TimesOnLine: Shareholders force change on Shell
The Dutch and British arms could be merged to make management easier. Report by Dominic O’Connell
June 20, 2004
Posted 21 June 04
LIKE a lumbering elephant lured into a pit by wily hunters, Royal Dutch/Shell fell victim last week to a shareholder ambush.
The embattled oil and gas group had doggedly resisted pressure to shed light on a long-running review of its Byzantine corporate-governance structure. Shell told its owners the details would emerge in good time, with next week’s annual meeting earmarked for their publication.
But rebellious shareholders, still smarting from the succession of management debacles that had triggered the review, were not about to let their prey escape. Last weekend the Association of British Insurers, whose investment committee has provided a forum for disgruntled investors to vent their spleen to Shell’s non-executive directors, let it be known that it planned to “red-top” Shell ahead of the meeting.
It was a potent threat: red-top status meant the oil giant faced the public embarrassment of having — at the least — its remuneration report rejected at the meeting.
Still Shell held fast. But on Wednesday came the knockout blow: a public letter from Calpers, the £87 billion Californian public-service pension fund, and Knight Vinke, an American activist fund. It read: “It was our collective hope and expectation that this rather basic information would be disclosed to shareholders concurrently with the publication of the agendas for the group’s annual general meetings on June 28. This opportunity has now been lost.”
Shareholder dissent, normally expressed behind closed doors in City meeting rooms, had burst into the open. The shock tactics did the trick. A day later Shell made an announcement setting out in broad terms what its corporate-governance review was all about, and what it might lead to.
The statement contained one immediate victory for the shareholders. In the second to last paragraph, the company said it would abolish its system of “priority shares”, a class of share awarded to management that had the effect of giving them the power to block takeover bids.
It also held out the hope of an even bigger prize. Shell is considering scrapping its much criticised dual-board structure, an arrangement that has its roots in the group’s 1907 founding. Developed to cope with a company that had two halves — one Dutch and one English — the structure had become a cause célèbre among shareholders, having been blamed for the complexity and lack of communication that lay behind this year’s problems.
Shell said in its statement that all options were open. “A number of possible structures, and improvements to decision making, accountability and enhancement of effective leadership, are under active consideration. Among other alternatives, forms of unified boards, to which a chief executive officer would report, are being studied.”
A Shell source defended the company’s decision to publish details before the annual meeting. “We had to strike a balance between the timely disclosure of progress and the need to carry out the review properly. In the end we think we did strike that balance with last week’s announcement,” the source said.
Two law firms — Slaughter & May on the British side, and De Brauw Blackstone Westbroek on the Dutch — have been appointed to draw up the list of options.
Unravelling the complicated raft of Anglo-Dutch partnerships that make up Royal Dutch/Shell will fully exercise the lawyers’ minds. One possible solution is for the Dutch part of the company — with accounts for 60% — to buy out the British arm, forming a new unified holding company.
Another solution being considered is for “stock-stapling”, a device that would link the company’s two traded shares.
Shareholders gave the Shell statement a cautious welcome. “This is an encouraging statement and the first tangible evidence to outsiders that deficiencies in Shell’s governance and board structures are finally being addressed,” said Eric Knight, managing director of Knight Vinke.
But he gave a coded warning that there may still be some fireworks at next week’s annual meeting. “We still have some questions regarding the issues to be addressed by this steering group, but the annual meeting will no doubt offer the opportunity to resolve these remaining questions.”
Shareholders might also consider that last week’s events have followed the pattern set earlier in the year, with Shell reacting reluctantly to outside pressure for greater disclosure of information.
The company’s troubles began in January, when it shocked the market by disclosing that its proven reserves of oil — a key indicator of future profitability — were 20% smaller than thought. Since then, three further write-downs of reserves have trickled out, and several senior managers — notably Sir Philip Watts, UK chief executive, and Judy Boynton, UK finance director — have walked the plank.
By next week’s meeting, shareholders may have more food for thought. The identity of Boynton’s replacement is expected to be announced this week, and in the meantime, investors will want to decide — if the company does go for a unified structure — whether the obvious internal candidate, Jeroen van der Veer, is the right man for the job.
On the latter point they will have ample time for reflection. Shell does not expect to be in a position to present its favoured option for reform until next year’s annual meeting.
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