The Economist: Humiliation: A once proud firm, brought down by its own flaws, needs a thorough shake-up: "IT IS the corporate equivalent of a Shakespearean tragedy. For more than a century, Royal Dutch/Shell was one of the proudest and most admired companies in the world.": "Its old corporate slogan, “You can be sure of Shell”, seemed a mere statement of fact. Now it seems as if the opposite is the case.": "this week's gale of bad news has shattered the firm's credibility": "“I am becoming sick and tired about lying”, the striking phrase in an internal e-mail from Shell's second-ranking executive to its top-ranking one, has been broadcast to the wide world, and will now be associated with the company's name for years to come." (ShellNews.net) Reposted 12 Nov 04

22 April 2004

IT IS the corporate equivalent of a Shakespearean tragedy. For more than a century, Royal Dutch/Shell was one of the proudest and most admired companies in the world. Famous for its long-term planning, its technical skills and its collegial management style, Shell also once served as a model of the successful multinational, with its far-flung operations, Anglo-Dutch heritage and twin board structure.

Its old corporate slogan, “You can be sure of Shell”, seemed a mere statement of fact.

Now it seems as if the opposite is the case. Portions of an internal report published this week into the company's restatement of its “proved” oil and gas reserves, first announced in January, reveal that Shell's two top managers spent years arguing about how and whether to lie to investors (see article).

Faith in Shell's management had been badly shaken by the earlier restatement of proved reserves, a key measure of how much oil and gas a company can get to market quickly.

But this week's gale of bad news has shattered the firm's credibility: a third restatement of reserves in four months, downgrades of its debt by leading credit agencies, and the resignation of its chief financial officer. Yet the biggest blow of all was the publication of the internal report. “I am becoming sick and tired about lying”, the striking phrase in an internal e-mail from Shell's second-ranking executive to its top-ranking one, has been broadcast to the wide world, and will now be associated with the company's name for years to come.

The report, a summary of a much larger document, describes the growing quarrel between Walter van de Vijver, the head of exploration and production, and Sir Philip Watts, the company's executive chairman, who had held Mr Van de Vijver's job before ascending to the top post in July 2001. What seems to have happened is that Mr Van de Vijver realised the reserve figures that he had inherited from Sir Philip were grossly inflated and unsustainable. So he complained to Sir Philip, a strong-willed boss whose reputation for finding and booking new reserves had helped him to climb to the top.

Sir Philip's response was to tell Mr Van de Vijver not only to maintain the existing reserve figures, but to do everything to increase them. The report makes clear that both men knew that the figures which they were presenting to the public were wrong, that those figures did not comply with the regulations of America's Securities and Exchange Commission (SEC), and that such deception mattered a great deal. Mr Van de Vijver may have grown “sick and tired” of lying, but fatigue alone did not stop him. At one point he even ordered an internal memo, warning that Shell was breaking the law, to be destroyed.

Both men resigned in early March and, like Shell itself, now face the prospect of shareholder lawsuits, and civil and criminal investigations. In one sense, the company's response to this crisis deserves praise. It published this week's damning report, and has finally instituted the kind of internal audits of reserves which some oil firms have used for years.

Shame and necessity

But in another sense, the reaction of Shell's existing management should still alarm its shareholders. It has tried to pin most of the blame on Sir Philip and Mr Van de Vijver. But its own internal report paints a much grimmer picture of complacency throughout its top management, which was told about growing problems with reserves, but chose not to enquire into them. Inertia and deference to the boss smothered debate at what was supposed to be one of the world's most thoughtful companies. Even formerly high-placed Shell insiders describe an inward-looking, conceited company which did not believe that complying with SEC rules should really matter.

Shell now needs a thorough overhaul. It remains financially healthy, despite the blows it has suffered, but it urgently needs to restore the faith of investors, and its credibility with regulators. Its separate British and Dutch boards of directors, now a cumbersome anachronism, must be combined into a single board to clarify lines of accountability, especially through a strong, independent chairman. That person must require Sir Philip's successor, Jeroen van der Veer, to change Shell's arrogant and inward-looking ways. And if he can't, or won't, an outsider will have to be brought in instead.