The Observer: Double-Dutch message
Heather Connon says Shell's investors need to know who is in charge
Sunday March 21, 2004
Shell's long-suffering shareholders were relatively unsurprised by the second cut in the company's reserves forecasts this year and the delay in publication of its annual report. For them shifting reserves figures are merely the symptom of a deeper malaise within the group. They want it cured quickly and properly.
It will be the key point at tomorrow's meeting between the firm and investors brokered by the Association of British Insurers.
At the heart of their concerns is the group's boardroom structure. Most British companies are run by one board, complete with chairman, executive and non-executive directors, with clear lines of reporting and accountability to shareholders. Shell has three boards and none is as accountable, or structured as effectively, as shareholders would like.
While investors accept that dual-registered companies - Shell was created through the merger of the Dutch group Royal Dutch and Britain's Shell - inevitably require more complicated structures than single-nationality ones, they point to companies such as Unilever and Fortis, which have managed the problem much more elegantly. Unilever has two boards, but they are identical, while Fortis has one chairman, chief executive and board of directors for its two companies.
Royal Dutch/Shell has two entirely different boards, one for each part of the group. But the operational power rests with neither of them, but with a separate, unelected board, the Committee of Managing Directors (CMD), consisting of senior executives from each of the two public companies.
Eric Knight, managing director of Knight Vinke Asset Management, which holds shares in Royal Dutch, points out the CMD is an informal body and its members are not accountable, and do not report, to the chairmen of the public companies.
'As a consequence, Shell's top management operates in what Shell refers to as a "collegiate" fashion, with no CEO having authority or responsibility for management of the group as a whole,' he said.
Shell has acknowledged the need to change this structure. It has been studying the structures used by other dual-listed companies as part of a review of its board and corporate structure expected to conclude next year. Jeroen Van der Veer, new chairman of the CMD, is also an advisory director of Unilever so has first-hand experience of how other companies do it.
Those close to the com pany say it is more likely that Shell will adopt a structure similar to that used by Fortis. One large shareholder who preferred not to be named said he was not concerned which structure the oil company plumped for.
'I just want a board with clear lines of accountability from all parts of the business,' he said.
But changes to the board structure will not be enough. Shareholders want new blood on the board. Like many well-run companies, Shell has traditionally promoted from within. Sir Philip Watts, who was forced to resign as chairman of the CMD earlier this month, had been with the company for more than 30 years and was in charge of the exploration and production division when the crucial reserves mis-statements were made. His successor, Van der Veer, joined the group immediately after his military service.
But it is not just executives who are home grown. Many of the so-called non-executives on the two boards also came up through the ranks. It is, said one investor, 'more like a clique than a properly managed company', while another likened its arcane structure and inaccessibility to the Kremlin.
They want new blood at the top of Shell. That need not mean sweeping management changes immediately; most agree that the group has been destabilised enough by the ousting of Watts and investigations by the US Securities and Exchange Commission and Financial Services Authority into the reserves issue. But they will make it clear to Sir Peter Burt, who is leading Shell's directors at tomorrow's meeting,that a new corporate structure has to include the recruitment of new personnel. 'A vigorous and respected outside chairman would go some way to alleviating our concerns,' said one leading shareholder.
While investors accept that Watts' departure made it difficult to recruit an outsider to replace him, they are concerned that the elevation of so many long-standing employees - Malcolm Brinded, Van der Veer's successor as head of exploration and production, has been with Shell more or less since he graduated in 1974 - simply perpetuates the closed culture.
Lobbying Shell is only half the battle. Royal Dutch has its own board and separate shareholders and, some say, that is where the real power lies. British investors have tried to enlist the support of Dutch institutions to lobby for change, but so far with little success.