Financial Times: Shell investors threaten to revolt

Posted 14 June 04

Royal Dutch/Shell faces the prospect of a investor revolt. With two weeks before the oil giant's delayed twin annual meetings, institutional shareholders are growing increasingly frustrated by the secrecy surrounding the internal review of its governance structures and they plan to go public with their grievances, in person, at the meetings.

Since January 9 Shell has downgraded its proved oil reserves four times and, in the aftermath, shed Sir Philip Watts, group chairman, Walter van de Vijver, head of exploration and production, and Judy Boynton, finance director. It is also facing numerous class action lawsuits and regulatory investigations in the US, UK and the Netherlands.

Investors believe the company's complex Anglo-Dutch governance structure and poor internal controls led to the debacle and are demanding reforms.

In the longer term, they want changes to Shell's structure, management competence, culture and control systems and recognise that achieving those reforms could take longer than 12 months.

Responding to these concerns in April, Shell said that it had established a "small, highly-focused group with a wide remit to review all options of the company's structure". It added: "The group's remit includes full access to external advisers and will require considered and detailed work."

But that hasn't satisfied investors, who are demanding to know which executives are conducting the review, its terms of reference and to whom it will be delivered.

Concerns about the review topped the agenda when a dozen investors from the US, UK and Europe met Aad Jacobs, chairman of Shell's group audit committee, last month in two separate hush-hush meetings in The Hague, home to Royal Dutch Petroleum, the larger part of the Anglo-Dutch group, with 60 per cent of the equity.

Mr Jacobs is seen by investors as the most powerful executive within the company and shareholders travelled to meet him hoping he would soothe their many concerns. Mr Jacobs listened to their worries but they returned home disappointed.

One investor who was present at the meetings said: "There is a fundamental disagreement between the management and investors. Shell maintains that the problems were caused by individuals and not structures. Quite frankly, after all that has happened, that attitude beggars belief."

Another said: "Shell seems to be in denial and thinks that all these problems are just a blip."

At the meetings, Mr Jacobs pointedly refused to name the personnel on the "highly-focused" review group.

Another shareholder said: "Unless the review is more transparent, we fear it could all be stitched up without Shell being committed to fundamental changes in governance structures. They are in danger of missing a golden opportunity to restore credibility."

Despite the double rebuff, it is understood that investors have followed up the meetings with a "barrage" of letters to senior management.

Many fund managers in the UK have summoned the required "letters of representation" that will enable them to attend the meeting at the Excel conference centre in east London.

Shell-watchers say that the company will have been mortified last week when Calpers, the giant US activist pension fund, placed it on its corporate governance "focus" list along with just three other targets. It is the first time Calpers has placed a non-US company on its list. It said: "The boards of Royal Dutch and Shell Transport appear to be caught in a tug of war preventing either of them to adequately hold management accountable."

Recent developments have included investors in the US, UK and the Netherlands coming together to tackle the company, although Dutch shareholders such as PGGM and ABP are more reluctant to go public because of sensitivities about attacking a blue-chip national champion.

"Dutch-based investors cannot afford to be isolated from their US and UK counterparts," said one US investor. "Even the Dutch recognise the need for improvements in governance."

Dutch shareholder resolve has been stiffened by a new corporate governance code in the Netherlands and there has been a notable shift of strategy by the funds in recent months.

Investors are in no mood to walk away. One said: "Even if the Shell reforms are a whitewash, we continue to fight. In the short term it will damage the company's standing and raise its cost of capital. Shell is going to be a watershed for European corporate governance. We cannot afford to give up."

Another said: "We are not in the mood to accept a fudge and we do not want to lose momentum."

Shareholders say they are wary of forcing any more senior management changes for the time being. One investor said: "A trust deficit exists, but most investors recognise that there needs to be some stability." Some rare positive news, then, for Mr Jacobs and his team as they prepare to face the music on June 28.

Additional reporting by Ian Bickerton in Amsterdam