Sunday Telegraph: Shell coming to the end of going Dutch

(Filed: 20/06/2004)

Shareholders are demanding wholesale reform, including the creation of a single company, writes Sylvia Pfeifer 

Urban myth has it that Royal Dutch/Shell is so dedicated to ensuring it is prepared for all possible scenarios that its planning department once worked out what the oil giant would look like in the aftermath of a nuclear holocaust.

Myth or not, in many ways, the combination of four downgrades of its oil and gas reserves, management upheaval, regulatory investigations and shareholder pressure has struck the oil giant a series of devastating blows that even its planners would struggle to predict.

But if recent events are anything to go by, the company, once famed for its unerring ability to plan for events, is finding it extremely difficult coping with its current crisis.

Last week - faced with the growing prospect of a shareholder rebellion at its annual meeting on June 28 - the embattled Anglo-Dutch group finally bowed to demands to detail the terms of its review of its complex governance and structure.

The company even surprised many by announcing that it would scrap its controversial priority shares, which have come under fire because they carry extra voting rights controlled by Shell's management.

"A number of possible structures, and improvements to decision-making, accountability and enhancement of effective leadership, are under active consideration. Amongst other alternatives, forms of unified boards, to which a CEO would report, are being studied. Nothing is ruled out at this stage," Shell declared.

Shareholders welcomed the news but many were still left wondering why it had taken a hefty dose of very public pressure to prise even straight-forward details from the famously introspective group. For almost two months the company had refused to name the executives conducting the review - a move which our City Editor warned was foolish on May 9.

"They seem to be moving in the right direction," says Robert Talbut, chief investment officer of Isis Asset Management. "But this [steering group] has been in existence for two months already and it will take a further five to publish the results of the review. My view is that seven months is an enormously long time to whittle things down to some suggestions. Ideally, also, we were not looking for a situation where the company would go into purdah for five months. We were hoping the situation would be an involved one."

Investors have been deeply concerned by Shell's handling of the review. Its reticence raised fears that it had gone back into its shell after the reserves debacle led to the departure of its three senior executives - chairman Sir Philip Watts, Walter van der Vijver, the head of exploration and production, and Judy Boynton, the finance director.

"We're in an amazing place," says one former Shell executive. "What can have been secret about the people doing this review. The implied assumption is that the business belongs to the inmates."

This apparent disregard for its institutional shareholders is nothing new. Large enough never to have to go to the public markets to raise money, Shell has been steeped in a civil service mentality ever since its creation in 1907. At the heart of this mentality is its unusual corporate structure. After 97 years the original merger partners - Royal Dutch of the Netherlands and the UK's Shell Transport & Trading - still retain separate identities and listings in Holland and the UK. Even the 60:40 ownership split between Royal Dutch and Shell T&T agreed by Shell's founders, Sir Henri Deterding and Marcus Samuel, remains.

So too does the informal, consensus-driven, management structure the founders put in place. Although people talk about the Royal Dutch/Shell group, it does not exist as a legal entity. Nor does its main decision-making body, the "conference", the name given to meetings between the combined boards of directors of the two companies.

What the reserves debacle has highlighted above all, say investors, is the need for a structure that holds individuals accountable. Previous restructuring attempts, notably after the Brent Spar crisis in 1995 - when plans to sink a disused oil platform at sea were abandoned after fierce opposition - changed much, including internal reporting structures. This time, however, investors want to see wholesale change: a company with one board, one chairman and one chief executive.

"This is an issue of structure," notes another former Shell executive. "Nor is this virgin territory. The board did, in fact, receive a proposal from the committee of managing directors to make changes to the structure when Mark Moody-Stuart was chairman before Watts, which was rejected."

This time round, however, Shell knows it can't turn back. Its announcement last week that it will abolish the 1,500 priority shares in Royal Dutch, the Netherlands-based side of the group, would bring it into line with the new Tabaksblat corporate governance code in Holland. Crucially, it is being welcomed by investors as a potential catalyst for real change - and is even raising the prospect of Shell becoming vulnerable to a takeover.

Under the current arrangements, each director of Royal Dutch and member of its supervisory board holds six shares. The remainder are held by a special foundation. The shares effectively give the management and supervisory boards undue power in important decisions such as senior appointments and structural changes. They also have the power to give consent to amend the articles of association of the company. Shell's annual report confirms that "the priority shares can be considered an anti-takeover measure".

"Shareholders are looking at a way to influence the board, so this helps. It is clear that unless this happens, not much else can happen," says one executive close to the situation.

Ultimately, say investors, the aim is not confrontation for it own sake but for Shell to address a problem of underperformance that has dogged it since the late 1990s when it was left behind as rivals embarked on a series of mega-mergers.

"What the shareholders want is that the company comes forward with a process of change that they can support. They do not want confrontation for its own sake. The ball is therefore in Shell's court," says Peter Montagnon, the head of investment affairs at the Association of British Insurers.

"What I would like them to say is 'We're doing this for the good of the company'," says one investor. "The review should give the company the ability to address its underperformance and win on an international stage."

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