After purchasing $750 million in equity of energy giant Shell, Daniel Loeb demanded something radical: He wanted his investment dismembered. Loeb, CEO of the hedge fund Third Point LLC, penned a passionate Third Quarter letter to his investors wherein he outlined the competing interests within Shell. To Loeb, Shell’s simultaneous commitments to fossil fuels production and renewable energy sources have resulted in “an incoherent, conflicting set of strategies attempting to appease multiple interests but satisfying none.” Loeb’s solution? Balkanize Shell into multiple companies, each with a narrow focus.
Loeb’s actions garnered attention from various actors in the struggle over climate action and opened questions about the most effective way to change polluting companies from the inside. Loeb is a so-called “activist investor,” a Wall Street insider who buys huge shares of companies to change their corporate structure. Recently, activist investors have targeted Big Oil companies to make them climate-friendly. By splitting Shell into different companies, some focused on renewable energy production, others focused on phasing out fossil fuels, Loeb contends the incentives for each new firm can be aligned with a vision of a green future. A green offshoot of Shell would no longer be impeded by connections to Shell’s oil and gas divisions and could meaningfully change what kind of energy the world consumes.
But can large corporations effectively balance interests in hydrocarbons and green energies? For Yale Professor of Economics Charles Hodgson, they can.
“Companies produce products that compete with their existing product line all the time,” Hodgson told The Politic in an interview. Consider Sony’s evolution in the production of audio equipment. Sony was an industry leader in the production of cassette tapes, but also pioneered CD and DVD technology. Sony effectively phased out an old technology while profiting from pioneering new, competing products. In Hodgson’s words, “There is no reason why old and new products cannot coexist within one company.”
Needless to say, Shell and other energy giants oppose their own dismemberment. In their view, they can balance these competing interests, and their scope and scale uniquely enable them to lead the transition to renewable energy.
Economies of scope occur when the production of one good reduces the cost of producing an associated good. For example, if a firm produces marshmallows, it would require few alterations to its production processes to produce marshmallow fluff. Since these goods are related, it is more efficient for one firm to produce both goods instead of two firms each producing one good. When Shell claims they rely on economies of scope to transition to green energy, they are claiming that their existing technologies, infrastructure, and market knowledge reduce costs and expedite their ability to produce sustainable energy.
Assessing Shell’s claims about the importance of scope can be tricky, especially from outside the company. For the effects of scope to be tangible, there must be some identifiable benefit to having a presence in many different markets. Economists recognize that there might be validity to Shell’s argument for the benefits of scope. Hodgson points to a mobile, global workforce of engineers and experts, and a global network of transport and trade infrastructure as possible advantages of having a significant foothold in conflicting energy markets. “Shell started as an oil shipping company and later transitioned to an extraction and production company,” Hodgson said. “The industry lends itself to global firms of scope.”
In an interview with The Politic, Yale Professor of Economics Jose-Antonio Espin-Sanchez recalled Bell Labs — an American research giant that underwent a similar process of segmentation. Bell Labs reorganized to remain competitive in the market, but after the reorganization, the sum of the remaining parts was not comparable to the unified lab.
In a June 1991 article in the preeminent journal Science, senior researcher Al Cho illustrated the problems with reorganization: “What if you wanted a microscope and were told that you can’t have one because all the microscopes are in the other division? In the reorganization, people were reshuffled and relabeled, but what we really needed was a vision.” A divided Shell could run a similar risk, and a unified corporate strategy could leverage their infrastructure and expertise to support sustainability efforts.
However, Hodgson is not convinced that Shell and other energy giants truly rely on scope to drive their sustainability efforts. Unlike oil and natural gas, green energy is often produced locally. Instead of shipping oil across continents, green energy firms install solar panels for specific houses. For Hodgson, “It’s not obvious that the same advantages of scope apply in the green energy industry.”
Big Oil also claims that the sheer scale of its operation enables them to use profits from oil production to fund innovations in sustainability. But, if Shell can break into smaller companies while maintaining the advantages of size — namely access to capital — then Shell’s green energy efforts would not suffer due to a smaller scale. As it currently stands, Shell is the fourth-largest company in the world oil market by market capitalization, a measurement of corporate value. Breaking the green energy division of Shell off into a separate entity might allow it to become a relatively larger player in a smaller green energy market. Even a small piece of Shell could still be a powerful market force. In this way, Shell’s green division could use its market presence to bring about a sustainable future faster than Shell’s current corporate configuration.
Despite Hodgson’s analysis suggesting that companies like Shell could lead the transition to a green future, the hesitancy of Big Oil to make changes to green energy arises from different perspectives on the severity of the climate issue.
While Hodgson discussed firms’ theoretical ability to balance interests between fossil fuels and sustainability, Hodgson noted that theory often fails in practice. Ultimately, CEOs and managers dictate the speed at which companies adopt and fund new endeavors. “Management at Shell and investors have different perceptions over the changing policy environment and the existential risk of climate change,” Hodgson said. “I’m sure the concern over climate change is genuine. The disagreement between parties arises over how quickly this needs to happen.” Pushy executives in legacy oil and gas departments might have disproportionate influence over the distribution of resources inside of Shell, even if the broader corporate strategy prioritizes sustainability.
For Espin-Sanchez, the behavior of activist investors might be explained by these internal boardroom conflicts and not by a genuine desire to radically alter the corporate structure. “Activist firms often try to correct differences in management. In this case, management might be overlooking opportunities in green technology and these investors are drawing attention to these possible profits,” Espin-Sanchez told The Politic.
Selin Goren ’24 has worked both in the United States and in Turkey to pass legislation, change corporate behavior, and raise public awareness to address the climate crisis. In an interview with The Politic, Goren discussed her work with Turkish appliance company Arçelik as a prime example of the importance of corporate leadership acknowledging the urgency of climate change.
“Arçelik had not been involved in sustainability,” Goren explained, “but then CEO Hakan Bulgurlu took over the company.” Bulgurlu shifted the company’s focus toward sustainability and green technology. Bulgurlu climbed Mount Everest to raise awareness for climate change, and Arçelik began to fund climate efforts.
Unlike some climate activists, Goren’s experiences with Arçelik have made her confident that management changes can truly alter a company’s approach to the climate crisis. Goren attended conferences organized by Arçelik that brought together youth activists, climate scientists, business leaders, and journalists. As a part of these conferences, Goren presented a sustainability report in a press conference with Bulgurlu. “The change in CEO changed the entire philosophy,” said Goren.
Despite the complexities of industrial organization and corporate politics, there is some consensus on the next steps. Espin-Sanchez and Hodgson agree that the government cannot intervene in the structure of Shell and other energy giants. Legally, forcing these companies to change their internal organization would be difficult. Economically, it is unclear whether politicians could assess the most efficient way to organize these companies. Third Point and other activist firms will have to use their corporate sway to reorganize and reprioritize a green future.
Hodgson notes that policymakers have an obvious option to assist activist firms’ green mission: Tax carbon. “We should be taxing carbon emissions. If we tax appropriately, we provide the incentives to invest appropriately,” Hodgson argued. A carbon tax would incentivize Shell and others to realistically assess the roles scope and scale play in their operations. If scope truly assists in the transition to sustainable energy, a carbon tax would incentivize Big Oil to keep its current structure. However, if competing interests prevent Big Oil from properly innovating, then a carbon tax could nudge these corporations to adopt a new structure.
The future of the climate crisis is further complicated by Big Oil’s control over politics and information. In October 2021, executives for Chevron, BP, Shell, and Exxon testified to the House Committee on Oversight and Reform about their alleged disinformation campaign against climate action. Big Oil loves to spur consumers into a frenzy by claiming that any action that hurts its operations increases energy costs for consumers. In reality, economists believe consumers might have little to fear from the reorganization of Shell. Espin-Sanchez believes it would require several large companies to fracture for prices to noticeably rise. Hodgson and Espin-Sanchez both noted that the OPEC cartel, an international organization including Saudi Arabia, Venezuela, and Iran that fixes oil production to set the world oil prices, dominates the energy market.In essence, OPEC ensures that Shell, despite its size, cannot single-handedly set global energy prices.
Goren, smiling with cheerful eyes, spoke hopefully even as she discussed the existential challenges facing our generation. Even as someone who understands the severity of the climate crisis and has dedicated countless hours to community education and divestment efforts, Goren still has faith that some investors and board executives are genuinely trying to make a difference. “There are people not satisfied with the current system and think it is fundamentally flawed,” said Goren. “Not all firms can be trusted, but our only other option is to let businesses go on as usual. I’m optimistic about change in general, but these companies are here to stay in the short term. The best thing we can do right now is to change their behavior for the better.”