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Simple solutions are best for Shell

The Times: Simple solutions are best for Shell

“One of the world’s most trusted investments lost its credibility and its top credit rating.”: “directors and top managers were the authors of Shell’s misfortunes”

By Patience Wheatcroft

July 30, 2004

SHELL shareholders have suffered enough. They have seen oil prices booming, yet their own fortunes have been shrinking. One of the world’s most trusted investments lost its credibility and its top credit rating. Investors have suffered a series of sudden downgrades of reserves of unproven value, resignations of top executives, class-action lawsuits and investigations by regulators in London, New York, Washington, The Hague and Amsterdam.

They have watched shares of their arch rival BP rise 10 per cent so far this year. BP has comfortably beaten the market and is poised to reach new highs on the strength of analysts’ plaudits and buoyant oil prices. Over the same climatically benign period, Shell shares had fallen 7 per cent, until yesterday that is.

At last, someone has taken pity. The US Securities and Exchange Commission and London’s Financial Services Authority have levied fines totalling £83 million. These are by any standards heavy penalties, essentially for misleading the market. But they could have been more punitive and they could have dragged on for many more months.

They seem to have accepted that directors and top managers were the authors of Shell’s misfortunes and that shareholders were overwhelmingly the chief victims. To impose crippling fines on the company would merely inflict more woes on the victims. If the authorities want to take things further, they should talk to Sir Philip Watts, Shell’s former chairman, and his executive colleagues.

The US Justice Department, Dutch regulators and Euronext should take the same view, rather than playing out some Western version of the Kremlin’s onslaught against Yukos. So should the US investors who rushed instinctively to their “no-win, no-fee” lawyers. The prospect of passing on from the reserves mistake was enough to push Shell shares up 2 per cent in a day. For this first piece of good news to become a good story, however, the company needs to learn the lessons of its mistakes.

The first priority is to beef up the search for oil. Regardless of short-term peaks, such as the 24-hour panic when Russian bailiffs mistakenly ordered Yukos to freeze its sales, historically high oil prices look here to stay unless the West or the East sinks into a new recession. Buying in at these prices is expensive. Shell needs to try harder and get smarter, even if that eats up short-term cashflow.

Unless Shell fundamentally rethinks its corporate structure, however, similar mistakes to Sir Phil’s are only too likely to recur, because they are the errors of arrogance and lack of accountability. Shell is the minority UK holding company in a unified Royal Dutch/Shell group. Royal Dutch, based in The Hague, owns 60 per cent, because Henry Deterding timed the deal better than Marcus Samuel.

The two boards have different executive and non-executive directors. Royal Dutch/Shell, which sits between them, is a management company run by managers. Because of this split, they are not fully accountable to either board. It would have suited Shell, if not many others, for sterling to have joined the euro. Shell and Royal Dutch could then simply have merged into a single company.

Simpler changes are now needed. The board of Royal Dutch should include all the directors of both Shell and Royal Dutch. As far as is practical they should, in any case, be the same people. Much worthy but arcane verbiage is written about the niceties of corporate governance. At Shell, they are basic and matter.

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