Financial Times: How Shell changed its culture and lost its way: It is a tale of incompetence. Or, as a "shocked, dismayed and ashamed" Mr van der Veer put it: "We have more problems than just the reserves issue.": "While Mr van der Veer was preparing his admissions in Houston last month..."
 

By Ian Bickerton

Published: June 17 2004

Posted 18 June 2004  

It is rare to find Royal Dutch/Shell in openly confessional mood. Yet as Jeroen van der Veer, its managing chairman, stood with the applause of the oil group's 400 senior executives ringing in his ears at a conference in Houston, Texas, last month, he will have known that the response was an expression of relief that the century-old Dutch-British company had finally come clean.

"Did the mid-90s transformation bring the desirable behaviours?" asked Mr van der Veer. "Or did it erode professionalism, corporate cohesion, 'enterprise first' thinking and loyalty?"

Sorting through the management-speak, Mr van der Veer was conceding what others have long argued, directly tracing the group's scars of today - four downgrades of its oil reserves, regulatory investigations, shareholder angst and management upheaval - back to the self-inflicted wounds of the past.

On Thursday the group bowed to pressure from investors by proposing that its Dutch board would give up its priority shares, which carry extra voting rights. Shell also met another shareholder demand by naming the executives in the steering group conducting a corporate governance review prompted by the reserves scandal.

But Royal Dutch/Shell's current crisis was triggered not by January's dramatic forced restatement of oil and gas reserves, senior insiders say, but by events a decade earlier. "The reserves issue gets high profile but it is only one of the symptoms," said one. "You can tell a similar story from every discipline. It is a tale of incompetence."

Or, as a "shocked, dismayed and ashamed" Mr van der Veer put it: "We have more problems than just the reserves issue."

The saga of how a company once admired for its ability to forecast the future with uncanny accuracy had unaccountably lost its way began with an earlier public admission.

In 1995 Cor Herkströter, then chairman of the company's committee of managing directors (CMD), had arrived at the conclusion that Shell had become too set in its ways, immobile and overstaffed.

If he needed a push to accelerate change the Brent Spar crisis - when plans to sink a disused oil platform at sea had to be abandoned because of opposition from environmental campaigners - provided it. Conceding publicly that the company had been arrogant and secretive, Mr Herkströter set about cleaning it up.

Out went jobs-for-life - the wisdom of which would be indirectly questioned by Mr van der Veer nearly a decade later. "Has excessive job movement created too many gifted amateurs in a world that needs more professionalism, commitment and discipline?" he asked his Houston audience.

In came outsourcing of various functions. That, too, had its critics, although most have the benefit of hindsight. "We destroyed the best skills and resource management in the world," said one Dutch executive recalling the events. "If you remove your technical knowledge, you erase your corporate memory."

Critically, the most fundamental change was the dismantling of a complex matrix system of checks and balances that had been in existence since 1959. McKinsey, the consultancy that had devised the system, was rehired to unwind it, replacing a system built on geographic regional control with one founded in operating divisions.

"The country barons became too strong and had their own lines into the board," one senior former Shell figure says of the rationale behind the decision.

But what the consultants and planners had not considered, the same executive added, was that "most executives weren't businessmen, they hadn't run a business in their life. Profit meant nothing to them. They just thought things would go on as before."

Another senior figure within Royal Dutch/Shell recalled: "Controls were gradually broken down, because they were seen as a hindrance and people were encouraged to aspire. The talk was of emulating Baan [then a fast-rising software company], or Enron [the energy trader then growing spectacularly]. People walked around with yellow T-shirts saying 'Grow 15 per cent a year'.

"Where we had tracked projects to see if they were ahead of schedule, by now it was almost impossible to find out how much money we had committed. We used to have the best financial and business controls in the world. But the organisation was on its arse."

With the oil price high the danger signs were missed. An internal campaign launched at the time tried to put the company's vision in the same mould as John F. Kennedy and Nelson Mandela.

In 1998 Mark Moody-Stuart became chairman of the CMD and began turning business committees into executive committees with increased responsibilities, speeding the decision-making process with fewer restrictions, an executive recalled.

"That this decreased internal control and opened the way for top management manipulation of data was not perceived as dangerous at the time," said the executive.

However, later in 1998 oil prices fell and the brakes were applied and the company once more turned a closer eye to it costs. "Finance people were brought out of retirement," said one of the former executives. "They were working to bring back some of the controls."

There was, however, another flaw in Royal Dutch/Shell's internal reorganisation. A prominent Dutch business figure, instrumental in the mid-1990s reorganisation, said: "When the matrix was taken away, we had five businesses which were big enough in their own right to be run almost as separate multinationals.

"The intention was that the chief executive of any one of those business groups would not be the same person as the management committee member responsible for that unit.

"CMD was seen - and this is really inside knowledge, so I'm not sure I should be saying it - as the overall board and the chief executives of individual businesses would not [be on CMD]. Somehow it did not work that way, because when [Sir Philip] Watts became a member of CMD he remained the chairman of the executive committee of exploration and production.

"That made him a very strong member, being chairman of the biggest and most profitable business in the group. That is dangerous because everyone has his own turf and that could explain why people did not meddle too much in other people's businesses."

A devout Christian, Sir Philip, who became chairman of the CMD in July 2001, was "a very driven, command and control-type", several people who worked with him say. He was tough, if not ruthless, but while that attitude guaranteed him enemies it also earned him the backing of many who saw him as the most appropriate leadership choice.

While one of his first moves was to scale back public expectations of growth, increasingly ambitious targets continued to be set internally. "The guys who promised [to meet targets] got promotion, rewards," said one person who was close to Shell's top team at that time.

It is a point Shell appears now to concede. "Ambition is good, but ambition with disregard for peers or subordinates creates the wrong culture," said Mr van der Veer in Houston.

Meanwhile a wave of large oil industry takeovers was allowed to pass Shell by. Exxon acquired Mobil, which had previously been turned down by Shell. BP bought Amoco and Arco, integrating them rapidly. Texaco was bought by Chevron and Total merged with Elf and Fina.

"Shell was stubbornly unconvinced of the profitability of buying rather than finding its own oil, in spite of a steady decline in its own production from 2.3m to 2.2m barrels per day from 1997-2001 and a decline in its crude reserves," said a senior figure with long experience of the company. "Management seemed to have lost touch with reality."

Shell's current problems are a source of anguish to former staff with long service.

While Mr van der Veer was preparing his admissions in Houston last month, half way across the world, at the terrace restaurant of an exclusive golf club high above the sweep of a southern Spanish bay, retired group executives were chewing over the events of recent months. They increasingly concede that the company may fall victim to a takeover - a subject previously of academic interest mainly to investment bankers.

While at least two major European energy companies have calculated whether a takeover of Shell would be possible - before separately reaching the same conclusion that it was too big a mouthful to swallow - such analysis is now more openly discussed.

Royal Dutch/Shell's decision to scrap its preference shares puts those discussions in a new light. Some investment bankers and industry insiders feel Total, the French oil group, would be the most likely candidate to launch a takeover bid. Others argue it would be crazy to do so.

Total is smaller than Shell, but Thierry Desmarest, its gutsy leader, has shown an appetite for risk and could have ambition for a pan-European company. He would also face fewer regulatory hurdles than other companies because of Total's size and smaller US presence.

Rumours within the Royal Dutch/Shell network also suggest that the company has put a team to work to assess the potential for a break-up of some sort. A takeover or break-up would aim to unlock value in the group, whose shares trade at double digit discounts to BP and Exxon.

The 1,500 priority shares that are held jointly and individually by members of the oil company's Dutch supervisory board and two Dutch management board executives - Mr van der Veer and Rob Routs, who is chairman of oil and chemicals - carry exceptional power and authority.

Each has 800 times the voting power of an ordinary share. The holders nominate the management board of Royal Dutch and its supervisory board. Only holders of preference shares can grant an amendment for the dissolution of the company.

One of the most senior lawyers in the Netherlands said the priority shares represented "a defence more powerful than any in the Netherlands. Only Shell can institute measures to abolish the shares."

Many believe that overhauling Royal Dutch/Shell is not simply a matter of the existence or otherwise of the preference shares. Whenever talk turns to the power of Royal Dutch, the Netherlands-based arm of the oil giant, one man's name keeps recurring.

For years from the mid-1980s Lodewijk van Wachem towered over Royal Dutch. He retired in 2002 after a 50-year career at the group, the last 10 as chairman of its Dutch supervisory board. Before that he had been chairman of its management committee from the mid-1980s.

Those who have worked with Mr van Wachem say he controlled the management team long before he became its chairman. They believe his influence is undiminished, two years after his departure from the company and even though he holds no preference shares.

Now 72, and supervisory board chairman at Philips, Mr van Wachem shuns the limelight. "He doesn't do interviews; he sees no value in talking to the media," said one person who knows him.

"He is a devout Dutch Calvinist," says a recently retired executive. "He is seen as one of the all-time greats in Shell. He still has enormous influence."

Another sums him up: "Van Wachem's view is that conservatism was what made Shell great."

There are some who believe Mr van Wachem could have provided the wise counsel needed during the acrimonious battle over oil reserves of recent years between Walter van der Vijver, head of exploration and production, and Sir Philip.

Despite Royal Dutch/Shell's claims to the contrary, Mr van der Vijver has stuck to the opinion that, as he wrestled with the reserves crisis, protocol barred an approach by him to any non-executive board member.

Some insiders support that view. But even they believe there was a route open to Mr van der Vijver. "The mistake he made was not to seek advice," said one. "Although protocol says 'Don't go to supervisory board' he should have gone outside it and had a beer with van Wachem."

Perhaps those investors who have been agitating for an overhaul of Royal Dutch/Shell's dual-board governance structure have been banging on the wrong door.

Additional reporting by Carola Hoyos