Executive Summary

In the absence of a potent checking mechanism, few organizations tend to lean towards short-term goals and therefore, end up hurting the ecosystem in which they operate. These short-term victories are short-lived too. In case of the oil spills within Nigeria due to the oil drilling, the UN has estimated a cost of USD 1 bn to clean the environment and bring it back to how it was before. This cost obviously has to be borne by the companies drilling there. So, taking the short-cut is quite counter-productive. 

Many cases across the globe in both oil industry, as well as other industries, indicate that the cost of being unethical is too high and in some cases may wipe out the organization caught on the wrong foot. So, long-term sustainability when rooted in ethics leads to not only sustainability but also reputation and support of customers wanting the organization to succeed. Johnson and Johnson is a good example of such a socially responsible company.  

Lastly, speaking specifically about the oil industry, there is a way to make oil companies responsible through policies. These policies are there to safeguard the source countries and at the same time warn customers of the wrongdoings of the oil drilling company. This kind of policy has been successful in the diamond industry trying to curb Blood Diamonds. The Kimberly Process effectively brought an end to wrongdoing conduits. A similar legislation and agreement between countries should do a world of good to the oil industry as well. 

Ethical Behaviour leading to Organizational Stability is the best and the utopian way of looking at things but should push come to shove, the world should not shy away from strong policies capable of bringing down the wrong-doers to their knees.

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Introduction

While ethical practices in organizations is a wide spectrum discussion and in fact, impacts all organizations, for the benefit of this discussion we will limit our scope to oil companies and their impact on the environment. When we say impact we also would like to see how important and sustainable it is for organizations to be responsible towards the ecosystem they survive in. The ecosystem includes external parties like, people, living creatures, society, soil, atmosphere, and internal parties like employees, stakeholders, the board of directors and other participants who are directly or indirectly impacted by the operations of the company. 

The one peculiar aspect of oil companies is that it usually operates in a country to drill oil and mostly exports it to other countries, earning the host country and itself profit. Now, imagine a scenario where the host country is quite impoverished while the company drilling the oil is one of the largest in the world. Who do you think will have the higher bargaining power? If you think like me, you know the answer is the oil company. And now, if that is so, how much do you think is their drive to follow ethical practices towards the external parties in the ecosystem? Tricky, right? This completely depends on the ethical practices of the organization or the individual at the forefront of the project. The country has the larger need for foreign exchange and that can be easily exploited by a not-so-ethically driven company.  

The example above need not be a hypothetical example but a real one. Consider the big oil companies, Exxon, Shell, and Chevron for the sake of discussion. What are their revenues? It is USD 244 bn., 307 bn., and 134 bn. respectively. Now, what are the GDPs of most African countries? If Nigeria and South Africa alone are taken, being two of the largest economies in Africa, the GDP stands at USD 376 bn. and USD 349 bn. respectively. So, the oil companies are almost the size of these African countries and not to mention, Nigeria’s 70% of revenues come from crude oil export. Who drills the crude? You get my point on the bargaining power, right? 

This, incidentally is what happened in Nigeria. A number of oil companies drilling in Nigeria have polluted the environment so bad that UN estimates that it would require USD 1 bn and 30 years of cleaning to undo the pollution because of oil spills. Many experts in Nigeria feel that the USD 1 bn. is hardly sufficient and a larger USD 100 bn. would be required to undo the damage.

The more important question though is, would this have happened if the oil companies had followed due environmentally safe processes? Did they need to be checked for compliance? Obviously, Nigeria did not have much of a say in the matter but how could companies get away doing this? 

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Take a look here for the article talking about the Nigeria mainland pollution covered in the Telegraph

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Well, the answer leans to some extent towards Ethics

Ethical behavior has differing definitions by many of the great minds that have studied the subject. In simpler terms it is the understanding of what is right and what is not, in a given circumstance, and attempt to follow the right path even in the absence of external monitoring. Ethics applies both to the individual and the organization but in many cases, the individual may have to toe the line of the organization. So it depends how morally and ethically the organization feels towards its responsibilities which then trickles down to the individuals.

Oil Spill in Oloibiri Town, Nigeria

Now in the case of Nigeria and the oil companies, there is an apparent absence of ethical processes. What do I mean? Could we have expected the same companies to have done that kind of damage in the US or UK and get away with it? Which means it is not the process but the lack of process which has caused the damage. And this circumventing of the process could have happened to pocket a larger profit. It isn’t hard to see that such kind of behavior overlooking ethics is to gain short-term benefits. But the bad news is that the world does catch up with the wrong-doers. More of that we will discuss shortly, but before that few other examples for the oil industry itself.

While here we looked at the pollution on the mainland because of short-term profits scoring over ethical processes, the aspect is not limited to this example alone. Even oil transportation faces similar issues. The need for a double hull oil tanker is well-known and accepted one since the 1989 Exxon Valdez oil spill off the coast of Alaska. Such devastating was the spill that even today it is taken as a reference to compare oil spill disasters. America promptly changed policies to ensure single-hulled vessels don’t make port calls to America, however, the oil companies just diverted such ships to Asia. Why? Because regulations in Asia were not as strict as in America. So, there is hardly any feeling of social responsibility leave alone ethics when dealing with such issues. To be ethical and environmentally responsible would mean that the company would have to shell out money in the short-term. This, therefore, becomes a catch-22 situation.

Here's a pictorial explanation of why double hull ships were needed when transporting environmentally critical cargo like oil.

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You can read more about the Exxon Valdez Oil Spill here

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What is the cost of being ethical?

The cost of being ethical is many a time a fraction of the cost of undoing the damage of being unethical. We already saw the Nigerian case where USD 1 bn. is the minimum requirement from the oil companies to shell out to clean the environment. Now, had the companies just followed the standard operating procedure of cleaning any situation of a spill, it would have cost it few hundred thousand dollars. Besides, it would have caused a sense of responsibility among the employees to be more careful when dealing with oil. But this not having happened also allowed a loosening of stance towards employees who did not bother about the spills, even if it did happen. Now the end result of such neglect is that the companies will cough up a billion dollar and this is just a small fraction of what can be expected as ask from Nigeria. As readers would have guessed, the cost of unethical and socially irresponsible behavior adds up to 10,000 times more cost, eventually.

One more example from outside the industry which was witnessed as recent as 2016 was the Volkswagen software cheating to beat pollution norms. Now at the time of investigations, Volkswagen was the world’s largest car manufacturer ahead of General Motors and Toyota. However, at the end of the investigation, when it was found that Volkswagen instead of implementing technology to reduce pollution tricked the system to pass even a polluting vehicle, the repercussions were huge. They lost market-share and although the issue happened in the US, all markets refused to buy Volkswagen products and over and above that, they were slapped a USD 18 bn fine. Last but not the least, the CEO had to resign and move out taking the full-blame of the episode. See the repercussion of unethical behavior? 

This is not the only example. Let’s look at another example from the oil industry. The Prestige oil spill off the coast of Spain in 2002 was due to the structurally deficient oil tanker, MV Prestige. The spill was so bad that it was supposed to be more than the Exxon spill and more toxic because of the higher water temperatures.

Gannet killed by the Prestige spill. One among many thousands of birds and animals dead across Spain, Portugal and French coast.

Now, all that the oil company had to do in the beginning itself was to scrap the 27 year old Prestige and get a new ship, keeping up with the socially responsible behavior. But instead, the beleaguered vessel was allowed to carry on to do away with the short-term cost – probably a cost in millions of dollars. But what happened post their irresponsible behavior? In 2017, the London P&I Club (insurer of the ship) was fined to pay USD 1 billion. So, cost of unethical behavior is in fact, quite large. 

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You can read about the Prestige Oil Spill over here

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So, what’s the solution?

There are only two ways of looking at this problem: 

1. Hope that the organization and its employees believe that ethical practices are the only way to sustain the organization 

OR 

2. Implement strict policies which penalize organizations wavering from the set standards

Ethical Practice as a lever for Organizational Sustainability 

The Sustainability of an Organization can be seen through the lens of either thinking about shareholders or stakeholders. What’s the difference?  

The shareholders fixed thought process will lean toward maximizing the returns for the invested parties and therefore, will be more of a short-term sustainability approach. Which also means cutting corners at times in order to save cost or time or both. This is what we discussed so far as being counter-productive and we saw that tthe cost of cutting corners could be really high. 

The second way of looking at things in a holistic manner. This includes the external and internal parties of the organization. Everyone is a stakeholder and the organization needs to be driven by the well-being of all involved as a way of ensuring sustainability. But does that work? Let’s see. 

Heard of Johnson and Johnson and the Tylenol episode?

In 1982, there was news that somebody was poisoning the Tylenol sold over the counter with cyanide. There were seven reported deaths. The move of Johnson and Johnson at that time was considered time memorial and even today it commands respect from the global community. 

Johnson and Johnson immediately recalled all the Tylenol and worked closely with the police department, FBI and other investigating agencies. They then repackaged the Tylenols with triple sealed packs. This enhanced the reputation of the company among the stakeholders. The company did lose deeply in the short run but within a year they gained back the lost market share and remained at the top for a long-long time. Even today, after nearly four-decades the reputation of the company is enviable. See, how being responsive to stakeholders builds long-term sustainability? That’s the mantra.

By the way, I hope readers noticed that it was not Johnson and Johnson’s mistake and they did not have to recall the Tylenol. They could have just let it be with the pharmacists and leave it to them to destroy it. No regulatory authority, government or investigating agencies could have faulted them. That would have been short-term profit making and only God knows if that had happened where Johnson and Johnson would have been today?

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You can read about the Tylenol Episode in detail over here.

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Although the example was from outside the oil industry in discussion, ethical behaviour and working towards the benefits of the stakeholders does lead to improved reputation and long-term sustainability.

Implement strict policies which penalizes organizations wavering from the set standards

Now some amount of regulation is required and it does not mean that we cannot trust organizations. It is just the few who malign the many. In fact, Johnson and Johnson's case study clearly brings out the fact that truly ethical organization can act responsibly even if the regulation does not need them to do anything.  

In case of oil industry specifically, as I had mentioned earlier, there is no inherent reason for the oil company to be compliant to global best practices if the regulation of the country does not deem so. More so, if the country in question is literally dependant on the oil company for its income [like Nigeria] then it is at the mercy of the company to follow set processes. In such cases, since the income for both, the company and the country, is through export, they tend to focus more on the customer country rather than the source country. In such a situation, what makes us think that the company will act responsibly towards the source country? There is simply no reason to, and therefore, spills and ecological damages may continue. 

Well, there is a solution though. It has happened in another industry and it is through customer sensitising. Customers took the wrongdoers to task by not buying from them. How does that sound happening in the oil industry?

So, what are we talking about? We are talking about Blood Diamond. Readers aware of the Kimberly Process would know what happened in the industry but for others let me explain. Blood Diamond or Conflict Diamond was a situation where rebels in the diamond mining countries mined them to make money and topple elected governments. Since access to diamonds were relatively free, nothing was there to stop them. Buyers hardly had a sense of where the diamonds came from.  

To counter this the Kimberly Process was agreed upon between 75 different countries which mined diamonds covering more than 99% of the global diamond supply. In these countries the diamonds had to be certified, post which they could be traded. This ensured that end customers were not unwittingly contributing towards conflicts in the source country. A similar process implemented in the oil industry should solve the problem of erroneous companies getting away with polluting and damaging source country’s ecosystem.  

This can be brought about by policy changes and can bring all nations together with respect to fossil fuels!

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You can read about Blood Diamonds here

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Summary 

Through our discussion it is quite simple to understand that there is direct correlation between ethical practices and organizational stability. It is also in the interest of the company’s stakeholders that the company behaves responsibly. 

Customers tend to go out of the way to support socially responsible company and unfortunately, the reverse is also true. Customers do go out of their way to punish socially irresponsible companies by not buying from them.  

So, it is imperative that companies remain stakeholder focused, ethically inclined, and socially responsible. This will help them win loyal customers. Once that is done, they don’t have to worry about sustainability as that would be a given!! 

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This article is written in response to @sbamsoneu’s research writing contest. It can be read here.   

Image Courtesy: Pixabay