Shell's revived interest in Wind Energy needs to be taken with a pinch of salt.

The above from a story in "The Times."

My 40 years in Shell taught me one thing - it is a Corporation that’s very good at oil and gas, but hopeless at anything else! In my time here’s a partial list of things we tried but couldn’t make work:

• Nuclear
• Metals
• Coal
• Forestry
• Solar
• Wind
• Agrochemicals
• Electricity Generation
• Convenience Stores
• Biofuels
• Fast food
• Home insulation
• Natural Gas retailing...

The way to the top in Shell is based on the skills of finding and extracting of hydrocarbons occasionally augmented by those who can refine, market or trade and transport them. If in doubt the top management always retreats to its oily comfort zones. We dipped a toe in many waters but diversification was not really what we did.

Shell is not a conventional multinational that can comfortably diversify. It’s basically an oil company. There is little transfer in of people from outside oil at the higher levels of general management. Virtually all the top jobs are filled from internal promotion. So oil people promote oil people. The performance parameters in oil/gas are subtly different from those of other global businesses. The valued skills are heavily technical knowledge based - engineering, geology etc. In Retail (petrol stations) where I worked for a time we found that above the mid to senior level there was no comprehension at all of what a consumer or a brand was among the Board level top management (or those a rung or two down). Fortunately at my middle/senior level we did know what we were doing. Mostly!

Back in the 1970s and 1980s diversification was underway on a fairly large scale. In 1974 Shell lost about $290 million on its Nuclear Energy joint venture with Gulf Oil. Whilst the scale of this was exceptional the underlying causes were similar to most of the other failed diversifications. Shell simply did not understand nuclear and had few if any competences in house to manage it.    

The Metals corporation Billiton was acquired in 1970 the logic of this being that like upstream oil Metals was also a raw material extractive business. You looked for minerals deposits and if you found them you extracted them. You then, again like oil, you converted the raw material into useful products that people wanted to buy. Billiton stayed a Shell company for quite some time but eventually it was sold, largely I think because it was a distraction from the core oil business.

Around the same time as Billiton Shell Coal was created. Here the logic was similar (it’s an extractive business) with the added bonus that there was a logic in the corporation becoming an Energy rather than “just” an oil operation. But, as with metals, there was little corporate memory in Shell on coal and despite some considerable injections of capital it was eventually disposed of. (Concerns about the difficulties of managing the environmental aspects of this increasingly unpopular energy source also played a part).

Shell has been in the Chemicals business for nearly a hundred years but in recent times has moved out of anything, like Agrochemicals, which they determined was not core or which required high capital investment or had high operating costs. Research was significantly reduced and Research laboratories like those at Sittingborne in Kent were closed. The activity in this sector remains significant and it is the one business that endures outside the core oil/gas sector. That said petrochemicals are a logical extension of refining which until recently was also part of Shell's core business.

Multinational oil companies, like Shell, grew on the back of vertical integration. Everything from the wellhead to the petrol station was Shell branded and often Shell operated. In the supply chain Refining was a key link and certainly part of Shell's traditional competences. With closures in the United Kingdom (where Shell once had three refineries but now has none) and elsewhere this is reducing and it remains to be seen whether the corporation will continue to feel that it needs to refine crude oil when others have business models that enable them to do it more efficiently and at lower unit cost. For Shell refineries have always been cost centres whereas for independent refiners they are profit centres. Shell never really managed to make money out of refining.

As far as marketing and trading is concerned Shell petrol stations remain ubiquitous around the world but increasingly country Retail operations are franchised and Shell is no longer hands on - this applies across Africa for example. This is different from diversification exits, but the drivers are similar. Where diversification fails it is often because of an unwillingness to invest or to spend revenue costs in maintaining and/or expanding the business. So it is sometimes in Retail where it is often seen to be preferable to try and keep the brand presence by franchising and let someone else incur the operating costs.  

Around 1990 and onwards Shell sought to increase income flows from petrol stations by diversifying into Convenience Stores under the "Select" brand. The strategic logic of this was powerful as was the initial design and branding. The problem was that actually to build a standalone C-Store brand which could potentially be successful in up to one hundred countries would have required a massive effort. Other oil companies built local partnerships with experienced C-Store and Supermarket companies (BP with Marks and Spencer in the UK a good example). Shell's initiative was half-hearted and under-funded and the C-Store policy around the world is now confused and incoherent.

One of the most instructive stories about Shell and diversification was the creation, and eventual sale, of the Power generation company Intergen. This initiative lasted ten years and again it became a victim of not being a core business. Shell is dipping its toe into this water again with its newish "Shell New Energies" initiative. Its worth reading the interview with CEO Mark Gainsborough here. In many ways the enthusiasm he shows is, in my experience, typical of Shell's positioning at the start of a diversification. Maybe this one will be different and last the course, but don't hold your breath !

Shell's biggest diversification success was not a diversification at all really! The growth of the natural gas business has been impressive and Gas is now right at the heart of the corporation's future, and has been for some time. The Gas supply chain, whilst different technically form oil, has many similarities with it. This is home soil for Shell though its attempt to stretch the involvement into the marketing to end users was less successful. Shell Gas Direct marketed gas in the UK for a time before, like so many other diversifications, being sold.

Shell's brief involvement in Forestry throughs some light on one of the motivations for Diversification. PR.  This corporate advertisement is instructive. It claims that "One day it [forestry] may be our biggest business". Shell withdrew from Forestry the year after it was aired!

So be sceptical of the Wind Farm initiative. Maybe Shell's return to wind power will buck the trend of many years and be a diversification that endures. But don't hold your breath !     

Political parties as brands - Labour is failing

A brand is a combination of characteristics possessed by a product or service that identifies it and distinguishes it from its competitors. Identity is part of this (the brand name, colour scheme, symbols etc.) but the key elements are product quality, performance and value. It is not sufficient to have an attractive brand image. That image must stand for something that the consumer values when they experience it. The reverse also applies. If you have a good product but fail to communicate its benefits then you will fail or underperform compared with a competitor with an equally good product who does communicate effectively.

Political parties and politicians are brands. They conform to all the brand realities in the paragraph above. Brand loyalty (the propensity to favour a brand through good times and bad) is probably stronger with parties than it is with consumer products or services. In Britain the Conservatives and Labour can usually rely on around 30% of loyal support - how they add to this determines whether they achieve office, or not. And that process is all about Brand Management. 

The idea that political parties and politicians are brands stretches back a long way. In Britain certainly to Gladstone and Disraeli, if not earlier. The Liberals and the Conservatives in Victorian times were arguably not that different. But Gladstone and Disraeli were chalk and cheese! Even without mass communications the voter made his choice based on his perception of these two very different brand offers.

In modern times the first truly marketed brand was that of John Kennedy in 1960. In "The Making of the President" Theodore White describes how all the newly modern techniques of brand marketing (think "Mad Men" !) were used to promote JFK. There is no doubt that better brand management won the day (very narrowly) against the better known Vice President Richard Nixon. 

In Britain the most successful brand relaunch was that of the Labour Party in the run up to the 1997 General Election. This ticked all the boxes. The core product was changed. The Left Wing baggage that had made Labour unelectable was jettisoned - especially Clause 4 that Achilles Heel that committed Labour to seek the common ownership of assets. The visual identity was also changed to position Lablour as more classless rather than (just) being the choice of the C2DE social classes. A conscious attempt was made to position Labour as pro Business. The name was changed and it was "New Labour" that was promoted as the brand name overtly signifying change. And above all a Leader was chosen who visually stood for these changes. Tony Blair was the most important combinations strength of New Labour. Young, good looking, articulate he commanded the media who lapped it all up. Even Rupert Murdoch backe Blair and Labour in 1997 - the grey man John Major stood no chance. It was a landslide.

Everything that goes up must come down and so it was with New Labour. But Blair won three General   Elections and only a combination of a far weaker brand presence in 2010 (Brown was no Blair),  a recovered Conservative Party and what Harold Macmilan called "events" lost Labour power. Since then Labour's position as a credible brand has gone from bad to worse. In 2015 it looked for a long time that the Coaliiton would lose office and that it would be a Labour Government with a majority rather than a Conservative one which would replace it. In fact the opposite happened. The Labour brand was not strong enough, Ed Miliband as its principal communicator lacked sufficient credibility and the media was mostly hostile. And some new entrants (the SNP, UKIP, the Greens) stymied the chance of Labour regaining power.

Post 2015 the political scene in Britain has become toxic. The principal reason for the this was the EU referendum where the brand which best reflected the public mood, "Brexit", won the day. That public mood was anti-politics - a plague on all their houses. The Brexit case was (a) That all is not well in the KIngdom of Britain and that (b) The reason for our malaise was the EU, our not controlling our own governance, and the fact that we let too many foreigners into our country. Marketers know that you can sell snake oil once and "Brexit" was all snake oil. But the sale was made and we are stuck with it.

In this toxic world Labour has imploded. The choice of Jeremy Corbyn as Leader could not have been more damaging to the brand. One of the interesting elements of brand management is the niche brand proposition. In this a marketer decides to launch a product which is aimed at a very specific niche target group. Mercedes has such a product with their "Smart" car. The endorsement of the Mercedes brand helps (as does that of BMW in the case of the Mini) but in no way is the Smart car the new Mercedes! Jeremy Corbyn is the same. His (very) Old Labour positioning has brought people to the Party as his rallies show. But this is a niche group. Not everyone in Labour was happy with New Labour or with Tony Blair but the New Labour brand was sufficiently strong to marginalise this internal opposition. Corbyn was part of this opposition and now he and those like him have taken over the party. The support for Labour under this regime seems to be less than the core 30% from which you start to build a credible case for power. There is no chance whatsoever of Corbyn and co reaching out to the floating voter as New Labour did. In other words there is no chance of Labour gaining power under his leadership.

Brands flourish when they meet the needs of consumers and wither when their offer is no longer offering benefits which match these needs. Labour today is a niche brand which like all niche brands has loyal and enthusiastic support. But it it needs to be a brand with extensive popular appeal across class, gender, locale and many other demographics. Unless and until it realises this it has no chance of power.

What is "dumping" - and are the Chinese doing it ?

Economists, businessmen and politicians would probably see the whole question of what "dumping" is slightly differently. Are the Chinese dumping excess Steel production at below cost? Let's try and analyse what "dumping" is.

Any manufacturer incurs fixed and variable costs in producing products. The fixed costs include labour (usually), rent, other asset related costs (e.g. Business rates), maintenance and repair, licence fees and so on. These fixed costs are not production level dependent. The variable costs include consumables, raw materials, energy, transport etc. Essentially the higher your production the higher your variable costs.

In China the  Steel production is around 820m tonnes (49% of world total) and Steel consumption around 710m tonnes (46% of world total). In other words China is a net exporter of steel - the largest in the world by far - as well as being the largest consumer and producer. 

Let's say that "China Inc." covers all of its inland demand and allocates all of its fixed costs to this demand. A reasonable thing to do. Then, within its capacity capability, it produces further steel which it exports in order to make a further positive contribution to its operations. The key point here is "positive contribution". Obviously the income stream from the exports must exceed the variable costs of that production. Otherwise every exported tonne would lose money. That would certainly be "dumping". But it is, in my view, not dumping to allocate only variable costs to that part of your production you export (less than 10% in the case of China). Others may disagree ! 

The enormous scale of China's steel industry (70 times that of the U.K.), its modernity and its comparatively low fixed costs (especially labour) gives it a huge competitive advantage in world markets. It is not primarily focused on exports at all though and can therefore afford to sell at prices which only as a minimum cover the variable costs of production. As I say my contention is that the Chinese could only be accused of "dumping" if they sell at prices below these variable costs. 

There is no case for keeping steel production open in Redcar

Steel is a commodity. This means that producers must mainly compete on price. As with all commodities there are opportunities to add value on the margin with enhanced products or services for special applications. But the vast majority of steel use is of materials that meet a common specification and are undifferentiated. So any buyer of steel issues tenders and chooses a supplier who offers delivered materials meeting an agreed specification at the lowest price.

In the modern world the trading of commodities is international and even bulky items like steel can be transported over large distances economically. This means that the global market will be dominated by the suppliers with the lowest production costs who can as a result offer the lowest prices. 'Twas ever thus. The decline in textile manufacturing in the UK (for example) was because others in lower labour cost countries could offer lower costs. And with free trade and the removal of tariff barriers there is nothing we could do about it, and didn't.

So is steel production in Redcar (etc.) a lost cause? Almost certainly. Should the British government subsidise British steel to keep plants open? The only instance where this might be justifiable would be if the present steel market conditions were temporary and some sort of bridging arrangement was necessary. The does not appear to be the case.

The closure of the mines in the 1980s was crassly and insensitively handled, but the strategy was right. The UK could not compete with lower cost coal producers and the energy sector was moving away from coal anyway. There is a parallel with the current state of affairs in steel. The U.K. can be a niche producer of added value steel products, but not a competitive producer of commodity steel. So Government's task is not to shore up unviable plants but to find a way of softening the blow for those thrown out of work. It's a tough conclusion but there is no other one.

Drinking in Saudi Arabia

I was sitting in an expat residential compound in Riyadh on one of my many trips to Saudi Arabia some fifteen years ago. My host was the ex-pat head of Shell in that country and he was hospitably ensuring that I and the other guests had what we wanted to drink. Beer, spirits, wine were available without any restrictions. Inside the compound! The details of how it all got there I can’t remember but any ex-pat would know the sources and how to ensure that thirsts were always quenched.

I got quite close to one of the more urbane Saudis who worked with us in Riyadh. He invited me to his home and there I met his wife – a beautiful young woman who behind the walls of their house wore high fashion clothes and acted just as any woman in the West would act. The two of them were generous hosts and insisted that I tried a particular Malt Whisky – a Macallan as I recall. There was a seemingly unlimited choice of other spirits as well. This friend told me how it worked. “Did you know”, he said,  “that the Kingdom is the world’s largest consumer of Johnnie Walker Black Label?”. I’ve no idea if this was actually true but maybe it was. The supply route was explained to me. One of the members of the House of Saud, the ruling family, (there are a lot of them), had the Johnnie Walker “concession” and arranged both the (illegal) import and the (equally illegal) distribution to customers. This was matched for all of the rest of the high quantities of alcoholic drinks that the country consumed.

The home manufacture of alcohol by ex-pats in their compound homes was also common. They would brew beer, make wine from kits and some even had a still to make hooch. This was partly because the imported real thing, though available, was expensive. Mr Andree was apparently arrested for transporting a quantity of homemade alcohol. He was caught by the “religious police” – perhaps there was a particularly tough officer on the case. In general the Saudis turned a blind eye to what was going on so long as it was not “in-your-face” - and they rarely if ever went into an ex-pat compound.

Nothing is ever quite what it seems in this corrupt and bribery-ridden country. Maybe the arrest and imprisonment of Mr Andree has more to it than it seems? He has apparently lived in Saudi Arabia for the last 25 years, “developing and managing a number of locally owned oil companies” and that will have at times, no doubt, have  placed him in difficult personal positions in a sector where there are many rivalries. Has he fallen foul of somebody who wanted revenge – or at least for him to be out of the way? Who knows, but a man who has lived in the Kingdom for so long is unlikely not to know the rules and to have found subtle ways around them.    

It is a black and white matter - the hideous use of reverse type.

This is the front page of today's "Jewish Chronicle". I'm not asking you to read it, or try to, because of its content. I'm showing it to comment on the still insidious and hideous practice of the use of "reverse type". "Reverse Type" is when a publication (including online) decides to print in white on black rather than black on white. The great AdMan David Ogilvy wisely said "If the New York Times could be made more readable by printing in reverse type they'd do it" - or words to that effect.

So why do some publications still do this decades after Ogilvy settled the matter? Ignorance mainly. A new generation of designers is around who think that they need to grab attention by being smart. Of course the "Jewish Chronicle" is not all white on black. But here they think they have a big story and big questions for Labour leadership candidate Jeremy Corbyn. Perhaps they do. How especially odd that they do this not by making the text more readable (by increasing the font size for example) but by making it less!

Another common use of reverse type is in theatre programmes. It's trendy - I assume. Even more bizarre! In a theatre you are often reading your programme in dim light. Combine that with trying to decifer text in reverse type! 

For once this is a black and white matter!

BG acquisition offers Shell opportunity for major strategy change

As a Shell "lifer" - more than forty years if you include my time as a Director of the Pension  Fund - I cannot recall a bigger strategic shift than the acquisition of BG. It offers the Corporarion a unique opportunity to do what Tom Peters called "stick to its knitting" - to concentrate on what it's really good at.

BG is an "Upstream" company. It only does exploration and production of oil and gas. And that is what Royal Dutch Shell (RDS) is good at too. To the man or woman in the street it is the Shell emblem standing over a Shell petrol station for which it is best known. But over the years this part of the business - never, in truth, that important to the heavies at the top - has declined in importance. The "Downstream" - the refining and marketing of oil, gas and chemicals - is pretty much cast adrift from the Upstream. The engineers, geologists and accountants in the highest echelons of Shell never really understood it anyway! There are no longer any economies of scale from being involved in oil from wellhead to petrol pump, if there ever were. 

In the last period of my Shell career the start of a major centralisation of business occurred. The power of the national "Operating companies" (OpCos) was severely curtailed. Most of these were marketing companies and there was a presumption, based on profound ignorance, that they could be managed centrally in the way that the Upstream increasingly was.  Those arguing the indisputable truism that "All Markets Are Local" we're not listened to and numbers on the ground in the OpCos were drastically reduced and their autonomy was destroyed.

The Downstream was an uncomfortable mix of Refining - an asset rich highly technical business - and Marketing which if done well has to be customer driven. Once, perhaps, to market oil oil products you did need to refine them. That hasn't applied for a long time. Shell no longer has any refineries in the UK but still has a significant marketing business. The same applies to many Shell operations around the world.

Over the last decade or more Shell has pulled out of the Downstream in many countries - in some cases franchising the brand to a separate business Independently managed and neither Shell owned nor controlled. This reduces assets employed, whilst maintaining a visible brand presence. There is nothing wrong in principle with this model - MacDonalds and other fast food businesses do it - but it has to be tightly controlled. Especially the brand. I very much doubt that the Board of RDS spends any time on these matters - the huge Upstrean business occupies most of their time. And when it comes to investment the priorities are also overwhelmingly Upstream.

The purchase of BG merges a significant Upstream operation into RDS's already huge one. All of top management's attention in the next few years will be on making this work. In these circumstances the Downstream would be an uneccesarily distraction. There is an overwhelmingly strong case for splitting the Downstram away as a totally separate stand-alone company which would focus entirely on marketing the brand to customers around the world. Oil Trading and Chemicals would also be part of this new Shell company. It would be separately traded as a FTSE company and entirely disconnected from the Upstream of RDS. The new company would take the "Shell" brand while the Upstream would be renamed "Royal Dutch". Easy !

I would guess that there are a few people in BG who know all about demerger. Remember the old British Gas was a vertically integrated company, like Shell, doing everything from exploration to selling Gas to the end consumer. It was split into two back in 1997 when the brand name "British Gas" went to the UK marketing company (owned by Centrica) with the Upstream business being renamed BG. Shell has the opportunity to do the same now and there are sound reasons for doing so. 

I 

You may not like it but tax avoidance is good business.

The tax Division in Shell was pretty big when I worked there. I suspect it's much bigger now. Multinationals by definition operate globally - in Shell's case in just about every country in the world. I have two Shell pensions. One relates to my UK service, the other to my years of service overseas. That latter pension is from a Pension Fund based in Bermuda - this location, which is perfectly legal of course, is purely for tax reasons. The Fund benefits from an advantageous tax regime in the British Overseas territory, and so indirectly do I. I pay tax on my overseas pension of course, but I get a small tax exemption to reflect the fact that the pension is in effect deferred salary from a time when my employment was not UK tax liable.

The Pension example is one of thousands illustrating that big Corporations have to be tax efficient, and have the ability to be so. That ability comes from that big Tax Division whose brief is, of course, to minimise Shell's tax obligations. Some profits are deliberately made in low tax locations rather than high tax. Some businesses are deliberately located in low tax countries rather than high tax. And so on. Sometimes it's much cheaper to do business in one place rather than another and Shell, and the rest, have an obligation to respond to this. Who is the obligation to? Well the owners of the Corporation of course - including institutional investors. Why pay tax if you don't have to?

Those that levy tax certainly have their work cut out to apply the law when in the big Companies there are top tax lawyers trying to beat the system! The search for tax loopholes which lead to the avoidance of tax liability is part art and part science. It's clever stuff, but there is nothing illegal about it. It's up to the authorities to close the loopholes not to businesses to pay taxes when they are not obliged to. Labour leader Ed Millibsnd said this about the Boos of Boots:

"I don't think people in Britain are going to take kindly to being lectured by someone who is avoiding his taxes..."

Aside from the personalisation (it's the Company not the individual) I'm afraid Ed just doesn't get it. Ever day thousands of British businesses and their advisers and lawyers are working hard to avoid paying taxes. They are not evading them (which would be unlawful) but avoiding them (which is good business). It is utterly naive to imply that companies should voluntarily pay taxes when they don't have to. 

Shell and the National Gallery–welcome to a Moral Maze

 

I went to the superb exhibition “Rembrandt: The Late Works” at the National Gallery yesterday. The exhibition is sponsored by Shell - quite strongly as it happens. There are a couple of prominent Shell promotional displays and the Shell emblem is visible all over, though not within the actual gallery where the works are to be seen. This suggests that the Shell sponsorship was financially quite large, even that the event, in straightened times for the Arts, might not have gone ahead without it.

A couple of days earlier those opposed to the National Gallery’s involvement with Shell mounted a protest in Trafalgar Square. There had also been protests also when the exhibition opened in October (see photo above). In a democracy we have to allow peaceful protests by individuals or groups opposed to things they consider wrong. The protestors against Shell are quite within their rights and the things they complain about - from oil spills and gas flaring in the Niger Delta to tar sands projects in Canada are legitimate areas of concern. In the minds of many  Shell is an extremely unethical choice of sponsor for the National Gallery. But there is a moral maze here.

During the latter part of my Shell career I was responsible for a number of Shell sponsorships and the related PR activity in the Middle East. It was my job, but I did it willingly in the main. The overriding objective was to associate Shell with events and activities that conferred value or prestige on the brand. The reverse was also often true. Shell’s sponsorship of something often added some legitimacy to an event. But this was in a region where an Oil Major such as Shell is broadly well thought of anyway! Here in Britain that is far from necessarily the case.

In the case of the National Gallery Shell’s involvement is far from gratuitous. There is actually a connection with Shell and the restoration of masterworks which is as interesting as it is surprising. Shell’s case for being involved, in the official programme, is persuasive. I am not buying the official line completely - the altruistic element of Shell’s involvement is only one reason and so is the technical and scientific case. For Shell the major benefit is prestige and the boost to their less than lilywhite reputation that the sponsorship seeks to create.

But what of the protestors? Their goal is to use the high visibility of the exhibition to publicise their causes and to give a focus to their campaign to persuade Arts bodies like the National Gallery not be financially supported by the likes of Shell. (There is a similar campaign in respect of BP and the Tate Gallery) . This is very polarising. Despite my Shell career and status as an (active) pensioner) I am a critic of the Corporation in some of what it does and how it does it. But I am also a supporter the Arts and if exhibitions like the Rembrandt would only be possible with money from Shell or BP then I can see the case to be made in their favour. Especially if the rationale for involvement is more than tenuous - as does seem to be the case for Shell and the National Gallery. I personally remain open-minded on the subject. It is a moral maze and I’m sure that I’m not the only one struggling top find my way around !

The changing world of Oil and Energy. Interesting times!

There is an almost perfect correlation between Multinational Oil company profits and the price of Crude Oil. The higher the latter, the higher the former. Changes within the business operations, cost reduction exercises and other reorganisations and the like, can affect financial performance on the margins. And instituting such changes can give Directors the feeling that they are “doing something” to justify their windfall level remuneration. But, in truth, it’s the traded value of Crude which really drives the dosh. So falling prices are bad for Shell, Exxn and the rest of them Arguably, however, they are good for the rest of us.

There are those who argue that the higher the oil price the stronger the drive for diversification will be. Renewables become more relatively viable if Crude prices are high. But Shell, having established Wind, Solar, Forestry and other unconventional energy businesses got out of most of them despite the rise in Oil prices. Even the (highly questionable) Governments’ subsidies for renewable energy were insufficient to keep Shell in the game. And falling prices make it unlikely that they will return.

One of the drivers of falling prices is the gradual increase in production – especially in the United States – of hydrocarbons (mostly Gas) from Shale. Fracking is changing the face of the energy scene, and not just in America. The US could become self-sufficient in Energy as a consequence, an extraordinary turnaround. The energy business is a classic example of where price is a direct consequence of the interplay of supply and demand. As supply of oil and gas from new non OPEC production such as shale increases the price falls. For the first time for a while the Sheikhs and their friends are not telling us how much we’ll pay for our gasoline!

The prediction of oil price trends is a dodgy old game and one major shock can lead to panic and price rises. That said there is reason to be bearish on oil for at least the medium term. There is an uncomfortable dilemma ahead for the Oil Majors. Unconventional oil and gas production – be it via fracking or by moving into environmentally questionable areas like the Arctic – is expensive. And yet if the reliance on Middle East and other traditional producers is to be reduced then this has to happen. But the bean counters are going to be worried about project viability if the Crude price keeps falling. My guess is that the hurdle rate for investment approval slips negative in many cases at $80 a barrel or less.

Consolidation of the energy sector may be the way forward. Rumours of BP and Shell dusting off the merger files sound logical to me. BP is far from out of the mire of the Browne and Hayward years yet. But come the dawn, and if the lawyers confirm that all the lawsuits are behind them, then a Shell/BP merger seems more likely than not. The opportunity to build a great Europe-based Energy multinational around the strong(ish) foundations of RDS and BP would be attractive – not least to the European Union. The nightmare alternative, by which either or both fall into the hands of Russian, or Chinese or Arab predators is not! 

“Follow the money” is never bad advice. And along with “Who benefits” I’d recommend it at this time. The next few years will see major changes, some surprising, to the global energy scene. The power is shifting. Interesting times. The prizes are high! Who will win? We’ll see.

Once you could be Sure of Shell…

Most of my 37 year Shell career was spent in the “Downstream” but from time to time I had contact with the Upstream operations and in my final assignment in the Middle East I was very close to Upstream issues. Both Shell’s exploration and production activities (the Upstream) and their refining and marketing business (the Downstream) had the Shell emblem (the “Pecten”) flying over them – but that was about the only thing they had in common!

EP is a top down business. The experts in The Hague, mostly products of the best geology and technology Universities, built unrivalled expertise in the tasks of finding and exploiting hydrocarbon assets. They were also pretty good at building the necessary alliances with partners that virtually all upstream operations require. Their world was the world of oil reservoirs, horizontal drilling, fracking and all the other thousand and one technologies and techniques that made the business work.

Refining and Marketing – or at least the marketing bit of it – is bottom up. The millions of motorists, commercial buyers, airlines, shipping companies, domestic consumers etc. etc. who have needs for one or more petroleum products represent the “Market”. The refining bit once had some synergy with the marketing operation (and indeed with the Upstream) in that to sell products you needed to create them in the first place – by cracking Crude Oil into its useful component parts. But over the years the need for an Oil Major to run refineries disappeared. The marketers could buy from independent refineries and the EP people could sell to them either directly or through traders. The benefits of an “integrated” oil well to petrol tank operation went away. Oil Production, Oil Refining and Oil Marketing became three distinct and very different businesses many years ago. There were no economies of scale from being involved all the way along the chain.

In the late 1980s I was working in Shell Hong Kong. This was a medium-sized and highly profitable marketing business. We sold the full range of oil products to customers in the Territory and, increasingly, in China. The Shell brand was strong and we were market leader – indeed in many sectors we had the Boston Consulting Group’s ideal situation where our market share was at least twice that of our nearest competitor! It was a Cash Cow. We invested heavily in the Shell brand through advertising and service – and it worked. It was a heady time for all of us – a company that could be customer-driven with no distractions. Then a change occurred. A new Chief Executive was appointed – a geologist who had been part of the team which had discovered North Sea Oil in the late 1960s and early 1970s. An Upstream man through and through. He knew nothing about Marketing and cared less. It was an odd appointment driven solely by Shell’s ambition to participate in major projects in the Upstream (and Refining) in China. The new CEO’s task was to get alongside the authorities and prospective partners in China and open doors and forge alliances.

The learning experience for me and others in Hong Kong was that to the powers at be at the very top of Shell, Marketing was a foreign subject about which they knew nothing. The idea of sending a non-Marketer to head up a highly successful marketing business was mad, unless you realised that was the way the high-priced help thought. Their Shell was the Shell of Oil Wells and Gas plants not the Shell of petrol stations and ordinary customers. In reality, of course, Shell was both and there were skilled professionals in all the disciplines around the world. But as you moved up the hierarchy interest in marketing declined and at the very top it was rarely a substantive item on the agenda. It was in the 1990s that I realised that to protect its marketing business and to focus absolutely on its huge Upstream business Shell needed to split the two. I wasn’t alone in seeing two distinct corporations emerging. “Royal Dutch”, which would be run from The Hague and which would take over all the Upstream. And “Shell Marketing” which would be run from London and would run all of Shell’s Marketing operations in 130 or so countries around the globe. In fact the main emphasis of “Shell Marketing” would be to delegate to local operating units (as in Hong Kong) on the indisputable grounds that “all markets are local”.

The logic of a split along these lines was strong and it meets virtually every criteria preached by the Business Schools. Why pretend that just because two utterly different businesses both have the Shell emblem flying over them they are the same, require the same skills and could be driven by the same imperatives? It just wasn’t true. But as we all know this was not the reorganisation that Shell pursued. Instead, and in response to the Reserves scandal, it created “Royal Dutch Shell” and moved its governance primarily to The Hague. A Company that clearly was not integrated along the supply chain any more, nor needed to be, stayed in its historical configuration. Decisions about Marketing strategy were taken ultimately by non-marketers for whom, like my once CEO in Hong Kong, marketing was an unknown world. When this happens only Dollars can be the common denominator. So aggressive cost cutting was forced on the marketers. Strange global organisations were created with business heads being arbitrarily located in offices miles, often thousands of miles, for some of their markets. The local operating units, like Shell Hong Kong, lost their autonomy and freedom to act. Investment in the brand declined as did any expenditure which could be described as “discretionary”. The myth that “Refining” and “Marketing” had any synergy was perpetuated and country exits were predicated on Refinery closures with the marketing infrastructure and brand strength not being valued. Market withdrawals gathered pace including in Markets which in which in my time I spent a lot of time – Spain, Australia, Italy, Greece – possibly Canada among many, many others.

The new RDS structure had been contemptuous of local markets. Hardly surprisingly performance in these neglected markets declined which then in too many cases was to lead to market withdrawal. Will Shell have any Marketing operations in ten, even five years time. Maybe not. Could it have been different? Unquestionably if the Upstream/Downstream split many of us supported had been followed. A Board of Directors which primarily focuses on the customer is what the really great brands have in common – ask McDonald’s or Coca Cola. A brand which acknowledges that all markets are local will succeed where one that tries to take local decisions at the centre will fail. A brand which invest in its strength and promotes its benefits will grow whereas one that fails to invest will wither on the vine. If you want to kill an organism then starve it.

When I retired I was presented with a small silver Shell emblem which I still wear with pride from time to time. It once stood for excellence in marketing and was one of the world’s most familiar brand symbols. Now it’s a bit of a collectors item symbolising a world that has long gone…

Not just Fred the Shred RBS - one victim, many villains

The failure of RBS was like "Murder on the Orient Express" - multiple villains - Fred the Shred wasn't the only one. One of the villains (rarely mentioned) was David Cameron. His speech in 2005 (the one wot got him the job) accused Gordon Brown of being the "regulator in chief" - a popular and common line for the Conservative to take throughout the Blair/Brown years. It was dangerously wrong. Brown was "Light Touch" for three reasons:

(1) The failure to regulate led to huge financial sector profitability which led to huge tax liabilities which funded huge increases in public expenditure. 

(2) By default because regulation was split three ways - The FSA, the Bank of England, the Treasury. This led not to "over-regulation" but to culpably failed regulation.

(3) Political pragmatism. Brown could shrug off Cameron and the other Tory accusers because their "over-regulation" jibe at entry wasn't true. New Labour was the lightest-touch administration in post war history. 

Book Review: “Making it Happen–Fred Goodwin, RBS and the men who blew up the British economy” by Iain Martin

“It wasn't just Fred!”

Iain Martin's "Making it Happen - Fred Goodwin, RBS and the men who blew up the British economy" is a fine piece of investigative journalism and a beautifully written and very readable account of this sorry tale of corporate misgovernance. Whilst Goodwin is the main villain - rightly - there is nevertheless a sense of "Murder on the Orient Express" to the story. In Agatha Christie's detective story, you will recall, the denouement was that ALL of the suspects were guilty! The fall of RBS was the same. Fred the Shred brought down RBS, but he didn't achieve this without the connivance, neglect, self-interested actions, greed and incompetence of many others. Martin points the finger at Fred, of course, and provides the evidence. But others do not escape - there were many guilty men in this affair.

Fred Goodwin was born in 1958. This means that at the time of Margaret Thatcher's "Big Bang" in 1986 he was in his late twenties and ideally positioned to be one of Thatcher's children. He was making his way as a junior accountant at the time with Touch Roche. Less than ten years later he was Chief Executive of the Clydesdale Bank appointed by its Australian owners, Iain Martin says, because of his "ferociously logical approach to problem solving and the capacity to learn quickly". So Fred was not a banker and had no practical hands-on experience in a Bank at all. In a way, in the post Big Bang world, this was an advantage. Banks, especially maybe Scottish banks, were pretty conservative institutions and if they were to take advantage of the new financial freedoms they would need to change. On the other hand Fred Goodwin had none of the detailed understanding of bank processes and daily priorities that a career banker would have had. When growth in the good times is needed the Goodwins, gung-Ho and oozing self-confidence are what you need. But when things start to get difficult you want such people as far away from the levers of power as possible.

In the mid 1980s the Royal Bank of Scotland was dull, unambitious and pretty moribund - a "tired bit-part player" Iain Martin calls it. It was a takeover target for one on the far larger English banks. Lloyds had had a go as had Standard Chartered. It was at this time that the fervent Scottish Nationalist George Mathewson joined RBS - he was soon to become CEO. He formed an alliance with fellow Scot George Younger, the Chairman, and together they decided to do everything that was necessary to make RBS successful as an unashamedly nationalistic Scottish bank. A major step was the acquisition, in 1988, of Citizens Bank in the US. Mathewson and Younger succeeded in their ambition to transform the Royal Bank and by 1997, the year of Labour's return to power after thirteen years, Mathewson was hunting around for a successor. A year later Fred Goodwin, on the back of his success at Clydesdale, was hired. This was to be twist or stick time for the Royal Bank. True the Bank was out of the doldrums but to move onwards and upwards a step change was necessary. After a battle with their rival Scottish Bank "Bank of Scotland" RBS acquired the much bigger, but rather tired and complacent NatWest. Fred Goodwin led this successful coup and was rewarded with the CEO job when Mathewson moved upstairs as Chairman shortly after the NatWest takeover.

The early years of the new millennium were to be bonanza time for the financial services industry. Tony Blair left Gordon Brown to run not just the Treasury but much of domestic policy as well. The growth of the banks was extraordinary. Interest rates set by the Bank of England were low. Lending was growing exponentially. Fred Goodwin strove to make RBS a leader in all this. Its size, with NatWest being integrated, made it a player on an international scale. And Citizens gave them a solid foothold in the rapidly growing American financial services sector. Most importantly financial regulation in the UK was not just "light touch" but confused and often non-existent. Iain Martin is excellent on how regulation fell somewhere between the Bank of England, the understaffed Financial Services Authority (FSA) and the Treasury. The key, of course, for Brown was to interfere as little as possible. He had a cunning plan which was that credit-fired growth would make the Financial Services sector so profitable that the taxes on the profits they paid would fund an expansion in spending on public services. Socialism (sort of) would be paid for by uber-capitalism.

It is instructive to look back and see not just how disastrous this regulation lacuna was but how Britain's opposition got it 100% wrong. Typical was David Cameron's speech to the Conservative Party conference in 2005 (the speech which got him the leader's job a couple of months later). Cameron said

"Everyone knows that business need deregulation to compete with China and India. Who is standing in the way? The great regulator and controller, Gordon Brown."

In fact the opposite was the truth. Far from regulating and controlling Brown (a disastrous Chancellor Iain Martin calls him) stood back and let Fred Goodwin and his like get on with it! For a while it worked. In his "Mansion House" speech in June 2007 Brown said the Government would ensure Britain stayed a "world leader in stability... by ensuring [her] macroeconomic framework remains a world benchmark". That was "delusional drivel" says Martin!

The uber-capitalism was alive and well in Fred Goodwin's RBS. Soon the now "Sir Fred" began to act like a "Master of the Universe". There were private jets. Fleets of Mercedes specially painted in RBS Blue. Sponsorship of a Formula one team, of the Rugby 6 Nations and all the usual trappings of power and privilege. "Compensation packages" for the head honchos escalated exponentially as well. Bankers' bonuses were born and reborn. A grand new headquarters building near Edinburgh Airport was planned on an 80 acre site and in 2005 it was completed and opened by the Queen.
Banking can be divided between the traditional retail and commercial segment, with its branches and its domestic and business customers (the Royal Bank's home territory for two hundred years), and "Investment Banking" the (comparatively) new kid on the block. The latter grew massively across the world in the 1970s and after - especially in Britain post big bank. It is in Investment Banking that the big numbers apply. The scale of the trades, the complexity, the innovation and - of course - the rewards given to the successful practitioners. In RBS's US investment banking subsidiary Greenwich Capital many employees had salary and bonuses in the high millions of dollars per annum! This company moved in a big way into collaterised debt obligations (CDOs) which, in theory, provided reliable income streams from repackaged mortgage securitisations. Iain Martin describes all of this in an illuminating chapter "Safe as houses". Mortgagees pay their monthly amounts and these find their way via CDOs to RBS, or its subsidiary. What could go wrong? Especially as Greenwich was at the upper end of the category with its AAA or "Super senior" portfolios. "RBS does not do sub prime" said Sir Fred. Well actually they did, and he didn't know. Probably.

Let's reflect for a moment on this world of around 2004/5. Gordon Brown opened American Investment Banker Lehman Brothers' massive new offices in Canary Wharf on 5th April 2004 and made a laudatory speech commending their "greatness" and "innovation". There would, he frequently said at that time, be no return to "Boom and Bust". Credit is the driver of business and the source of income to banks. Credit is what makes buying a property possible for private individuals. The banks make money on the spread - the difference between what they pay for money and what they can sell it for. And they made a lot. Interest rates are the key tool. Alan Greenspan, chairman of the Federal Reserve in the US would use interest rates to keep the financial economy booming along reducing rates (for example) if the Stock Market wobbled. Eddie George at the (newly responsible for interest rates and inflation) Bank of England did the same, as did his successor Mervyn King. The increased liquidity from this would keep people spending, and borrowing, and lending. By the mid 2000s Bank balance sheets, leveraged to the hilt, were approaching five times the size of the UK economy (GDP). In 1970, before the Big Bang and the "Loadsamoney" era, they had been at 38%. The Royal Bank of Scotland was sailing along on this boom, its profits growing every year and its business portfolio widening, especially in the Investment Banking sectors. It had a touch of the Lehmans, a lot of the Northern Rocks (home loans) and many, many other fingers in financial services pies from Insurance to Leasing. It was diversified in business and geography. But Sir Fred wanted more, much more. His eyes fell on the Dutch Bank ABN Amro.

The synergies between ABN Amro and RBS were questionable to say the least. It was a big bank, with international interests, but a far from coherent structure. Iain Martin describes it as a "conglomeration of various inefficient units patched together". It was an unappetising mix of the good, the bad and the decidedly dodgy. There were bits Fred Goodwin definitely wanted and bits he certainly didn't. Part of the problem was that he wasn't sure of which bits fell in which category! When he heard in late 2006 that Barclays was interested it became a battle and Fred engaged in earnest as it was announced that Barclays was in formal talks the following Spring. He wanted to be bigger than Barclays it was, astonishing as it may seem, as simple as that! Goodwin put together a consortium which comprised RBS, Fortis the Belgian Bank and Santander from Spain. By June there was a deal which was, Iain Martin emphasises, approved by every one of the RBS Board. Iain Martin lists all 17 of them to make sure that we get the message that this wasn't just Fred Goodwin being cavalier! Meanwhile there was bad news from the US. In February HSBC said it was providing for $10 Billion of losses relating to the American mortgage market. It soon became apparent that the RBS American subsidiary was deep into this mess as well. "...the CDO machine at Greenwich was disintegrating". In The UK by September 2007 Northern Rock was in trouble. Around the world financial markets were in turmoil and financial institutions were under threat. The extent of that threat was unknown but no prudent Bank would surely go for a grandiose acquisition at this time. Surely?

RBS's takeover of ABN Amro was completed in October 2007. Iain Martin's "It was obvious... that RBS had completed the purchase of ABN Amro at an extremely difficult moment" is a masterpiece of understatement! The Royal Bank's balance sheet had doubled overnight! At £1.9 trillion it was "bigger by at least £400bn than the output of the entire British economy"! Well the rest of the RBS story really follows on inevitably form the position it found itself in after the Dutch acquisition and given the global financial circumstances gathering pace. Only a £12bn Rights issue in April 2008 stopped the bank from going under as money haemorrhaged away in the US and elsewhere. This was temporary relief. In September Lehman Brothers went bankrupt to be followed by a raft of other financial institutions on both sides of the Atlantic. The game was up. A month later RBS had to rescued by the British Government - eventually to the extent of £45bn. £750 from every man, woman and child in Britain (or £9,000 from every Scot!).

As I said at the beginning of this review although Fred Goodwin was the main villain of the piece in this sorry story it is fairer to call it a collective misjudgement. Unlike with Enron (and Arthur Anderson) eight years earlier nobody went to jail because, extraordinary though it may seem, no laws were actually broken. That there was fiduciary incompetence and irresponsibility on a massive scale by Fred and others is not in doubt. But they didn't break the law! The only conclusion from this is that the Law was an ass! Gordon Brown was proud of his light touch regulation but that it was so light touch that nobody was legally guilty in the RBS story is surely a scandal in itself. Brown failed. The Bank of England failed. The Financial Services Authority failed. Britain's political leaders on both sides of the House failed abysmally. The media failed. Accountants and Auditors failed. Risk managers failed. All the highly paid employees of RBS failed as did those charged with monitoring and guiding them. That they did not, as in "Murder on the Orient Express" wilfully slay their victim is by the by. The effect was the same. The Bank was dead and bereft of life due to the negligence, greed and incompetence of many. It wasn't just Fred.


“Making it Happen: Fred Goodwin, RBS and the Men Who Blew up the British Economy” by Iain Martin
350pp, Simon & Schuster,  £20.

What is a Premium service?

The Transport Minister Norman Lamb justified the rising cost of commuter rail travel by saying that customers are paying for a "Premium Service". I don't think that Mr Lamb understands the concept of what "Premium" means - so let me help him.

Products and Services can be segmented by the "extras" over and above the functional commodity that they offer. Let's take a couple of examples. When I go to the theatre I can decide to pay as little as possible for my ticket and watch the performance from the Gallery. Or I can decide to pay more and watch it from the Stalls. The performance I see is completely unaffected by my personal choice. It is my call whether I pay a "premium" for a better view and a more comfortable seat. Similarly with Air travel. If I'm flying on a particular airline's scheduled flight from London to New York I probably have three ticket options. "Economy" ( or "Coach), Business Class (or "Club") or First Class. The latter two classes offer benefits over and above the basic deal in Economy. But in all three classes the plane arrives at the same time at JFK!. It's my call whether I pay more for the "Premium" advantages of the higher two classes.

In both of these examples (and one could add thousands of product or service related offers which make the same point) the basic offer is functional, affordable and (in the horrible cliche) they "do what they say on the tin". With commuter rail travel the same does not apply. True there are some longer journey commuter lines where First Class is available as a premium offer. But the vast majority of commuter rail travel is single class with no alternative to the standard available - even for those who can afford it. There is nothing "Premium" about the service at all. Indeed arguably many commuter rail lines offer the bare minimum. Crowded trains where standing is the norm. Unreliable performance with delays and breakdowns common. The prices may be "Premium" - but the service certainly isn't !

Open letter to Shell CEO Peter Voser in respect of the Bahrain Grand Prix

Dear Mr Voser

 

Bahrain Grand Prix
I write this open letter as a private individual, a former long-term employee, a shareholder and a Pensioner of Royal Dutch Shell. I call on Shell to take the following action in respect of the 2012 Bahrain Grand Prix:

 

1. To instruct Ferrari to remove all Shell branding from their competing cars (and other items) for the duration of this year's Grand Prix event.
2. To rescind invitations to customers and other third parties in respect of Corporate Hospitality in the "Formula One Club" and elsewhere at the event.
3. To withdraw all staff from the event other than those required to fulfil Shell's contractual obligations to Ferrari.
4. To remove or otherwise cover up any Shell branding and advertising at the Bahrain Grand Prix circuit.

 

 

Rationale

 

1. Royal Dutch Shell has made a commitment to Human Rights in the past and has communicated in public its support for the UNIVERSAL DECLARATION OF HUMAN RIGHTS of the United Nations.
2. A recent comprehensive report by Amnesty International documented the continued and flagrant abuses of Human Rights in the Kingdom of Bahrain and by its Government.
3. The leaders of Formula one, and the teams, have decided to go ahead with the 2012 Bahrain Grand Prix despite the fact that the Kingdom of Bahrain oppresses its citizens and denies them the Human Rights to which under the UN Charter they are entitled.
4. Royal Dutch Shell (Shell) has contractual obligations to Ferrari which it must honour. However there is no reason why Shell should not take the action I have outlined above in order to protect its reputation and to show its concern about the going ahead of an event which has been strongly condemned by all who take the UN Declaration seriously

I hope that you will feel able to take the action I have asked for.


Paddy Briggs

 

  

Corporate Social Responsibility - what it really means

 

The calamity of BP's Deepwater Horizon disaster continues to put corporate reputation as a subject very much in the spotlight and, hardly surprisingly, many commentators contrast BP's past attempts to claim the moral highground on environmental matters with the stark reality of what happened in the Gulf of Mexico. The idea that corporations should be "socially responsible" whilst fashionable is not new - and it remains an extremely controversial concept. Let me try and delve into what Corporate Social Responsibility (CSR) really means - and explain that all too often CSR has been just a tool of a company's reputation management/Public Relations activities rather than something that sets strict behavioural norms. In all too many cases CSR reports are selective, partial and glossy window-dressing - leading to charges of "Greenwash" - rather than true reflections of a corporation's actual non-financial (Health, Safety, Environment etc.) performance.

It is no exaggeration to say that that over the past two hundred years or so virtually everything that we value - even take for granted - about our way of life has happened because of the operation of regulated free markets. I put the adjective "regulated" in this statement not to over-emphasise the need for laws, rules and controls but to suggest that whilst the principal driver of progress and change has been the action of entrepreneurs and entrepreneurial corporations a measure of regulation has always been necessary. If the first half of the nineteenth century was the age of untrammelled industrial growth the 150 years since then has been no less spectacular - but there has been, as there needed to be, increasing legal restraint on corporate behaviour.

There has always been the same dynamic underway between free-enterprise companies and regulators - mainly governments. The companies from Standard Oil through Philip Morris to Microsoft always argue that any regulation of their freedoms will inhibit their business to the disadvantage of their customers and, most important of all, their shareholders. They harp back, in sprit if not always in rhetoric, to Adam Smith who said:

"Every individual endeavours to employ his capital so that its produce may be of the greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain... [but] by pursuing his own interest he frequently promotes that of the society more effectually than he really intends to promote it". Adam Smith in "the Wealth of Nations". 1776

The argument of Smith was that the pursuit of self-interest is inevitable and desirable and that an unintended consequence is that society is thereby "effectually" promoted. This theory is a bit like "trickle-down economics" - let us entrepreneurs get on with running businesses and benefits will cascade to all - even the worthy poor. Well not long after Smith his theory was tested as the nineteenth century Industrial revolution took hold in Europe and the United States. Before the century was out a raft of legislation was enacted to restrain industry as it became abundantly clear that whilst industrialisation brought many benefits it brought horrendous unintended consequences as well - from child labour to exploitation of workers to unsafe working conditions and monopoly power - and more. The break-up of the monopolistic Standard Oil in 1911 was amongst the most dramatic of instances where Government saw the need to restrain business in the public interest - but there are hundreds of other examples. It is no exaggeration to say that each successive wave of legislation was resisted by business - and that companies often claimed that self-regulation would be sufficient and that laws were unnecessary. In more modern times we have seen the tobacco industry fighting tooth and nail not to have to restrain the promotion of their brands and products - and we have seen self-interested bodies like the International Advertising Association (IAA) supporting them. To this day the IAA says, in respect of tobacco advertising, that they "…believe in the right to truthfully and responsibly advertise legal products to appropriate audiences and oppose efforts to restrict such advertising." The "Mad Men" live on!

The reason for this lengthy preamble on the history of regulation is to put the modern-day CSR debate into a historical context. There has always been a battle between legislators and businesses and one of the business defences has always been "Trust us - what we do is in the public interest and we accept the responsibility to police ourselves". However that most free-market of all economists, Milton Friedman, poured scorn on the idea that companies could or should be self-regulating over and above their legal obligations. Here is what Friedman said in 1962:

"The doctrine of "social responsibility" [is a] fundamentally subversive doctrine in a free society … in such a society there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." Milton Friedman in "Capitalism and Freedom" 1962

Whatever else he might have been Friedman was no hypocrite and he abhorred obfuscation and window-dressing. Whilst he would no doubt have had no problem with the idea of lobbying to influence legislators he would have resisted any "voluntary codes" and overblown statements of "Business Principles". What, for example, would he have thought of this statement in the 1999 Annual Report of a major American corporation "Our philosophy is not to stand in the way of our employees, so we don't insist on hierarchical approval. We do, however, keep a keen eye on how prudent they are and rigorously evaluate and control the risk involved in each of our activities"? Whilst Friedman might have applauded the broad sentiment he would not of course have condoned any illegal behaviour and lack of internal controls. When the true story of Enron (for this is from their Report) emerged then Friedman's general position was vindicated. Enron did not stay "within the rules of the game" and broke the law in almost everything that they did. Whatever self-policing there was (and most of it was in reality non-existent) failed abysmally.

Enron lied about most things so it is not surprising that they lied about their internal controls. But much less venal companies fall into a similar trap in some of their rhetoric - not least in their so-called commitment to the principles of Sustainable Development. Here, for example, is what Mark Moody-Stuart said on the subject when he was head of Shell: “[Sustainability] is a three-legged stool balanced between economic, environment and social considerations”. This type of rhetoric has been common amongst those who believe that companies' commitments to CSR really are meaningful - it is par for the course. Milton Friedman would have been horrified at the underlying premise of the "three-legged stool" - that there is a precise equivalence between a company's economic driver and its social and environmental behaviours. Note that there has to be equivalence if the metaphor is to work. If one leg is longer than the others are then the stool is unbalanced and falls over! In reality, as we see time and time again, the economic driver is far, far more important than any incidental social and environmental obligations that a company may propound. The line of questioning that BP CEO Tony Hayward faced recently in the U.S. Congress was substantially about whether cost and profit issues (Economic) had outweighed Environmental considerations in BP's decision making regarding Deepwater Horizon.

So history teaches us that we should be deeply sceptical about any corporation's claim to self-regulation or allusion to "Principles" over and above their legal obligations. Not least because the directors of corporations have a statutory and fiduciary duty always to act in the interest of shareholders - and shareholders interests are monetary above all. A shareholder wants stock prices to perform well and dividends to be good - and that's about it! And the Directors want the same thing - their bonuses, stock options and performance-related remuneration rely on it! So the more self-righteous and superior Companies seem to be in their CSR statements the more sceptical we should be! Some companies make their position on social responsibility matters crystal clear and with a pleasing lack of hype. The often-vilified Ryanair is one. In their "Code of Ethics" they say:

"Ryanair is committed to conducting business in an ethical fashion that complies with all laws and regulations in the countries in which Ryanair operates. As employees and representatives of Ryanair, we must consider how our actions affect the integrity and credibility of the Company as a whole"

Contrast this frankness (Friedman would have been proud of Ryanair!) with the page after page of "Business Principles" bombast and self-congratulatory hype in the Annual Report of British American Tobacco which includes the following two "core beliefs" (there are a dozen or so more of these platitudes):

· We believe our businesses should uphold high standards of behaviour and integrity.

· We believe that high standards of corporate social responsibility should be promoted within the tobacco industry.

This from a corporation that actively seeks to promote its brands and noxious products wherever it can - especially in the developing world! If ever there was an oxymoronic statement it is the idea of "corporate social responsibility …within the tobacco industry". Mad Men again!

Multinational corporations sometimes claim that their commitments to Corporate Social Responsibility are such that they always apply their own global standards of behaviour - which means that that will override local standards where those local standards are lower. BP, for example, says "We’re proud to set universal standards of behaviour across our entire operation…developing our own set of rigorous guidelines - [which are] often more rigorous than local laws and regulations". Intellectually, of course the logic of this is inescapable. If your CSR commitment is absolute then even if you don't legally need to apply your standards you will do so anyway - because that is what you believe in. Sadly, however, this is all too often a chimera. As The Guardian's environment correspondent John Vidal put it recently in respect of BP's Gulf of Mexico problems "If this accident had occurred in a developing country, say off the west coast of Africa or Indonesia, BP could probably have avoided all publicity and escaped starting a clean-up for many months." Vidal is right. Similarly if Shell had been treating an oil field in the U.S. or Europe in the way that it has its assets in the Niger Delta, where 2,000 major spillage sites have never been cleaned up, then the political and media fallout would be similar to what BP is now struggling with in the United States.

So what does Corporate Social Responsibility really mean? It is not about putting a favourable gloss on a company's activities and drawing a veil over its less salubrious actions. It is not about being a generous donor to charities, however commendable that may be - you cannot buy yourself a good reputation by making donations to good causes. It is not about a re-branding or stakeholder engagement programme - however useful such things may be from time to time. What it is about is first and foremost obeying the law - and then, if you believe it is necessary and in the interests of shareholders, going the extra mile in respect of your health, safety, environment and community relations behaviour (etc.). It means respecting all your stakeholders - especially including those, like suppliers of goods and services and often employees and sub-contractors, over whom you may have the whip hand. These commitments have to be codified, managed, funded and rigorously and consistently applied. In my view there are few if any big companies and perhaps no multinational corporations that have such a commitment and act with such integrity - although some of course are better than others. Which is why it is only by regulation at a national and international level that society at large can be protected - history teaches us nothing less!

News International's brand new opportunity

News International (NI), the UK newspaper arm of Rupert Murdoch’s News Corp, has been in serious trouble with one of its brands. However unlike, say, BP it is a sub-brand, “The News of the World”,  which has turned toxic not the corporate “mother brand” and whilst there is fallout on NI, and even to a small extent on News Corp itself, the Murdoch empire has really only suffered collateral damage.

Corporations of the size of News Corp are used to managing a proliferation of brands in different markets. News Corp has literally hundreds of separate brands across its diverse media businesses and its senior executives understand well that brands have strengths and weaknesses and that, as in the case of the “News of the World”, they can be damaged. They have decided that the damage to the News of the World is beyond repair and so they are closing the title. Such drastic action is quite rare but even the most skilled brand practitioners have to bite the bullet sometimes.   Coca Cola, for example, had a brand disaster with Disani a bottled water brand in the UK a few years ago. They withdrew it rather than try and repair it. The “News of the World” is a much older and formerly a very strong brand entity but the phone hacking and police bribery stories were such that the brand was judged by NI executives to be beyond repair – they were no doubt right.

News International's main revenue generators have been “The Sun” and the “News of the World” and these titles’  income streams have cross-subsidised the loss-making “The Times” and “The Sunday Times”.  Indeed without the ad revenues of the tabloids NIs whole business model collapses. The shareholders of News Corp have every right to expect that NI will seek to minimise the effect on the bottom line of the “News of the World” closure – and there is only one way to do this. The Sunday tabloid, with a circulation of 2.6million, has to be replaced urgently and a sound advertising driven business has rapidly to be built up.

A definition of a strong brand is one that generates income over and above is basic utility or commodity value. When it became apparent that the “News of the World” could no longer do this there was no choice for NI but to withdraw the brand. But the business infrastructure of the newspaper remains intact. The editors,  journalists, reporters and support staff are in place. The advertising sales teams have not been disbanded. These employees can be switched instantly to a new title and that is what will happen. Out of the ashes of the “News of the World” a new NI Sunday tabloid will emerge.

Which brings us back to the brand. A sign of a strong brand is when it is used in the vernacular one step removed from its actual business. So just as we once talked of the “Pepsi Generation” so the idea of the “Sun reader” is fixed in the awareness of marketers and commentators. Whilst this descriptor may be used by some in a derogatory way in fact the Sun readers are very valuable indeed. There are 7.5 million of them, spread fairly evenly across the age ranges and with 88% of them in the CDE social class groups. They have a very high collective purchasing power and they are firmly in the sights of the FMCG marketers – like the supermarket chains.  And it is this huge group which NI will want to attract to their new Sunday tabloid – and how better to do this than to give it the Sun’s brand name?

The launch of a “Sunday Sun” or, more likely, a “Sun on Sunday” could happen immediately – indeed it is not too far fetched for the switch from the News of the World brand to the Sun brand could happen on consecutive Sundays. This might politically be a step too far for NI, although I wouldn’t put it past them. But whether the Sunday Sun title appears immediately or whether there is a short hiatus doesn't really matter – it will happen. And for a marketer it is a dream project to launch the Sun’s Sunday sister. The promotional and advertising budgets can be guaranteed. Cross promotions from the weekday title will be straightforward to arrange – expect coupons which when saved during the week will give a free copy of the Sunday to loyal readers at launch.

The Sunday version of the Sun will have a huge head start over any other new title – this is because the brand values of the Daily will simply be transferred to the Sunday. You don't need to explain to a “Sun reader” what a “Sun on Sunday” means – it all in the name.

It’s the brand stupid

When the news broke, on Twitter inevitably, that the “News of the World” was to close there was a mighty gnashing of teeth and no little wailing form the journalist community. Job losses. Innocent victims. That sort of thing. But actually it’s no big deal. Here’s why.

When a brand is damaged beyond repair, but there is a market position to defend, then rebranding is the obvious choice. At the moment BP is rebranding many of its gas stations in the US “Amoco” and the reasons for that are obvious. For News International its the same. They have a very strong brand in “The Sun” which has a circulation of 3million –nearly one million ahead of its next competitor. Their fatally wounded “News of the World” brand is similarly strong in circulation terms 2.7m and a lead of over 800,000. There is no way that NI is going to give up that inco0me stream – and they don't need to.

The introduction of a “Sunday Sun” (or “Sun on Sunday” ) has huge benefits. The toxic News of the World brand is shed. The Sun brand can extend seamlessly into a seven day operation. There will be some economic savings. And online they can concentrate on one Sun branded website for all their communications.

One can expect that those Sun readers who don't currently buy the NOW will be heavily incentivised to switch their Sunday paper to The Sunday Sun. Or in some cases to buy a Sunday paper where currently they don't. Cross promotions will be the order of the day – NI has the financial resources to really build the Sunday Sun as a successful sub-brand of the generic Sun brand.

The people who should worry about  Mr Murdoch’s clever coup are the publishers of NI’s competitors! A seven day Sun will be formidable.  

Shell's latest corporate advertisement

LET'S DELIVER ENERGY
FOR A CHANGING WORLD.
LET'S GO

Today's consumers are smarter than ever about energy. Naturally they want it to heat, cool and light their homes, get them to work, and power their mobile phones. But they are also keen to help build an energy system that sustains the lives of future generations. They want their energy to come from cleaner sources. They want to get the most out of every drop. And they want to see positive results now.

At Shell, we're listening. Consumers' raised expectations inspire us to come up with ever more innovative products and services.

Take the quest for cleaner air in our cities. We have created a fuel oil, which can cut soot emissions from factories by up to 75%. That should help people breathe a little easier.

Customers at our service stations want to play their part, too. They want fuels that are more efficient. We've responded with new blends that help drivers save fuel with every fill-up. And we're working with transport companies, combining the latest fuels and lubricants with satellite technology to reduce fuel consumption.

Low-carbon biofuels are another way to meet rising expectations. They can help reduce emissions from road transport right now. We're already the world's largest distributor of biofuels and are pursuing plans for large-scale production.


We're also working with technical partners to develop future biofuels from non-food sources, like crop residue and even algae.

Of course, our customers' horizons stretch beyond transport to more responsible living, whether through cleaner electricity or more energy-efficient homes and offices.

That's why we are boosting production of cleaner-burning natural gas, which emits less than half the carbon dioxide of coal when used to generate electricity. And why we are investing in vital technology to capture emissions from power plants and other industrial sites and store it safely underground.

Despite all this change, one thing remains the same. After more than a century, our customers still expect reliable and affordable energy every day. With global energy demand set to double by mid-century, that will be a challenge. But together with our partners we will continue unlocking energy from hard-to-reach places like frozen Siberia and delivering it to customers around the world.

At Shell, we're grateful to have millions of customers asking for better energy. They demand as much of us as we ask of ourselves.

Commentary
In its latest corporate advertisement (above), expensively placed in some influential publications like "The Economist", Shell claims to be "listening". We have heard this claim before of course and we should treat it with some scepticism - Shell pulled its online feedback forum "Tell Shell" some years ago - presumably because of the virulence of the criticism on it. But no matter - let's take this latest request for feedback at face value and offer some.

The dark arts of advertising are notoriously " economical with the actualite" - but I would guess that nobody really minds a bit of hype and "accentuating the positive" - where would copywriting be without the need to put a brand's products or services in the most favourable light? But there are limits - the need to be "Legal, decent, honest and truthful" is required of any advertiser and the rules say that your ads shouldn't mislead, lie or even tell half-truths.

So in the context of the need to be at least credible in your ads, and at best transparently truthful, how should we judge Shell's latest offering? Remember we are talking big bucks here - not principally to the ad agency for preparing the ad and writing the copy but definitely to the media for running it. A few hundred thousand dollars at least - and possibly much more. Has Shell's budget been wisely spent?

The first paragraph claims that "Today's consumers are smarter than ever about energy". It goes on to say that these consumers are "also keen to help build an energy system that sustains the lives of future generations". How many consumers (that's you and me folks) speak in anything like these terms? I don't know what an "energy system" is - and I worked in the industry for nearly forty years. I doubt that my neighbours would have a clue what it is either. Presumably somebody can define the term "energy system" - but there's little point in using such opaque language in an ad - even in "The Economist"!

So that first paragraph is at best patronising and trite and at worst gobbledegook. But the second paragraph is far worse. The claim is that "Consumers' raised expectations inspire us to come up with ever more innovative products and services". The conceit of this statement is breathtaking. It purports to suggest (a) That Shell is innovative and (b) That innovation is consumer led. Now lets be charitable and agree that Shell can indeed be innovative. Virtually all of this innovation comes from the upstream - and impressive some of it is as well. But there is no way that this highly technological activity can be seen as consumer driven. Then in the following paragraph we get mention of a low soot fuel oil for factories. In Britain, which is where this ad appears, a tiny minority of factories burn fuel oil - most of them switched to cheaper and more environmentally friendly natural gas years ago. Not too many people will be breathing any easier as a result of this innovation!

So what about the "service stations" (paragraph 4) - a curious and old-fashioned term by the way. They mean petrol stations I think. Here we are told that customers want "fuels that are more efficient". Well yes - but not if they have to pay through the nose for them. The "new blends" that are referred to (presumably like V-Power) cost a premium, which negates any efficiency savings. Most motorists want cheap petrol - and there's not much of a promise about this in the ad. If V-Power and its like really saved money through efficiency don't you think that Shell would give us the data to prove the case?

The statements about "Low carbon biofuels" (paragraph 5 and 6) are another utterly misleading bit of hype. It is no doubt true that Shell is a big player in these products - but there is nothing much new about them. The Brazilians have run some of their cars on biofuels for a generation or more but in the UK they are virtually non-existent - and will remain so unless governments create a tax regime which make them viable. Some chance!

The seventh paragraph about "customers' horizons" is just poor copywriting and is virtually meaningless. It's an unsubstantiated claim - hardly surprising as it is hollow and patronising. It leads on to the next paragraph where the implicit claim is that Shell's driver for the expansion of its Gas sector is in some way environmental and that it is driven by these "customer horizons". The real reason for Shell's drive to boost its production of natural gas is because this sector is growing and is profitable - good business in other words. Yes it is cleaner than coal - but Shell has no influence at all on utilities' decisions to build Power stations that run on Gas rather than coal. True Shell can supply the gas, at a price, if the utility makes that decision but the determiners of the decision are primarily governments and local authorities - they are the ones one should thank for the resultant cleaner air - not Shell!

The penultimate paragraph is platitudinous and one again trite. If you asked them my guess is that many consumers would be very disturbed about some of the side effects of Shell's ambition to "…continue unlocking energy from hard-to-reach places". The Tar Sands of Canada is just one example of where this ambition is, to say the least, controversial!

Shell is not a bad company - although it does some indefensible things at times. But it does itself no service by running advertisements which claim distinctiveness when little exists, claim to have a unique understanding of consumers without any evidence being provided and lapse into self-congratulatory and highly selective hype.