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Victims punished at Shell

Financial Times: Victims punished at Shell

“The FSA justifies the fine by saying it has to send a signal to the market about unacceptable behaviour.”

By John Plender

Published: August 2 2004 04:00 | Last updated: August 2 2004 04:00

What are the securities regulators hoping to achieve with their fines on Royal Dutch/Shell? The people who have chiefly been harmed by the inaccurate data on reserves in the annual report are those investors and shareholders who took investment decisions in a false market. Managers stood to gain from the inflation of the numbers since their pay was partly related to the level of proved reserves. This was, then, a classic example of the principal-agent problem identified in the 18th century by Adam Smith, who noted that agents can never be relied on to look after someone else’s interests as well as their own.

What the Securities and Exchange Commission and the Financial Services Authority have done with their $151m (£83m) fines is to punish the wronged principal rather than the agent. All right, the US Department of Justice and sundry others have a lynch party in hot pursuit of various executives, but that does not make the watchdogs’ punishment look any less odd – especially given that the fine is a mere bagatelle for shareholders in a company of this size.

There is marginally more logic in Eliot Spitzer’s assault on the Wall Street investment banks because the top executives own such a significant percentage of the equity and can thus feel real pain. The snag there is that the biggest miscreants have not been fired and can compensate themselves by grabbing yet more stock options at outside shareholders’ expense.

The FSA justifies the fine by saying it has to send a signal to the market about unacceptable behaviour. Others, such as the Office of Fair Trading, fine companies on a similar basis. And the shareholders were responsible for appointing the board in the first place, it adds. Well, maybe. But it is perverse to send signals to the market at the expense of the people you are trying to protect. And just because other people are doing the same thing, it does not follow that two wrong targets make a right. I still feel that regulatory zeal is being oddly directed here.

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