Royal Dutch Shell Group .com

The Economist: This time sorry may not be enough 

Jan 29th 2004

From The Economist print edition


What, if anything, can Sir Philip Watts do to survive at Royal Dutch/Shell?


A HOSTILE mob of investors will greet Sir Philip Watts, chairman of Royal Dutch/Shell, on February 5th when he announces the Anglo-Dutch oil group's annual results. It will not be the profit number that interests shareholders most, but rather a planned 75-minute presentation showing how much crude oil the company has access to around the world. On January 9th, Shell shocked the financial markets and oil industry by downgrading nearly four billion barrels of its “proven” reserves to “probable”. At a stroke, this wiped one-fifth off a measure most observers use to value oil companies. The firm's shares dived.


Almost as infuriating to investors was the fact that the chairman was not there to deliver the bad news personally. Long regarded as aloof, brusque and disdainful in his dealings with the financial community—in sharp contrast to the genteel, diplomatic style of most of his predecessors—this no-show struck many as the final straw. Sir Philip's excuse, in an e-mail sent later to employees, was that this was essentially a technical adjustment, and that his presence would not have been useful since, being in a pre-results quiet period, he could not add any commentary. His e-mail did, however, concede that some people might think that this was a mistake.


Even some of Sir Philip's friends were shocked that this key figure was revealed to the market in such a summary fashion. They doubt that he can survive for the remaining 18 months of his term, fearing that no amount of apologising now—his advisers are working flat-out on a campaign combining explanation with fulsome apology at the results conference—can save him. His task is especially difficult, not only because this is by far the biggest downgrading of “proven” reserves ever by an oil firm, but also because the man in charge of exploration and production, known as the “upstream” end of the oil industry, when the reserves were overbooked as proven was, er, Sir Philip.


Still, even now, Sir Philip can take some comfort from the fact that the fulsome apology has a noble history within Shell, both as a technique for calming irate shareholders and for unleashing performance-enhancing reforms within the firm—which, for all its self-proclaimed expertise at sophisticated management and strategic planning, has made serious mistakes over the years.


In the mid-1990s, for example, Sir Philip's predecessor but one as chairman, Cor Herkstroter, was under fire for Shell's environmental record in Nigeria, highlighted by the Nigerian government's execution of Ken Saro-Wiwa, an activist who had criticised the company. (In charge of business in Nigeria in the lead-up to this was, yes, one Philip Watts.) Mr Herkstroter was also attacked for ignoring for too long protests against Shell's plans to dispose of its Brent Spar offshore oil-rig in the North Sea. Apologising, Mr Herkstroter admitted that these were errors and attributed them to “technical arrogance”. (Shellmen, plus the occasional Shellwoman, typically exude a certain effortless superiority.) As evidence of his contrition, Mr Herkstroter launched Shell's policy of being proactive on environmental matters. Sir Philip, in turn, has won praise for putting “sustainable development” at the heart of Shell's business philosophy.


Can Sir Philip now echo Mr Herkstroter, by issuing a heartfelt mea culpa and setting in train some big reforms? One rival oil executive wonders if Sir Philip's strategy now is to get the bad news out of the way, clean the slate, take a hit on the share price and set the scene for progress. If so, it would be taking its inspiration from what happened in the early 1990s to Shell's great rival, BP. Its boss at the time, Sir Robert Horton, accumulated huge debts to invest heavily in new oil fields in the belief that the oil price would soon soar. When it failed to do so, BP's board fired Sir Bob, and his replacement David (now Lord) Simon reined back spending to cut debt. BP was thus in good shape to take a leading part in the great oil-industry consolidation, snapping up Amoco and Arco in America and Burmah Castrol in Britain.


Shell, by contrast, came late to the consolidation game. When it bought another British energy firm, Enterprise, two years ago, most analysts thought it overpaid. Some observers have attributed this to Shell's odd ownership structure, and the culture it spawns. Sir Philip has been trying to modernise this, and perhaps this could be his saving grace.


You can hear the sea-change


The company is a 60:40 amalgam of Royal Dutch Petroleum and Shell Transport and Trading, which together own the many Shell operating companies around the world. Admirers say that this generates a need for consensus decision-making which is well-suited to a firm with a 50-year horizon, and that although decisions may take longer to reach, broad agreement usually results in quicker and better execution. But a growing number of critics reckon that the firm's governance structure belongs to the era of their 1907 merger, when Royal Dutch was an imperial presence in Asia and Shell was trading sea shells and paraffin. It has two separate boards of directors; at group level, Sir Philip is technically only the chairman of a committee of six group managing directors, not a command-and-control boss.


The dodgy reserves figures are themselves evidence of the weakness of Shell's governance structure. The firm did not have a consistent global process for categorising and measuring reserves; each business used its own approach. Sir Philip started a review of processes, aiming to produce a uniform system. This led to greater rigour being applied and, then, to the downgrade. BP and others have had global processes for the past 15 years. It may be that what Shell now needs most is a modern, integrated governance structure for the Sarbanes-Oxley era. Delivering it may be just the project to keep Sir Philip in his job—though, to succeed, he will have to challenge directly the corporate culture that many insiders believe made Shell great.


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