Boards beware: the road to Shell was paved with ‘good’ intentions

Daily Telegraph: Boards beware: the road to Shell was paved with ‘good’ intentions

“This being Shell, everything was systematic, and was approved at the highest level, and had been going on for years.”: “On top of all this comes the loss to Shell’s reputation – its ultimate hidden reserve.”: “It will have to be rebuilt and earned, and that takes time, if it can be done at all.”

By Chrsitopher Fildes (Filed: 31/08/2004)

Goodwill is hard to measure. Auditors prefer to write if off. Cynics define it as the difference between what you pay for something and what it proves to be worth. It can amount to a hidden reserve, until it turns out to have been overstated. Textbook example: Shell.

Everybody knew Shell, or thought they did. It was too big to miss, after all – durable, self-perpetuating and professional.

Its worst critics called it boring. That changed on the day when Shell owned up to overstating its reserves of oil, and the chairman was told to clear his desk.

The critics had to admit that there were worse things in life and in business than boredom.

No rogue trader, so they learned, had been at work. No absent-minded clerk had got his sums wrong and miscounted the reserves. This being Shell, everything was systematic, and was approved at the highest level, and had been going on for years.

Shell, says an observant accountant, had begun to push the envelope, and went on pushing it until it burst.

The punishments have followed. The Financial Services Authority thinks that a fine of – ooh, let’s call it £17m – would be right. The lawyers expect to make far more than that from a wave of class actions.

The Nigerians, those pillars of commercial morality, think that Shell ought to pay them an extra £1.5 billion. On top of all this comes the loss to Shell’s reputation – its ultimate hidden reserve.

Companies like Shell are attentive to their reputation as good neighbours. Corporate social responsibility is their name for this, and they publish fat reports to show what they do for diversity and rainforests. Protocols and conventions, airily adopted at some international jamboree, can acquire the force of scripture for this purpose.

As chairman of Shell, Sir Philip Watts attached much importance to these responsibilities, arguing that they gave companies like his their charter to exist. Perhaps they distracted him.

He want so far as to publish a book about them, called Walking the Talk. He can now write a sequel, called Walking the Plank.

Every great boom brings a test of good character. Warren Buffett as chairman of Salomon Brothers warned his team not to do things that they would not like to see reported in their local papers. That was good advice, but it did not stick. Twenty years ago, when the City was booming, a merchant banker justified his tactics: “People say we break the rules. I say we innovate.” He was deluding himself, and his bank paid a price for it.

The great stock market boom that peaked at the turn of the century generated any number of delusions, most of all on Wall Street, and the big investment banks all had to take their share of the blame. Some of their star performers found that there was no more demand for their services, and the banks themselves settled for penalties.

Congress whirred into action, passing new laws designed to pin directors down to their responsibilities. New York’s attorney-general, Eliot Spitzer, set out to make a name for himself – his latest target is Glaxo SmithKline. Only William Donaldson, the Wall Street veteran recalled as regulator-in-chief, thought that something more was needed. He would have liked, he said, to see signs of contrition.

That touched the spot. It implied that the errant banks and those who ran them might genuinely wish to mend their ways, or ought to, sensing that their reputation was at stake. Without it, a fine would be no more than a business expense, and the banks could go back to pushing their envelopes, until one or more of them burst.

After the great boom of the 1920s had ended in the Great Crash, Congress had whirred into action, investigating and legislating. Jack Morgan, head of the family bank, was called up to account for its actions. He put his case simply. JP Morgan, he said, had always tried to do first-class business, and that in a first-class way.

The merit of a test like this is that the office-boy can understand it and the customers can recognise it. Those who want third-class business done in third-class ways can always shop somewhere else.

It is a reminder, though, as it might have been to Shell’s directors, that the price of reputation is eternal vigilance.

Eternal compliance is not the same thing. Directors must sometimes feel that they been sentenced to it. They must form themselves into committees, and work their way through the requirements of the boardroom codes, and report in numbing detail. They may be tempted to think that if all the boxes can be ticked, their work is done.

In one way, the codes have made it harder for vigilance to be effective. To spot something amiss, directors may need to be knowledgeable; to do something about it, they may need to be independent. The Higgs code implies that these qualities are mutually exclusive. Once a non-executive director has been with a company for long enough to know his way around it, he is deemed to have lost his independence, and is expected to move on.

Next year they will have even more work wished upon them. They will have to publish an Operating and Financial Review, which will show, or is meant to show, what their company plans to do and how it plans to do it. Would Shell have said that it planned to look on the bright side and hope that more oil would turn up?

The moral is that chairmen and directors need to mind their own businesses. If they fail in that, no reviews or reports can salvage a reputation.

It cannot be replenished, like a supply of oil, or ordered and bought in from some supplier of images. It will have to be rebuilt and earned, and that takes time, if it can be done at all.

There is more to good conduct and character in business than being friendly to trees. In life, too, for that matter.

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