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Daily Telegraph: Commanders scuffled while Shell sailed blindly onů

 

City comment Edited by Neil Collins (Filed: 20/04/2004)

 

Visitors to the Shell website today are in for an unaccustomed treat. There they can read a story of an executive power battle, of how a rose-tinted fiction was maintained, and a rare insight into the inner workings of one of the world's largest, and famously secretive companies.

 

The title of the work, the Report to the Group Audit Committee and the Reserves Recategorisation Review, gives little hint of the gems it contains. Indeed, we are only allowed to see the 26-page executive summary - the Shell board has been prevented from publishing the full document by the American Department of Justice, after it was told that to do so would not be considered as "fully co-operating" with its inquiry.

 

This is pretty ominous, but even the summary is shocking, exposing as it does the struggle between Sir Philip Watts and Walter van de Vijver to apportion blame as the disaster loomed.

 

As we now know, Shell's overstatement of its oil and gas reserves did not sneak up on the company because of a poor year in 2003, as was implied when it was first revealed, but stretches back for a decade, including the entire time when Sir Philip was in charge of exploration and production.

 

The figures he produced then helped him become chairman of the committee of managing directors, and the most powerful man in the company. His successor at E&P, Mr van de Vijver, might have become a whistleblower as the extent of the shortfall gradually became apparent to the insiders.

 

The e-mails and memos in the report show that he couldn't quite decide what to do. If he could put the blame on Sir Philip, he might get the top job himself, but the longer he delayed, the more the blame would attach to him, and the weaker his position would be. The result was that he never quite said what he really thought until it was too late.

 

As he admitted as long ago as September 2002, the disclosures to his colleagues might not have been enough for them to appreciate the severity and magnitude of the problem. It was only after the event, in response to the inquiry, that he claimed his attempts to alert the management were met with "resistance."

 

This is bad enough, but what's worse is the lack of the controls and clear, short lines of communication that successful companies need. Mr van de Vijver complains of an "unspoken rule that you are not supposed to go to individual board members" with major problems, which sounds like a climate of deference at best, or fear at worst.

 

There are glaring weaknesses in Shell's procedures. The pressure to replace reserves every year as the oil and gas is sold is relentless, and Shell devised a bonus system to encourage this. Unfortunately, it failed to impose a proper audit on the reserves claims being made, so human nature did the rest. This is truly shocking for a company which, despite boasting the biggest bureaucracy outside the civil service, claimed to be well-run.

 

In fact, Shell has been nothing of the kind. Its size, history and share structure has long made it impervious to outside criticism, and even now it has still to produce a modern, unified board to replace the traditional carve-up of top posts with its bigger sister, Royal Dutch. That it should need an outside report to tell it to rewrite its reserves guidelines to ensure regulatory compliance beggars belief.

 

It's a measure of the company's vast momentum that the shares have recovered half the fall that followed the initial shock of the "recategorisation", and they were hardly moved yesterday. The buoyant oil price is a great help, but when big companies with autocratic rulers start to go wrong, the problems can prove very hard to fix. Just ask the long-suffering shareholders in, say, Marks & Spencer.

 

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2004/04/20/ccom20.xml&sSheet=/money/2004/04/20/ixcoms.html


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