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Funds fail to question the wisdom of Shell’s rhubarb cola

The Times: Funds fail to question the wisdom of Shell’s rhubarb cola

By Carl Mortished

June 16, 2004

HAVE you ever wondered what if customers and shareholders were to find out what goes on in your workplace? Total disclosure would be daunting for most companies and is something that management would do its utmost to avoid.

You can imagine the embarrassing questions: how much are you spending on that product? Who predicted that rhubarb cola would sell? Who said there was room for another women’s magazine? Fortunately, shareholders are rarely interested in drilling down to that level of detail, but sometimes they will not let go.

Shell is under intense scrutiny and it is proving unable to persuade some shareholders that they should let up. We know of the misreporting of four billion barrels of oil and gas reserves and the attempted cover-up by senior executives. Sackings of the miscreants and publication of forensic reports have failed to satisfy the shareholder detectives.

They want more, and some intend to kick up a fuss at Shell’s annual meeting on June 28. Their biggest worry is that the ship is out of radio contact with the governors and that, anyway, the governors are at lunch or asleep.

The governors are the directors of Shell’s two holding company boards, Shell Transport & Trading and Royal Dutch Petroleum. The structure is unwieldy, say some investors, and too political. Shell insists a review of the structure is under way but refuses to disclose who is doing the reviewing. Calpers, the influential California public service pension fund, has put Shell on probation for corporate governance failures and points to the excessive and baleful influence of the board of Royal Dutch on the appointment of Shell’s executive directors.

Behind all this lies a fundamental question that Shell finds difficult to answer: who is in charge? More specifically, who was in charge? When asked previously, Shell people would say: the committee of managing directors is collectively in charge. Since the sackings in March of two members of that committee, Sir Philip Watts and Walter van de Vijver, collective responsibility is no longer mentioned.

There is a wider and more troubling question: who governs the governors? In theory, the directors of Shell Transport and Royal Dutch take ultimate responsibility but there has been little sign that the august individuals that people the Shell boardrooms are taking much responsibility for the Shell debacle. They include Wim Kok, former Prime Minister of the Netherlands, Sir Peter Burt and Sir Mark Moody-Stuart, a former chairman of the mysterious CMD and now chairman of Anglo-American.

These dozen or more governors meet in a “conference” of the two boards. What do they discuss? The dividend, obviously, which they rubber-stamp along with the annual accounts. What else is deemed to be their responsibility?

Lord Oxburgh, the interim chairman of Shell Transport who has been given the unenviable task of assuaging the concerns of Shell Transport investors, said he was not privy to Mr Van de Vijver’s concerns that Shell was misreporting its reserves. No surprise, there, but was not the distinguished geologist aware that Shell was having trouble finding new oil and gas reserves, a matter of some gossip in the oil industry? And what about Sir Mark? He was, presumably, aware of the poor exploration record but did he never raise the matter at “conference””?

You might think that an oil company’s record in discovering oil was probably the first and last thing to discuss at a board meeting. But that assumes that directors are serious people and not flunkeys. You have to believe that the whole apparatus of corporate control is there to protect investors rather than to draw a veil over incompetence.

Which brings us back to the thorny problem of who is to warn us about incompetence. When the bosses are covering up like crazy and the non-executives are tucking into a good lunch, who protects investors from the rhubarb cola project?

Unfortunately, we have to rely on fund managers, those who invest our pensions. On June 28 a few of them may ask questions of Shell’s board. Calpers has declared itself but the majority remain silent.

This week some fund managers complained that Shell is not being transparent about its review process. They chose to remain anonymous even as they complained about secrecy. This is par for the course for the fund management industry which is at the root of the problem of corporate governance. Those responsible for investing the nation’s wealth are the least accountable.

Consider how much information we have about Shell: names of directors and senior management, how much they are paid and how their bonuses and stock options are awarded. Considerable (but insufficient) information is provided about investment decisions and performance is recorded in detail (although that information was in one case misreported).

Consider the report from your pension trustees, as I have done. I don’t know the names of the fund managers, how they were chosen or their track record. I don’t know how they were remunerated, what bonuses they received and on what basis. I know how the fund performed and whether or not it beat the FTSE but I don’t know how my managers rank against their rivals. They are in control of my financial future but I have not a clue whether they are the best or mediocre.

They are in control, they govern the governors, they earn millions and are accountable to no one.

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