Financial Times: Shell becomes a normal company: “Shell needed a catalytic crisis over phoney oil reserve accounting - which is far from finished - to shock it into changing a century-old structure that resembled a kind of Austro-Hungarian dual monarchy run by a Soviet-style central committee.” (ShellNews.net)

Published: October 29 2004

Shell needed a catalytic crisis over phoney oil reserve accounting - which is far from finished - to shock it into changing a century-old structure that resembled a kind of Austro-Hungarian dual monarchy run by a Soviet-style central committee. But it has at last come up with a simple, modern corporate framework. The group's Dutch and UK parent companies are to be merged into a new company, Royal Dutch Shell, under a single board and chief executive. There is no guarantee that such a structure would prevent false reserve accounting occurring again, but there is every reason to think it would speed detection and resolution of such problems in the future.

Shell's current boss, Jeroen van der Veer, loses his chairing role to a new non-executive chairman, but gains management clout by becoming a regular chief executive. His current lengthy title of "chairman of the committee of managing directors" was actually in inverse proportion to his real power over the Shell divisional barons on this committee. The latter body is to be abolished, and its members placed on the new unified board. As important as Mr van der Veer's new powers - which ironically could have been positively dangerous in the hands of his predecessor, Sir Philip Watts - is the decision to give the chief financial officer more authority. The reserves fiasco revealed a serious lack of central audit reporting within the group. Another welcome governance reform is to have a majority on the board of non-executive directors with no previous ties to Shell.

The Shell reforms will be watched closely as a potential model by other bi-national groups. From a position of being even more Byzantine than other companies such as Unilever (with its two boards, although with identical membership), Shell has leaped ahead in the unification stakes. Interesting, too, for other Anglo-Dutch companies will be Shell's pick-and-mix approach for the new entity. To avoid the Dutch requirement for a superfluous (whoops, supervisory) committee, Royal Dutch Shell is to be incorporated in the UK, although it will be headquartered in the Netherlands, and tax resident there. This last feature will not change what tax Shell or its shareholders pay in both countries. But the reforms are supposed to phase out Shell's practice of alternating top jobs between the two nationalities.

Shell's need to preserve the 60/40 ownership split between its parent companies has always made it near impossible for the group to pay for acquisitions by issuing new shares, as BP has done so spectacularly in recent years. With the creation of identical shares in a new single company, that constraint now goes. But the new Shell is most unlikely to go on a buying spree, with oil asset values pushed so high by the oil price. Shell's task now is to put the same energy into operations as it has into corporate reform, and redouble its checks on existing oil reserves and its efforts to find new ones.