PIRC INTELLIGENCE: MAY 1997 SHELL TRANSPORT AGM: Sea Change at Shell - Shareholders Send a Message
PIRC Article May 1997
Posted 23 May 04
More than ten percent of Shell investors voted in favour of a shareholder resolution that called on the company to improve its corporate responsibility policies. A further 6.5 percent of shareholders abstained, marking a record lack of support for Shell's board.
The result was striking, given that it was the first shareholder proposal on environmental or ethical grounds at a large UK company.
The proposal was filed by PIRC three months before the May AGM, following nearly two years of discussions with the company. Prior to the AGM, Shell took steps to address many of the proposal's recommendations. The company designated a senior director to be responsible for environmental affairs, made a commitment to human rights in its revised Statement of General Business Principles, published a report on Nigeria and a revised group health, safety and environment report, and agreed in principle with a policy of external verification of environmental information.
PIRC welcomes Shell's progress, but considers that more remains to be done, specifically registering for international standards and external auditing. PIRC will continue to monitor the company to ensure that its actions live up to its commitments.
Results
The full results, as a percentage of votes cast, were as follows: Number of votes cast
(millions) %
For 39.9 10.5
Against 317.1 83.0
Abstain 24.9 6.5
Turnout was high, at just over 46 percent.
The Resolution
The proposal, sponsored by a group of public and private pension funds as well as individual shareholders, was filed as a result of widespread concern over Shell's performance on environmental and ethical issues, particularly in Nigeria. (See PIRC Intelligence, March 1997).
Shell's chairman, John Jennings, said that he "took exception" to the resolution, though the company told shareholders that it agreed with its objectives. Shell raised no commercial objections to the proposal. Rather, it argued that a company of Shell's size and complexity could not be run by a referendum among shareholders, and that if shareholders didn't approve of current policy, they should vote to change the directors.
In PIRC's view, these criticisms were invalid. First, Shell last faced a shareholder proposal 14 years ago, in 1983. This hardly constitutes management by referendum. Secondly, replacing the directors represents a "nuclear option" that far exaggerates the moderate advice offered by the resolution.
PIRC argued that shareholders have a legitimate right, if not responsibility, to signal concerns over issues fundamental to the company's success. Furthermore, the resolution was specifically designed to be advisory in status. There was always room for discussion by the board. The fact that Shell has moved significantly on the issues suggests that shareholder pressure has had a positive effect.
Named Director
Shell has an unwieldy corporate structure, in which managerial power is devolved to dozens of group companies round the world. PIRC was concerned that this structure allowed for poor performance on environmental and social responsibility issues in the name of decentralisation. It considered that the company should name a senior director with overall responsibility for corporate responsibility as a signal of the seriousness of the issues, and to ensure that accountability was focused at the top of the company.
After the resolution was filed, Shell announced that Cor Herkströter, chairman of the committee of managing directors, would fulfil such a role. PIRC welcomed the move.
Human Rights
Shell came under considerable criticism for its role in Nigeria, which peaked following the execution of nine political activists, including writer Ken Saro-Wiwa. (See PIRC's report to clients, Controversies Affecting Shell in Nigeria, March 1996). The company admits that relations with communities in Nigeria are still fraught. Shell still has no plans to return to the Ogoni region of the Niger delta for fear that its employees will be attacked.
The resolution asked Shell to develop policies for the protection of human rights, and to report to shareholders on the company's progress on implementing such policies in Nigeria.
Shell's revised Statement of General Business Principles made a commitment to uphold the UN declaration of human rights. Shell is the first multinational to make such a commitment, and should be congratulated. Also, Shell published a report on Nigeria on the morning of the AGM. PIRC remains concerned, however, that the company acts on this pledge.
PIRC's arguments were supported by Amnesty International UK. At its April 1997 annual general meeting, the human rights group passed a motion which "Calls on Shell to act on its human rights responsibilities by
initiating an independently verified social audit for its Nigerian operations to demonstrate the company's commitments to transparency on human rights issues
implementing immediate human rights training for its security staff".
PIRC considered that this approach should be extended across the Shell group of companies. The point was explored further in a briefing to Shell investors organised by PIRC. The briefing was addressed by Sir Geoffrey Chandler, chair of the Amnesty International Business Group and a member of the board of Amnesty International UK.
Sir Geoffrey worked for Shell for 22 years and was appointed a director of the company. In 1976 he helped draft Shell's first Statement of General Business Principles. He told investors: "I continue to regard Shell as one of the great companies of the world... We are not adversaries of Shell. We believe that what is to the advantage of human rights is also to the advantage of the company."
Sir Geoffrey argued that the resolution was in Shell's own self-interest. He said "the self-interest of companies lies in an improvement of human rights... Corporate willingness to speak out is vital to corporate reputation. Failure to do so is damaging, as we saw with Shell in Nigeria."
He also congratulated Shell for making a commitment to human rights. He said: "This was a genuine breakthrough, but it is a breakthrough that needs to be audited." Shell's halfway-house approach on this and other issues struck Sir Geoffrey as paradoxical: "Shell has accepted it has made mistakes, yet continues its defensive posture in refusing to follow this through to action which would enhance its reputation and persuade the world that it is earnest in its stated intentions. There is a great opportunity for Shell to show leadership."
Finally, he argued that the resolution went "to the heart of corporate governance... Shareholders can either be ciphers, or they can have a voice." He urged shareholders to use their voice, and support the resolution.
Environmental Performance
In recent years, Shell has been heavily criticised for its environmental policies, both over its plans to dispose of the Brent Spar oil platform and over environmental problems in Nigeria. These issues were covered in the investor briefing.
The briefing was addressed by Clive Wicks, who worked in Nigeria for 14 years as a director of BAT, and is now the head of International Programmes at the World Wide Fund for Nature. He urged a co-operative policy, saying he didn't see the resolution as a "knocking operation of Shell."
Mr Wicks identified fundamental environmental problems in Nigeria, and described parts of the Niger delta as "Dante's inferno", due to the oil industry. According to World Bank figures, Shell has a disastrous record of gas flaring, the low-level burning-off of unwanted gas. He said that oil companies in Nigeria currently burn off 76 percent of the gas produced, compared to an average in OPEC countries of 18 percent. He called this level of burn-off "totally unacceptable". Mr Wicks denounced the practice of burning off the energy supplies of future generations of Nigerians as being incompatible with Shell's commitment to sustainable development.
The environmental problems in Nigeria, Mr Wicks argued, carry enormous potential liabilities for Shell's shareholders, in the form of possible future lawsuits. He said: "A lot of Nigerian lawyers and scientists are involved and they have told me that when democracy comes to Nigeria, there will be a lot of court cases against Shell and oil companies."
How could Shell improve? Mr Wicks said: "We want to see baseline data for all companies and all units within companies. If you want to see a good model, look at the BP report." He argued that in many parts of the world, Shell has excellent environmental standards and reporting procedures. Shell Canada, for example, has a medical doctor as its environmental officer who demands, in Mr Wicks' words, "a very detailed report on absolutely every emission and every pollutant produced by every one of the installations they have in Canada. He insists that it is documented and put into a public report." By comparison, said Mr Wicks, you have countries like Nigeria where environmental performance has been deplorable. He said: "We do not feel that you can have these double standards around the world. There has to be consistency across an international group."
Shell's Response on Nigeria
Shell argued that it already made extensive information available on its progress in Nigeria, and cited a report to shareholders, enclosed with the notice of meeting. PIRC considered that this report failed to do justice to the significance of the situation in Nigeria. The brochure instead included information of trivial importance compared with the major challenges facing the company in one of its largest areas of oil and gas production. For example, the numbers of cassava and pineapple cuttings donated was listed in minute detail. The number of cassava cuttings donated cannot be viewed as relevant in the context of the serious challenges faced by the company. Shell is still not operating in Ogoniland, having withdrawn under violent protest from the local community who held the company responsible for environmental damage to the area.
Moreover, PIRC argued that the Nigerian situation must be considered in the context of Shell's operations worldwide. Shell does business in 120 countries, many of which are potential political or environmental trouble-spots. Indeed, a US-based environmental group, Project Underground, has recently attacked Shell's record in Peru. PIRC considered that Shell should use the Nigerian experience as a means of developing a more responsible code of practice elsewhere.
External Audit
A key recommendation of the shareholder resolution was that environmental information should be externally audited. PIRC contended that this is now best practice among leading companies, including BP.
Shell rejected the need for independent verification of its environmental disclosure policies, saying "your directors are responsible for content of the policies: they are also responsible for making sure that they are effectively monitored. External audit is one of the tools available for such monitoring, but only one of such tools. It will be used where it is judged to be meaningful, appropriate and cost effective."
Shell also argued that it had a good record on the environment, coupled with a readiness to adapt. At the AGM, the company distributed its 1997 Health, Safety and Environment Report as evidence of its good faith on this issue. In PIRC's view, the report, while welcome, was incomplete. It contained some useful information, but not enough for a large company with the environmental impact of Shell. Further, the information was not broken down by group or country, and there was no specific mention of the problems in Nigeria. The report was condemned by Friends of the Earth as a "greenwash". FoE said that "the commitment in the report to the principle of sustainable development cannot be taken seriously". Also, no targets are set for future improvement, and while individual Shell companies "may if they wish" register under an internationally accepted standard, it is not a requirement.
In PIRC's view, Shell could make an immediate improvement by submitting its environmental information for external verification. Notably, Shell UK made a commitment to this on the day after the AGM. Environmental auditing is not a new issue for companies. In 1990, the chairman of the CBI, Sir Brian Corby, argued that environmental issues could not be ignored and that auditing was of clear commercial benefit to companies. The importance of systematic appraisal has also been stressed recently by the Association of Certified and Chartered Accountants.
A move towards environmental auditing has been encouraged by the government. A working party established jointly by the Department of Trade & Industry and Department of the Environment in its Advisory Committee on Business and the Environment argued that: "An authoritative, independent review of an environmental report can be a major spur to improving the quality, integrity and credibility of its content... Independent verification should be encouraged."
In addition, the European environmental management system requiring external verification has been endorsed by the UK government. The EMAS (Eco Management and Audit Scheme) requires that the statement of a particular site's performance against standards is accredited by a verifier responsible for ensuring the validity, completeness and reliability of the statement. This verification report is publicly reported.
External Audit
UK companies publishing a separate independently verified environmental report
(Reporting window of January 1995 to April 1996)
Body Shop
Severn Trent
British Airways
British Telecommunications
Yorkshire Electricity
British Gas
British Petroleum
National Power
Thames Water
Source: Company Reporting Ltd, Edinburgh
Conclusion
Resolution 10 marked a sea change in shareholder activism in the UK, not just for social and ethical investors, but for those who believe that shareholders have an active part to play in corporate governance. Shell opposed the resolution, not from commercial objections, nor because they felt its advice was at fault. Indeed, since the proposal was filed in February, the company has adopted many of the proposal's recommendations voluntarily.
One can only conclude, therefore, that Shell - traditionally an introspective and secretive company - objected to the resolution per se, that they objected to the involvement of shareholders in the running of the company.
Such an attitude misunderstands the role that shareholders can and should play in promoting the healthy management of a company. Shareholders do not wish to micromanage, but they can communicate their concerns to the board. A shareholder resolution is one way of achieving this.
Resolution 10, because it has helped Shell focus on an issue of serious concern to its shareholders, must be counted as a victory.
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