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Royal Dutch Shell – Conflict is not the only way

Financial Times: Conflict is not the only way: “When managers begin managing the company for themselves rather than for shareholders, conflict breaks out.”

By Morgen Witzel

Published: August 13 2004

Every business hasto deal with the views and demands of groups outside the organisation. Ultimately, businesses are part of society, and have to take account of society’s views. As businesses grow, their profile increases and they become better known, and this in turn leads to still greater external pressures.

The most important external group with which managers must deal are their own shareholders. Managers have a legal and moral duty to manage the company well and earn profits for this group. When managers begin managing the company for themselves rather than for shareholders, conflict breaks out.

Five years ago, we lived in a relatively quiet environment in which shareholders, by and large, let managers get on with managing, so long as growth was maintained and dividends paid. That culture ended with Enron, WorldCom and Parmalat. Now we have shareholders who demand to know what is happening to their assets, and are not afraid to use their power to change management decisions, or even managers, as Shell and Sainsbury recently discovered.

Unfortunately, shareholders (being human) do not always act responsibly, and in some cases their intervention has made matters worse. But that is beside the point. Shareholders have a right to know what is happening to their assets.

Customers also form a powerful group whose wishes cannot be ignored. If offended, customers have the power to hurt the company where it matters most. Levi Strauss, under pressure to abandon its operations in South Africa during the apartheid era, finally decided to do so after its own customers threatened a boycott. This case was more complicated than it might first appear; Levi Strauss managers themselves had long wanted to pull out of the country, but hesitated for fear of the economic consequences for their own employees. The boycott decided the issue for them.

Boycotts do not have to be over political or social issues; many Coca-Cola customers boycotted the company’s products after the introduction of the infamous “New Coke” simply because they were angry about changes to their favourite product.

Government can of course exert significant pressure, particularly in developing countries and in areas where there is a long tradition of close links between business and government. And finally, society as a whole has its own views of what business is for and how managers and companies ought to behave. In recent years, those pressures have become more overt. Anti-globalisation protests and the targeting of companies involved in scientific research by animal rights protestors have shown how powerful those pressures can be.

Often we see the issue in terms of conflict, with business and social interests in opposition. It does not have to be that way. Companies that see their interests as being in harmony with social concerns can use this to their advantage. The growth in the organic and GM-free food sectors is an example of businesses realising that social trends should be responded to, not fought against. Other companies such as the Body Shop have for years been simultaneously satisfying social needs and making profits for shareholders.

No manager is an island, and businesses cannot afford simply to dismiss external pressures and carry on as if society does not exist.

As the second stage of growth concludes and the mature business prepares to make the leap out of local markets and on to the world stage, the need for managers to work with society and not against it becomes even more important. Monday: Staying competitive.

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