By Fiona Maharg Bravo
Royal Dutch/Shell’s problems stem from the multinational group’s lack of accountability to investors. After the recent debacle over a mis-statement of its oil reserves in its accounts, it might have been expected that the group would have started to listen to them. But that’s not the case.
The Dutch/British group’s new chairman, Jeroen van der Veer, has mounted a defence of the existing double-headed board structure. His argument in general is that Royal Dutch/Shell’s problems can be attributed to a few rotten apples, not to its corporate governance or culture. Sure, the group needs to tidy things up a bit around the edges. But there’s no way it needs to rethink its structure.
What’s more, van der Veer has introduced an element of British versus Dutch into the debate. And as there is real concern in the Netherlands that a reorganization might mean loss of industrial sovereignty, the move might ultimately make meaningful reform harder to achieve.
Weak arguments for inaction
Most of the arguments that the group has made in favour of the status quo are pretty weak. One is that the existing regime has worked well for a century; so why fix what isn’t broken? Another is that the reserves debacle was the responsibility of a few guilty people – including Royal/Dutch Shell chairman Sir Philip Watts and the group’s head of exploration and production, Walter van der Vijver – and they have now resigned.
One argument that looks superficially stronger is that the Dutch element, Royal Dutch Petroleum, should get a premium for unifying the boards. That’s because it has a 60% interest in the group’s joint operating companies. Combine everything and the Royal Dutch investors lose control.
That sounds convincing in theory. The snag is that there is no evidence that the existing arrangements allow it to exercise real control over the combined group. Although the boards from both sides convene in what is known as Conference, the Dutch side doesn’t appear to have a larger number of votes than the British. A premium might be justifiable if the Dutch arm had special voting rights that gave it control. Indeed, in some ways this goes to the heart of the problem. It is not clear to whom the top executives are really accountable.
Take the mysterious three-man committee of managing directors that sits in no-man’s land above the boards of UK company Shell Transport & Trading and Royal Dutch Petroleum. It has the important task of developing the group’s strategy, yet it is not clear what it reports or to whom.
It is no wonder that it took the boards years to spot the reserves scandal, or that they actually broke with otherwise hallowed tradition to make the chief
perpetrator, Watts, chairman, rather than have a Dutch executive.
Van der Veer has increasingly dragged nationalities into the debate. He said recently that any dispute over future structure would lead to a “6-4 victory” for the Dutch side.
Such language might actually support the case for reform. What better illustration of the “us and them” mentality that the existing dual structure perpetuates?
There is concern in the Netherlands that a full-scale merger, even one that preserved the dual continental and London listings, would lead to Royal Dutch losing its Dutchness.
That is a real possibility. After all, 70% of Royal Dutch’s nine directors are Dutch. Yet Dutch investors are thought to hold less than 10% of the shares. Moreover, it is likely that power and influence would drift across the North Sea to London.
That said, the biggest risk for Royal Dutch/Shell is that it continues doing nothing. The group will trade at an ever bigger discount to rival companies such as BP. And it will be clear that Shell’s powerful internal culture – once a source of pride – is incapable of evolving.
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