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The Financial Times: Shell's reform from within needed a crisis: Old seeds of oil group's troubles


By Jane Fuller

Published: March 20 2004 4:00 | Last Updated: March 20 2004 4:00


Sometimes it is gratifying to see a company in crisis: the annoyingly acquisitive WorldCom, for example.


The same cannot be said of Royal Dutch/Shell. Its crisis is, fortunately, not on a par with US or Italian scandals. But it is shocking, nonetheless, because it seems out of character.


The oil company used to be synonymous with conservatism and ethical business practices. Its reputation for developing talent attracted bright young people. The culture may have been closed, but it seemed a healthy one of organic growth through investment in human and natural resources.


What can have gone wrong?


Lack of crisis has been part of the problem. British Petroleum nearly went bust in the early 1990s. Its dramatic recovery made it much more exciting than its stolid peer.


Shell was shaken to some extent in the mid-1990s by outcries over environmental (Brent Spar) and human rights (Nigeria) issues. These did expose the risks inherent in its introspective culture, but did not threaten the $12bn cash it had accumulated. Change did, eventually, follow in these "softer" areas. In 1998, when Sir Mark Moody-Stuart became chairman, Shell brought out a "Report to Society" and its first environmental audit. A sinking oil price - Brent Crude dipped below $10 in December 1998 - also provided a spur to re-instilling financial discipline. Misguided investments were written down; costs and capital spending were cut; it started to rationalise the sprawling country network - a painfully slow process.


The idea was that Shell could reform itself organically while its great rivals, BP and Exxon, did so by mega-bid.


It was a brave effort, but it sowed some of the seeds of the recent disaster.


The imposition of tough financial targets - spending down, production and returns up - on an organisation used to easy investment was bound to exert great pressure on the executives involved. High pressure encourages risks to be taken and corners to be cut.


As usual, it proved easier to make savings than to keep production growing. Initially the outcome was gilded by the recovering oil price: 2000 was a record year for profits.


But then success was undermined by failure to replace reserves. The reaction of Sir Philip Watts, first as head of exploration and production and then as chairman, was over-optimistic booking of proved reserves and a bit of an acquisition spree.


Now it looks as if he was running to stand still. No wonder he was sometimes evasive and defensive in meetings with analysts and investors.


Shell's problems run much deeper than poor presentation, however. Hence the departure of Sir Philip and Walter van de Vijver, his successor at E&P.


Failing to comply with the US Securities and Exchange Commission rules is an astonishing mistake for a global company. The market will remain nervous about the true state of affairs until external consultants have finished reassessing the portfolio.


This shining of external light on Shell's affairs is a metaphor for what is needed in terms of fresh blood at senior management and board level.


When a conservative company starts taking risks, corporate governance is of prime importance. Shell's divided and multi-layered structure obstructed accountability and independent scrutiny.


Sadly, Shell's attempt to reform from within has fallen short. But a crisis is just what it needs. It should seize the opportunity to effect fundamental reforms to the way it runs itself. 

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