Tuesday, Apr 20, 2004
They just do not get it. For all their public breast-beating yesterday, the leaders of Royal Dutch/Shell are still in denial about some fundamental characteristics of the group that contributed to its oil reserving scandal; and their curiously complacent world view should be worrying for investors.
Yesterday's publication of a damning external report on the company's over-reserving was accompanied by some ritual handwringing: "profound regret and apologies . . . major embarrassment etc etc." The group produced a third head on a platter, that of Judy Boynton, the chief financial officer, to pile on top of those of Sir Philip Watts, chairman, and Walter van de Vijver, head of exploration.
But the whole thrust of remarks by Aad Jacobs and Lord Oxburgh, respectively chairmen of Royal Dutch and Shell, was to paint the scandal as a narrow technical failure within the company's exploration and production arm.
It was not, declared Lord Oxburgh, about Shell but a small part of E&P. "I don't think it has significance for the culture of the company as a whole." The story was attributable, he declared, to "human failings not structural deficiencies".
This is an extraordinary conclusion to reach on the evidence presented in the external report. There was certainly a huge problem of aggressive reserve booking in E&P, and gross deficiencies in the company's control mechanisms, which it is now belatedly organising programmes to address.
But what is so shocking about the report is the way it highlights barefaced lying, duplicity, vicious infighting, complacency and incompetence at the very top of the company in its key executive body, the Committee of Managing Directors.
Lord Oxburgh, who reels off platitudes about the company's "honesty, integrity, respect for people," must be purblind if he concludes this is not more broadly about Shell's culture.
For the report lays out a running battle over several years between Sir Philip, on whose watch at E&P many of the questionable reserves were booked, and his successor, Mr van de Vijver, who repeatedly argued internally that reserves had been overbooked. As early as February 2002 he raised concerns with the CMD. Yet nothing was done to alter public perceptions until January this year.
It is hardly surprising the three heads have rolled. Mr van de Vijver, despite all his private alarm raising, is accused by the report of attempting to destroy a document recommending disclosure of the need to debook reserves. It says Ms Boynton, who had responsibility for public financial disclosures, took virtually no action before this year to inquire independently into aggressive bookings.
But the facts also raise important questions about Shell's unusual and cumbersome form of corporate governance, involving separate Dutch and UK boards, linked through the CMD. It is a system that appears to militate against clear and proper managerial accountability.
The report notes that external checks on reserve abuses were frustrated. Shell's outside directors and its group audit committee "were not presented with information that would have allowed them to identify or address the issue". Mr van de Vijver, in attempting to justify his non-disclosure, blames the culture: "you are not supposed to go directly to individual board members or to the audit committee".
It is hard to avoid the conclusion that his concerns would have had much more chance of being aired and remedial action taken far earlier, if Shell had had an Anglo-Saxon governance structure with a single unified board bringing together executives and independent directors under a non-executive chairman.
But the company does not appear to see it that way. Lord Oxburgh does not think the report has implications for its structure. Following pressure from shareholders, the group is conducting a review of corporate governance and it said yesterday it would be accelerating this in the light of the review.
That may not mean much. The annual meeting in June will only get a progress update and Lord Oxburgh warned yesterday that while structural relations between the two companies was on the agenda, the situation was more complex than those who offered advice appreciated. Doubtless it is, but that is no reason for defeatism.
Royal Dutch is the dominant partner, with 60 per cent of the equity. It is conservative, has a flagship role in the Dutch economy and the board is entrenched through its control of priority shares, which carry extra voting rights. But complexity should not stop the company aiming for the creation of a unified board on the lines of those other Anglo-Dutch combines, Reed Elsevier and Unilever.
Investors should want Royal Dutch/ Shell to come out of this crisis a stronger, better managed group that has cast off its inturned, complacent culture. On the evidence of yesterday's presentation (with the exception of the crisply impressive Malcolm Brinded, managing director of Shell), there is still a long way to go. martin.dickson@ft.com www.ft.com/lombard for European Comment go to www.ft.com/eurocomment
By MARTIN DICKSON
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