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The Scotsman: Restoration masterclass

MARTIN FLANAGAN
 
SHELL pink is a nice colour. And it is astonishing that oil major Royal Dutch Shell is in the pink again just three years after a scandal ripped out the boardroom, sent the share price plunging, woke up the regulators, provoked unprecedented internal navel-gazing, and led to nearly a century of corporate history being consigned to the bin.

The oil reserves overstatement scandal of 2004, when the company admitted it had overstated this touchstone of an oil group’s health by 20 per cent and then tried to cover it up, devastated the British-Dutch group’s reputation for probity.

The other part of the pincer movement on Shell’s battered share price at that time was the five resulting profits warning that followed in 2004.

Simon Culhane, boss of the City’s ethics body, the Securities Institute, told me at the time that the whole episode had damaged the image of business generally because Shell was such a big company. If Shell could stray ethically, why not others?

But Shell’s turnaround to corporate favour again has been very impressive.

Yesterday’s announcement of a $352.6 million (£178.3m) payment in compensation to non-US investors deemed to have lost out because of the scandal draws the final line under the affair.

It takes Shell’s overall financial payments in compensation and regulatory fines to $700m.

But it should be borne in mind that these settlements, while seemingly big, are almost immaterial for a company of Shell’s size.

Remember this is a business that smashed the yearly profits record for a UK company two months ago – admittedly helped by surging oil prices – as it drove profits up 12 per cent to $25.3 billion (nearly £13bn) in 2006.

And the shares? A robust recovery.

They fell 10 per cent to trade below £13 apiece at the time the reserves overbooking timebomb exploded.

The stock closed last night, by comparison, at 1,693p, up 8p on the settlement resolution, and have traded as high as nearly £20 in the past year.

Perhaps the best thing of all to come out of the reserves scandal was that it forced the labyrinthine dual-listed Shell to simplify itself for the investment community.

In the wake of the affair it ditched not only leading executives held culpable, but also its complex dual corporate structure.

It became a single listed company with one board, one chairman and one chief executive.

Headquarters and tax domicile in Holland, primary capital listing in London. All a great aid to clarity and sanity.

As the chairman who became chief executive under the new framework, Jeroen Van der Veer, said at the time: “We want to have a company where bad news travels up fast.”

Shell was helped by two factors in its turnaround: it was a very profitable business despite the reserves overstatement, which was more a worry about future profits some years down the pike.

And its problems came at a time when the oil price was high and going higher, so the backdrop for recovery was benign.

But a company is not just about figures. It is about things such as structure, investor responsiveness, personalities, trust and resilience.

Shell could be a textbook exercise for future generations of business students about what to do when public relations disaster strikes.

It listened hard to what investors had to say about an obsolescent dual listing and managerial structure that allowed such major problems to remain hidden from the rest of the board. There were no sacred cows.

And the implementation of the changes was swift to restore confidence: about ten months.

Shell did not really need yesterday’s final settlement as any form of catharsis. It had already achieved that.

But this is a welcome mopping up of the details, and important to the investors concerned.

http://business.scotsman.com/markets.cfm?id=559282007

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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