Clive Mather: Harmonizing Energy and the Environment

Clive Mather was president and CEO of Shell Canada Limited, one of the largest publicly listed companies on the Toronto Stock Exchange, from 2004 till 2007. In 2007, Royal Dutch Shell acquired all of the outstanding public shares of the company and announced it would reorganize the company to fit its global lines of business. As a result, Clive handed over responsibility in June 2007 and, having reached Shell’s retirement age, set off to pursue other interests.

Clive is currently the lead director of Iogen Corporation, a Canadian biotechnology company that produces cellulosic ethanol, renewable fuels from corn straw. He is chairman of Tearfund, an international charity working to combat global poverty, and chairman of the Shell Pensions Trust Limited, managing assets of $25 billion. He also works with organizations on both sides of the Atlantic on energy and environmental issues.

In his 38-year career with Shell, his assignments spanned all Shell’s major businesses, including assignments in Brunei, Gabon, North America, South Africa, the Netherlands, and the United Kingdom.

While in Canada, he took a high profile on environmental matters, presenting the business case to promote sustainable development. He was also a non-executive director of Placer Dome Inc., one of Canada’s biggest mining houses and a non-executive director of the C.D. Howe Institute, Canada’s premier think-tank. He worked closely with the British and Canadian High Commissions and national export agencies to promote bilateral trade and investment opportunities.

Clive began his career with Shell in Human Resources (HR), working in industrial relations and personnel management. Later he moved into the commercial stream as a regional manager for Shell’s retail sales in the U.K. In 1986, he moved to Cape Town and became a director of Shell South Africa, responsible for HR and public affairs.

Between 1991 and 2001, he held various senior management roles in Shell with global responsibility for information technology, e-business, and contract and procurement. In the U.K., he helped found TradeRanger as an independent cross-industry procurement exchange, and Kalido as a software company destined for IPO. As CEO of Shell Services International Limited, he was tasked with integrating Shell’s global IT operations via a standardized desktop and common business processes. As international director, he worked with the main board on major country investments — especially China, Russia, and India. Finally he worked as a special advisor to the chairman, committee of managing directors on international governance issues.

In 2002, he was appointed chairman of Shell U.K. Limited and head of global learning in Shell International, based in London. In the former role, he was responsible for all Shell activities and reputation in the U.K.; in the latter he established a network of leadership development and learning to improve Shell’s global business competitiveness for the long term.

Through unexpected circumstances, the board of Shell Canada needed a new CEO in 2004 and Clive was appointed to lead the company at that time.

Clive was born in Warwickshire, England, educated at Warwick School and Lincoln College, Oxford, and currently lives in England.

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This conversation was conducted at the former Shell Canada headquarters in Calgary, Alberta, Canada, on July 14, 2008 (when the price of oil was about $140 per barrel).

Thomas Cottrell, professor of strategy at University of Calgary, participated in this Conversation.

Ethix: There appears to be a conflict between the pursuit of oil and the protection of the environment. How do you view this challenge?

Clive Mather: Let me start from the premise that our modern world depends upon energy. For all my life, the primary source of that energy has been hydrocarbons such as coal, oil, and gas. Increasingly, people have become worried about the impact of producing and using that energy. Now economic, social, and environmental issues are each reaching critical points.

Take the economic area, for example. We have now passed through $140 per barrel for the price of oil and any newspaper today will give you a new bigger number that people think we might hit. The price of oil is very unlikely to cause economic recession by itself. The credit problems are the more likely source for this. But the price of oil will lead to demand destruction in other parts of the economy, because people are very loathe to give up the convenience of personal mobility and the personal comfort of heat in the winter and cooling in the summer.

There is also the social agenda related to the value of energy at its source. This creates enormous tensions particularly for those who live and work in areas of production such as Nigeria or Venezuela. Communities can get displaced, you can get dramatic shifts in wealth in their societies, and populations can become both stressed and polarized.

Environmental Agenda

Then there is the environmental agenda. Some simplification is helpful in looking at this, and I think it fits in three big buckets. There is the physical impact of producing and transporting the carbon-based products. In the case of mining oil sands, the impact is even more dramatic than drilling. The water systems are a big issue in the mining of oil sands as well as all forms of industrial activity. We depend on water and are beginning to realize that water is a scarce commodity even in a country like Canada, where at least at first sight the fresh- water supply appears unlimited.

Then there is the area of carbon emissions. For 100 years, the industry has been releasing carbon dioxide (CO2) into the atmosphere. Carbon has been held underground in geological formations either as a gas, solid, or liquid. Through burning, we release it into the atmosphere.

I have been utterly persuaded for a very long time that regardless of the debate, the world is heating up, and the correlation with the amount of CO2 in the atmosphere is worthy of our attention. I can’t prove that the two are connected, although the scientific community on the whole believes that is so. But I never waste time with people in the debate, because if you don’t want to be persuaded, I am sure you could find a way not to be convinced. It seems to me that from any basic sort of precautionary principle, you would want to reduce carbon in the atmosphere. The issue is, are we going to do anything about it or not?

I think we should get after it for two reasons. First of all, the track we are on could make this planet very inhospitable, and the people who are going to suffer most are the world’s poor. To be honest, we around this table are “fat cats” compared with the norms around the world, even if we do not want to think of ourselves this way. We will be OK because we’ve got the wealth and the resources and the lifestyle to cushion the worst impacts of climate change due to alterations in weather. But for the world’s poor, this climate change is going to be terrible. These are our neighbors, and we need to ask ourselves, “What are we doing to these people?”

Do you consider the release of CO2 in the atmosphere as the primary environmental concern about oil today?

It certainly has the biggest potential, but I would say it ranks alongside land use and water because they are all interlinked. The reason for that is because the biggest production opportunity for Shell Canada when I was responsible was oil sands, and this makes a big impact on the environment. Anybody who has flown into Athabasca can see the scale of industrial development. Water usage has been rising dramatically, so in Alberta, the oil sand industry is now a big user of water. It is a small user of water compared to agriculture, but nevertheless, if you are CEO, you are thinking about huge multibillion-dollar investments going on 30, 40, 50 years. You have to think about how we are going to manage these issues, because society will not let us carry on the way the industry has.

Twenty years ago we didn’t understand the potential impact of what we were doing as clearly as we do today. At that time, getting oil from oil sands was really rather a novel experiment much like the Western pioneers. It took courage and significant financial risk to even try to get useful oil from oil sands. But now this is a major part of our business and has moved to the mainstream.

The industry has been on a program of continuous improvement for 100 years. That is the result of the open market of competition, making things better and having less impact on the environment. But now we must meet much more stringent tests in society because society is changing.

Europe has sometimes claimed leadership around the environmental debate but that is not altogether right. Europe has done many good things in this area, but great work has been done in North America, though it has just tended to be below the radar screen. Federal U.S.A. and federal Canada haven’t legislated to the same extent, for example, we see President Bush and other federal leaders pushing certain agendas. But look carefully at what is going on in California, Montana, or New York and you see quite a different picture. My great hope is that as we move through the next presidential election, we will end up with North America leading the environmental charge at the federal level. This is what we desperately need. For all of Europe’s muscle and commitment, without the U.S. and Canada, it is just not going to happen because so much of the world economy depends upon our initiatives.

The Valdez decision came back recently lowering the amount of money that was given to the people affected by the oil that washed ashore from the Exxon tanker many years ago. Did that decision send a signal that we don’t care as much about the environment, or is it strictly a legal decision?

I have no direct experience with that case, but I’ll say two things about it. First of all, Valdez changed the oil industry overnight. I am not talking about pollution and cost of reparation; I am talking about drinking. Up to that point, alcohol was a part of the oil industry. It had grown up as a man’s world, a rough, tough place where people would readily mix work and alcohol. Overnight, that became completely unacceptable. I have never seen an industry change on a dime like it did. People suddenly realized the horrendous impact, and that it isn’t OK to drink on the job. Nobody would ever think now of offering you alcohol. If you turned up in a plant at Shell, Exxon, BP, for example, with the faintest record about it, you would be out.
I have been utterly persuaded that the world is heating up, and the correlation with the amoun of CO2 in the atmosphere is worthy of our attention.
Now if you talk about the broader issue of commitment to environmentally based practice, I don’t think anything that is happening around the final Valdez settlements will diminish the priority that industry has given to it. The only thing I would say is that some of the industry is more predisposed to greenwash than others.

Going Green

What do you mean by the term “greenwash”?

“Greenwash” is kind of wrapping your products in green as a promotion. You go to a supermarket shelf and look at ice cream or shaving cream that claims to be green but really isn’t. An airline will say to you, “You can buy carbon credits.” Well, this is not smart. We are deluding ourselves. We are trying to pretend that if you pay an extra $10 in the confession box that makes everything OK, but this does not begin to address the CO2 impact of air travel. That is what I call greenwash, you’re just bathing yourself in green liquid, but it isn’t actually changing you at all.

If you look at the global advertising from the petroleum companies, you sometimes think, “Gee, this company has really got it.” While some are serious about the environment, for others it is simply an advertising campaign. I cringe a bit at that.

But I worked for a company that did and does take it seriously. It has been investing and reporting publicly for a very long time. I don’t for one minute claim that we’ve arrived, but I would say that we have been working hard on the journey. We have a remarkable record of setting targets before people ever heard of things like Transparency International or the Global Reporting Initiative.

When we started the first oil-sands mining project, we made a commitment, which I inherited as president and was very proud of, that said we will deliver crude oil from the oil sands with no more CO2 emissions overall, than the imported crude from the Middle East or North Sea it was displacing. That was a pretty remarkable commitment to make and it took a lot of effort and money to deliver, but that is the sort commitment Shell Canada has made. And of course there are others who are really trying in this area.

And how does the general public distinguish between those companies that are really trying and those that are just greenwashing?

It isn’t easy and a lot of people are doing a great disservice to the environmental agenda by pretending.

What about the announcement that President Bush made today (July 18, 2008) about opening up the outer continental shelf for drilling? Are you concerned about this?

I am. As understanding and concern around the carbon issue has risen, it has tracked concern about energy security. Suddenly people are really worried about energy security, and rightly so. All of us resent having to pay the prices we do, but the thing we really fear is that we can’t gas up our cars at all. The decline in the indigenous production has been pretty fast in the U.S. When I was younger, production in Texas, California, and the Rocky Mountains basically kept the U.S. economy going; it doesn’t anymore. The U.S. is a big importer. Thus, from the perspective of the White House or the Department of Energy, you have to wonder where you will get energy in the future. This is the motivation for the U.S. to want to drill closer to home.

You would expect there to be very tight standards imposed by public policy around that sort of development, and secondly, you would expect the industry to deliver that. My experience is that the industry would always do what public policy requires of it. So, I think you can expect the new areas to be explored and developed in an environmentally sustainable way, but undoubtably it will require good public policy and technical development beyond where we are today.

Is that public policy in place yet?

I’m not sure. Closer to my experience, if you want to put a new production facility in Northern Alberta, you can expect to go through a regulatory process for three years. And you are going to need a team of 50 people and another three years to prepare the case. You can expect a set of stringent conditions, very specific to your development, which would run into pages and pages and pages. This is land owned by the province and the province has every right to specify how it will be developed — right down to very, very specific details about emissions and facilities. The same must be true in the Arctic. Of course, the Arctic also brings other technical challenges. It takes serious engineering, because the forces in the ice packs impacting on production facilities are huge. So anytime you decide to drill in a new area, you must resolve all of the issues and then go through a period of approval as to the safety and reliability of your solutions. This takes time and the new drilling is not a near-term solution.

Business and Society

You recently said that only by harnessing the full force of business, are we going to be able to tackle the global issues of climate change. But CEOs are under tremendous pressure from the market to deliver value to the shareholder. How does big business address societal problems and still respond to the shareholder?

Business, not necessarily big business, is the single most powerful force of the world that is manmade. Though weather forces are stronger, business is more powerful than armies, diplomats, or governments. If you had said to me 20 years ago, “You’ve got to put a coffee shop selling Seattle coffee at average prices on every corner of Beijing,” you couldn’t legislate that. You couldn’t take an army to do it. But Starbucks has done just that — and McDonald’s with burgers and fries. Shell has done similarly with petrol stations. It’s not magical. It’s hard work. It’s marketing and operational delivery. Every business starts with a perceived need and then gets out and addresses that need.

We will not solve this problem by exhortation. If we are going to tackle climate change, we need good public policy first. Then we need to unleash the forces of business. This starts with educating the consumer. Then we need economic tools to aid decision making.

You have to put a price on carbon because that is what makes the critical shift from trying to do the right thing, based on concern for long-term trends, to a sharp focus on the bottom line. At the moment, most of the efforts being applied are driven by intuition and risk management, but the environmental issue is going to be the biggest thing we will have to face in the next two or three decades. This turns into a reality if somebody says that for every ton of CO2 you use, you have to pay $X.

For example, Boeing has developed its new Dreamliner making extensive use of lightweight carbon fiber. This was likely motivated by the fuel savings rather than finding an effective use for carbon. But with a carbon tax, such designs would have an even stronger economic motivation. A carbon tax would aid Shell, McDonald’s, and every other player in business by making operations more efficient, or in capturing the CO2 in some ways. At the moment, this work is mostly driven by either good intentions, where CEOs think about the impact on their own families, or whatever. You don’t have to be the world’s greatest scenario planner to realize that the environment agenda is coming at a cost, but we need more than that.

The single act of valuing carbon is what I think is going to turn this debate from the good intention and the anticipatory planning into hard-nosed economics. If the carbon tax is 2 percent or 3 percent of the total cost of the product you are trying to deliver, you are going to manage the cost. But you have to get the policy exactly right.

As I have studied Enron, it seemed they would look at each law to gain leverage from a loophole in that law. There will always be loopholes, and my concern would be that if you reduce it to an economic argument, and you don’t get the economics of taxation correct, then you will end up driving some other behavior as people try to optimize their economics. How do you make sure that you get it right?

I’ve never heard that problem described so eloquently, and I wouldn’t push back on that at all. There will be unintended consequences and you won’t get it right first time. You will get it right over time, however, and the more evidence there is of the harmful impact of climate change, the faster you will get it right.
When we handicap our projects based on carbon emissions it will bias our decision-making in favor of lower carbon projects.
Let me offer an illustration from my personal experience. When I grew up in the U.K., every service station offered a range of octane to meet your needs. The way to bump up the octane was to use a tetra ethyl lead additive, which was a serious poison. There was mounting evidence that breathing this stuff could lead to serious brain damage. So we started debating how to get off of leaded gasoline. The oil companies and car makers had already developed the engines and the fuel needed to do this. It started by offering unleaded as an alternative, but it was not widely used since it was more expensive. There were debates about how to deal with the cars that required leaded gas. Then the chancellor of the exchequer of the U.K. introduced a small tax break for unleaded gas, which meant that it suddenly became marginally cheaper. The debates ended and leaded gasoline simply went away.

We won’t get it right the first time, but we will get there. The sooner we get started, the better is my great plea. We are wasting time. Get it wrong, but get something done. You don’t need a very big number as a carbon tax to start driving the economics and make it an economic advantage to reduce carbon output and sequester carbon more effectively.

This must be made to work on the consumer side as well. When I grew up, we had strawberries in the summer and really enjoyed them. Now we have strawberries 365 days of the year. This means they are flown in from all over the world. If we had a carbon tax on the strawberries, and other imported foods, you could still have strawberries on Christmas Day, but you would have to pay significantly more because of factoring in the cost of the carbon.

International Business

Let’s talk about oil and Africa. What are the opportunities of getting oil from Africa, how do you deal with the broken infrastructure and corruption there, and what responsibilities do you have to see that the benefits from the sale of oil have an impact on the daily lives of people there?

Mather: I lived in Africa for nearly 10 years, and I have a deep affection for the continent. There is humanity in Africa which is extraordinary, where people will always look after you. It is an amazing place, but they have really struggled to develop the institutions, administrations, and governments which meet our standards of integrity. We must be very careful about how we deal with other cultures — not imposing our culture on them.

There are wonderful economic opportunities for some of these countries which, in too many cases, are currently being squandered on the back of corruption. International institutions like United Nations work very hard on the Global Reporting Initiative and similar. And international companies are trying to lead here. Again, I am very proud of what Shell and some others have done in this area.
For the world’s poor, this climate change is going to be terrible.
But at the end of the day, a company has to abide by the laws of the country where it operates. If the law says that the royalty regime provides the state with $6 billion dollars of revenue a year or $60 billion, or whatever the number is, that’s what it is. It is not for you to say what’s going to happen to that money. The worry is that a lot of it may be siphoned off at various stages and not benefit society as a whole.

The developed world needs the energy, the uranium, the lead, or the copper, whatever it is, and is prepared to pay the price. The companies do the best they can at the source of the supply chain, not just in the way they provide the products society needs, but in local employment and infrastructure such as housing and roads. It does not begin to address the fundamental issues — that those in power in some of these countries, operate woefully short of what any one of us would regard as even satisfactory.

How do you think about wages when you work in an impoverished country?

Ethically, a major company would not pay less than a living wage, though there may be examples of that. In my experience, and in all of the companies that I have worked for, we have paid extremely well. We do this for two reasons: One is because you have to pay market rates, which often rise quickly when a major project is under development; secondly, you are looking for skill that is normally in short supply. If you go into your average African country and are looking for engineers, there aren’t very many of them, and they tend to go for a high price. Typically we have concentrated on the other side of the problem, increasing the supply and developing the talent, lest high-wage rates distort the market.

Economics of Oil

Let’s talk about the price of oil. It was $146 today (July 14, 2008), and I wonder how much of this is a fair-market price, and how much is driven by speculation?

I am not persuaded that speculative activity is the real villain here, though of course there will be a bit. I don’t think anybody wants the price of oil where it is today. I know that oil companies don’t need anything like $140, and indeed worry this will stimulate the development of alternatives to hydro-carbons more effectively than anything else that has happened in the last 100 years. This brings wind, tidal, even algae into economic contention.

The fundamental issue is very simple. World production supply is typically about 85 million barrels a day. More than 80 percent of the supply is now controlled by national oil companies in one form or another, not the Western majors who typically provide technology solutions, contracted services, transportation links, and markets. World demand has been about 85 million barrels a day. Anything that happens, such as a refinery that goes offline, a storm disrupting offshore platforms, or President Chavez playing politics with oil and the price will go up. Customers, and the traders who service them, are paranoid about energy security — being sure they have locked-in contracts for future delivery.

Do you have any concern that the “majors” are playing a lesser role in the production of oil in the world? Do the nationals have the same level of expertise for the production of oil?

Many national oil companies now have long production experience and, of course, have access to all the international contractors who service the industry, including the majors. They rely on the big international players for leading-edge technology and markets. So in my view, they either have, or can get, the production expertise required. The concern is more about the use of oil supply for political ends.

Where do you see the prices going?

Most people are forecasting a continued increase, but I think it could turn down just as easily. Now, it is not going to go back to $30 a barrel, but probably could go back to $80. I think the world has decided that a higher price is in order and actually that suits a lot of people. It is a fallacy to think that the only people who are benefiting from this are the producing nations. Governments in the consuming nations also benefit through more revenue from value-added taxation. And many environmentalists and politicians believe higher prices encourage fuel efficiency and reduce emissions.

We are already beginning to see some signs that the higher price of oil is changing personal behavior. SUV sales are off. Some of the retailers in Europe are beginning to turn in figures which are poor, and I think one of the reasons is that there has been demand destruction created by the price of gasoline. Many people can’t avoid using their car; their whole lifestyle is set up around it.

This creates societal problems. Public transport to meet people’s needs for getting to school, getting to work, or whatever, are just not in place. People will try carpooling and driving more slowly, but there is only so much they can practically do. I think there is going to be a point where sales of films, CDs, designer clothes, or whatever will all start to drop off because people have to spend more of their income on gasoline. At that point, economic activity will slow and you may start to see demand for energy fall. Demand could also slow as new energy sources are introduced.

If you were still running Shell Canada and you were looking at a 10-year investment project, what would you assume for the price of a barrel of oil? It seems to me this would be an indication of a stable price.

I am loath to answer that question as openly as you put it, because this is a strategic decision for the company, and I doubt it would be useful or respectful for me to quote a number. However, I would say two things. If you look at the deals that are being done in the market, and there was one announced this morning by Shell, you could broadly work out what price that they factored in, and it is quite high. The other thing is, does each company’s price for investment purposes reflect their portfolio as well as their estimate of market movements? What ultimately drives your decision-making is your portfolio and the opportunities you have. If you choose to buy another company, of course you may have to pay a significant premium inflating the underlying cost of production, but if you invest in your own production then you can do things at a lower cost.

Biofuels

What are your views on biofuels?

I have been fairly vociferous about the lack of environmental benefits from generating ethanol. Turning food into fuel is a mistake. Environmentalists have been saying it ever since we started. Governments latched onto it because it seemed easy. And in the U.S., it brought in a very significant farm lobby. You don’t get to be president unless you win the prairies. However, we shouldn’t have done it, and we are seeing the consequences now. Corn-based ethanol has contributed to pushing corn prices to record levels, and that’s adding to the problems in the world. Everyone has seen the hike in the price of bread, pasta, and meat — all linked to corn, of course. And for the world’s poor, the most vulnerable at the end of the chain, the consequences are dire.

Isn’t a contributing factor related to the rise in commodities prices the farm subsidies in the West?

How you treat people makes a huge difference in productivity and innovation.
I think you are right, and I find the ethics of all this very worrying. There is another approach, where you turn corn straw into ethanol, and this really is a brilliant technology. Corn straw would otherwise be burned or plowed back into the ground, where it takes a long time to add any nutritional value back into the soil. This new process uses the enzyme from a mushroom to turn the corn stalk into biofuel. It is exciting because, essentially, you get a carbon-free cycle. You drive your own car with the ethanol, you produce CO2, the CO2 is sucked in by the corn as it grows, and then it is turned back into the fuel that you put in your car. Now, it’s not entirely perpetual motion, but it is remarkably efficient — potentially 90+ percent. There are other good biofuels that start with waste such as wood-chip technologies. However, using the corn itself as a fuel is a big mistake and has no environmental credentials at all as far as I can see.

Balancing Priorities

Business leaders have to make a lot of balancing acts between various stakeholders, between short term and long term. What are the tensions on you to weigh the shareholder versus the employee versus the customer and weight next year versus 10 years from now and so on?

That’s a huge question. I am seriously worried about the fuel bills that many will have to pay as we go through the next winter because we haven’t actually experienced $140 a barrel in terms of heating oil and other things through the winter. This is just one example.

At Shell, we systematically did three things. I am not sure that they completely answer your question, but it is the best I can do. First, we used scenarios a lot. This is not about predicting the future, but it does give you alternative viable futures. And you better make sure your investment is going to be robust across the spectrum of potential futures. If you record some of the key events of the very recent past, and you wind the clock back to the beginning of that period, would you have predicted this? No, you wouldn’t. Nobody would have predicted 9/11, nobody would have predicted the aftermath of Enron. Enron changed the world of business.

Second, we use a lot of stakeholder engagements. We have people who work with us, who represent different opinions and different areas of life. They regularly sit down with us and listen to our plans. Because they come from a totally different perspective, they will flag things that we had overlooked.

Third, you have to put a price on risks and uncertainties. We have been factoring in a price of carbon on our investments for a very long time. We never disclose how we do our arithmetic on our investments, because if you do that, you might as well go out of business. When we handicap our projects based on carbon emissions, it will bias our decision making in favor of lower-carbon projects. We force ourselves to put a price on the consequences of our investments and that is healthy. Depending on your industry, you may put a price on other things, such as the amount of lobbying that may be needed to get something done, or water usage, or meteorological risk. What you have done is to handicap that project recognizing the particular challenges you face.

Let’s take water usage. This is a huge issue since we can essentially draw the water for free today or at such a low cost that in economic terms it is virtually free. That isn’t going to last forever. We need to force the design of the project to do the right thing. So, we put a price in of X cents per liter of water that represents our best view of the future cost. That will then help drive a design that will optimize water usage, making investments in, say, recycling easier to justify. It’s not foolproof, but it helps ensure that the long-term economic rationale is fully captured in the final decision.

The analysts finally figured out we were taxing carbon to influence priorities on projects we were doing. Many of them do a far better job than they are given credit. I would also say in real humility as a CEO that they taught me a lot. Often the way they would do their analysis was different from us, and I found that quite insightful at times.

How important is international experience and international perspective in today’s business world?

I joined Shell because I wanted to travel. When I signed up, Shell’s career-development programs were designed to produce generalists. They wanted people who would invest their whole career with them because, to run a business of this scale, you need to have gained broad experience. I think many big corporations had a collective rush of madness a couple of decades ago when they believed the management gurus started to say “careers are dead.” The idea that all you need to do is simply move around to acquire your skills is fine if you want to be a functional specialist. But if you are trying to drive these huge businesses for the next 50 or 60 years, not the next five or six months, you need people who have got an enormous amount of relevant experience. And in our industry, geographic diversity really helps because we live in a global village. Oil is all over the world. Our markets and our challenges are truly global. I have counted it a joy to be part of all this.

Our children grew up in this setting. For example, our eldest did four or five educational systems and four or five different languages. There were times as parents when we wondered if we were being fair. Well, you should see them all now; they are very special people. Of course, I am biased, but I find their maturity and ability very unusual, and I am wondering if that’s just because they have seen so much of the world. I think travel is a wonderful education and it’s something that Europeans appreciate differently than North Americans. Of course in Europe you have different cultures as your neighbors. Belgium is just down the road from Germany and France and so on, and each has its own distinctive history, culture, and language. I know that New York is different than Boston, but not to the same extent.

This multicultural understanding is vital for business success in the future. So any aspiring leader needs to find ways to gain such multicultural experiences.

The People Side of Business

How do you deal with bad news as a leader? Ken Lay from Enron was noted for the fact that he did not want to hear bad news.

People are human; things will go wrong, and accidents happen. As a leader, you need to discipline your management team to say thank you to people who bring you difficult news. You don’t really need to know all the good things going on, but you absolutely must know the bad things. It is that which people are hesitant to talk about that you really need to know, because that is the only way to improve your company. That was Enron’s gift to the world, showing us how wrong it is to think you can control everything. I know there are control freaks around and very smart corporate departments that manage everything, but I don’t know how they do it. Ideally you’ve got thousands of free spirits working for you, but tightly aligned through shared objectives and strict ethical codes. Having openness and trust is the only protection you have in running a business. You have to build an environment where you trust each other. That meant walking around and talking to people, not just sitting in my office.

How can we at business schools do a better job with undergraduates in preparing them for a career?

Development of people involves a mix of things, from sound theory to practical experiences. The two bounce off of each other. Those in business and those in business schools can work together to do this work of developing people. But it would be arrogant of me to tell you how to do your job.

Let me get more specific. I teach managerial compensation and, at the margin, we say employees are going to want more leisure than to work harder, and employees would rather take less risk than more. But when I think back on my own career, companies that believed in me, or invested in me, or trusted me, made a big difference in how I worked and got satisfaction from my job. These factors are not in our economic models. I wonder if we should be thinking differently about our compensation models.

I have learned there are a lot of intangibles about connecting with people. When I took over the operation in Canada, I started during vacation season and there were very few people here. So I just walked around, sat down with people, and interacted. It was a wonderful experience, and in hindsight I should always have done this starting a new assignment. Our days are set up to get formal briefings, rushing from meeting to meeting, but by just walking around, you get to see people, find out who they are, and what makes them tick. We have a fantastic workforce that we have never really unleashed.
Leading people is more than an economic model — it’s the whole deal!
Secondly, our market was changing very rapidly, and it was through our people that we got ahead of that curve. People who enjoyed their work began recruiting their friends to work here. These new people learned about Shell and the Shell brand not by reading a book, but by interacting with a group of enthusiastic people. As for compensation, you must be careful to pay the market rate, but that is just the beginning. You can’t trade loyalty off for 50 percent of the going rate. Building a loyal, motivated workforce is much more than simply looking at compensation numbers.

Here’s another important piece of this. Businesses go through cycles of ups and downs, and it is tempting in a down cycle to resort to laying off people. We are not a labor-intensive industry, though you may be if you are a Safeway or Wal-Mart. In the past, our industry would simply lay people off in one of these down cycles. Then when things picked up, you looked around and discovered you had lost a generation. There is a leadership gap when you go to fill the positions for the next wave.

I think there is a tremendous value attached to the intangibles. There is also a long-term investment model, a long-term relationship-building model because this is one of the things that is not in the economic model.

Perhaps this comes from thinking of people as economic assets rather than whole people. I just laugh when companies say, “People are our number-one asset,” because they generally don’t behave that way. If you do behave that way, you can conquer the world. This is the key to all good, sustainable business.

How you treat people makes a huge difference in productivity and innovation. Use your eyes as a leader. Who is in at 5 o’clock in the morning? If people are in at 5 o’clock in the morning, they are in there because they want to be there and not because you told them to be there.

People would say to me, what are the working hours? What is the dress code? I always thought that dress-down Friday was the most stupid thing ever invented. Why would you worry about Friday? Dress appropriately every day. If you are going to go and see the queen, you probably better put a shirt and tie on. If you are going in the field, jeans are better! Encourage people to use good judgment. If they get freedom and pleasure from their work, they’ll die for you. Having success together is one of the most important parts of the job. Everybody wants to be a part of a winning crew.

When I visit another company, what I always do is to look at the notice boards. They tell you everything that is going on. When you have a lot of rules in a very rigid environment, this is stifling. Treat people like people. If you have a problem, don’t simply lay out a lot of edicts, but say, “We have a problem and let’s look for the best way to solve it.” It is not that difficult, is it?

Sometimes you can believe these things as the leader of an organization, but they get stopped by other mid-level managers. As CEO, how do you get this thinking deeper into the organization?

Get around; spend your time out of the office. You can always slave over draft 15 of some document, getting things exactly right. But is that the best use of your time? Be there with your people and encourage the things that you want to see. Ask the questions, set the tone, challenge and celebrate. If you are an extrovert, it helps. But if you are an introvert, then you must make yourself get out of the office to know what’s going on. Leading people is more than an economic model — it’s the whole deal!