Business Report (South Africa): Expectations high for Royal Dutch/Shell: “Remember, the group's reserves have been restated several times this year, and this has resulted in fines of $150 million (R915 million at Friday's rate) for accounting inexactitudes.” (ShellNews.net) 8 Nov 04
By Bert Chanesta
There are high expectations that the proposed new management structure at the Royal Dutch/Shell group of companies will result in better corporate governance and reliable accounting information.
Remember, the group's reserves have been restated several times this year, and this has resulted in fines of $150 million (R915 million at Friday's rate) for accounting inexactitudes.
On a more positive note, the group was recently able to report an impressive increase in net income for the third quarter. A damper on this news, however, was the disclosure that a further 900 million barrels of reserves, worth about $450 million, is set to be written down.
The failure in the veracity of the accounting information has been attributed in part to what Christian Leuz, a professor of accounting at Wharton Business School, refers to as "the largely unconsolidated structure" of the group.
The existing group structure does not lend itself to easy definition.
The group's genesis can be traced back to a deal struck in 1907 by Briton Marcus Samuel, whose interests have emerged as Shell Transport and Trading, and Dutchman Henri Deterding of the company now known as Royal Dutch Petroleum.
The deal resulted in what Stuart Hampton of Hoover's Online describes as "an unconsummated merger".
Royal Dutch and Shell are often written about as "parent" companies that do not engage in operational activities. Royal Dutch and Shell hold 60 percent and 40 percent, respectively, in the group, both directly and indirectly.
Samuel and Deterding obviously perceived synergies and benefits from a form of combination that recognised their separate interests. But they stopped short of a complete merger.
The chairmanship of the group is rotated. Royal Dutch and Shell jointly appoint directors to the group's holding companies.
The boards of Royal Dutch and Shell are separate, although they report into a separate committee comprised of managing directors, who make decisions by consensus
. The committee of managing directors oversees more than 1 000 operating companies around the world.
This set-up is clearly unwieldy. It is small wonder that there have been glitches in the flow of vital information from the field to the ultimate executive suite.
The proposed restructuring of the group is designed to redress the shortcomings in the present set-up.
The effective merger of Royal Dutch and Shell will finally happen and the combined entity will be known as Royal Dutch Shell (RDS), which will be incorporated in the UK. It will have its tax residence in the Netherlands.
Significantly, there will be one board with a non-executive chairman and a majority of independent non-executive directors. Interestingly, there will not be a complete fusion of shareholder identity.
The shareholders will swap their shares in Royal Dutch and Shell for shares in RDS, at a ratio designed to ensure that the Royal Dutch shareholders retain 60 percent of RDS, with the Shell shareholders holding the balance of 40 percent.
The Royal Dutch shareholders will get class A shares, which will be entitled to Dutch-sourced dividends.
The Shell shareholders will get class B shares, which will be entitled to UK-sourced dividends. Apart from the specified dividend entitlement, the A and B shares will be equal.
The unitary board in the single entity RDS should certainly improve corporate governance and result in operational efficiency.
What is less certain is the effect that the different expectations of the A and B shareholders will have on the vision of the company.
Bert Chanetsa is a director of Chanetsa Incorporated