The Times: Shell: A very British kind of scandal: why Shell is no Enron
April 23, 2004
By Anthony Sampson
Three top executives have quit amid revelations that Shell's oil reserves have been overestimated. The scandal exposes peculiarly British managerial incompetence and isolation
WHATEVER HAPPENED TO SHELL as the paragon of corporate culture? Most observers like myself who watched the rise and fall of giant companies over the decades saw Royal Dutch/Shell as in a class of its own: the model for multinationals, the trainer of the best managers, the guarantor of rational collegiate decisions and the “long view” which ensured its continuity.
Now all its reputation for corporate wisdom has been undermined over a few months by the shattering publicity surrounding its downgrading of its oil reserves, and finally ruined by the evidence from an external report published this week. Incriminating e-mails reveal bitter in-fighting between its top executives, and show how little they trust each other — summed up in one devastating sentence: “I am becoming sick and tired about lying about the extent of our reserves,” wrote the exploration chief, Walter van de Vijver, to the chairman Sir Philip Watts.
Nor has the credibility of Shell been increased by the subsequent explanation from the non-executive chairman of the British parent board, Lord Oxburgh, an academic petrologist and former rector of Imperial College. He blandly insists that the mistakes were due to “human failings not structural deficiencies”, and explains: “I don’t think it has significance for the culture of the company as a whole.”
Can that really be true? Shell executives have always been proud of a company culture based on close and trusting collaboration. “There was a cult of strong team management,” Shell’s former chief economist Vincent Cable, now a Lib Dem MP, recalled this week. But the external report shows deep distrust and concealment at the top which makes a mockery of team management.
So what went wrong with the corporate culture? It is important to flash back to its origins; for Shell’s insistence on team work originates from a traumatic experience of dictatorship. When the British Shell company merged with Royal Dutch in 1906 it was soon dominated by a single despot, Henri Deterding, a brilliant trader who became increasingly autocratic and ended up a fervent admirer of Hitler.
After Deterding was ousted the board were determined to avoid further autocrats, and the company was run by a committee who worked closely together and built up a uniquely strong management. In Britain Shell pioneered the “managerial revolution”, picking bright young graduates from Oxbridge who competed with the Foreign Service in diplomatic skills.
The “Shellocracy” became legendary for their combination of commercial shrewdness and diplomacy. In the postwar decades, as they faced nationalist revolts in oil-producing countries, they were skilful in placating local resentments by promoting Asians or Latin Americans inside the company.
Shell was much more sophisticated than BP, which threw up arrogant bosses such as Lord Strathalmond, who helped to lose Iran through his failure to understand that country’s nationalism. Shell still produced buccaneers and autocratic traders, such as Lord McFadzean of Kelvinside in the Seventies, but they were held in check by the committee of management; and the company was a model of continuity. Shell was specially admired for its elaborate decentralisation, which gave exceptional scope to its managers abroad. While it proclaimed its giant’s strength when it built Shell Centre, dwarfing the Houses of Parliament opposite, it insisted that it was really a federation of smaller Shells, held together with minimal interference by the directors in London and The Hague.
The decentralised structure allowed the best managers to show their abilities as they moved upwards, while ex-Shell people enjoyed unique prestige when they joined other companies. Today’s Shell graduates include Paul Skinner, now chairman of Rio Tinto, Maarten van den Bergh, chairman of Lloyds TSB bank and Sir Mark Moody-Stuart, who moved from chairing Shell to chairing Anglo-American, the South African mining giant. Charles Handy, the guru of British management, is an ex-Shell executive who has always admired its ability to take the long view.
The British heads of Shell have tended to alternate between petroleum engineers and master-managers, between technocrats and buccaneers: but the directors maintained both commercial drive and long-term foresight. Shell forecasters predicted the likelihood of a serious energy shortage before the oil crisis of 1973 which took most oil companies totally by surprise.
They remained shrewd diplomats. When Shell was threatened with boycotts in the Eighties because of its connivance with apartheid South Africa it gave discreet support to the banned African National Congress. When it was attacked for damaging the environment in Nigeria it spent huge sums on ecological campaigns to establish itself as the greenest of companies (though BP soon stole some of its clothes, and chose a green logo).
But there were some signs of a decline in the quality of Shell’s top executives as the company faced greater competition for talent. One former personnel manager told me that he traced the decline back to Shell’s over-cautious recruitment after the student revolts in 1968. “We didn’t get the best graduates. We were too arrogant, and we didn’t understand the attitude shift.”
When Sir Philip became chairman in 2002 he was seen as an internationalist with a deep experience of the developing world. He was a geophysicist from Leeds University who had taught in a Methodist school in Sierra Leone and had been a seismologist in Indonesia. But he had one serious drawback — he was a minimal communicator who dreaded confronting shareholders or the media — which infuriated them. And he was facing a much more sceptical marketplace, both in Europe and in America. It was more demanding after the Enron scandal raised doubts about the honesty of all big corporations.
Assessing the size of a company’s oil reserves, which are still under the ground, was always a contentious issue, which many experts regard as more an art than a science. But Sir Philip did not realise how critical the answers were becoming for more questioning investors; and he soon antagonised the new head of exploration, Walter van de Vijver, who had a deadly feud with him, exacerbated by the traditional Anglo-Dutch rivalry.
Questions about the oil reserves, which might seem speculative to academic scientists, are crucial when they are translated into the share price, which fell abruptly as they were downgraded; over-optimistic estimates appeared to shareholders as downright lies. And in the meantime the investigations by the SEC in Washington were relentless and inescapable.
The acrimonious e-mails from van de Vijver show signs of desperate secrecy and concealment within a company which was once proud of rational and open discussion. When he was warned by his staff about non-disclosure, he replied: “This is absolute dynamite, not at all what I expected, and needs to be destroyed.”
The tradition of decentralisation now showed an obverse side — a fatal lack of decisive control at the top — while the two boards, in London and The Hague, were too weak and diverse. The British board was thoroughly international — including a Saudi, a Venezuelan, an American woman and an ex-Australian historian — but it was not equipped or informed to prevent the fatal deadlock at the top. Sir Philip and van der Vijver both paid the price of their secretiveness and non-communication, when they had to resign; followed last week by the American chief financial officer Judy Boynton, whom the external investigators found had taken “virtually no action . . . to inquire independently into the facts”.
The removal of Sir Philip was depicted as a “Dutch putsch” when he was replaced as chairman by Jeroen van der Veer, who is keen to strengthen the influence of The Hague. He made clear his disappointment about the scandals and emphasised the challenges for the company. But Lord Oxburgh, the chairman of the London board, still sounds complacent when he denies that the scandal reflects on the company’s culture. It is clear that Shell’s culture has serious faults, after nearly a century of acclaim. Its managers and directors, fortified by their generous salaries and perks, have become tragically out of touch with the requirements of the marketplace and the regulators. To restore trust will require a drastic reorganisation, including far tougher systems of compliance, and more serious and unified boards.
It is unfair and misleading to compare Shell’s failure to the Enron disaster: Shell’s mistakes were not motivated by individual greed, or accompanied by fraud, but by incompetence and insulation at the top — a much more British phenomenon. In many ways the incriminating Shell e-mails are reminiscent of the e-mails which emerged from the Hutton inquiry, which showed how the integrity of intelligence can be corrupted by the pressures of short-term expediency. Both case-histories indicate the same kind of hothouse atmosphere at the top, with a dangerous lack of wider accountability.
It is clear that Shell’s superstructure must be opened up to ensure that it can be effectively supervised by its boards, which should be responsible to the shareholders. But it would be a tragedy if, in the process, Shell loses the most valuable feature of its corporate culture — the capacity to take the long-term view.
Anthony Sampson is the author of Who Runs This Place: The Anatomy of Britain in the 21st Century, and Seven Sisters, the definitive account of the oil industry
Seven sisters to four
FROM 1998 to 2000, six of the original seven oil giants that dominated the worldwide business for most of the 20th century paired off with each other or lesser rivals for economies of scale and better access to capital: BP bought Amoco in 1998, Exxon merged with Mobil in 1999 (creating the world’s biggest company in a $75 billion deal) and Chevron with Texaco in 2000. Gulf Oil had already been swallowed up by Chevron in 1984. Only Shell stayed out of the frenzy. Analysts now say it might have done better to take part.