The Financial Times: Pressure rises on group to hire new blood

By Norma Cohen in London

Published: March 18 2004 20:00 | Last Updated: March 18 2004 20:00  

UK shareholders in Shell Trading have told the company's non-executive directors that they would like to see new executive appointments from outside the company.

"We wrote to the chairman to ask for new blood," one shareholder recounted.

Similarly, other shareholders who were visited by the UK entity's senior non-executive directors, Sir Peter Burt and Lord Oxburgh, conveyed their view that the departure of the group's former chairman, Sir Philip Watts, leaves room to bring in executives capable of taking a fresh look.

Even more important than punishing existing executives for past failures, they said, was the need to restructure the board to make it more responsive to investor needs. "We told Shell that the problem appears to be symptomatic of poor internal controls not working as well as poor governance and structural problems," said one shareholder, recounting a conversation with Sir Philip just days before his departure.

Meanwhile, investors said on Thursday that Shell appeared to promote Judy Boynton, its finance director, who had been criticised by shareholders after the restatement of reserves. Finance directors of the different businesses will now be reporting to her.

Shell on Thursday unveiled what it described as a "recategorisation" of its proved reserves and announced a further write-off against earnings totalling $30m.

Investors in the UK entity, which controls 40 per cent of the total group and has little power to force its board to take specific actions, were sanguine on Thursday about the latest statement on reserves.

"The issue at the moment is very short-term stuff," said one shareholder. "By definition, the whole process (of categorising reserves) is an inexact science," said one retail fund manager.

Another noted that it was no greater than a similar recategorisation by BP, and that in any event, is unlikely to be meaningful in the overall profitability of the group, nor would it affect Shell's ability to pay a dividend.

However, shareholders said that what lay at the heart of the group's difficulties was the awkward nature of its reporting structure and the fact that decision-making was conducted by a committee far too large for the purpose.

"The board structure is sub-optimal at the moment," said one shareholder. "My real concern is that Shell has been underperforming its peer group for 10 years."

Eric Knight, of Knight Vinke Asset Management, which is a significant shareholder in both the UK and Netherlands-listed companies, said that because of ownership and voting structure, UK shareholders were badly placed to force change at the company.

So-called priority shares are held by management, as at many Dutch companies, making it difficult for investors to use their votes to force needed changes.

"Our influence is limited," said one shareholder, adding "people have always considered this to be a second rate company."

Because the shares have long traded at a discount to the peer group, investors have been prepared to buy the shares despite the perceived governance issues.

Moreover, both companies, he says, are run by committees consisting of separate senior executives.

"It is perhaps not well appreciated that the members of this committee, in particular the chief executives of the main operating divisions, do not report and are not formally responsible to the main CMD [executive] committee."