Royal Dutch Shell Group .com

Financial Times: Bonuses go as changes in internal control structures take effect


By Clay Harris

Mar 19, 2004


None of Royal Dutch/Shell's top executives will receive a performance-related bonus for 2003, the oil and gas group said yesterday, as it confirmed that the booking of reserves was no longer a factor in bonuses.


The Anglo-Dutch group paid executive directors 3.2m in performance-related bonuses in 2002, based on the euro exchange rate at the year end.


Reeling from having to announce another cut in reserves and to postpone its annual meetings by two months, Shell outlined changes in internal reporting, efforts to improve compliance with Securities and Exchange Commission requirements, and plans for a wider review of governance.


It said external experts would have a "systematic" role in the audit of reserves. Malcolm Brinded, the new head of exploration and production (EP), called this a "key change". Like many of its peers, Shell has resisted such use of outsiders.


The booking of new reserves had previously constituted between 5 and 15 per cent of the possible annual bonus for certain EP staff. That element has now been removed for anyone involved in the assurance of reserves.


This will include the committee of managing directors (CMD), all of whom will now have to sign off reserves each year. Jeroen van der Veer, the new chairman, said yesterday that CMD members would "need to bring their knowledge to a level that they feel confident [to do so]". The group audit committee (GAC) will also see reserves figures and be able to ask questions.


Other changes related to reserves include:


* reserves auditors will report to the group internal audit, outside the business line. Within EP, reserves reporting will come through the technical rather than the planning side;


* approval will involve peer challenge at regional level;


* reporting guidelines are being "revised to remove any remaining ambiguity in the application of SEC rules and guidance" and EP staff will be trained to "ensure that SEC rules, guidance and compliance requirements are fully understood and adhered to throughout the organisation";


* in addition to a significant increase in staff, including external experts, the frequency of country reserve audits would increased, with important countries now audited annually; and


* guidelines will include "clear, auditable commercial triggers for recognising new proved reserve bookings . . . and clearer guidance on technical and commercial issues".


Mr van der Veer said: "It is belt and braces on various levels so we can make sure that we will never drop this ball again." He said: "We think the whole reserves issue . . .is not related to the structure of the Shell group." But that "was not a justification to keep the governance and structure . . . exactly the same".


Mr van der Veer said the "listening phase" would last for about a month after the rescheduled annual meetings on June 28. Proposals would be completed by early 2005, in time to be considered by next year's annual meetings. He added: "It is not the case that we already have one explicit model in mind [or] that we would like to copy a specific company. Having looked around, we will figure out what is the best for Shell."


Some governance changes had already been made:


* chief financial officers in operating businesses will report to the group CFO, rather than to divisional chief executives; and


* the group internal audit will report direct to the group CFO, with the group chief internal auditor having direct access to the GAC.


Mr van der Veer said Shell's goal was "to be out in front with the best behaviour in a very complex and transparent world. If we can master that task, I see it as a competitive advantage."

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