The contribution of Corporate Social Responsibility (CSR) to Shell Nigeria’s Corporate Strategy

Introduction

Apart from profitability, the primary objective of business also includes sustenance of operations into the long term, receiving repeat business and thereby achieve the satisfaction of the needs of its shareholders. This necessitates the examination of operations with a view to advance objectives such as sustainability which entails being ethical and observing social responsibility. To many businesses operating in the modern competitive global economy, however, being ethical or socially responsible in the conduct of business presents an ongoing challenge (Wheeler et al., 2010).
With a focus on Shell Nigeria, this report critically evaluates the concept of corporate social responsibility (CSR) assessing its contribution to the company’s corporate strategy. It begins by assessing the industry background of the oil sector in which Shell operates bringing forth the issues that impact the company and its stakeholders in their engagement. The report then looks at the concept of CSR, assessing its theoretical basis and the actual pursuits undertaken by the company. This culminates in the evaluation of the contribution of these initiatives to the company’s corporate strategy.

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Shell Nigeria

Shell Nigeria is an arm of the multinational oil corporation Shell Corporation operating under the entities Shell Petroleum Development Company (SPDC) Nigeria Limited, Shell Nigeria Exploration and Production Company (SNEPCO), and Shell Nigeria Gas (SNG). It has had a presence in Nigeria since its foundation by Royal Dutch/Shell Group in 1936 and has been involved in onshore and offshore exploration and production of oil and natural gas (Shell, 2011). The company’s operations spread out within the Niger Delta (Nigeria) and constituting the Group’s international supply chain comprise 6000km of flow pipeline networks and stations, oil fields and producing wells, gas plants, and two major export terminals (Royal Dutch Shell, 2012a; OPEC, 2011).

The parent company, Shell Corporation, is one among major entities participating in the exploration, production, distribution and sale of oil and gas across the globe. The company manages multinational subsidiary petrochemical and energy companies operating in over 80 countries (OPEC, 2011). Exploration and extraction operations of crude oil and gas in Nigeria form an essential component of Shell Corporations upstream supply chain. Its downstream supply chain is engaged in refinery and distribution of oil and gas, as well as trade and shipping of crude worldwide. The company is also involved in the manufacture and marketing of a range of products including petrochemicals for its industrial customers. Its daily volume of production entails 3.2 million barrels of oil and gas (at 48% this output) delivering refined fuel oil to consumers through its 43,000 Shell service stations across the globe (OPEC, 2011).
Nigeria is important for Shell accounting for about a quarter of its worldwide production with an estimated contributed share in profit averaging $1.8 billion annually. This represents 10.4% of upstream operational profits and 7.3% of total profit (Shell, 2011). Given its importance to the Group’s upstream operations, any challenge on this front adversely affects global operations of the multinational corporation (Royal Dutch Shell, 2012a; Emesh, 2009). Several challenges beset multinational oil corporations operating particularly in developing countries as explored below.

The dilemma of oil companies operating in developing countries

Significant oil and gas reserves are found in developing countries of Africa (OPEC, 2011). These countries often lack the resource capability both in terms of financial capacity and infrastructure to conduct exploration and extraction operations of oil and gas. This explains the presence of multinational oil corporations such as Shell in these countries and in regions such as the Niger Delta of Nigeria which holds significant oil reserves deemed to be among the largest in Africa (Wheeler et al., 2010).

Operations of oil multinationals in these developing countries are however fraught with huge challenges brought about by the political and social situations which characterise them. Due to their structural and institutional weaknesses, these countries are often prone to recurring conflict and political instability which portends violence and risks to investments (Wheeler et al., 2010; Idemudia, 2009). However, with much to gain from the exploration and exploitation of oil and in spite of the risks and attendant challenges, the multinational oil corporations value the acquisition of market share (Emesh, 2009).

It is also noteworthy that profits accrued from the exploitation of the oil resource have historically been misappropriated, benefitting a few influential people in the local and national governments while the host communities and citizenry at large suffer poverty. With an abundance of oil revenue, a corrupt leadership forego accountability to constituents and undermine political and economic institutions while focus on oil wealth stifles diversification of the economy into other essential sectors (Emesh, 2009; Olowu, 2011). This scenario has often exacerbated the political and social situation, increasing the occurrences of conflicts and violence and threatening sustainability of business and integrity of the supply chain (Wheeler et al., 2010).

The discontent of host communities and stakeholders at the local level has led to acts of vandalism, sabotage and disruption, as well as outright insurgency which not only threaten operations but also impact the prices of crude oil internationally fomenting unnecessary fluctuations (Olowu, 2011). This alongside the adverse environmental impact of the extractive industry in general and impacts on human rights has often injured the reputations particularly of oil multinationals such as Shell Nigeria. They have promoted the perception that such companies are merely profit-oriented and care less about the impacts of their operations (Idemudia, 2009).

Such global concern over these issues has hitherto led to threats of and actual boycotts of Shell products, costly lawsuits and liabilities, and in addition to attendant inefficiencies and security of assets and resources, these challenges have not only impacted Shell’s local operations in Nigeria but have hindered the potential of the entire multinational corporation internationally (Olowu, 2011).

Companies such as Shell, therefore, continually need to evaluate political and social risks assessing probable effects on their business and the investment climate, as well as the impact on their profit forecasts and sustenance of operations (Olowu, 2011; Fombrun, 2001). This scenario has illustrated that adverse effects can have dire consequences for the entire business beyond its local operational environment. In order to sustain their business and even achieve growth and expansion, it is imperative for companies to enhance their relations with society ensuring that they are strong and mutually beneficial. Beyond the profit objective, multinational corporations are increasingly demanded of to engage with host countries and communities and CSR has become one of the strategies towards this endeavour (Haigh and Jones, 2006).

In response to this demand and in the attempt to shore up its reputation and to build goodwill with local communities, Shell has developed policies and programs aimed at taking on social responsibilities. These programs focus on poverty alleviation, dealing with challenging human rights issues, and the pursuit of sustainable development, seeking to lower the negative environmental impact of their activities (Shell, 2011; Olowu, 2011).

These practices are generally referred to as corporate social responsibility (CSR). They can serve as a channel through which to nurture relations with society and stakeholders in general so as to address this dilemma that companies face in the modern business environment (Driver, 2006; Haigh and Jones, 2006). In this regard, it can act dually as an avenue for ethical and social responsibility and as well a worthwhile and essential business strategy.
However, finding the right approach and the right initiatives to undertake is challenging for many entities as expectations are very high and diverse particularly in developing countries. As well, in most cases, the development initiatives anticipated should ideally be the prerogative and duty of respective governments and authorities. Their pursuit enables these public agencies to disregard their duties and to forgo accountability to their constituents, a free hand to misappropriate what would otherwise be spent on development (Frynas, 2005).

Corporate Social Responsibility (CSR)

CSR is a fast-growing concept in which organizations consider the interests of various stakeholders including society, the environment, and the community in which they are established, taking responsibility for the impact of their activities. It refers to activities that a corporate entity engages with and which are aimed at investment into better and stronger relations with stakeholders and society (Bourne, 2009). This commitment is a voluntary endeavour to improve quality of life for local communities and society at large and extends beyond the basic requirement to comply with regulations or legislation (Boyd et al., 2007).

Though historically consider to encompass corporate philanthropy, the concept can now be summarized conveniently in the phrase…“doing well by doing good” which is inherent in a firm’s accountability and which underlies its social contract with society (Driver, 2006). It encompasses concepts such as corporate accountability, corporate citizenship, business ethics, sustainability, as well as social responsibility in investment and community involvement (Fombrun, 2001). CSR is thus not the sole responsibility of the multinational corporation, but it also concerns the host communities and countries that can engage in planning and in the push for implementation of activities. This, however, gives the pursuit an arbitrariness that makes assessment of success and effectiveness quite challenging.

Success in business and sustainability of operations significantly depends on an organization’s capacity to maximize benefits accrued from its resources such as financial and human resources, physical assets, as well as intangible resources such as goodwill from stakeholders and society in general (Werbach, 2009). This is quite evident in challenges that have beset Shell’s supply chain stemming from challenges in its operations in the Niger Delta. Even with the right mix of financial and human resources, as well as an adequate asset base, the lack of goodwill leading to discontent locally and globally and acts of reprisals has in the past led to disruption of operations and loss of potential which have had widespread implications, including adverse effects on profitability, the company’s reputation, as well as the prices of crude oil in the international market.

In this regard CSR has become a significant component of Shell Nigeria’s corporate strategy in its quest for mutually beneficial engagement with stakeholders and achievement of requisite goodwill (Shell, 2011; Olowu, 2011). Through the proactive pursuit of CSR, companies can take responsibility for the impact of their operations and welfare of host societies, as well as stakeholders in general. Though perceived as an outlay that is difficult to recoup, there is evidence of potential reciprocal effect and business sense in CSR investments attributed to its creation of value and enhancement of stakeholder relations (Driver, 2006;).

Due to the general lack of infrastructure and development projects provided by respective governments in developing countries, the need for CSR covering broader roles such as poverty alleviation, good governance and development is prominent. Multinational corporations such as Shell come under heightened expectations to fill in the gap providing the requisite development (Wheeler et al., 2010). The initiatives undertaken by Shell towards CSR are explored.

Critics bemoan this reality in the expectation for intervention by such business entities on matters outside their primary objective. They posit that this demand influences and affects the conduct of business in the increasingly competitive business environment posing a challenge to strategists in the choice between meeting business objectives and shareholder satisfaction on the one hand, and the needs of the wider stakeholder base on the other (Frynas, 2005). This further complicates the development of corporate strategy given the need to focus on a number of extraneous issues often with private entities arrogating themselves duties that ought to be performed by the state or local councils. Such realities hinder the effectiveness of CSR initiatives and particularly its contribution to the company’s corporate strategy. CSR initiatives of Shell Nigeria are thus evaluated in the following section.

CSR initiatives of Shell Nigeria

Numerous activities that Shell engages in its pursuit of social responsibility are herein evaluated to assess their effectiveness and therefore contribution to the company’s corporate strategy. Initiatives undertaken by Shell Nigeria in its CSR pursuit cover external aspects such as environmental protection, community relations and human rights, as well as internal aspects such as principles and codes of practice, product stewardship, stakeholder and employee rights, and transparency (Shell, 2011; Idemudia, 2009). Shell Nigeria and the entire Group takes up an active leadership role in the development of codes of conduct and practice governing workplaces and their engagement with facets of society (Royal Dutch Shell, 2012b; UN, 2011).

The company has also supported development through programs in education, health, construction, commerce, agriculture, transport, etc. benefiting local communities (Olowu, 2011). Additionally, the company alongside others in the oil industry command leadership in programs promoting CSR internationally on various fronts. This has been facilitated by Shell’s new and sophisticated approach they refer to as Community Development (CD), offering a paradigm shift to environmental responsibility, social welfare, human rights, and political responsibility, among other issues of CSR (UN, 2011). This approach entails greater stakeholder engagement bringing together many entities including NGOs, state and local governments, and community leaders in identifying and implementing projects, ensuring increased local ownership, transparency and accountability (Idemudia, 2009).

Numerous projects have been successfully undertaken through this approach over the years especially benefiting areas in which the company’s infrastructure is located and/or flow lines traverse (Royal Dutch Shell, 2012b; Olowu, 2011). Goodwill generated from such “investments” in CSR has ensured integrity of assets that were hitherto under threat which is fundamental to successful operations. Various initiatives undertaken such as the community Health Insurance Schemes, enterprise development schemes, water supply and electricity supply, among others offer worthwhile lessons through which the success can be replicated elsewhere (UN, 2011; Idemudia, 2009).

This way, the company has benefited from consistency afforded enabling it to meet tight lead times and to better align supply and demand through greater efficiency. Success of development initiatives has enhanced well-being and economic empowerment of communities thereby reducing dependency for regional development which had burdened the company (Shell, 2011; Emesh, 2009). Additionally, initiatives undertaken in partnership with numerous players aimed at enhancement of the conservation of biodiversity through the minimization of the negative impact of activities have enabled reduction of environmental impact due to gas flaring and oil spills. The diversification into the production of natural gas has benefited the company significantly, becoming a worthwhile revenue stream (Royal Dutch Shell, 2012a).

Through a variety of indices assessing social and environmental performance of entities such as Shell, its CSR initiatives have earned it recognition globally as a leader in responsibility and a CSR champion. These indices include: the United Nations Global Compact (UNGC)- 2010; Dow Jones Sustainability Index (DSI)- 2010; Carbon Disclosure Leadership Index – 2011, the FTSE4Good and Goldman Sachs Sustain ESG (environmental, social and governance) – 2010 (UN, 2011; Shell, 2011; OPEC, 2011). Good ratings attained in these indices are evidence of the impact that it has had in its CSR pursuit. The recognition has been beneficial in shoring the company’s reputation across the globe enhancing its corporate value and standing of its brand.

However, oil multinationals (including Shell) remain at variance with local communities regarding the success and effectiveness of these CSR initiatives with the latter still not content. This represents the major challenge with CSR pursuits, particularly in cases such as this where expectations are quite high (Frynas, 2005). The actual success of Shell Nigeria’s CSR is evaluated to assess its contribution to its corporate strategy and bottom line.

Contribution of CSR to Shell Nigeria’s corporate strategy

Corporate strategy focuses on the organization’s overall scope with an aim to sustain growth and to achieve strategic positioning. The maximization of profits and minimization of costs is a primary goal of any business venture. This not only necessitates continuous improvement along the supply chain towards the enhancement of efficiency and effectiveness, but also entails an important aspect in the modern competitive business environment, value creation (Werbach, 2009; Kazem and Richard, 2008).

Competitive advantage entails the capability a business to provide superior products, services, or value differentiating itself from its competitors. Price/cost advantage, delivery, quality and flexibility are identified as among the components of the value advantage which enhance competitive capability. To be able to sustain its competitive advantage, a company or organization has to exploit such available capabilities which are as important as resources such as physical assets, financial resources, and human resources (Werbach, 2009).
However, the oil industry is characterized by minimal capacity for value addition to products and services, exploitation of a price advantage, or physical resource capabilities (Wheeler et al., 2010). It is therefore crucial for players in the industry to focus on value advantage deriving from delivery efficiency, quality, flexibility, as well as intangible aspects such as corporate value and reputation. The pursuit of corporate value and goodwill through CSR is therefore crucial for an entity to achieve a sustainable competitive advantage given the intense competition and capabilities (Fombrun, 2001).

According to Sachs et al., (2009) and Driver (2006), the CSR idea… “ties up with the drive for sustainability which is to develop solutions for business in such a way as to meet the requirements of the current generation without compromising the ability to provide the needs of future generations in bounty and diversity.” This is the basis for Shell’s renewed and revitalised pursuit of CSR which has enabled it to assume leadership on the responsibility front, a model for corporate citizenship (Shell, 2011). Despite the challenge in defining actual benefit and achievement in sustainability initiatives, the pursuit of CSR has granted Shell an important edge in the intensely competitive environment, enhancing the company’s corporate value.

Corporations invest in CSR motivated by the view on business ethics which holds that shareholders and stakeholders desire a financially stable and responsible corporation adhering to values of ethical conduct and environmental sustainability. A worthwhile brand image and reputation is thus central to strategy (Sachs et al., 2009; Haigh and Jones, 2006). This is the primary thesis of this report and which is shown to guide Shell Nigeria’s corporate strategy, as well as that of the entire Group.

Benefiting from reduced civil tension, as well as oil theft and sabotage, Shell has, in recent years, managed to increase production from new ventures such as offshore deep water explorations, as well as enhanced supply chain efficiencies – achieving increases in production averaging 31% year-on-year. Diversification into Liquid Natural Gas (LNG) production has enabled the company to enhance its revenue and to develop a new market (both locally and for export). Its economic potential has generated incentive and economic impetus to enhance the capture of natural gas associated with oil reserves that would otherwise be flared (Royal Dutch Shell, 2012a; Shell, 2011; Fombrun, 2001). Reduced flaring and the clean-up of oil spills have had a positive effect on the company’s risk and reputation management warding off potential lawsuits and liabilities (Shell, 2011; Dyer and Chu, 2003).

Turbulence in the political and social environment and the resultant uncertainty in supply and demand, as well as concerns over bad repute negatively affect investor decisions and therefore share prices (Fombrun, 2008). A firm that wishes to attain success in the modern business environment must keenly assess these fundamental flags and their associated costs , as well as future value or potential which significantly influence investor decisions. These may influence the company’s access to capital and to new markets and cannot be ignored (Sachs et al., 2009; Dyer and Chu, 2003). These factors can be adequately addressed through the focus on enhancement of goodwill and efficiency through social responsibility pursuits.

It is evident therefore that Shell’s CSR initiatives have contributed significantly to the company’s corporate strategy enhancing its capacity to sustain its operations and to thrive despite the challenges in the extractive sector and developing countries hosting it.

Conclusion

Through the pursuit of CSR, oil multinationals such as Shell can gain valuable goodwill enabling success of their operations and the enhancement of their overall image and perception as a corporate citizen both locally and internationally. Shell Nigeria’s proactive community development initiatives have in the most part significantly reduced conflict resultant from discontent and grievance of local communities and global concern impacting the corporate reputation of the entire Group internationally. Reductions in civil tensions, oil theft and sabotage have enabled increased production and new ventures and as well, the venture into the capture of associated natural gas has seen the company diversify into new revenue streams and markets of LNG. These benefits as well as the bolstering investor confidence due to this revitalization are evidence of the contribution of CSR to Shell Nigeria’s corporate strategy.

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