T Thomas: Corporate deception

Many firms disregard human values in their pursuit of profit

When the Enron and Worldcom scandals surfaced in the last two years, business people everywhere thought of it as a peculiarly American phenomenon driven by the greed of US businessmen.

But now we have two of the bluest of blue chip European companies, Shell and Glaxo, being exposed for what is nothing short of corporate deception. Both are companies much admired in India, where they have operated for almost a century. Shell is a combine of Royal Dutch Shell and the British, Shell Transport Company.

To ensure 60 per cent control by the Dutch side, the Dutch management holds 1,500 priority shares, which have 800 times the voting power of an ordinary share.

In the last few weeks, Shell has had to downrate its oil and gas reserves. Maintaining the level of reserves in line with the amount of oil being pumped out of its fields is almost like balancing the books. If the two are not balanced, the company will eventually run out of production. Therefore to overstate reserves deliberately is a serious deception and raises many questions.

Firstly, how could the board of one of the world's largest companies do such a thing, that too a company rooted in the straight-laced Calvinist culture of the Dutch? Unless it did so in its anxiety to conform to Securities and Exchange Commission's definition of reserves.

In that case, Shell should have clarified this adequately. Secondly, most people had assumed that Shell had learnt to be more sensitive to public opinion, after the extremely negative publicity that the company got in the mid-1990s for trying to sink a disused oil platform, Brent Spar, in the North Sea.

One of the common reasons for insensitivity is arrogance, the belief that one is always right and superior to others. Corporate arrogance has been a characteristic of Shell for a long time, as was evident in India when they built the first petroleum refinery at Trombay.

When they wanted to expand the refinery's capacity, the Government of India suggested that they might issue some equity to Indian shareholders, just as Unilever had done in Hindustan Lever. Shell refused to do so. The government then refused permission for Shell's expansion. That was the beginning of the fall of Shell in India.

The other characteristic of Shell is a measure of secretiveness in its dealings. In most oil-rich countries "" like Indonesia, Saudi Arabia and Nigeria "" petroleum companies are forced to enter into secret deals for exploration rights, which the companies try not to make public because of the potential for embarrassment.

What has probably precipitated the current problem in Shell is the change in organisational structure in the mid-1990s. Originally Shell had a matrix organisation with regional directors and central functional directors.

This was replaced by a structure based on five independent operating divisions. The head of each operating division was an independent operator with no effective central control on him.

Arrogance also prevented Shell from expansion through acquisition, making it dependent solely on exploration for its growth. Mobil was turned down by Shell, but was then acquired by Exxon.

In contrast to Shell, British Petroleum (BP) bought two US companies, Amoco and Arco, and integrated them rapidly. Perhaps the ambition to grow organically prompted Shell to exaggerate its reserves. Now that reality has caught up with Shell, the company in a confessional mode and admitting that it had perhaps been arrogant.

Hopefully this could be the beginning of a cultural change in Shell, which has some unique strengths in forecasting the future "" the development of a set of scenarios that takes into account the various driving forces and the uncertainties. Using this technique, Shell was able to forecast the power of oil producers through Opec. Shell was also able to forecast correctly in the early 1980s that the Soviet economy was in crisis and would have to open up "" a proposition that even the CIA found difficult to believe. These strengths are still with Shell and the company may well come out of the present crisis humbler and more open.

The case of Glaxo is very different. Glaxo was a relatively small company till the 1970s, when its former finance director Paul Girolomi became the chairman. He was a man with a vision. Glaxo had developed a product called Zantac to treat peptic ulcer. Girolomo decided boldly to signal the superiority of Zantac through premium pricing.

Since he did not have the necessary sales and distribution strength in the US, he arranged to distribute this product through the sales force of Roche. Zantac became the largest selling pharma product, making Glaxo the most successful drug company. With the addition of SmithKline Beecham it is today the world's second largest drug firm.

Now Eliot Spitzer, the attorney general of New York state, has filed a law suit against Glaxo saying that the company had deliberately concealed data from its clinical trials on anti-depressant product Seroxat. If the product is used by children, it could increase suicidal intentions.

Pharmaceutical companies have to submit all their clinical data to drug controllers before getting approval to market a drug. But they have no obligation to publicise all this information to the wider circle of doctors and patients. Therefore companies are tempted to publish only positive clinical trial results, but not the negative ones.

Between 1993 and 2003, Glaxo SmithKline had financed clinical studies on 1,600 children suffering from major depression or social anxiety. The studies had shown that suicidal thoughts or depression were two to six times more common among children on the drug than those on a placebo.

The lawsuit in New York alleges that Glaxo suppressed these findings, while Seroxat sales increased to over $3 billion a year. Between 1990 and 2003 some 50,000 children under 18 were prescribed the drug in the UK alone.

Now 3,000 UK families have also initiated legal proceedings against the company. In an unprecedented move Lancet, the respected medical journal, accused Glaxo of losing touch with its basic humanity. In an editorial, the journal said: "GSK appears to be floundering in the semantic depths. While it has been earnestly parsing the meaning of 'suicidal thinking' and 'publicly', it appears to have forgotten what lies behind those words "" people. The time has come for these matters to be revealed in a bright and public light."

Lancet also poured scorn on Glaxo's argument that trials data had in fact been made public. This was done at scientific meetings attended only by specialists and published in the letters pages of medical journals. Now Glaxo has at last decided to publish all the data on its website. But it is too little and too late.

In the case of Glaxo the deception is even more unpardonable as it was playing with the lives of children. The law suits can result in heavy payouts that could even bankrupt the company.

Still there is no mechanism to assign responsibility and to penalise the top management for what appears to be a case of callous disregard for human lives in the company's pursuit of growth and profits. Some will wonder whether it is a part of the Americanisation of Glaxo's culture. But on the other hand it is the US legal system in the person of Mr Spitzer that has caught up with Glaxo!

The case of Shell and Glaxo do hold lessons for corporations everywhere, including those in India.