The Observer: Non-execs face their hardest test
Conal Walsh on how US lawyers and regulators are getting stuck in
Sunday April 25, 2004
Shell's bosses are fighting furiously to contain the damage caused by last week's report into the recategorisation of its oil reserves.
Davis Polk & Wardwell's findings have already led to credit-rating downgrades for the oil giant and harsh criticism of departed executives, but some of those still at the helm will be praying that investigators will not throw up more bad publicity.
America's Securities & Exchange Commission is examining whether the misreported reserves - and the tardiness of Sir Philip Watts and others in correcting them publicly - amount to investors being misled. Even more serious is a parallel probe by the Manhattan branch of the Department of Justice, which has the power to bring criminal charges. Last week it was reported that the DoJ was stepping up its investigation, while Shell's auditors, KPMG and PricewaterhouseCoopers, face a grilling from the SEC.
Key to both inquiries is the 450-page Davis Polk & Wardwell report, of which only the executive summary has been publicly released. The bulk of it has been withheld at the request of investigators, who probably want to finish interviewing witnesses first.
Waiting in the wings are class-action lawyers, who have already filed multimillion-pound suits against Shell on behalf of investors in the US court, and who will seize on any further evidence of boardroom culpability.
Depending on what emerges, Shell's illustrious non-executive directors could face further embarrassment. These include Sir John Kerr, formerly Britain's ambassador to the US, ITV chairman Sir Peter Burt, Anglo American boss Sir Mark Moody-Stuart and (on the Dutch board) Holland's former prime minister Wim Kok.
None had any prior knowledge of the reserves shortfall, but whether that will prove an adequate defence remains unclear. Representing shareholders' interests is an important part of their job. They have already faced collective criticism from Lehman Brothers and will have to blame their ignorance on Royal Dutch/Shell's faulty controls and, possibly, its unusual corporate structure. The oil group is already examining the desirability of bringing its Dutch and British boards together. In the meantime, responsibility for reviewing and signing off reserves has passed directly to its three-man governing committee of managing directors.
Finance director Judy Boynton was moved to a new post last week, and the company has restated its faith in the new group chairman, Jeroen van der Veer.
It is hardly surprising that Lord Oxburgh, non-executive chairman of Shell's UK board, reportedly wants to retire. But at least there is respite of sorts from the British regulators.
In contrast to their American cousins, the reaction of the UK authorities has been exceedingly relaxed. The Financial Services Authority is conducting an inquiry and, it is thought, liaising with the SEC. But the Serious Fraud Office is not thought to be involved, and the Department of Trade and Industry has not exercised its powers to launch an investigation under the Companies Act.