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Royal Dutch Shell – Easier to unify than to unite

Financial Times: Easier to unify than to unite

“The prolonged deception about the state of its oil reserves owed as much to corporate governance failures as to the wrongdoing of individuals.”: “the most important reform must be of its behaviour.”

Published: August 13 2004

Royal Dutch/Shell is doing the right thing in conducting a root-and-branch review of its structure. The prolonged deception about the state of its oil reserves owed as much to corporate governance failures as to the wrongdoing of individuals. But this does not mean that the most radical option for structural change is the best one. Nor does it mean that whatever new form it chooses will solve all its problems.

The easy thing to agree, apparently, is that the group should unify its Dutch and British boards. Having a single non-executive chairman and a single chief executive should improve leadership and accountability. By removing the need for a joint forum called the Conference and allowing the number of non-executives to be pruned it should speed decision-making and concentrate responsibility.

But a unified board is not a unitary board. Unless the group hacks at its Dutch roots, it will have to keep the dual structure that separates non-executives on the supervisory board from executives on the committee of managing directors. This is less of a culture clash than it appears because under revised UK corporate governance rules the board’s key supervisory committees – audit, nomination and remuneration – are non-executive.

Yet the problem with such a separation between executives and non-executives is that it restricts the flow of information. Indeed, this was one of the factors behind Shell’s disclosure problem. So unifying the board geographically will not be enough. Formal and informal communication between the layers of management will need to be strengthened.

So what of the other big idea: completing the merger begun nearly 100 years ago. This would be logical, but several practical difficulties remain. As Royal Dutch owns 60 per cent of the group and Shell Transport & Trading 40 per cent, negotiations over control and value could be tortuous. Does the UK side buy another 10 per cent to take itself to parity? Or should Royal Dutch buy out the British minority? The taxman would want his cut from any transaction, and lawyers and bankers would have a field day. The longer all this dragged on, the more of a distraction to management, which has enough to worry about because the company cannot find as much oil as it sells.

The issue is how to ensure that Royal Dutch/Shell acts as one company. Even a full merger may not solve this: old rivalries often persist after deals, undermining combined purpose and thwarting attempts at meritocracy. Shell is part-way down this route. Its committee of managing directors is drawn from global businesses. It can use this to make further progress.

Whatever new form emerges, the most important reform must be of its behaviour. This goes back to issues raised in its soul-searching: compliance with regulation, financial controls, discipline and professionalism. Unified and strengthened leadership is essential to this. A full merger is not.

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