Brainfood: Behind the spin - Shell

THE DILEMMA

by
Last Updated: 31 Aug 2010

The Anglo-Dutch energy goliath has had a calamitous few months. For a company that includes 'honesty' and 'integrity' among its core values, its admission that it over-stated its oil and natural gas reserves (a crucial yardstick for investors) has been highly embarrassing. On 9 January, Royal Dutch/Shell was forced to cut its proved reserves by 20% after admitting they had been wrongly booked with the SEC. Those implicated in the crisis - Sir Philip Watts, chairman; Walter van de Vijver, head of exploration and production; and Judy Boynton, chief financial officer - were asked to resign. Things got worse. In April, an internal report revealed that its top executive committee had been aware of the over-optimistic claims since February 2002 and ignored warnings that making an unsustainable claim breached SEC rules.

THE SPIN

Shell blamed the crisis on human failings rather than on poor internal structures. Lord Oxborough, non-executive head of the UK divison, said the fact that a 20% shortfall was hidden for up to two years did not have 'significance for the culture of the company as a whole'. So, there are only a few bad apples in Shell's barrel - at the top. John Hofmeister, Shell's HR director, told the FT that systems were in place for any director to raise concerns over the oil group's reserves, 'through audit, human resources or the non-executive process'.

THE STRAIGHT TALK

Van de Vijver saw things differently. Shell's April report referred to an e-mail he had sent to Watts in November 2003, in which he said he was 'sick and tired of lying about the extent of our reserves issue'. He claimed that he could not bypass Watts to make his concerns over the reserves more widely known 'because the unspoken rule within the company is that you are not supposed to go directly to individual board members or the group audit committee'. The report raised the issue of problems with internal controls, saying the reserves audit function was 'understaffed and undertrained'.

THE VERDICT

Shell is considering improving its governance and transparency by strengthening its unusual dual Dutch and British non-executive board structure. But critics argue that this cumbersome double arrangement helped to create the crisis and that unifying the boards would be a better solution. Shell achieved a brief respite when it published strong Q1 results, but its biggest challenge is to increase energy reserves. Time to strike gold?

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