenues returned to the oil-producing states; raise environmental standards; or at least to meet with MOSOP leaders to discuss their demands. This strategy ran the risk of “meddling” in politics. However, by doing nothing, Shell was perceived as condoning a highly unjust distribution of resources in Nigerian society–resources for which the company itself was a primary source.

Independently initiated their own negotiations with MOSOP.

Shell did not have to wait for the government; the company could have entered into negotiations with MOSOP directly. The company no doubt believed that MOSOP’s reparation demands– for $10 billion–were preposterous and that any payments of reparations would have set a dangerous precedent. However, the company certainly could have negotiated over issues such as electrification of local communities, road-building, and provision of piped water and sanitation.

Explored alternative approaches to dealing with vigilante violence.

Apparently, the only reaction to civil disturbances that occurred to Shell was to call in the police and, when this failed, to work with paramilitary forces. Yet, the police and military had little moral authority in Ogoniland, and were able to operate only through the use of terror. An obvious solution that Shell did not pursue was to work with MOSOP itself to control violence. MOSOP leaders had disavowed violence and, unlike the military, had great moral authority, particularly among Ogoni youth. The potential existed to negotiate a deal: MOSOP’s help in controlling violence, in exchange for concessions in community economic development. Shell’s apparent inability to see MOSOP as a potential partner was a critical mistake.

Built more effective relations with the local communities in which it operated.

Although Shell gave significant amounts of money to support local economic development–on the order of $20 million a year in the Niger delta–the case indicates that the company decided unilaterally how to spend these funds, and most local residents did not perceive much benefit. The company should have organized community councils to advise the company on how to deploy its economic assistance budget. After the emergence of MOSOP, that organization could have been given a formal role in such an advisory process. The community would have developed a greater appreciation for Shell’s efforts, and the company would have received a better information about community concerns and grievances.

Maintained higher environmental and safety standards in its Nigerian operations.

Meeting the standards set by Nigeria’s weak and poorly enforced regulations was not enough. Shell should have–and easily could have–brought its Nigerian operations up to the standards it maintained in the developed world. This was especially important in a situation, such as the Niger delta, where its operations encroached on a very densely populated area.

Hired local people in its operations, at all levels.

Discrimination against the Ogoni in employment (for example, by hiring them for the dirtiest and most dangerous jobs) fueled the Ogonis’ perception of injustice and deepened enmity against the company. Shell should have had programs in place to affirmatively hire, train, and promote residents of the communities where their operations were located.

Used its local influence to have sought to restrain, rather than encourage, police violence.

Finally, Shell should have instituted strict controls concerning cooperation with police. Shell should not have supplied the police or military with firearms, other equipment, or money. It should have insisted on restraint and refused to cooperate with the police or military in any situation in which terror was used.
3. What internal or external factors contributed to the emergence of this crisis for Shell?

Several internal and external factors may have contributed to the emergence of this crisis. These include:

Decentralization.

Royal Dutch/Shell ran a very decentralized operation. In many respects, this benefited the company, which was able quickly and flexibly to take advantage of local opportunities as they emerged. But decentralization also implied weaker controls over subsidiaries. In this case, it is possible that corporate directors in London or The Hague, if they had had better information about the use of terror to protect Shell operations, would have intervened earlier. However, the case also contains clues (e.g., Wiwa’s conversations with Anderson) that corporate headquarters may have known about and fully condoned its Nigerian subsidiary’s actions.

Large fixed capital investment.

Royal Dutch/Shell had an enormous capital investment literally “on the ground,” in the form of drilling rigs, pipelines, flowlines, terminals, and the like. It also had a large human capital investment, in the form of its 1900 or so Nigerian employees. Almost all of this capital equipment, and many of the company’s employees, would not or could not leave the country in the event of the company’s withdrawal. This created a huge incentive for Shell to stay in Nigeria; it would have been very difficult and expensive for Shell to “walk away” from the problem.

Strategic importance of Nigeria to the parent firm.

Nigeria was very important to the parent firm as one of the company’s primary sources of high grade “sweet crude,” the major ingredient of gasoline.

Fundamental injustice at the core of Nigerian society.

Nigerian civil society was predicated on a fundamental injustice: expropriation of the oil wealth of the Niger delta for the enrichment of the Hausa-Fulani dominated military elite and their allies. Arguably, Shell was in no way responsible for this situation, which had resulted from a long and tangled legacy of colonialism and civil war. However, its commercial partnership with the NNPC made the company seem complicit in this injustice.

Atmosphere of corruption.

Corruption was pervasive in Nigerian society. In this context, many actions that would be viewed as morally reprehensible elsewhere (e.g., payments to the police) came to be seen as normal.

Lack of countervailing pressures.

In Nigeria’s undemocratic society, there were few groups–until the emergence of MOSOP–pushing Shell for greater accountability, for example, on environmental issues. Until recently, Nigeria has attracted little attention in the international community.

Lack of a written code of conduct.

Shell was apparently operating without an explicit code of ethics or code of conduct.

4. What should Shell do now?

Shell has a number of options. These can be arrayed on a grid, from maximum disengagement to maximum engagement. In addition to the specific steps discussed in the response to question (2), above, broad strategic options available to Shell range from maximum disengagement to maximum engagement. (Note: not all options listed below are mutually exclusive.) These may be summarized (from most disengaged to most engaged):

Withdrawal: withdraw from Nigeria; sell assets to Nigerian government or to another multinational oil company for the best possible price; transfer out those Nigerian employees willing to relocate

PRO: avoids involvement with a corrupt regime; avoids further environmental contamination; avoids possible international boycott or criticism; avoids danger to staff from civil disturbances

CON: loss of revenue from Nigerian operations (14% of company’s profit worldwide); possible loss on sale of capital assets, depending on the sale price to another firm; environmental and employment policies of replacement firm or firms might be worse than Shell’s; loss of jobs for Nigerian employees unable to relocate; loss of opportunity for constructive engagement in Nigeria

Partial withdrawal: withdraw (or remain withdrawn) from those regions in Nigeria where civil disturbances are most threatening; continue operations in other regions

PRO: achieves some of the benefits of (1) without complete loss of revenue and possible losses on sale of assets

CON: has many of the same negative effects of (1), although proportionately reduced

Public relations campaign: mount a public relations campaign in response to calls for an international boycott of Shell products

PRO: may decrease adverse impact of international criticism or boycott on sales; may decrease the likelihood of shareholder criticism;

CON: no obvious disadvantages, although may be perceived by some as hypocritical or disingenuous

Remedy environmental damage: attempt to remedy environmental damage or to provide compensation to those injured by environmental spills or accidents

PRO: blunts international criticism; improves relations with Ogoni people and reduces the likelihood of civil violence should Shell recommence operations in Ogoniland regime;

CON: possibly expensive; requires admission of responsibility

Reopen operations: attempt to recommence operations in Ogoniland

PRO: recaptures lost revenue; expands employment opportunities for Nigerians; provides opportunity for constructive engagement in Ogoniland

CON: continued involvement with corrupt regime; threat of international criticism and boycott; further environmental contamination likely

Expand operations: in Nigeria, e.g., through completion of the liquefied natural gas project or construction of new oil fields and refining facilities

PRO: advantages of (5), plus recaptures some flared gas, reducing environmental damage

CON: same as (5)

Teaching Tip
Students may be asked to select one or more or these options and draft a memo to top executives defending their recommendations.
5. Evaluate Shell’s actions in Nigeria in reference to an existing code of conduct for multinational organizations. Do you believe that Shell was in compliance with the code you have selected? If not, how not? Do you believe the code you have selected is appropriate and adequate?

Students should prepare by reading one or more codes of conduct for international business, or essays defining standards for ethical conduct in international business.
There are many ways to approach this assignment, depending on the code selected. To give one example, drawing on Donaldson’s model. In his book, The Ethics of International Business, Donaldson argues based on social contract theory that multinational corporations have certain duties with respect to the rights of others. These rights are:
Group one:
1. freedom of physical movement
2. ownership of property
3. freedom from torture
4. fair trial

Group two:
5. nondiscriminatory treatment
6. physical security
7. freedom of speech and association
8. minimal education
9. political participation
10. subsistence

In the case of group one rights, the MNC has only the duty to avoid depriving others of these rights; in the case of group two rights, the MNC has the additional duty to help protect others from deprivation of these rights.

Shell’s actions can be analyzed through the framework of such guidelines. For example, did Shell adequately protect its employees, customers, and community residents from deprivation of their rights to physical security and to political participation? One of the interesting intellectual puzzles not really answerable within Donaldson’s framework is: to what extent is indirect support by a MNC for violation of rights (for example, Shell’s tax support of the federal government, which in turn deprived some of its citizens of the right to a fair trial) a violation of international business ethics?
6. In your opinion, is it possible to develop a universal set of ethical standards for business (ethical universalism), or do cultural differences make universal standards impractical, if not impossible (ethical relativism)? Do you believe that Shell’s behavior was justifiable on the grounds that it was consistent with local (Nigerian) ethical standards?

Question (5) assumes that it is possible and, indeed, beneficial, to codify a set of universal ethical standards for business. The United Nations, as well as a number of private organizations (e.g., the Caux Roundtable), and leading scholars of business ethics (e.g., Thomas Donaldson and Richard DeGeorge) have attempted to draft such codes of conduct for international business, as described in the response to Question (5). However, an alternative view, ethical relativism, maintains that cultural and socioeconomic differences among nations makes it difficult, if not impossible, to create a universal set of ethical standards. Accordingly, it is appropriate to adjust behavior to make it consistent with local ethical standards.
For example, in Donaldson’s framework, discussed above, corporations are assumed to have a global obligation to help protect others from deprivation of their rights to free speech and association and political representation. Applied to Nigeria, this argument might mean that Shell had an obligation to intervene to help secure Saro-Wiwa’s release from prison. An ethical relativist, on the other hand, might argue that these principles do not apply universally. In Nigeria, the rights to free speech, free association, and political representation were not constitutionally protected and, in fact, were routinely denied by the military government. Under these circumstances, an ethical relativist might argue that Shell had no special obligation to intervene to secure Saro-Wiwa’s release; and, in fact, to do so would violate locally accepted standards and jeopardize Shell’s continuing relationship with the Nigerian authorities.

Teaching Tip
For a recent discussion of the application of the theory of ethical relativism to business practices abroad, see: Jeffrey R. Cohen, Laurie W. Palnt, and David J. Sharp, “Cultural and Social Constraints on International Codes of Ethics: Lessons from Accounting,” Journal of Business Ethics 11: 687 – 700, 1992.
Epilogue

On May 10, 1996, Shell Nigeria’s managing director Brian Anderson announced the company’s intention to resume oil operations in Ogoniland if it could reach agreement with Ogoni leaders. The company agreed immediately to clean up all oil spills in the region, whether caused by company negligence or sabotage. It also promised to resume community development projects abandoned when it withdrew from the region in 1993. Anderson said that the proposal was made “in the spirit of cooperation. All we need to start the process is the assurance of all Ogoni communities that our staff can work safely in Ogoniland.”1 The company also pressed ahead with its plans to build a liquefied natural gas project, despite cancellation of World Bank funding. In a separate interview, Royal Dutch/Shell President Cor Herkstroter said: “We want a constructive solution. Leaving Nigeria doesn’t get you that. It is much more constructive to stay there and do the right things, such as reconciliation.”2

In Nigeria, human rights abuses in Ogoniland continued and, in some respects, intensified. Most surviving leaders of MOSOP fled the country, and many Ogoni were living as refugees in neighboring countries.

In November 1996, Saro-Wiwa’s family filed suit against Shell in U.S. federal court in New York, charging the company with wrongful death and human rights violations. The plaintiffs claimed that Shell had held meetings with the military regime “to discuss strategies concerning the unlawful execution of Saro-Wiwa.” The lawsuit was unresolved, as of 2001.

In response to international criticism, Shell took several actions to reform its practices-and its reputation. These efforts are described in the following case, “The Transformation of Shell.”
Multimedia Version Available
A multimedia version of this case, developed under the auspices of the Council on Ethics in Economics, is available for adoption for classroom use. The multimedia version includes videotaped interviews with key participants, links to relevant Web sites, financial data, photographs, maps, charts, and other materials that will enrich student understanding of the case situation. It has been designed for delivery to students online. The multimedia case may be accessed and reviewed at www.i-case.com. For current pricing information or other inquiries, please call i-case at (800) 678-5202.
1 “Shell Wants to Go Back to Ogoniland, Vows Reconciliation,” Deutshce Press-Agentur, May 10, 1996.
2 “Shell Searches Its Soul During Troubled Times,” The Financial Times, May 10, 1996.
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