Financial Times: How Shell became a victim of business fashion
By John Kay
Published: April 21 2004 5:00 | Last Updated: April 21 2004 5:00
Most of the largest companies in the world a century ago - businesses such as US Steel and International Harvester - are now but a shadow of their former selves; many have disappeared. But three have maintained their positions. Two are American - General Electric and ExxonMobil, successor to John D. Rockefeller's Standard Oil. The other is European. What has gone so badly wrong at Royal Dutch/Shell, which, for more than 100 years, has been the leading trading company outside the US?
Shell's greatest competitive advantage, like GE's, has been the calibre of its management. Before consultancy and investment banking became attractive, Shell recruited the best graduates. It trained them and it offered them a social life as well as a career. It expected they would spend that career with the company they had joined in their twenties, and it almost invariably gave the top jobs to insiders. Shell rarely made acquisitions and focused on its core businesses. The corporate ethos was intellectual, even academic, and the purpose of the company's scenario-planning was not to predict the future but to be prepared for all contingencies. Boardroom style was collegiate and consensual. Shell was the epitome of what Max Weber described as "rational-bureaucratic" organisation, with all that is good and bad in that description. Its leaders displayed the arrogance of benevolent philosopher kings.
All this is today deeply unfashionable. Corporate chiefs want to be seen as visionary entrepreneurs, not dispassionate administrators - and to be rewarded accordingly. Committees are out, charismatic leadership is in. While earlier multinationals had an imperial vision, companies today are urged to maximise shareholder value. And shareholders demand that earnings per share grow far faster than the underlying growth rate of a mature business such as integrated oil production and retailing. A high rating from financial markets depends on a frenetic pace of acquisitions and disposals and a carefully organised programme to manage earnings growth and provide guidance to analysts.
Jack Welch's achievement at GE was to manage this shift. The changes he made were partly of substance - establishing a profitable and opaque financial services business - but most of all of style. No chief executive of Shell devoted so much time to investor relations, or published a racy autobiography. Not everyone liked this tougher, personalised view of business. Civil society organisations demanded multinational corporations be made accountable. Trust in companies, and in the people who ran them, declined.
Shell's misfortune was that, although it had not changed enough to please financial markets, it was a particular victim of that backlash. The company was taken aback by criticism of its activities in Nigeria and the disposal of the Brent Spar platform. The analysis had been careful, the intentions good; why, its managers plaintively wondered, was Shell vilified? But no sooner had the company announced its commitment to social responsibility than it came under fire for its stodgy business image relative to rivals.
Caught in the crossfire between those who see business as a purely instrumental, financial activity and those who demand that business be judged on its contribution to the public good, Shell has satisfied no one. And for a common reason. The introverted, intellectual belief that, if you go on doing a good job, people will eventually give you credit for it is no longer justified. Today, politics are governed by spin and tabloid headlines and business is accountable to investment managers judged on quarterly figures. And when rewards are based on individual performance, the mutual trust necessary for collegiate management breaks down. In accommodating itself to current fashion, Shell looks like parents at their children's disco, courting popularity but only losing dignity.
Yet there does not seem to be much wrong with the underlying business. Shell is profitable, its revenues are growing, the reputation of its products is unimpaired by problems with its corporate image. The dispute over reserves obscures the central point that Shell owns no less oil than it did. It is a company out of sympathy with its times. But maybe the fault lies with the times as well as with Shell.