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Power struggle that cut an oil giant down to size

The Sunday Times: Power struggle that cut an oil giant down to size

‘A revealing new book lifts the lid on the boardroom manoeuvring that finally brought change to Royal Dutch/Shell: WALTER VAN DE VIJVER was worried, and was about to express his fears in an e-mail to his boss. “I am becoming sick and tired about lying about the extent of our reserves issues,” he told Sir Philip Watts.’

Sunday 2 October 2005

WALTER VAN DE VIJVER was worried, and was about to express his fears in an e-mail to his boss.

“I am becoming sick and tired about lying about the extent of our reserves issues,” he told Sir Philip Watts.

The top two executives at Shell, the Anglo-Dutch oil giant, had been locked in a bitter struggle since Watts became chairman of the committee of managing directors and Van de Vijver had succeeded him as managing director for exploration and production.

Commentators regularly voted Shell one of the world’s most admired companies. But it wasn’t a company — it was a joint venture between Royal Dutch Petroleum, which had a 60% controlling interest, and Britain’s Shell Transport and Trading, which had the rest.

It was run by the committee of managing directors. Non-executives met the other directors in a 21-strong body called the conference, which Watts also chaired.

They were unaware of the clash between Van de Vijver and Watts. The row centred on the over-aggressive booking of oil reserves. When executives realised they had exceeded what was allowed by US Securities and Exchange Commission (SEC) rules, the plan was to “manage” the position over time. It became clear this would not work.

At the end of December Shell called an emergency meeting of the group audit committee to discuss reserves. The issue was so sensitive that no agenda papers were sent out.

A month later Shell shocked the market by announcing its reserves would be cut by 3.9 billion barrels, or 20% of the total. The shares fell 7.5% on the day.

The company’s big shareholders decided to take action. The Association of British Insurers (ABI) formed a special committee to address the questions, and the National Association of Pension Funds (NAPF) formed a case committee.

On February 2 about a dozen investors met a Shell delegation led by Lord Oxburgh, the senior non-exec. The issues raised included reserves replacement, communications, the structure of the company, credibility of the senior management team, and the SEC standards.

It was made clear that Royal Dutch had a veto on structure, and if shareholders wanted change, investors would have to be diplomatic.

On March 24 the NAPF case committee met Shell directors and received a frank picture of Shell’s governance issues. Not only did Royal Dutch hold a majority stake in the venture, but it had priority shares whose holders had sole right to nominate people for vacancies on supervisory and management boards, and the right to block any changes to the articles of Royal Dutch. The shares were controlled by members of the Royal Dutch management and supervisory boards. It was legally impossible for shareholders to force a change.

If it looked as if the British company was ganging up with shareholders to cause structural change, it would be counter-productive. Investors were impressed with the openness of the non-executive directors, but concerned that the company was controlled by bureaucracy and not by the boards.

By early April the Shell non-execs had got the message. With the Dutch it was less clear. At least one leading Dutch investor expressed the view that the reserves story was not about governance, and sent a message that no change was needed.

The governance issue would not go away. On April 28 the conference set up a steering group led by Sir John (now Lord) Kerr, to review the possible simplification of management structures and improve decision-making, accountability and leadership. Shell announced the existence of the group but at first would not disclose members or terms of reference. This led to a barrage of criticism. Kerr’s contribution was crucial. Eventually he and his colleagues met investors representing more than 50% of the equity of the group. He was the only person on the board who had listened to so many shareholders — something that considerably enhanced his credibility.

A crucial decision was to leave the most difficult issues until last. The steering group started by developing detailed documents to define the roles of the top jobs in the organisation, deferring the difficult questions about structure. In all, the group met 21 times. As well as the ABI and NAPF groups they consulted big Dutch investors, the leading American funds Capital and Fidelity and others.

Stormy annual meetings made it clear that radical change was needed. The chairman of Royal Dutch said: “We do not believe there is a correlation between the reserves recategorisation and the governance of . . . the group.” But the resolution to discharge the directors for 2003 was nearly defeated.

The conclusion began to emerge that there should be a proper chief executive, accountable to a unified board with a majority of outside directors and a non-executive chairman. The documents defining the roles of the key parties were discussed in detail and accepted at a long meeting of the conference on September 7, 2004.

On structure, the review boiled down to two options: a dual company structure or unification as a single entity. The expectation was that the conference would go for the first option.

It was thought the executive directors should not take part, because they were interested parties. But, backed by the chairman, they insisted on being in the room, and astonished many of those present by all coming down in favour of unification.

The details were approved unanimously at a final meeting on October 27. They involved creation of a new company, Royal Dutch Shell plc, listed in London but headquartered in the Netherlands. As Kerr put it: “We surprised ourselves by going much further than we thought we would.”

Simon Fraser of Fidelity said: “They did seem to listen. They got on the front foot and they over-delivered; announcing the changes a bit sooner than they had promised and changing more than the investors had expected.”

© Nicholas Beale 2005

Adapted from Constructive Engagement — Directors and Investors in Action, by Nicholas Beale, published by Gower tomorrow, £65. Copies can be ordered for £58.50, delivery free, from Sunday Times Books First on 0870 165 8585. More information at www.conseng.net.

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