An Investigation of Corporate Social Responsibility among Companies in the Oil Industry
Date of Submission
The research looks at measures of corporate social responsibility that have been done in the oil industry to determine how genuine they are, whether they are worse in developing countries and whether regulation offers a better assurance to stakeholders. The literature review highlight to the conflict of interest that exists in shareholders when it comes to corporate social responsibility. Companies in the oil industry only seem to react to extrinsic pressure from stakeholders. The research methodology settles on the use of a secondary qualitative study. A multiple case study analysis is adopted to answer the research questions. The results of the data analysis indicate that oil companies are more reactive rather than proactive in corporate social responsibility except for the case of BP. This occurs after pressure from stakeholders or the international community. In the case of Nigeria, the economic loss led to the change in policy. The research also determined that developing countries are the worst hit. Finally, regulation seems to provide a better assurance to stakeholders as opposed to self-regulated corporate social responsibility policies.
Table of Contents
Corporate social responsibility is a term that refers to the responsibility that organizations have towards other elements while they continue their operations. Nowadays, this issue is imperative to how companies conduct business. While corporate social responsibility seems to be a new topic, many different scholars have debated it since the concept of business was developed. In truth, the interaction of business with the environment cannot be classified as something new in practice or theory. However, there has been greater pressure on businesses to adhere to corporate social responsibility in an attempt to increase the ethical consideration that businesses have when they exploit resources. This means that the mutual interaction of businesses with the environment cannot be one-sided in nature. The environment needs to be maintained or exploited within reasonable measures (Jamali & Mirshak, 2007, p. 82). When considering the environment, this does not refer to only the physical environment, this refers to the entire combination of social, environmental and business aspects that are affected by the business. An example is when a business deals with mining, the environment is affected by the drilling and the relocation of physical material. Socially, the company needs to compensate workers adequately based on the type of work and the risk involved in their work. Finally, some of the profits need to be used in ensuring that the company improves the lives of the people in the geographical region that they live. This clearly shows that corporate social responsibility needs to be done from a holistic approach where there is harmony with all the different aspect of a business. This harmony has made corporate social responsibility a common topic in many academic studies.
The following graph shows the increase in corporate social responsibility
The main conundrum with corporate social responsibility is that it organizations are based on the need to increase wealth and profitability. This means that a company needs to reduce any extra expenses in order to increase the overall profit margin that the organization is having. Milton Friedman highlighted that there are two fundamental questions that limit the effectiveness of corporate social responsibility. The first question is: What are the organization’s goals? Most companies are not created with the aim of adding value to a community or protecting an environment. In most cases, companies are started to add wealth to the shareholders. This means that most companies seek to exploit existing resources in order to increase profit. The exception is non-profit organizations that seek to improve the welfare of people or protect the environment. However, there are very few such companies in existence. This means that corporate social responsibility is essentially going against the goals of most organizations. In truth, the question is whether these organizations engage in corporate social responsibility for public approval, or they do it genuinely. Based on the evidence provided by Friedman, many of these companies only do this is order to avoid negative publicity for lack of corporate social responsibility. The second question is: Whether there are any authorities that determine the vital activities of companies? This is a subject of regulation. Regulation in most industries is done based on the overall nature of the industry. However, each company is in a different location with different effects on the environment (Prno & Slocombe, 2012). This means that regulations cannot be specific enough to determine what is vital in corporate social responsibility. Therefore, many companies self-regulate when dealing with social corporate responsibility. The organizations will then seek to do this while minimizing the cost to increase profit margins.
Corporate social responsibility needs to be viewed from two perspectives. The first is from the shareholders who seek to gain a direct return on the capital that they have contributed. The second are stakeholders who are directly and indirectly affected by the activities of the organization. Shareholders seek to gain a return on their investment and then increase the profit that they gain from the organization. Corporate social responsibility can be viewed as a liability to shareholders. On the other hand, stakeholders are interested in ensuring that the exploitation of resources by the organization is done sustainably while ensuring the integrity of the environment and community that interacts with the business. However, it is important to note that decision making in any organization is made by the shareholders. Shareholders determine the members who are included on the board of the company. This means that shareholders have a direct influence on the company. Since the shareholders view corporate social responsibility as a liability, it is done in a minimalistic way or simply as a public relations gimmick that seeks to improve brand image. On the other hand, stakeholders in any organization are not involved in policy making. This means that the only way that corporate social responsibility is improved is through intrinsic motivation by the shareholders or extrinsic pressure from stakeholders (Brown & Forster, 2013). This makes corporate social responsibility difficult to completely achieve when the stakeholders are handicapped by an inability to create concrete policies in the country.
The problem with corporate social responsibility arises from the fact that it goes against what is viewed as economic rationality. This means that economically, social corporate responsibility is a liability that businesses. The problem then arises of whether then corporate social responsibility measures in a company are genuine or only there to give the impression that they are willing to be responsible to reduce the extrinsic pressure from stakeholders.
This problem is compounded in the oil industry that is prone to numerous cases of negative externalities, negligence, and fraud. The problem arises from several main conditions. The first condition is the nature of the companies and the profit margins that are expected. Most oil companies are Fortune 500 companies that are known for their large profit margins. Due to this, the companies seek to minimize the liabilities as much as possible. Due to the most of the corporate social responsibility is only a fraction of the total profitability. In proportion to other industries, the percentage of earnings as compared to the portion that is set aside for corporate social responsibility is very low. This means that in terms of proportions of earnings, the contribution of oil companies is low despite being more in quantity than from other companies.
The second issue that can be highlighted is the nature of the commodity. Oil is a scarce resource. Due to this, most companies are willing to increase the risk that is expected to get the commodity. This increase in risk means that there are greater hazards not only to the environment, but to communities where oil is being drilled from or transported. The complexity is that the problem is based on duality. The first is the short term risk that arises from oil spills, natural gas leaks and disposal of by-products. The long-term issue is the issue of global warming or the increase of carbon emissions due to oil. On a social level, there is a question of the communities that are around areas with oil reserves. The threats of displacement and compensation that the workers are given as compared to the salaries of the greatest executives.
While corporate social responsibility is being practiced in the oil industry, it is important to note that several academic articles have highlighted that the oil industry uses corporate social responsibility for three reasons. The first is to seek a social license to operate in a specific area. The second is to provide the perception of corporate social responsibility and lastly is to provide problem-solving systems that are based on value creation. This begs the question of how genuine the corporate social responsibility is from oil companies.
The aim of the study is to review corporate social responsibility in the oil industry in an attempt to determine whether these companies are adhering to corporate social responsibility policies or whether they use it as a public relations campaign to reduce the extrinsic pressure from stakeholders.
The specific objectives of the study are:
- To determine whether oil companies are motivated by disaster and extrinsic stakeholder pressure to adopt corporate social responsibility or whether they are motivated by intrinsic desire
- To determine whether corporate social responsibility in oil companies is worse in developing countries
- To determine whether government regulation would bring better results as opposed to social corporate responsibility in the oil industry
The specific objectives highlighted above needs to be reviewed based on the following research question.
- Are oil companies being motivated by disaster and extrinsic stakeholder pressure to adopt corporate social responsibility or whether they are motivated by intrinsic desire?
- Is corporate social responsibility among companies in the oil industry worse in developing countries due to lack of extrinsic pressure?
- Will regulation bring better results as opposed to corporate social responsibility in the oil industry?
The research seeks to view corporate social responsibility in the oil industry from a perspective of whether organizations in the oil industry. There are numerous academic papers that attest to the existence of social corporate responsibility in the oil industry. However, there are few papers that look at how genuine the corporate social responsibility appears. In addition to this, stakeholders apply pressure to companies extrinsically to push the agenda of corporate social responsibility. However, in developing countries, there is a lack of this push and oil companies may be inclined to forgo corporate social responsibility altogether. This study is important because it will highlight such instances. Finally, a study on corporate social responsibility is important because it provides a snapshot of the industry to allow future comparison with measures that will be made by the industry.
The scope of the study refers to the implications and the reach of the study. The research that will be done will look at companies in the oil industry. This will be a global review where company corporate social responsibility policies will be reviewed both in developing and developed countries. This will determine whether pressure from stakeholders in developed countries provides the extrinsic pressure. This will determine whether companies can self-regulate. In case of the latter, the study will conclude that regulation needs to be set to ensure that companies adhere to certain rules.
The dissertation is subdivided into three main parts. The first segment involves an introduction of the paper. A background of the concept of corporate social responsibility is provided where main aspects of the topic are discussed. A problem statement reviewing the main issues in the oil industry as the objectives and research questions are set in the study. The second segment involves a review of literature that concerns corporate social responsibility in the oil industry. Major researchers such as Friedman are quoted. The third section of the study involves a review of the research methodology that is used in the study. A secondary approach is used with qualitative analysis preferred due to the nature of the objectives. The fourth segment involves a review of the data selected and determination of the underlying themes. An explanation is provided based on the research question. Finally, the segment on conclusions reviews the study based on the objectives. Recommendations are made based on the results of the study.
This segment of the study reviews the academic literature on the subject. This involves looking at the difference between stakeholder and shareholder pressure in an organization based on the importance of making profits. The study proceeds to look at academic issues in corporate social responsibility in the oil industry.
According to the shareholder view of the firm, the only role that the management should play is to increase the wealth of the company’s equity owners and other groups that have made monetary investments. The view, advanced by Milton Friedman, argues that private investors deserve to be in the controlling seat of the company’s decision-making process. At the same time, shareholders should have a first claim to the company’s returns based on the fact that they incur the opportunity cost of investing in the company instead of pursuing other projects. In this regard, the shareholder theory argues that pursuing alternative goals, such as corporate social responsibility acts, would have a diminishing effect on shareholder value.
In support of the shareholder view, Jensen and Meckling urged companies and their shareholders to peg managers’ performance on how much return was generated from managerial decisions. Therefore, there was an increase in the number of companies that peg their manager’s pay on such indicators as the company’s stock price and the amount of profits made over one year. An additional idea advanced by Jensen and Meckling was that a group of few private equity firms has the potential of extracting the best results from a listed company as opposed to where the listed company is owned by a diversified number of shareholders. Martin (2010) noted that Jensen and Meckling were of the opinion that managers and shareholders were not on similar terms as far as whose goals should be satisfied first. Having been handed over the running, and the capital, of the company, managers were free to pursue their interests. This was at the cost of maximising the wealth of shareholders. The arguments advanced by Jensen and Meckling, and Friedman make little mention of the important role played by other groups of people within the company.
The idea that shareholders are an important factor towards the success of a company is not one to be refuted. This is based on the fact that they contribute the capital that is necessary for the establishment of the company. However, the idea that they are the only group of people who matter once the company is operational has been put to the test. In fact, it has been argued that the management has done a poor job of satisfying this obligation towards shareholders. For example, Jensen (1968) found that private mutual funds did a worse job at increasing shareholder wealth as compared to individual investors. In a more recent finding, it is estimated that shareholder returns for the period between 1933 and 1976 was just 7.6% (Martin, 2010). However, the returns were worse in the period between 1977 and 2008 where the average shareholder made a return of 5.9% every year (Martin, 2010). Therefore, there is enough evidence to dispute the argument that shareholders are the only group of people who should be considered when managing the company because a sole focus on their needs has left them worse off than when the company managerial theory was also intent on satisfying the needs of other groups.
According to Freeman (1984), the role of stakeholders is not one to be ignored. In his landmark book, Freeman (1984) defined a stakeholder to be that group of people who affect or are affected by the operations of the company, in this regard, a stakeholder group could be inclusive of employees who play a vital role as innovators and even managers of shareholder’s money. It would also include suppliers who play the role of providing quality inputs to the company. Other major stakeholders in the company have been identified to be the government, customers, and the society at large. One of the advancements of stakeholder theory is through a company’s corporate social responsibility activities (Brown & Forster, 2013).
According to Wagner et al (2011), one of the issues that confronts a manager is seeking to fulfil the needs of stakeholders is the basic fact that there is a long list of groups whose needs are paramount to the company. The result is that the manager is often at a loss on how to prioritize on the divergent and often conflicting needs of each stakeholder group. For instance, satisfying the needs of employees might require the spending of vast amounts of money on training and motivation. Such a step comes at the expense of reducing the company’s profitability and shareholder returns. In the recent past, these needs have been forged into three; economic, social, and environmental (Stenzel, 2010, p. 1). These needs have been confided in a reporting framework known as the Global Reporting Initiative (Global Reporting Initiative, 2014; Alazzani & Wan-Hussin, 2013).
According to Alazzani and Wan-Hussin (2013), an increasing number of oil and gas companies are adopting the GRI as the standard against which they assess their CSR activities. According the GRI, there are three perspectives that could be used in classifying stakeholders and their respective needs. These are economic, environmental, and social aspects (Global Reporting Initiative, 2014). The economic aspect seeks to assess how well the company did in terms of making credible profit returns to shareholders. In addition, the economic perspective assesses how well the company performed in terms of establishing a market presence and other indirect economic impacts.
According to Alzalabani (2013), one of the main reasons for the economic recession of between 2007 and 2009 was the fact that companies took out excessive risks. This was especially with regards to their capital structures that were loaded with high levels of debt. In this regard, GRI’s economic perspective seeks to address other economic indicators as being the amount of risk that the company is exposed to as a result of its operations.
According to Marimon (2012) and as contained in the reporting standards, the second perspective is that the company should conduct its operations in a manner that can be considered to be environmentally sustainable. Under this perspective, the company is expected to employ sound production and operational systems that cause minimum impact on the environmental well-being. According to Lozano (2012), companies should seek to ensure that their current product needs do not interfere or diminish the needs of future generations. In this regard, it is important that the company is aware of its impact on the environment by performing tests on the amount of effluents and wastes released to the environment, carbon emissions, biodiversity, and the environmental cost of transport.
According to Owen and Kemp (2012), mining companies must be keenly aware that they operate with the authority from the local community. In the past, mining companies were distrusted by local communities owing to the latter’s capabilities to destroy the livelihood and fabric of an entire society. With developments in global legal structures, it became possible for these local communities to outvote mining company interests through court suits (Prno & Slocombe, 2012, p. 349). Such results have been termed as the mining company failing to gather gain the social license to operate. In gaining the social licence, a mining company is expected to address the issues of labour practices, human rights, product responsibility, and general social needs such as corruption and public policy (Global Reporting Initiative, 2014; Prno & Slocombe, 2012).
According to Cheon et al. (2014), oil and gas companies are the wealthiest of all companies across the world. In the 2014 Fortune 500 listing of companies by virtue of gross revenues, there were four companies among the top ten whose core business is directly related to the mining, refining, and marketing of oil and gas (Time Inc., 2015). Moreover, the top ten companies included two companies dealing in the production of automobiles, which are the highest consumers of oil and gas products (Time Inc., 2015). Collectively, oil and gas companies play a critical role in the world of business through the revenues and profits generated. For instance, it is estimated that the entire oil and gas industry is worth about £35 billion in annual revenues for the UK and $134 billion to the US economy (U.S. Environmental Protection Agency, 2015; British Broadcasting Corporation, 2014). It is not possible to deny that the petroleum industry is a major player in the global economy and that of countries that are directly involved in the mining and refining processes.
According to Frynas (2009), the four major petroleum companies (Royal Dutch Shell, Exxon, BO, and Chevron) spent an estimated $500 between them on developing the communities where they had operations. During the year 2013, Royal Dutch Shell spent an estimated $160 million in voluntary social activities (Royal Shell Plc., 2013). The inference is that these companies play a large role in developing the communities in which they operate. According to Spence (2011), the reason for increased spending in the community is due to the increased gap in expectations between the society and the company’s business interests. Moreover, the cost of suffering reputational damage has far exceeded the cost of make such investments (Spence, 2011, p. 78).
Recent studies have shown that oil and gas companies are some of the largest contributors towards the phenomenon that is global warming (McKibben, 2012). Globally, it is estimated that oil and gas producing nations hold over 2,795 gigatons of fuel reserves, this is compared to the 565 gigatons that is estimated to be safe so as to avoid the danger of escalating global warming to higher levels than is already the case. While these could be considered to be merely reserves that are yet to be released into the atmosphere, it is plausible to consider other factors. One, these are reserves that are owned by a country and an oil and gas company. Therefore, the nation and the company have already factored these reserves into their balance sheets as development costs and intangible assets, as per the accounting rules (Damodaran, 2009; Deloitte Global Services Limited, 2015). The implication is that the reserves have to be used up at one time in the future so as to fulfil the needs of debtors who loan money based on the estimated amount of oil held by a company or the entire nation.
CSR is classically defined to be a voluntary undertaking on the part of the company towards its list of prominent stakeholders (Frynas, 2005, p. 586). However, there are other motives for undertaking CSR activities. According to Spence (2011), a mining company might engage in CSR activities as part of the act to appear sensitive to the needs of the market. These needs include taking care of the environment and the community in which it operates. Moreover, mining companies might investment in CSR in the hope of motivating their employees, gaining a competitive advantage, maintaining stable operating conditions, among other external needs (Frynas, 2005, p. 583).
However, these are needs that are beside the primary perception of CSR, which is the provision of a solution where general business laws fall short (Frynas, 2012, p. 7). Therefore, countries are increasingly making it mandatory for companies to set aside a certain sum of funds for the sole purpose of developing the communities in which they operate. Moreover, it has become mandatory for petroleum companies to adhere to certain environmental rules across the world, especially in developed nations. With carbon emission targets being set by national governments, oil and gas companies are hard pressed to become responsible towards the environment and the society in general.
One of the core areas where government regulation has played a key role in the petroleum industry is with regards to oil spills (Frynas, 2012, p. 1). Oil spills are defined to be the accidental leaks into the environment that occur during the operation of oil mining, transportation, or marketing operation (Frynas, 2012). Oil spills can have a catastrophic impact on the environment, and the community affected. For instance, the Deepwater Horizon oil spill of the year 2010. The oil well was offshore of the American coast, about forty-one kilometre away from the nearest American port. During its collapse and subsequent explosion, the accident led to the direct deaths of eleven employees and the injuries to tens more. Besides the loss of life, the catastrophic impact on the environment was enormous and one that had not been witnessed before. It took three months to control the oil leak and seal the well, at the end of which some 780,000 million cubic meters of oil had already leaked into the open ocean. BP recognizes that the oil spill continues to cost the company money in terms of environmental clean-up and legal proceedings (BP Plc., 2013).
According to Frynas (2012), such tragic events continue to attract the attention of countries that host oil companies owing to their potential impact on the country’s environmental heritage. The result has been the drafting of laws that affect oil and gas mining and the penalties that are to be paid should oil spills occur. At the same time, companies realize that oil spills are a costly affair. Not only does a company such as BP, pay substantial amounts in cleaning up the oil spill, but it also suffers reputational risk. In addition, the petroleum company stands to lose the much-prized license to operate within a country owing to a history of oil spills. Consequently, companies have become more abrasive in controlling oil spills.
The second aspect that has been addressed through voluntary and government action is that of the exercise of human rights (Crane, et al., 2013). In previous years, mining companies have been accused of providing their employees with poor working conditions such as subjecting them to extreme weather conditions and dangers from company operations. For example, an offshore mining platform exposes the employee to the weather elements of storms and the possibility of an on-site explosion hundreds of kilometers away from the nearest land port. Nations have been concerned over the vulgarities that some of their citizens might be exposed to, with the result being the enactment of laws meant to offer better-working conditions (Crane, et al., 2013). Petroleum companies are also aware of the reputational risk that might be suffered due to negative public limelight regarding the working conditions of their employees. Such a limelight might affect their attractiveness within the job market, which is a highly undesired situation.
According to Jamali (2007), a developed country is one that is characterized by strong institutions that regulate corporate and individual behavior. In this regard, a developed nation is one where the flow of resources is expected to be transparent and well-understood. In these nations, the role of the company towards its employees, the environment, and the society is understood by all. When there are shortcomings between performance and expectations, the avenues for correction are equally clear with the judicial system offering much of the remedy. This is beside immediate government action (Jamali & Mirshak, 2007). This is not to mention that developed nations are endowed with easily accessible resources such as communication and transport networks. Therefore, petroleum companies in developed nations offer CSR as part of a charity effort.
According to Spencer (2011), the situation in developing nations is different from that of the developed world. One of the main factors that characterize a developing world is a clear discord in the presence of infrastructure. While the developmental equivalent has a well-connected population, the developing nation has the infrastructure, but it is concentrated in one area or just a selected number of urban towns. Secondly, the developing nation lacks the clear institutions that are present in a developed world. Due to a gulf between the literate and the illiterate, it becomes easy for the politically connected to seek favors and do away with the rule of law, even when there are clear procedures to be followed (Spence, 2011). The result is that there is a gap between what is expected of a petroleum company and what is delivered. Unlike the developed case scenario, few challenge the status quo.
It is under the developing nation circumstances that the mantle of a company’s CSR is tested. Due to the presence of the chance to by-pass legal provisions, many petroleum companies can opt out of their obligations to the community and the government (Spence, 2011). In a case of Royal Dutch Shell in Nigeria, the company’s recognition that it is being associated with a corrupt and inefficient regime made it change its mode of operations. As from the 1980s, Royal Dutch Shell has made significant efforts to reduce environmental pollution and engage in community development efforts such as providing education and health facilities (Spence, 2011). The effectiveness of government against self-regulation in developed nations remains to be seen and is the subject of subsequent sections of this study.
This segment of the paper reviews the research methodology used in the study. This involves looking at the research approach that will be used and the research design that will be used in the study. Overall, the main aim is to allow the collection and interpretation of information that will answer the research questions adequately.
The research approach of any dissertation determines the underlying characteristics of the study that will be undertaken. The research approach first needs to determine whether it shall be inductive or deductive. An inductive study is a study that seeks to create a theory or a model that is different from previous models that have been generated by scholars. This is one of the most complicated research approaches available because validation of the model needs to be done. Alternatively, a deductive approach involves the review of the research questions or hypotheses of a topic based on collected information. The main aim of such a paper is answering the objectives of the paper. The theoretical framework in such a paper is based on information from previous scholars. This study uses information from the work of Milton Friedman in the research methodology and uses it as information to explain corporate social responsibility (Govaert, 2009, p. 23). There is no creation of a theory or model. This indicates that the study adopted is deductive in nature rather than an inductive study.
The second consideration that needs to be made is determining whether to use a primary of a secondary approach to the study. A primary study involves the collection of novel data that has yet to be used in a previous study. On the other hand, secondary data is data that has already been collected and used by other scholars in their work. Each of the different types of data has different advantages. Primary data is advantageous because it collects information that is specifically, used in the study. This means that the research questions determine the data collected. This improves the accuracy of the study since the data is specifically suited to answer the research questions. Despite this advantage, primary data is difficult to collect because it requires a lot of money and time. This reduces the reach of most primary studies due to funding and the access to information. Due to this, it is not the best when undertaking global studies from a university dissertation (Sarantakos, 2007, p. 31). Another problem is the risk of making mistakes during the data collection process. Data collection is difficult in a primary setting and errors can reduce the reliability if the primary data that has been collected. Secondary information also has specific strengths and detriments that are different. The first strength is the ease of collection of information. Secondary data is already available from other studies and the investigator only needs to select the information accurately. Secondly, any secondary study requires less time and money to collect as opposed to a primary study. This makes it especially useful in a dissertation setting where finances are limited to the student. The main detriment is the likelihood of propagating errors that were collected from previous studies. Any errors in primary data collection will be propagated in secondary research. However, this can be circumvented by the review of the primary data collection methods that were used in the study. Since the study seeks to determine the authenticity of the corporate social responsibility in the oil industry, a primary study is difficult because revenue and time to collect information from all or even one oil company is not available. For this reason, a secondary research approach is preferred as the research approach in the study.
After determining a research approach to be used, it is important to determine the design that will be used in the study. A secondary study is different from a primary study in terms of the research design that will be used in the study. In the case of a primary study, the research design would have been determined by either a focus group, survey or an experiment. In a secondary study, the different designs are either academic literature review of case study analysis. Case study analysis involves looking at specific companies, countries or situations to provide an explanation of the subject being investigated. The alternative is using academic literature based on topic (Bocarnea, et al., 2013, p. 23). This is less refined because it provides a general explanation of the subject rather than a specific analysis. For this reason, a case study analysis is used.
Case studies can be of two main types. The first type involves a review of one case study. This is called a single case study approach. This is effective when trying to explain success measures that can be undertaken based on an instance of success from one company. The main detriment of this type of case study is that it is not representative of an industry only a specific company. The alternative is a multiple case study. This involves looking at different companies and using the similarities as the baseline for the entire industry (Sapsford & Jupp, 2006, p. 21). This approach is favored in the study because the different methods of corporate social responsibility of different situations and companies will determine the social corporate responsibility of the entire industry. This extrapolation is required in the study.
There are different methods of research that can be used in case study analysis. Any case study can opt to use the qualitative or the quantitative method of secondary collection of information. A quantitative method of secondary research involves the collection of quantitative data. Quantitative data is empirical data that can be analyzed using mathematical software. The main benefit of this research method is the ease of data analysis. However, this information as many restrictions like the determination of parametric data. There is also a high risk of error propagation if the information collected was wrong. The alternative is a qualitative case study research. This involves the collection of qualitative information from case studies and then analyzing the underlying themes that already exist. This is more complicated than quantitative research (Vogt, 2010, p. 21). However, it is best suited for understanding abstract issues such as corporate social responsibility. This is the reason it is used in the research.
Data collection involves looking at instances where corporate social responsibility was used by oil companies to deal with a disaster. This is reviewed to determine whether the measures taken were done to respond to extrinsic pressure or the measures were done based on genuine intrinsic needs to improve the social and physical environment of the oil company. An assessment will be done to determine whether government regulation would have been better than the self-regulating corporate social responsibility policies that the oil companies have adopted. This will determine the authenticity of the corporate social responsibility policies (Bergman, 2008, p. 23). Finally, an assessment will be done on the differences that occur in developed and developing countries. This will allow all the research questions to be adequately answered in the study.
Ethical considerations are important in all sections of a study. Ethical considerations are especially important when conducting primary studies involving human participants. However, the study uses secondary analysis, and the instances of human responses come from other academic papers. The only requirement is to ensure that the studies included had proper ethical considerations and permission to quote any human responses. Proper citing will ensure that the information is attributed to the right source.
The case study analysis that will be conducted will review the incidents that occurred in the past and the corporate social responsibility measures that have been put in place afterward. This will allow a look at the authenticity of the corporate social responsibility policies by companies in the oil industry.
The first case study is the Exxon Valdez Oil spill. This is the largest oil disaster that happened in the United States. Approximately 11 million gallons of crude oil were spilled into the ocean along the Alaskan coastline. The incident occurred in March as an oil tanker was traveling along the Prince William Sound reef in Alaska. The oil tanker ran aground and released millions of gallons of crude oil into the sea. The situation was further compounded by the fact that the disaster occurred a fair distance away from the coast (Guterman, 2009, p. 1558). The entire process cost the United States as well as the oil company billions of dollars in losses.
There are several issues that can be highlighted by the disaster. The first is the reasons that led to the disaster. Reports indicate that the oil disaster occurred when the captain allowed someone else to steer the ship because he was drunk at the time. The inquiry showed that most of the crew had been drinking prior to the report, and the third mate was the one at the wheel of the oil tanker (Guterman, 2009, p. 1558). The captain also had several cases of alcohol abuse, and this meant that he was a risk to the entire ship. In terms of due diligence, the captain should not have been allowed to control such a ship while still dealing with alcohol addiction problems.
The ramification of the disaster was the spilling of over 1.2 million barrels of oil into the ocean. This affected the area in three main ways. The first was the environmental destruction that is caused by the oil spill. Oil restricts oxygen from entering the water. 1.2 million barrels covers a significant distance from the ocean to restrict a large portion of the aquatic life from adequate oxygen. This leads to loss of life and a disruption of the food chain. In addition to this, oil is sticky and thus makes the skin of animals and birds different. The mobility of these animals if affected and millions of these animals die of drowning. In addition to this, fishing is the livelihood of any of the people living along the Alaskan coast. Disruption of the fishing for extended periods of time led to the loss of livelihood of hundreds of families that rely directly or indirectly on fishing (Guterman, 2009, p. 1558). Thus negatively impacts the amount of information that is already in existence.
The reaction of the oil companies was to use the Alyeska organization to ensure that there was fast and effective clean-up of the oil that had been spilled. The organization quickly assumed responsibility and set measures where the oil would be either siphoned or burned as fast as possible. However, the measures that were being taken were not adequate. The United States government took control of the operation and conducted the bulk of the clean-up process. Immediately, investigations were started to determine the exact cause of the oil spill and the possible ways of resolving the situation. The agencies involved in the clean-up process sought to either use chemicals, mechanically collect the oil or burning the oil to preserve the population. The different areas were subdivided, and the oil cleaned based on the nature of the area as the priority (Ott, 2009, p. 248). However, the loss of animal life was the greatest because the reduced oxygen absorption greatly affected breathing. Many of the microscopic plants and animals that provide the backbone of the area were also affected. The following table gives the perceived risk that is associated with the Exxon Valdez oil spill in studies of respondents perceptions.
The Exxon Valdez disaster is one of the most important parts of the history of corporate social responsibility in the oil industry. This is seen by the massive fine that any organization in America has ever been fined. This allowed compensation of the manpower and the loss of revenue among the people in Alaska. This is the first time that the oil industry found itself losing money due to corporate irresponsibility. This meant that corporate social responsibility now had to be taken seriously in order to avoid any financial losses (Ott, 2009, p. 248). This provides one of the fundamental pressures that are required. Stakeholders found themselves in a position of power where they could dictate policy. The effect on stakeholders psychological stress due to lack of earnings is shown in the table below.
Additionally, the government took a more involved role in the regulation of the oil industry. In 1990, following the disaster, Congress set the Oil Pollution Act. This act required the United States coast guard to toughen the regulations on oil tanker owners and oil tankers, as well as the operators. In addition to this, an oil fund was put to deal with similar disasters in future. The result was the toughening of oil tanker hulls as well as more involves monitoring of the oil tanker operators. This seems to be a good step towards corporate social responsibility in the oil industry. The question is whether this is extrinsic or intrinsic in nature. In the first place, it was evidence that the captain has a long standing problem with alcohol abuse that the oil company knew. However, this was left unchecked despite the risk that it posed. In addition to this, oil is known to be an environmentally harmful substance. Oil tankers need to be well protected to ensure that the material does not reach the environment. This would have been done without the pressure that came from stakeholders after the disaster. However, the oil companies were simply afraid to increase the cost of business. This was done at the expense of not only the environment, but also the people who live off the ocean (Ott, 2009, p. 248). This indicates that there was no intrinsic motivation by company shareholders before pressure from external stakeholders was introduced. It is important to realize that the disaster did highlight the ability of government regulation to increase corporate social responsibility where self–regulation was not able to be done. The United States is also a developed country, and the government can apply greater pressure on the oil companies.
Another great disaster that has occurred in recent years is the Piper Alpha oil disaster. The disaster occurred when one of the hydrogen oil production platforms exploded killing hundreds of workers. The nature of the disaster is complicated. The exact cause of the explosions is not known. However, the investigations indicated that there was a change in the maintenance pump after the initial one had been removed. The alternative pump may have failed to operate correctly and thus led to the ultimate explosion that started the chain reaction (Hull, 2002, p. 435). It is assumed that the initial pump explosion occurred at 10:00pm. Soon there were other explosions that occurred from the crude oil and natural gas that was in the organization.
The initial explosion disabled the control room. This meant that the main channels of communication were closed off. The water deluge system on the platform was also ineffective, and this meant that it could not be operated to deal with the explosion. The normal recommendation in case of an explosion is a congregation of the workers in the gallery area. Many of the workers moved to that section of the platform. However, there were flames and smoke in that section of the platform. This eliminated the expected method of evacuation through life boats or helicopters. The smoke was increasing, and many of the survivors had to crawl out of the gallery and jump into the water. Most of those who died were still on the gallery platform waiting for evacuation. In total, 167 employees perished in the platform disaster. In terms of corporate responsibility, there are many issues that were not done according to plan. The first issue was the slow response of the organization in mobilizing evacuation. Occidental Company, the oil company that operated the platform, denied any responsibility by saying that the set measures of safety that were above board (Ott, 2009, p. 248). However, these security measures were responsible for most of the deaths. There was only one evacuation site on the platform. This backfired because the fire, was concentrated around that section. Over 70 percent of those who perished were in the gallery area.
The second problem arises from the nature of the platforms. The company’s platforms were interconnected, and this meant that the Piper Alpha was being fed with oil from the other platforms. Common sense dictates that in case of a fire, the other platforms are supposed to be closed to reduce the flow of oil and natural gas to the other platforms. However, the company kept pumping oil and natural gas. This fed the flames and worsened the situation. Outright, Occidental denied any responsibility for the disaster despite the gaps in the security system that existed. First the water deluge system was out of commission for several months, despite the ever-present risk of disaster. There was no corporate social responsibility by the Occidental Company (Hull, 2002, p. 434). This indicated that despite public pressure, there was still no intrinsic need for the company to take responsibility. The judiciary did not press any charges on the company mainly because the energy minister at the time had close ties with the oil industry.
It is important to review whether incidences of disaster had caused any change in the security procedures. A further investigation shows that Occidental company has suffered two prior disasters that had almost led to similar disasters. In 1984, the company had to evacuate an entire platform due to a similar leak. In 1987, there was another factor incident that did not yield any resolution. Several elements of the two prior disasters such as the failure of the water deluge systems were still present in the 1988 disaster. This clearly indicates that despite the repeated risk that existed, there was no major change in the company safety policies. This shows that there was no intrinsic pressure to adhere to corporate social responsibility by the company (Hull, 2002, p. 434). The company was also shielded from external pressure by the decision to forgo charging of the company officials.
Clearly the failures that existed should have at least led to charges of corporate manslaughter due to the negligence of certain key aspects. It is also important to note the power that oil companies have due to their financial capabilities. While Scotland cannot be considered to be developing, it is less developed than Britain and other areas of Europe. This means that there is still an inadequate representation of stakeholders in policy making and regulation reinforcement. This is a clear indication that the development of an area influenced the extrinsic pressure that can be applied to companies in the oil industries. When compared to the Exxon disaster, it is worrying that there were more human fatalities but the difference in the external pressure is less than adequate to deal with the disaster (Hull, 2002, p. 434). The irony is that even to date, Occidental claims to be a company that always uses social responsibility yet it failed to provide any compensation for the victims of the fire beyond the mandated corporate amounts. In addition to this, the government gave the company huge tax reliefs to allow the rebuilding of the platform. In a way, the United Kingdom taxpayers indirectly funded the rebuilding and any losses that the company had. This is clearly not adhering to social or corporate responsibility. Currently, Occidental does not mention the disaster in its database.
One of the best examples of corporate social responsibility for the lack of this responsibility is the 1990’s involvement of Shell in Nigeria. Nigeria is one of the largest producers of oil around the world. There are over 3 million barrels of oil produced each day from the country. Nigeria relies on a lot on oil with over 65 percent of the GDP coming from oil. In terms of population, Nigeria is one of the most densely populated countries around the world. The country has over 130 million and a rural demographic of over 55 percent (Hemming, 1996, p. 393). One of these rural communities is the Ogoni community with approximately 500,000 people. The community is predominantly agricultural with the majority of their activities being centered on fishing or agriculture. The area where the Ogoni resides is in the oil-rich Niger Delta that has the largest oil deposits in the country. Shell is the main company that operates near community, and it has acquired the land using the Land Use Act of 1978 that allows multinational corporations to acquire land that will be used for operations.
The main issue arises from the method used in the disposal of unwanted gas and oil. There are numerous methods but the most effective methods are expensive and costly. The cheapest method is flaring where the unwanted oil is burned. This is the method that Shell Company adopted in the Niger Delta. However, this is done at a larger scale than in other areas of the country. In the United States, only 0.6 percent of the gas is flared. There is 1.5 percent in Russia, 5 percent in Mexico and 20 percent in Saudi Arabia. However, the rate of flaring in Nigeria is 76 percent. This indicates a significantly higher percentage than most of the other countries. The main problem with flaring is that it releases large amounts of carbon and methane into the atmosphere. This leads to acid rain as well as increased global warming. In the Niger Delta, Shell burns these oil flares for 24 hours. This creates a constant problem for those who live near these flares due to extreme heat and the damage that the heat causes to the crops (Hemming, 1996, p. 393). The acid rain then causes greater issues when it rains making many farm areas barren due to the excess chemicals that are spewed. Sociology scholars have clearly highlighted the plight of the Ogoni due to the problems that arise from the use of flaring in the Niger Delta. The following images give a description of the condition that the Ogoni people go through due to the flaring.
Most communities in Africa use rainwater as a source of drinking water. However, in the Niger Delta, this is not possible because the rain contains harmful chemicals that are detrimental to the health of the Ogoni people. Apart from flaring, there are numerous oil spills that occur due to lack of proper maintenance of the oil pipes. In 1992, a pipeline destroyed a river that was the source of drinking water for several villages. Life has been destroyed in the river due to the policies that are in place in the organization. Over 40 percent of the oil spills that occur in Shell occur in the Niger Delta. This indicates that the rates are significantly higher than in other areas.
188.8.131.52 Human rights violations
There are several human rights violations that have occurred in the Niger Delta. Due to the worsening condition of the quality of life of the people in the Ogoni community, there were peaceful protests by the people in an attempt to seek the intervention of the government. However, the response of the government to pressure from Shell was to create a unit known as the mobile police to tackle this peaceful protests. The protests led to the death of over 100 people with reports by the Human Rights Watch indicating that Shell provided the police with weapons that were used in the massacre. The Ogoni community responded by creating MOSOP (Movement for the Survival of the Ogoni People). The MOSOP formed an Ogoni Bill of Rights that were tabled to the Nigerian government and the United Nations. The bill also contained a statement that accused Shell of failing to share economic resources, causing environmental degradation and reducing the quality of life of the Ogoni community. This led to international condemnation by the United Nations Human Rights Commission. When the Nigerian government realized that the United Nations had also been provided with the bill a military force was created by that would specifically deal with any of the prosecutors (Hemming, 1996, p. 393). The heavy military presence led to the death of over 2,000 civilians and the destructions of over 35 villages in the Niger Delta. The problem became so bad that Shell had to discontinue operations for an extended period.
The leader of the MOSOP was considered a threat and charges were fabricated against him and the other leaders of the MOSOP. They were charged with conspiracy to commit murder. The charge carried a life imprisonment sentence. Despite appeals from major world leaders, including Nelson Mandela, the eight were hanged in 1995 (Hemming, 1996, p. 393). There was a worldwide outcry of the events along with public condemnation of Shell Company for its human rights violations and the involvement in the problem.
184.108.40.206 Shell’s solution to the condemnation
Despite the protracted issues between Shell and the Ogoni people, the first change started when the company started losing market share because of the international outcry due to the issue. Public opinion polls in developed countries showed that Shell was negatively viewed mainly due to the belief that it had negative human rights and environmental policies. This started to take a toll on share prices and business with other companies. More businesses opted for competitors rather than Shell. This caused a massive loss to the company. The company responded by taking measures to resolve any environmental damages that were caused in the past. This involved drastic reduction in flaring as well as clean-up of oil spills that occurred in the Ogoni area of the Niger Delta. This marks an intrinsic push to adhere to corporate social responsibility due to the loss of economic value of the company (Hemming, 1996, p. 393). One of the major changes was to allow SustainAbility to control the corporate social responsibility aspect of the organization. This assured stakeholders that measures were being put to deal with the issues that Shell had been accused of. SustainAbility pushed for the creation of a transparent approach that listened to what stakeholders had to say. This means that the grievances that had been ignored from the Ogoni community were now being taken under consideration. This involved reviewed of the health and safety regulations of the organization as well as a review of the self-imposed targets that Shell had set to reduce negative environmental impact.
Another measure taken by SustainAbility is to include stakeholders in the process of environmental conservation. Advertising campaigns were created targeting the Ogoni community and other stakeholders of the efforts that Shell was making to improve the standards of living of the society.
It can be clearly seen that the main driver of the change in Shell’s actions in the Niger Delta is the loss of revenue. This is in line with the assertion that shareholders will only make changes when it economically benefits them. Shell was using a lot of money to protect the oil wells as well supply the military with weapons. This money would have easily been converted to helping the Ogoni Community. In addition to this, many of the measures used in developed countries such as regulated flaring were upheld in Nigeria because the government was easier to bribe and convince of the importance. Ultimately, this is a clear indication of what can happen without any regulation.
One of the recent and most intrinsic shows of corporate social responsibility is shown by BP and their acceptance of their role in the global warming crisis. The company was the first major oil company to this and make deliberate changes to resolve the growing problem. This was widely unexpected in the oil industry since most companies were adamant that they were not the cause of the problem, but rather it was a result of human consumption. The major change that occurred was that BP had forced all the other oil companies to admit their role in environmental and check their environmental policies. One of the most important pledges was to reduce the company’s carbon dioxide emission to 10 percent in twenty years. However, BP was able to do this in less than four years. With the world taking global warming more seriously, there were many who applauded the efforts that BP had done but many critics in the oil industry had asserted that the move would have negative economic impacts on the company (Budzianowski, 2011, p. 293). While this was true, the public acclaim had increased the popularity of BP to counter this issue. The country also introduced the carbon trading that has now been adopted by many developed countries. This is a clear indication that the oil industry has the capability of being involved in the fight for environmental conservation.
There are several clear issues that can be seen from the case studies that have been analyzed. The first is the distinct difference between shareholder perception and stakeholder perception. Shareholders view the business as an income generating vehicle. On the other hand, stakeholders view the business as a resource exploiting entity. This means that the stakeholders seek to ensure that the resources used are not over-exploited or endangered by the oil company. It is difficult for any business to self-regulate. This is especially more difficult in the oil industry where the profits are large. The lack of self-regulation is clear in the platform fire where Occidental had two more incidents prior to the fire but failed to make any safety measures that would reduce the problem. In addition to this, the company continued to pipe oil and gas during the period, and this resulted in the acceleration of the fire beyond the limits that were expected before. In the Exxon Valdez oil spill, the company sought to siphon the fuel mechanically out of the ocean in an attempt to save on fuel (British Broadcasting Corporation, 2014). However, this was deemed ineffective, and the coast guard had to use other methods. In the Niger Delta, Shell Company did not listen to the grievances of the Ogoni community and opted for the more dangerous but cost effective method of flaring. This is a clear indication where the economic interests are pursued in the interest of the environment or community around the company. This means that the shareholders who are policy makers in the organization do not consider intrinsic corporate social responsibility from the onset.
This is compounded by the fact that all cases of corporate social responsibility changes to the policy occur after a major disaster. The change in hull strength of oil tankers and the strictness of the employee selection was done only after the Exxon Valdez oil spill. The Shell change occurred after many years of ignoring the plight of the Ogoni community. Only when the company started to reflect losses economically was the policy changed in favor of more strict methods. This indicates that most of the corporate social responsibility changes were as a result of pressure from stakeholders or the international community. This is a clear indication that the policies that are being set in place are more reactive than proactive in nature. This indicates an aspect of public relations in those campaigns. However, there are a few cases such as the BP global warming acknowledgment that indicate that some companies are proactive. However, this is only one of few proactive cases (Bergman, 2008). A conclusion can be drawn that most of the corporate governance procedures adopted by oil companies are reactive rather than proactive.
Finally, violations of social or environmental issues seem to be worse in less developed countries. The Exxon Valdez issues were resolved in a short time while the situation in Nigeria took several years before Shell even admitted its flaws. In addition to this, the change occurred after the developed world took notice and made public condemnation to Shell. This indicates that corporate social responsibility policies in developed countries are different from those in less developed countries. In addition to this, there was blatant bribery by the company along with active help by supply weapons that led to the innocent death of over 2,000 members of the Ogoni community. Developing countries have leaders who are more easily corrupted, and the voice of less prominent members of the community are ignored. This is the reason the Nigerian government came to the aid of Shell rather than resolve the issue amicably with its people (Brown & Forster, 2013). This is an indication that oil corporation have different standards for developing and developed countries. Developing countries are still yet to reach the level where stakeholder opinions are taken seriously.
Finally, the case studies have shown the power that regulation has in the oil industry. Before the Exxon Valdez period, there was little regulation on oil tankers. However, the onset of regulation has streamlined the policies and improved corporate social responsibility in the oil industry. In addition to this, it is clear that areas with low regulation like Scotland and Nigeria were prone to more socially and environmental practices (Hemming, 1996). This is a clear indication that despite the calls for self-regulation, there is a need for regulation that ensures that the rights and freedoms of individuals are maintained while ensuring that the environment is protected regardless of the area of the location. It is clear that corporate social responsibility reports are increasing as shown in the figure below, but the reason is may be for public relations.
The results of the study indicate that corporate social responsibility in the oil industry is different from what is expected in theory. The objective was to determine whether oil companies are motivated by disaster and extrinsic stakeholder pressure to adopt corporate social responsibility or whether they are motivated by intrinsic desire. It is clear that companies in the oil industry are motivated by extrinsic pressure rather than intrinsic desire to be more socially responsible in their practices. As highlighted in the case studies, most of the major changes that have occurred in corporate social responsibility in the oil industry was due to pressure from stakeholders. In the Exxon Valdez issue, the pressure from people in Alaska as well as environmental groups led oil companies adopting better oil transportation safety measures. Similarly, the pressure in Nigeria from the international community led Shell Company to shifting its approach to more stakeholder and environmentally friendly methods despite years of pressure from the Ogoni community. The theoretical framework highlighted that shareholders who are the main decision makers cannot intrinsically increase their liabilities through corporate social responsibility. However, when stakeholder pressure leads to economic loss either through fines or through loss or market, the shareholders are willing to engage in corporate social responsibility measures. In truth, this simply shows that the oil industry, mainly uses corporate social responsibility as a public relations gimmick to restore public image rather than as an intrinsically motivated subject (McKibben, 2012). However, there are exceptions such as BP’s unpressured move to reduce carbon emission. While this was unpopular with other oil companies, the company proceeded to reduce its carbon emission. This is one of the few exceptions.
The second objective of the study was to determine whether corporate social responsibility in oil companies is worse in developing countries. This is answered by comparing the response that oil companies have had after disasters show that in the United States the companies quickly took responsibility and tried to resolve the situation. In Scotland, which is slightly less developed than America, Occidental refuses to claim liability. This indicates the change in corporate social responsibility based on the level of development. The situation is worse in developing countries. The Ogoni community in Nigeria opposed the environmental degradation and loss of quality of life due to Shell’s 24 hour flaring policy. However, Shell responded by using connections in the government to fight against the Ogoni. Despite the loss of over 2,000 Ogoni community members, Shell only agreed to change policies when the company faced international condemnation and loss of market share (Spence, 2011). This clearly shows that oil companies take advantage of the lack of voice of stakeholders in developing countries.
The final objective is to determine whether to determine whether government regulation would bring better results as opposed to social corporate responsibility in the oil industry. In developed countries, pressure from stakeholders has led to the development of laws and regulations that clearly control the rate of environmental degradation. However, developing countries are not able to provide such strict measures to ensure that environmental degradation is reduced. The lack of regulation makes them more prone to issues of exploitation. This means that self-regulating social corporate responsibility in the oil industry does not guarantee environmental conservation or adherence to human rights. This means that measures of regulation should be set to provide a basis for corporate social responsibility.
There are a few recommendations that can offer to allow better corporate social responsibility in the oil industry. The first measure is the creation of a body that ensures that oil companies infringe a specified minimum environmental degradation measure and no human freedoms and rights. This will ensure that the oil companies compensate the communities around the region adequately in a fair manner. There should also be set penalties for any environmental damage or human rights violation that occurs. This should be global to ensure that even people in developing countries are protected. Finally, the minimum limits should not be included in corporate social responsibility. This will mean that social responsibility is done intrinsically, beyond the economic loss expected.
The results have indicated that most of the corporate social responsibility policies set by companies in the oil industry are reactive, and only seek to improve company image. A study should be undertaken to determine the exact minimum mandatory social responsibility measures that can be placed in the oil industry.
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