Evening Standard: The malaise afflicting Shell

By Anthony Hilton,

16 January 2004

HE Financial Times would have us believe that the boards of Shell - the British and Dutch ones - will stand four-square with the oil company's chairman Sir Philip Watts and face down those shareholders who are fuming at the way the announcement of a significant downgrade of its proven oil and gas reserves was handled. 

That may be true but, even these days, institutions* do not lightly demand the head of as big a beast in the corporate jungle as Sir Philip. Whatever the boards decide - if indeed the spat makes it on to their agendas - a significant number of institutions are adamant the matter will not easily be put to rest.

The combination of a controversial announcement and an absentee chairman sent the share price spinning but is now seen merely as a symptom of a bigger malaise. It has brought to the fore a deeper seam of unhappiness with the way Shell conducts and portrays itself and it has put a number of shareholders in the mood to press for substantive change.

Nigel Whittaker of ReputationInc, a consultancy that specialises in advising companies on how to handle-reputational risk, points out this could be another example of a phenomenon that has been widely observed in the US but which is also relevant here. He reminds us how the reputation, image and rating of a company get very much bound up with the reputation and image of its chief executive or chairman.

Research over the years by public relations firm Burson-Marsteller threw up the startling finding that as much as 50% of a company's reputation was dependent on the perception of the person leading it. There is a clear link between charisma and capital value.

It is worth applying this thought to BP and Shell, the world's number two and three oil companies. BP has in Lord Browne a boss to whom the City has warmed, who delivers on a regular basis the most comprehensive performance and financial updates and who is widely credited with having transformed the business. There are few in the country who are held in higher regard.

Sir Philip, on becoming chairman of Shell, has not made anything like the same kind of impression. His brushes with analysts and, to a lesser extent, with the media have been one of the defining points of his regime.

The rest is greyness. The image of Shell as a bureaucratically-driven company is as strong now as when he assumed the top job.

This does not mean the company is inefficient, nor indeed that the perception is fair, but it is the perception and, in a world driven by share prices, perceptions count.

Thus BP trades on an earnings multiple of 19.7 while Shell Transport & Trading - the UK business - trades on a multiple of just 11.8. How much of that discount is attributable to the respective images of Browne and Watts is a moot point, but some of it must be.

Were Shell able to command the same stock market rating as BP, it would imply an increase in its market capitalisation from £34.7bn to £57.9bn - a staggering £23bn rise. Even if a mere 10% of this rating difference is down to the fact that Browne comes across better than Watts, it is a difference worth £2.3bn.

So there is an issue here for Shell to consider. In recent times, prodded by Greenpeace and others, it has embraced a huge raft of environmental and social issues to underwrite its legitimacy in the court of public opinion and to continue to do the business it does.

What it does not seem fully to have grasped is that the need to communicate with non-shareholders on

social issues is mirrored by a need for top management to relate much more openly to the investment community. Reputational risk is a threat at the top as well as at the bottom of a company.

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