FROM OUR FEBRUARY 2005 SHELL NEWS ARCHIVE: “…we learned last year that the company leadership had been systematically lying to itself, its shareholders and wider stakeholders about the size of its oil reserves.”: “for years Shell lied about its sustainability as a business while preaching principles that it was betraying.”: “Shell had knowingly overstated its reserves by a third, a monumental betrayal of trust that is Europe’s version of Enron.”
By John Donovan
We have printed below a brilliant Will Hutton article published by The Observer on Sunday 6 February 2005. As he correctly says, this was a company that was lying to itself. No wonder Sir Philip Watts is seeking redemption.
The Observer: A word in your Shell-like
By Will Hutton: Sunday February 6, 2005
There’s nothing wrong with making profits. But we deserve a more sophisticated debate about sharing them
There is nothing like the news of one of Britain’s biggest companies making record profits to bring out all our ambiguities about capitalism in general and profit in particular. The left’s traditional mistrust of corporate money-making still casts a long shadow and even capitalists are uncertain how to respond when their profits are booming.
So it was last week when Jeroen van der Veer, Shell’s self-effacing chief executive, told the world that his company had made £9.8 billion in 2004, an all-time record for a European company. But van der Veer did not feel able to plough the profits back into his business, acutely under strain because of its fatally dwindling oil reserves. Rather, he told his investors that he was paying out a special dividend along with buying back shares to keep the share price high, even as Shell was simultaneously besieged with calls for a windfall tax and castigated for profiteering.
Tony Woodley, general secretary of the Transport and General Workers Union, and Martin O’Neill, chair of the select committee on trade and industry, united to call for a windfall profits tax on what Woodley dubbed obscene profits, a call for which they were ritually denounced by a string of City editors.
Didn’t Woodley and O’Neill recognise the function of profit in a capitalist society? Instead of fulminating about Shell’s profiteering, they should rejoice that the company was doing so well; the principal beneficiaries would be the very pension funds that Woodley wanted to help with the proceeds of the windfall tax.
At one level, the City editors and apologists for contemporary capitalism are right. Profit is the yeast of business; unless companies make a solid and positive return on their assets, they are in no position to invest and make their businesses sustainable. Profits can never be obscene.
What lay behind Shell’s growth was nothing more than the recent high oil price; it would be absurd to tax this one-off increase in profits, just as it would be crazy to give Shell a tax rebate when it declares one-off losses when the oil price drops. Shell has to live with the ups and downs of oil price changes; so does the society of which it is part. Changing the tax regime as fortunes change would be pure opportunism. By moving the goal posts in this fashion, society would be failing to understand the capitalist rules of the game from which we all benefit.
All that is true, but the case is weakened by Shell’s reaction to its sudden riches, along with that of the investment community. Even as Woodley et al are mocked for their anti-business foolishness, Shell and the City are treating the short-lived upward spike in Shell’s profits not as a welcome strengthening in the company’s financial position which will enable it to address its long- term business weaknesses, but as windfall swag which they want to get their hands on as quickly as possible. Hence the dividend and the share buy-backs.
But why shouldn’t the wider society get a share in the windfall action? If we are moving from a paradigm in which Shell is using its profits to build its business to one in which we are sharing the swag, it is an open question whether the beneficiaries should be confined to the shareholders in Shell, even if some are worthy pension funds.
Other pension funds are in acute financial difficulties through no fault of their own; shouldn’t the windfall spoils be diverted to them rather than every pension fund owning shares in Shell? And how to do that except via some windfall profits tax?
At stake is what ethic should underpin capitalism, profit and the idea of the company, an issue on which, paradoxically, Shell has purportedly led the way. In 1976, it declared that five principles would govern every aspect of its business; it would seek to maximise its profits, serve its customers, develop and husband its employees, do business with integrity and respect the societies in which it traded.
But while its ambitions are laudable – and actually practised by a wide number of Shell people – we learned last year that the company leadership had been systematically lying to itself, its shareholders and wider stakeholders about the size of its oil reserves.
Oil reserves are the lifeblood of an oil company: Shell had knowingly overstated its reserves by a third, a monumental betrayal of trust that is Europe’s version of Enron. Since then, heads have rolled and the company has rationalised its split headquarters into one in the Hague. But last week’s announcement confirmed the scale of the duplicity: while Exxon and BP have identified reserves that will guarantee oil production for the next 14 years, along with regularly finding new reserves that compensate for each year’s production so they are in a steady, sustainable state, Shell has only nine years of reserves and last year found only 10 weeks of new reserves to compensate for the year’s production. At this rate, it will have disappeared within a decade.
The criticism that Woodley and O’Neill should have been making about Shell – and which should have been endorsed in spades by the City – is that for years Shell lied about its sustainability as a business while preaching principles that it was betraying.
And now that it is in a position to make a massive investment in recovering the lost ground by finding new reserves and in investing in new technologies, like clean coal and renewable energy, that could make a massive contribution both to reducing carbon emissions and broadening Shell’s business, it is distributing its life-giving profits as windfall loot. Its ambition used to be to build a great company; no more.
The City and the right don’t talk in these terms, but neither do the left, British trade unions, nor even the moderates of New Labour. Last week, Woodley was at the centre of a proposed merger of his union with the GMB and Amicus to form a super-union which, at one blow, will supposedly rescue the fortunes of British unionism beset by its inability to recruit new members. It won’t.
Trade unionism is in trouble because it doesn’t have a workable diagnosis of capitalism that appeals to today’s workers. They want fulfilling and well-rewarded work, and to be treated with respect, in profitable companies that try to build great businesses, as Shell once was. The majority neither warm to talk of obscene profits nor to companies that mortgage the future for the present.
Until Woodley and his peers understand these realities, analyse them in these terms and find a rhetoric that speaks to them rather than see their constituency as readers of the Morning Star (where Woodley proselytised about the virtues of the merger), unionism is doomed.
But all of us are losers. We need to find voices in the body politic and civil society that articulate a more sophisticated debate than that between criticism of obscene profit and calls to rejoice on the other. Judging by last week, we are as far away from that as ever.