The Observer: Dutch helm disease gets blame at Shell
Sunday April 25, 2004
Investors accuse the oil giant's Hague arm of thwarting change, says
Royal Dutch/Shell last week tried to blame the scandal now enveloping it on a couple of 'bad apples'. As criminal investigations were confirmed by US federal prosecutors into the reserve booking affair, joint chairman Lord Oxburgh confessed that there were 'disturbing deficiencies' in the way the company was run, but that these could be put down to a couple of individuals.
It is clear he thinks the rotten cores belong to former chairman Sir Philip Watts and former head of exploration and production Walter van de Vijver, both of whom were ousted last month.
Last week's revelations of the trail of emails from Van de Vijver, complaining about the pressure Watts put him under to boost reserves and culminating in the now famous 'I am sick and tired of lying about the extent of our reserves issues', are as compelling a read as you'd find on an airport bookstall. But investors, and some in the company, believe it reveals rather more than how two ambitious executives went off the rails. One leading shareholder said: 'While it is profitable for them to paint this as a couple of bad apples, you have to read between the lines [of the Davis Polk & Wardwell report containing the emails] and what that says to me is that accountability and information flows were pretty deficient.'
In investors' minds, one of the key obstacles to changing the company's culture and its cumbersome structure - symbolised by the breakdown between the Hague-based Van de Vijver and London-based Watts - is its Anglo-Dutch structure. The complicated arrangement boils down to two holding companies (Royal Dutch and Shell Transport & Trading), which own 60 per cent and 40 per cent, respectively, of the group. RD has two boards - supervisory and management - and Shell has one. There are two operating subsidiaries, Shell Petroleum NV (Dutch), and Shell Petroleum Ltd (UK). RD owns 60 per cent of each and nominates two-thirds of the board members to each.
Shares in ST&T are traded and mainly held in the City. Royal Dutch shares are held mainly by Dutch institutions such as ING and ABN, but there is an important 25 per cent tranche of American depository receipts (ADR) held in the US.
Beneath these companies are five divisions, between which more than 100 businesses around the world are split. The executive board is known as the committee of managing directors. These are appointed from the two holding company boards. It was headed by Watts (of ST&T), who was replaced by Jeroen van der Veer (of RD). Formerly it comprised six directors. Since the scandal, which last week claimed its latest victim, finance director Judy Boynton, there are now three.
In investors' minds it is clear where the power lies. As one said: 'If you want to bring about change in this company you need to focus on Royal Dutch.'
Investors have been alive to this since Watts embarked on a series of roadshows in February advising both ST&T investors in London and the ADR holders in New York - a key group of activist shareholders - that if they wanted change they would have to lobby in the Hague as well as in London.
When he was replaced by Van der Veer the following month, in what was called a 'Putsch by the Dutch', suspicion mounted that RD was exerting control and that friction was increasing.
British ST&T investors claim that Royal Dutch is resistant to change. They also claim that Dutch investors have, until now, remained quiescent. The British dissenters have been joined by some Royal Dutch ADR holders, who have exerted pressure in Holland.
One investor in ST&T says: 'Individuals on the Shell Transport and Trading board are much more open to the whole question of organisational change than those on the Royal Dutch board.' The key proposals are to create a unitary board and have a single independent group chairman. But as one American RD investor counters: 'The fact is Lord Oxburgh may make the noises, but he does not call the shots.' There are several impediments to his lordship and others who want change. The first is cultural. 'Royal Dutch is closely intertwined with the Dutch establishment - the royal family, the business and political establishments,' says one City source. The Dutch Royal family does have a small stake. Wim Kok, former Prime Minister, is on the supervisory board. EU commissioner Frits Bolkestein was at the company for 16 years. Current Education Minister Annette Nijs left it in 2002.
These custodians, now guarding what is seen as one of Holland's last national champions, fear British shareholders. 'For all intents and purposes this is the last established [multinational] Dutch company. It is extremely difficult for them to let it go. Also, the Dutch institutional investors understand the pressure the players are under. There is a major issue of national pride.'
But those who want change realise they cannot force it on Royal Dutch. Shareholders have carefully scrutinised the joint venture agreement that governs the group. The problem, says one such investor, is that 'Royal Dutch is a company that has very shareholder-unfriendly structures'.
Examples include the fact that Royal Dutch directors themselves control the nomination of successors (not only to its own board but to ST&T as well), and do not have to listen to shareholders. They have a veto on acquisitions proposed by Shell, (without a corresponding arrangement the other way). The executive board (CMD) is not formally covered by the joint venture agreement and has no executive authority over the company's assets. And the tradition of alternating Anglo-Dutch management of the CMD is on sufferance.
Much of its control is vested in a tranche of 'priority shares', which have no economic value but control certain central activities, including nominations, of the company. These are held by a foundation, the trustees of which are the RD supervisory board members.
'Effectively this gives it a veto on fundamental change,' says a US investor.
Some in the City last week read the runes in a hopeful light, pointing out that the press conference to present the DP&W report was held jointly by Oxburgh and the RD chairman Aad Jacobs, and that the company promised to speed up the review of its structures.
While the legal issues rumble on, the real financial knock last week came when credit agencies stripped away the company's prized AAA credit rating. Shares may go up and down. Directors may go to court. But, as one investor said: 'The national champion leaving the gold standard - that should start them thinking.'