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The Sunday Telegraph: The fault of Royal Dutch Shell is offering too little


City comment

By Robert Peston, Sunday City Editor (Filed: 21/03/2004)


What do the chairmen of Lloyds TSB, Rio Tinto and Anglo American have in common, other than that they each hold one of swankiest corporate posts in the UK? Well, they're all alumni of the Royal Dutch/Shell group of companies and - not a coincidence - they are all being sued by disgruntled shareholders in the US.


Maarten Van den Bergh of Lloyds, Paul Skinner of Rio and Sir Mark Moody-Stuart of Anglo are defendants in class action cases being brought by investors over the mis-statement of Royal Dutch/ Shell's oil reserves. In the dock with them are the oil giant's current executive chairman, Jeroen van der Veer, its finance director, Judy Boynton, its recently ousted chairman, and Sir Phil Watts, inter alia.


In other words, the Shell shocker is sending juddering reverberations through the boardrooms of Britain. And it's a concern for shareholders in Lloyds, Rio and Anglo that their chairmen have a weather eye on the US courts.


The gruesome statistic for Van den Bergh, Skinner and Moody-Stuart is that the market capitalisation of Royal Dutch /Shell has fallen by $16bn (9bn) since it first warned in early January that the value of its proved reserves had been overstated by a staggering 25 per cent. And for the legion of aggressive US lawyers persuading shareholders to join the case, that is a relevant number when calculating damages claims. In the shadow of this possible tsunami, the trio of grandees may be a little distrait.


What's particularly unsettling about the Royal Dutch/Shell debacle is that this company has always been a byword for boring conservativism. Investors' criticisms of the company tended to be that it took too few risks compared with its livelier rival, BP. If you can't be sure of Shell, what share can you be sure of?


None of us had the faintest inkling that in early and mid 2002 Royal Dutch/Shell's committee of managing directors - or the caucus of senior executives that runs the group - were already being warned by written memorandum that the reserves might have been exaggerated. Not even the non-execs were aware of the reserves problem - although earlier this month, when they learned of the sweepings under the financial carpet, they ousted Watts and the head of exploration and production, Walter Van de Vijver (that the finance director, Boynton, clings on is probably unsustainable).


The non-execs' ire is understandable. Only a few weeks ago, Watts looked me in the eye and said: "In December as soon as this thing came to my attention, this was a matter of all hands on deck. I remember issuing the watchwords 'get the facts and do the right thing'." The appropriate but undelivered response was a giant raspberry.


The odd thing is that the oil and gas which Royal Dutch/Shell can no longer include in its "proved reserves" may well exist. Its error was to ignore the rules of the US Securities and Exchange Commission on the conditions that need to be satisfied for a company to classify a find in this category.


What went wrong? The most plausible explanation is that Royal Dutch/Shell became dangerously arrogant. And its inward-looking culture encouraged executives to dismiss SEC rules as quaint and less valid than the company's own methodology for assessing discoveries. The fact that last week it was forced to reduce its reserves for a second time this year shows that the awakening is slow and painful.


One of the harsh facts of life for any company with a share listing in the US - whether it thinks of itself as British or Dutch or from any other country - is that the SEC is the regulator that matters. The global financial marketplace is run on American law. And although the Financial Services Authority in the UK and its Dutch sister may make a useful contribution, they are junior players.


So where now for Shell? Well at the heart of the problem is a cumbersome board structure. There is a Dutch supervisory board, a Dutch board of management, a British plc board and a committee of managing directors. That is at least three groups too many.


And then there's the fact that the Dutch side is in effect a self-perpetuating oligarchy, because of the existence of "priority" shares that give the directors almost total control over board appointments.


All of this needs to be swept away and pronto, especially the priority shares. But although the British board concurs, the Dutch are still dithering. Following the ousting of Watts, they have the upper hand and are only committing themselves to unspecified governance changes by a deadline of spring next year.


In theory, a sensible streamlined structure - similar to that adopted this year by another Anglo-Dutch giant, Unilever - could be introduced in just a few short months. However, the Dutch directors seem to believe that the hurricane will stop blowing if they bide their time, hold their nerve, and cling on to their battered edifice. "Nave" is not the word.

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