The Guardian: Shareholders braced for more Shell shocks
Tuesday March 16, 2004
Mounting cost of oil group's failure to awaken from Sixties slumber
The new BP head office behind London's Piccadilly is a vision of the corporate future: smallish-scale, stylish and airy with staff all dressed in beige designer suits.
Arch-rival Shell's headquarters - the 1960s Shell Tower on the South Bank - by contrast is like a government office from that period: massive, monotone and airless, the staff wearing the regulation blue blazers and grey trousers of yesteryear.
Given the chaos that now besets Shell, the difference is a symbol of the two companies which, with their American cousin ExxonMobil, dominate the international oil industry.
While BP's chief executive, Lord Browne, is seen as a visionary and has wowed investors with a bold move into Russia, Shell chairman Sir Philip Watts has lost his job amid a mounting scandal over "lost" reserves that many attribute to an unwieldy corporate governance structure rooted in the past.
Worst of all, despite the exit of Sir Philip and his exploration director, Walter van de Vijver, there is no feeling in the City that this crisis will soon be over. In fact, almost everyone is convinced things will get worse before they get better.
Friday could be another difficult day for Shell. The annual report will be published and shareholders will scour it for evidence of big bonuses paid to top brass as well as any details of a payoff to Sir Philip.
'No sense of urgency'
"It's like a murder mystery. One fears a steady drip of bad news and that is going to do nothing for the share price," said Investec Securities oil analyst Bruce Evers last night.
Eric Knight, the managing director of Knight Vinke Asset Management, a shareholder in the Netherlands arm of Shell, said in a letter to the Financial Times yesterday that an internal review by management of the oil group's corporate governance was "unstructured, opaque and conveys no sense of urgency".
Fadel Gheit, an analyst with Fahnestock & Co brokerage in New York, who is unimpressed by the internal shake-up thus far, believes there have to be more management changes. "Shell needs a new cast of characters to usher in a new era."
The company has been struggling to cope with the investor and media attention. It insisted there were no plans for further management changes "at this moment", but words from this company are not taken at face value any more.
On the day Sir Philip resigned, a Shell spokesman insisted the chairman had gone by mutual consent, only to change the story an hour later by admitting he had been pushed out the door.
The next crucial moment could be the results of a report into the lost reserves from Shell's audit committee, led by non-executive directors. Sir Philip's successor, Jeroen van der Veer, has promised to make this public, but some doubt that all details will see the light of day. He hopes it will be ready within a month, while external pressure for action grows with investigations by the securities and exchange commission in the United States and the UK's Financial Services Authority.
The Amsterdam stock exchange has been asking questions while impatient investors in America have launched a $1bn lawsuit alleging that overstatement of Shell reserves by 20% meant the true financial value of the group was misunderstood. There is speculation that internal documents show Sir Philip and other senior managers - such as finance chief Judy Boynton and Mr Van Der Veer - knew two years ago of the problems related to reserve bookings.
Shell's fall from public grace began on February 5, when the group announced through its investor relations staff that it had downgraded reserves by 3.9bn barrels of oil equivalents. In earlier years it had included probable assets in Norway, Australia and Nigeria, which it concluded did not fit with SEC requirements on commerciality.
If this were not bad enough, the decision by Sir Philip not to break the news personally went down like a lead balloon in the investment community. It underlined suspicions that Shell was arrogant and out of touch, problems aggravated by a corporate governance structure that gave too much autonomy to regional managers booking their own reserves. One of these local officials had been Sir Philip as head of Nigeria and then boss of exploration at time when many of the problems arose.
Mr Van Der Veer has insisted that he will look at all these issues and take shareholder views into account. But he also indicated that he favoured the existing "collegiate" decision-making system and would probably wait till spring next year before deciding on whether to continue with Shell's dual board and company structure.
Such comments led Mr Knight to draw attention to Coca-Cola's recent decision to break with a 100-year tradition and extend its search for a new chief executive outside the group. This was in "striking contrast" with Shell's in-house reshuffle.
Problems at Shell have caused some shareholders to take their money elsewhere, bolstering the share price of BP and the smaller BG. But Shell's plight has spread a cloud over the entire energy sector, just as it was recovering from the dark days of Enron.
Mr Gheit says its unusual for a company to inflict so much damage on itself. "I have been covering the company for 18 years. I have never been so puzzled by its decision-making process."
The 26-storey Shell Tower continues to dominate the South Bank but the group's old corporate image - proud and conservative - no longer stands tall.