Royal Dutch Shell Group .com Who can be sure of Shell today?


With trust in business leaders plummeting in the wake of new scandals


Ken Symon surveys the latest fiasco

25 April 2004


BUSINESS leaders are not trustworthy, according to a staggering 85% of respondents to a survey published last week. What makes the leadersinlondon findings more striking is the fact that 41% of those questioned hold board level positions and more than half are in middle management.

Perhaps the results should not surprise anyone after a week in which it emerged that a top executive at a company long respected for its high corporate standards announced in an internal memo that he was “sick and tired of lying”.


The developing scandal at Shell has seemed like a slow motion film of a car crash, as more and more questions and revelations have emerged over what was clearly a systematic attempt to hoodwink the market, regulators and shareholders about the true state of the oil company’s reserves.


The question is, now that the company has apparently bitten the bullet over the issue with the publication of the independent investigation, what will the continuing fallout from the scandal be? Particularly as the Financial Services Authority has confirmed that it is launching an investigation.


The second major question is what US federal prosecutors will do when they have completed their investigation into the overstating of reserves. It is that criminal investigation more than the parallel one being carried out by the Securities and Exchange Commission that will arguably have the biggest effect on the company’s future fortunes.


It may be significant that Shell published only a summary of the report of an investigation led by the law firm Davis Polk & Wardwell into the under-reporting of reserves. It had done so, Shell said last week, because the “US government authorities” had asked that the full text should not be released.


The other remaining question is what further information on who was involved in the misdeeds at Shell is contained in the parts of the 463-page Davis Polk report not yet made public by Shell?


Shell executives, employees and shareholders will hope this week is easier than last. It began with a third major executive scalp being claimed followed swiftly by the report of an external investigation that revealed the most damning evidence from the very top of a major corporate in recent times.


The incriminating e-mails published as part of the report reveal not just the cover-up on misreporting of oil reserves but evidence of some pretty toxic infighting between senior executives. The already infamous e-mail from ousted exploration chief Walter van de Vijver to the former chairman Sir Philip Watts still has the power to shock.


It said: “I am becoming sick and tired of lying about the extent of our reserves.”


Of course, Shell’s plight was caused not just by lies but by some wrong strategic decisions. While the giant Shell is struggling, Scots oil minnow Cairn Energy saw its value soar last week on the back of a third find in the Rajasthan field. Shell’s decision to largely “pass” on the Indian sub-continent has led to an opportunity for the Edinburgh-based independent. Cairn’s share price rose by about 15% over the week to close at £10.13 while Shell’s fell again to close at 386.5p.


Little wonder that the remainder of the week brought news that the credit rating agencies were downgrading Shell from its previous triple A rating.


Moody’s Investor Services and Fitch Ratings reduced Shell’s highly prized AAA credit status by one notch to AA1 following a similar move by Standard & Poor’s last Monday.


Outlining its reason for the move, Moody’s said the recent audit report into the Anglo-Dutch group’s conduct “indicates a range of reporting and oversight flaws inconsistent with a highly rated entity, and raises major questions about Royal Dutch/Shell’s controls, reporting standards and corporate governance.”


That judgement on what went wrong at Shell seems very much at odds with the attempted justifications by Lord Oxburgh, the company’s current non-executive chairman.


While admitting Shell’s wrongdoing, he insisted it was due to “human failings not structural deficiencies”. He went on to conclude: “I don’t think it has significance for the culture of the company as a whole.”


This does not read well coming from the chairman of a company that has made so much of its high corporate standards before. It will also anger company critics who point to the Brent Spar decommissioning incident and the affair of company’s experience in Nigeria as further examples that its reputation in business circles was already not well deserved.


It is little wonder then that Oxburgh has made it clear that he will soon want to call it a day in the chairman’s post resulting in the group beginning the search for a replacement with the stomach and the skills to take the oil major through from its current parlous state to a full and credible recovery.


Board members casting around for a replacement for Oxburgh are believed to be considering Hugh Collum, the departing chairman of British Nuclear Fuels Limited. Directors advocating Collum’s candidacy see him as a prospective chairman who could head a united board – replacing the current twin Royal Dutch/Shell company structure.


No decision has yet been made on bringing together Royal Dutch and the UK arm, Shell Transport and Trading, into a single unit despite the fact that some of the company’s largest shareholders are pushing for the move.


Collum’s experience in handling the thorny issue of BFNL’s US nuclear clean-up contract is seen by his supporters as a strong reason for him taking the hot seat at Shell. In his work there, Collum has dealt with investigations launched by the SEC.


One other person mooted as possible chairman is Sir John Kerr, a Scot and non-executive director of Shell Transport and Trading since 2002. His relative lack of experience at the company may count against him. But in his favour is his years of high level diplomatic experience including a stint as EU ambassador to the US.


Whoever takes the post will have a huge job to do in restoring the Shell to anything like its former glory. A 1928 Shell petrol advert bore the legend: “Take no risk – take Shell.” Sadly that slogan will stick in the throat of shareholders in the modern day business.


The company’s activities are a prime example of why there is such a lack of trust in our business leaders.

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