The Independent: We can all learn from Shell's debacle
Hamish McRae
21 April 2004
What is so shocking is that everyone, including myself, thought Shell was an orderly and well-managed company
We can't be sure of Shell, but then we can't be sure of most large bureaucracies. The fact that Shell should lie about its oil reserves is particularly shocking because everyone, including myself, thought it was an orderly, well-managed organisation. Every company and public body is bound to employ some people that are light on the scruple front. But well-run organisations have structures that contain dishonesty.
Some of these are internal: committees review company accounts, compliance officers see that regulations are followed. In government, civil servants are careful to make sure ministers do what is legally right, or at least defensible. Here in this newspaper, these words will have been read by at least three other people with an eye to making sure they are honest, legal and decent.
But there also have to be other external checks. That is why accountants audit company accounts and why there is a National Audit Office to examine the way the Government spends taxpayers' money. The European Union has its accounts examined both internally and externally - though it then largely ignores the corruption that is revealed.
Any company run by a crook is likely to have rather weak controls - the "more than my job's worth, guv" approach was very evident under the late Robert Maxwell. The European Bank for Reconstruction and Development is under the gun at the moment for lax controls on the way its loans are spent. And I am afraid that the European Commission's record is pretty dreadful too, for it shoots the whistle-blowers rather than the people who have their hands in the till.
But Shell seemed to be a well-run company. It has good financial controls and depth of management. It is making money. Its fundamental business is sound. So two questions: what has gone wrong? And what are the lessons for the rest of us?
Trying to pick through the skimpy evidence so far, what seems to have happened is that a series of "iffy" judgements about reserves became set in stone and when it became clear that the judgements were over-optimistic, the company froze. Gauging oil reserves has always been something of a black art - what is hoped for, what is proven and what is eventually extracted are all very different. Most of the time the companies are accused of playing down their reserves: remember how the amount of oil that could be extracted from the North Sea has been consistently underestimated. But of all the major oil companies, Shell has always been "crude light".
It has a great distribution system but hasn't had quite enough crude reserves to put through it. That is something to do with a culture that is, or was, overly bureaucratic and risk-averse. In contrast to BP it failed over a long period to create that mix of intuition, courage and caution needed to place its bets. Which fields it should bid for, explore and develop? And when do you cut your losses?
Its classic error was pulling out of Alaska a few weeks before BP struck oil on the North Slope. That was a generation ago but the scars remain. It drilled in the Gulf of Mexico when others doubted there was oil because it was determined never to do an Alaska again. There is oil there, sure, but maybe not as much as Shell hoped.
So the pressure was on the oil exploration division to deliver. When anybody or any group are put under pressure to meet targets they try and do so. Sometimes that involved wishful thinking, which can be just about acceptable, and sadly sometimes it means fiddling the figures, which is not.
The punishment can be severe. Enron, under pressure to deliver a steady stream of profits, fiddled its figures, sucking in its auditors into the game. That led to the demise not only of the client but also of Arthur Andersen, one of the big five accountants. In the public sector the sanctions are less draconian. Our own government has massaged the immigration figures but while that led to the resignation of a junior minister, the top people seem to have escaped censure.
In the case of Shell, what I suspect started as wishful thinking gradually became a clear case of lying. Though there have been individual resignations the punishment is far from over.
That leads to the second question: what is to be done?
It is a touch unfashionable to say so, but transgression in the private sector leads almost invariably to society taking action to stop it happening again. The various commercial scandals in the US led not only to the collapse of companies but also changes in the law and criminal convictions against transgressors. The damage to the reputations of those who were peripherally involved, such as non-executive directors who failed to ask the right questions, is huge.
We will have to see how the Shell affair pans out but I would be very surprised if there were not legal changes in the valuing of assets, such as oil reserves, and it may well be that there are charges against individuals too. Put it this way: the punishment will be sufficiently severe that no natural European resources company will make these mistakes again.
Paradoxically there may be more lessons for the public sector. By world standards, the UK is fortunate in having both a civil service and a series of governments that are pretty free from corruption. We rank near the top of the virtue league compiled by Transparency International. But it is hard not to feel a sense of disquiet, a sense that the independence of the civil service is being chipped away and the preoccupation of the Government with presentation has blurred the fine line between wishful thinking and outright untruth.
There is nothing wrong with trying to present a case as effectively as possible. Indeed skill at presentation is a key skill of politicians. That is why so many of them started out as barristers. But sometimes spin slithers to something worse. Just as Shell tried to put a more favourable face on its reverses than was justified by the facts, so too our government has tried to put a more favourable face on a string of issues than was justified by the facts. Apply that to the intelligence about Iraq's weapons as well as to immigration numbers.
We the public should perhaps be less censorious when governments have to admit to bad numbers, just as financial markets should be more adult when a company admits to a bad quarter's earnings. Things go wrong in both the private and public sectors and to expect managers and ministers to be infallible is absurd. But how much better it is, if you discover you have made a mistake, to own up fast. Get the error into the public domain, explain what you are doing to correct things, and then move on.
And that, five years' on, will surely be the most important lesson of the Shell debacle. If they had got the bad news out two or three years ago, it would now be a memory. It would be an embarrassing memory, like that North Slope decision, but a memory. As it is the company is gravely damaged.
Now apply that to the British Government or the European Commission. If there has been a mistake, be it cock-up or corruption, come clean, put in a system to stop it happening again and you will be trusted. And if you try and cover up, well, you pay a much higher price in the long run when you are eventually found out.