Lying
Lying is wrong; except that in everyday usage it is not always so. The acceptabil-ity of a lie depends partly on the context in which it is made. Perjury, lying under oath in a court of law, is not acceptable; indeed it is a crime that carries heavy punishment. In the context of business negotiations lying, in the form of bluffing, may be acceptable as Carr argued (1968) in a classic article. Lies, in such a context, may be no more than putting a spin on an unpalatable truth.
The reprehensibility of a lie may also depend upon its nature. Telling an abso-lute untruth is often worse than failing to tell the whole truth. A cabinet secretary to a British government famously objected to a suggestion that he had lied. He had, he claimed, merely been ‘economical with the truth’. Managers often find difficulty when they have to keep silent about privileged or confiden-tial information, as when they know there are proposals to make people redundant but have been required to say nothing until the plans are finalised and can be announced. Their loyalty to their staff conflicts with their commit-ment to their company’s needs. Conflicts of interest are a particular problem for professionals and public officials whose judgement should be seen to be free of private or opposing interests. They should be open about any such conflicts.
Recruitment consultants finding new jobs for staff being made redundant would be regarded with suspicion if they received fees from both the organisation buying the out-placement service and the company in which they placed the redundant staff. The Nolan Committee’s (1995) seven principles for public life are all focused on ensuring that private or sectional interests do not prejudice people’s decisions on matters of public interest.
Lying
Morality Ethics
Winston Churchill used the phrase terminological inexactitude in a speech on Chinese labour in South Africa. The phrase was not actually used as a euphemism for a lie. He argued that although the labourers’ contracts might not be proper or healthy they could not be classified as slavery without ‘some risk of terminological inexactitude’. However Alexander Haig, the American politician, is credited with saying, ‘It is not a lie, it’s a terminological inexactitude’.
DEFINITION
Another test of the dishonesty of a lie is its purpose. There is a range of names for acceptable lies, including fibs and white lies, that are intended to avoid giving offence or causing distress to individuals. Not all managers see such lying as acceptable, as one told us in a research interview.
I think for me the most important thing is honesty and what I find difficult is when managers maybe are doing something for one reason but are telling staff it’s for another reason. Something like that I would find, and do find, quite difficult. Rather than actually saying to staff, you didn’t get the job because your performance isn’t as accurate or whatever else; what they give is fairly obscure reasons rather than actually facing the real reason.
The Nolan principles are:
Selflessness
Holders of public office should act solely in terms of the public interest. They should not do so in order to gain financial or other benefits for themselves, their family or their friends.
Integrity
Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might seek to influence them in the performance of their official duties.
Objectivity
In carrying out public business, including making public appointments, award-ing contracts, or recommendaward-ing individuals for rewards and benefits, holders of public office should make choices on merit.
Accountability
Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.
Openness
Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands.
Honesty
Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.
Leadership
Holders of public office should promote and support these principles by lead-ership and example.
DEFINITIONS
A lie involves intent to deceive; if there is no such intent there is no lie. We fill our conversations with figures of speech such as hyperbole (‘I’m so hungry I could eat a horse’) and metaphor (‘That man is a pig’) that do not lead people to accept the literal truth of what we are saying. Advertising is a common area in which companies may seek to deceive their customers. The Advertising Standards Authority, in a typical example, criticised Virgin Trains for claiming in their advertisements that all fares were half-price when conditions meant that many were not (Milmo, 2001).
Case study 2.12
The case of Shell’s missing oil barrels
The Royal Dutch/Shell company, or rather group of companies, has been accused of being over-large, out of control, secretive and hidden behind a bland façade. Theses claims have centred on the story of Shell’s missing oil reserves.
The problem began in the late 1990s. One of the figures used by observers of the oil industry is the reserve replacement ratio (RRR). Shell’s RRR was one of the poorest in the industry. It was not finding new sources of oil fast enough. Managers assumed that the policy for ‘booking’ new reserves was too restrictive. There was management fashion at the time for using problem solv-ing teams to come up with radical and creative solutions and Shell established four such teams to improve the exploration and production function that was led by Sir Phillip Watts. New guidelines for booking reserves were imple-mented. In Shell’s 1998 annual report there was a brief note reporting that
‘Estimation methods have been refined during 1998’. The RRR consequently increased by 40 per cent and the director was rewarded for improving the effi-ciency of his directorate. Shell had adopted the system of determining senior managers’ rewards and bonuses according to their performance against critical performance indicators. Rewards were triggered by numbers and targets and not by the rounded judgements of appraisers.
In 2001 the American Securities and Exchange Commission (SEC) pub-lished new guidelines for assessing the commerciality of new oil discoveries.
These were to be used to determine whether finds were certain enough to be accounted as a reserve. Shell’s booked reserves in Australia, Norway and Nigeria did not comply with the new SEC guidelines. However, there was great pressure within Shell to keep the RRR as high as possible. Nor was there much internal auditing pressure to review the reserve figures, the auditing of which was done part-time by one engineer who had no staff to back him up.
It is clear that several top executives within Shell knew of this problem by 2002. However nothing was made public. This was largely a result of feuds between senior managers, particularly between Sir Philip Watts (who had been promoted to Chairman) and Walter van de Vijver, head of exploration.
After what van de Vijver considered an unfair performance appraisal from Sir Philip Watts the former sent the latter an email stating ‘I am becoming sick and tired about lying about the extent of our oil reserves issues and the downward revision that needs to be done because of far too aggressive/opti-mistic bookings’.
On 9 January 2004 the Shell group announced through its investor relations staff that they had downgraded their reserves by 20 per cent, or 3.9 billion bar-rels of oil. The markets were not happy and the stock market valuation of Shell dropped £2.9bn. That the announcement had not been made by Sir Philip Watts personally increased investors’ anger. The pressure led to Watts and van de Vijver resigning. At first it was reported that Watts left by mutual consent although later it was admitted that he had been pushed. Nevertheless he received a £1m compensation package for the breaking of his contract. Jeroen van der Veer from Royal Dutch became the new chairman. There was some negative comment in the business press that the new chairman was an insider, although given the reported friction between the British and Dutch wings of the group Shell insiders would be more likely to see the appointment as a Dutch coup d’état. The Finance Director resigned in July. There was no ques-tion of financial impropriety on her part but there were quesques-tions about her effectiveness in ensuring compliance with good accounting practice.
Shell argued that the differences between its criteria for booking reserves, and those of the SEC, are largely a technical matter. The de-booking of reserves, they pointed out, does not mean that the oil is not there and they anticipate that 85 per cent of the missing barrels will prove to have been there all along.
Shell’s approach to internal control is on a risk assessment basis that is designed to manage rather than to eliminate the risks to achieving the compa-ny’s objectives. In September 2004 Sir Philip Watts announced that he planned to challenge the FSA in the Financial Services and Markets Tribunal (the appeal court for FSA decisions). He was claiming that he was treated unfairly by the FSA who criticised him implicitly in their report, although not by name, and did not give him an opportunity to rebut the criticisms (Hosking, 2004).
Shell’s audit committee instigated an internal review that was carried out by external accountants. There was pressure for an independent inquiry both in the UK and the USA. In the UK the charge was that the company had breached Stock Market regulations by not reporting in good time matters and information that could have an impact on the share price. The UK Financial Services Authority (FSA) started an investigation as did the SEC in America.
Shell cooperated fully with the investigations. In August 2004 the FSA fined the company £17m and the SEC fined it £66.29m. The FSA accused Shell of
‘unprecedented misconduct’ and a failure to put internal controls in place to prevent misleading information being given to the market. In its agreement with the SEC Shell did not admit any illegality but it did agree to spend nearly
£3m on developing better internal compliance systems. These official punish-ments may be only the start of the problem for Shell as lawyers in the USA are clamouring to start class actions against the company on behalf of various pen-sion funds who believe that the misinformation caused them financial losses.
Shell may be one of the first cases to feel the weight of the Sarbanes-Oxley Act that was passed in the USA following the Enron and WorldCom cases. Under this Act’s provisions the senior managers of the company signed a declaration concerning the 2002 annual report that ‘based on my knowledge, this annual report does not contain any untrue statement of a material fact’.
Royal Dutch Shell has an unusual, but not unique structure. It is a dual listed company. This means that the Shell group operates as a single organisation but
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legally it is two organisations, the Royal Dutch Petroleum Company, which is based in Holland and listed on the Dutch Stock exchange, and the Shell Transport and Trading Company, which is based in London and whose shares are listed on the London Stock Exchange. These two companies are the parent companies. The shareholders of Royal Dutch are mostly Dutch and those of Shell Trading mostly UK based, although there is a substantial block of American depository receipts (ADR) held in the USA. A series of legal agree-ments governs the relationship between the two parent companies. This arrangement dates from 1907 when Shell (which was founded in 1833 as a shop selling seashells to naturalists) merged with the Royal Dutch Company for the Exploration of Petroleum Wells in the Netherlands East Indies. Under this deal Royal Dutch controls 60 per cent of the group’s assets and Shell Trading con-trols the remaining 40 per cent.
Royal Dutch and Shell Trading do not undertake any operations. Instead they own the shares of two holding companies, Shell Petroleum N.V. and the Shell Petroleum Company Ltd. These in turn own the large number of compa-nies that carry out the group’s operations around the world. The two parent companies each have a board of directors (Royal Dutch has a supervisory board as well) that have different memberships. The combined group is overseen by an executive board known as the committee of managing directors (CMD). The members of the CMD are appointed by the boards of the parent companies. In such a structure there is clearly tension as to who has the greatest influence and who carries oversight and responsibility for the organisation’s compliance with laws and conventions. It appears that Royal Dutch is the dominant part-ner. The supervisory board of Royal Dutch controls a number of foundations that own ‘priority shares’ that confer voting rights but no economic benefit.
These enable the supervisory board to control nominations to both parent company boards and thus to the CMD. The CMD is not formally covered by the joint venture agreement that defines the merged company and so it has no formal authority over the parent companies’ assets.
Investors have complained that the legal structure of Royal Dutch/Shell makes it difficult for shareholders to gain information from the group and to influence its policy. This, taken together with the divisionalised structure of the group that leads to a high level of decentralisation, raises questions about the effectiveness of internal control. This said, the group has the full panoply of policies, codes of ethics and operating principles, which all large companies have, to ensure good governance. Economists have studied the tensions between insider ownership and insider control (through such devices as priority shares) in dual class companies. Some have suggested that when the insiders, in this case the Dutch boards, have great voting muscle they use it to support their own position as against the interests of outsiders such as share holders. This tendency itself would make it difficult for share-holders to hold the company to account. Although it can equally be argued that the system in Royal Dutch/Shell, which gave the managers low owner-ship but high voting rights, contributed to the development of a strong and flexible corporate culture.
The reserves revaluation has led to calls for changes in corporate gover-nance of Royal Dutch/Shell to prevent the reoccurrence of similar problems.
Refusing to be true to one’s own beliefs can be a form of self-deception. This can happen when a person justifies continuing their connection to an organisa-tion even though they object on ethical grounds to the organisaorganisa-tion’s behaviour.
Shell has now adopted a single board structure. In 2005 Shell announced the largest profit ever made by a British based company, largely attributable to the increase in world oil prices in 2004.
Sources: Doran and Mansell (2004), Gompers et al. (2004), Harrington (2003), Harris and Michaels (2004), Morgan (2004), Plender (2004), Shell Group (2004), The Guardian (2004a and 2004b), Watchman (2004).
• In your opinion did Shell lie?
• If you believe it did what were the factors and influences that may have caused them to lie?
• Is this a good news story because the regulatory agencies punished Shell?
• Why did Shell’s shareholders get so vexed about the corporate governance issues?
• What changes in corporate governance if any might be necessary?
Discussion activity 2.12
Case study 2.13
BAT, Nottingham University and the honorary professor
Nottingham University accepted £3.8m from British American Tobacco (BAT), the world’s second biggest tobacco company, towards setting up an interna-tional Centre for Corporate Responsibility. There was of course nothing illegal about the gift but many individuals and groups thought it was wrong. The problem was that Nottingham University carried out medical research into cancer and its treatment, some of it funded by medical charities. This was thought to fit ill with accepting money from a company that sells products known to cause cancer.
Richard Smith was editor of the British Medical Journal (BMJ) and an unpaid honorary professor of medical journalism at Nottingham University. He believed the university’s acceptance of BAT’s money was a ‘serious mistake’. He polled readers of the BMJ to discover their views on whether he should resign from his post at Nottingham University. Of the 1,075 votes cast 84 per cent said the university should return the money and 54 per cent said that Professor Smith should resign if the university did not do so. The latter vote was closer than had been anticipated and this was because some argued that the professor should stay within the university and argue his case internally. The professor did resign, both because he said he would abide by the result of the poll and because he firmly believed the university was wrong in its actions.
(Source: Meikle, 2001)
The next case study in this section has the character of an ancient Greek tragedy.
Jonathan Aitken, who had publicly defended the freedom of the press in his early career, committed hubris over a weekend spent in the Paris Ritz, received his nemesis and was reported to be looking for catharsis.
Is it better to retreat and live to fight another day or to take a stand on a matter one sees as an injustice?
Discussion activity 2.13