Financial Times: Shell's man who wasn't there
By Carola Hoyos and Alison Maitland
Published: January 14 2004
For Sir Philip Watts, chairman of Royal Dutch/Shell, this week's intense public debate over his future with the company may be the price for taking a long-term view when shareholders want answers to immediate problems.
Some big investors are demanding Sir Philip's resignation, outraged at his absence during last Friday's announcement that Shell was cutting its estimate of its proved oil and gas reserves by 20 per cent.
This communications miscalculation was not the first; Sir Philip, 58, has long been criticised for not answering tough questions from his investors. "I don't think we're in the business of instant shareholder value," he said in an interview with the Financial Times, which was conducted before last Friday's announcement.
Asked about the potential conflict between instant ret-urns and Shell's policy of sustainable development, he went on: "We have to create shareholder value and it has to be in the longer term as well. In our sort of industry, we need a good licence to operate. That is granted by our shareholders - but more particularly in the field by the people in whose areas we work."
It was typical of a man who has spent much of his time campaigning to win the hearts of environmentalists, sometimes more energetically than those of investors.
Shareholders' uneasy relationship with Sir Philip has escalated since he became chairman in July 2001. In 2002 they criticised him for his "brusque" manner, poor ability to communicate strategy and defensiveness when dealing with critical questions.
In his interview Sir Philip said he had worked hard to improve communications with investors. But he was adamant that he would not seek to emulate the more charismatic style of peers such as Sir Mark Moody-Stuart, his predecessor, and Lord Browne at BP.
"We need to get the message across better," he said. "We don't want the messenger to get in the way of the message. If that takes some difference in style, that I have had to do." Asked if he had taken advice on his presentation style, he said: "Yes, I did. If the style you're using is getting in the way of getting the message across effectively, you need to take advice." He added: "It's important that on the personal level you just be yourself. In the end we're in a long-term business. Substance wins over style. The last thing we need is some kind of effort to spin Shell."
As Shell is in its pre-results closed period Sir Philip will not be free for further comment until the fourth-quarter figures are published on February 5.
Some big shareholders were unforgiving about his stated efforts to brush up his image. "If communication is an issue that needs to be improved, to deliver bad news and not to have the chairman or any executives available is truly shocking," said one of Shell's top 10 investors.
Sir Philip accepted that his manner could be direct to the point of bluntness. He wryly attributed this to his upbringing in Leicestershire, where his father worked in a hosiery factory from the age of 14, and to his time at Leeds University, studying physics and geophysics.
He said it was dangerous to be too defensive about criticism. "If [the critics] are right, we should agree and do something about it. If we feel they're wrong, we should get into conversation with them and try to understand where they're coming from [and] redouble our efforts to get our message and the facts across. These things take time."
Some analysts and rival oil executives say Sir Philip's misjudgments on the external reaction to bad news have overshadowed the improvements he has brought to Shell.
"I'm not sure Watts should be ousted for this," said J.J. Traynor, analyst at Deutsche Bank. "The problems in Shell stem from underinvestment." He pointed out that between 1996 and 2000 Shell spent $6bn a year on finding new reserves, when it should have been spending closer to $9bn a year.
From 2000 to 2003, exploration and production capital expenditure rose to $9bn, closer to the level at BP, Shell's nearest rival. The increase has helped Shell identify seven new production centres that will add almost 1m barrels a day to production and 9bn barrels of reserves by 2008.
But Sir Philip has found it difficult to limit the damage from problems he inherited.
One of his first tasks as chairman was the unenviable job of admitting in 2001 that Shell would miss its 5 per cent production growth targets - an admission BP was forced also to make soon afterwards. He also failed to convince investors that he had not overpaid for Enterprise in 2001.
By then, Sir Philip had had plenty of practice with difficult challenges. He was head of Shell in Nigeria when it abandoned operations in Ogoniland in 1993 after widespread protests against the company and its environmental record. In 1995, the year after he left, Ken Saro-Wiwa and other Ogoni activists were executed by the military government, an event he describes as a tragedy.
Then, as Shell's European co-ordinator in The Hague, he was caught in an environmental crisis over the Brent Spar oil platform.
These incidents help explain why Sir Philip has spent much of his time pushing sustainable development, a policy the group made central seven years ago after reviewing its business principles.
"We decided to introduce two phrases: first, 'contribute to sustainable development' and second 'support for fundamental human rights'. I remember going to the board and suggesting those two additions." He was knighted last year for services to business and his work on sustainable development. However, taking this path has led to difficult questions about the potential clash between social and environmental concerns and short-term profitability. Last year, for example, Shell took the decision never to drill on world heritage site land -a bold step, made even bolder since it was having more trouble than many rivals in finding new oil reserves.
Sir Philip said each case had to be treated on its merits: "Let's take biodiversity. If you want to do a seismic survey in the jungle, you can cut a very wide track or it can be a very narrow track. You can make diversions round trees or just cut trees willy-nilly. It comes down to those sorts of very practical things."
In a speech in Texan oil country last year, he acknowledged continuing uncertainties about the risks and the impact of global warming but said: "We can't wait to answer all questions beyond reasonable doubt." It is a view Lee Raymond, chief executive of ExxonMobil, the world's largest oil group, does not share, to the chagrin of environmentalists. But it has not hurt - and may have helped - his relationship with investors, who value Exxon at a 37 per cent premium to Shell.
Sir Philip has fronted efforts to improve the low representation of women in senior jobs, recently joining the UK government and business schools in a campaign to persuade FTSE 100 companies to appoint more women to their boards. But even that has backfired, with Judy Boynton, the company's first woman on the board of directors, named by many investors and analysts as the second least trusted Shell senior executive. She was also absent from Friday's announcement.
Sir Philip, whose values are rooted in Nonconformist Christianity, joined Shell as a graduate in 1969. One of his former senior colleagues described him as a highly ambitious man who drove himself and those around him very hard: "He can be charming and extremely nice. But, like many people, when he's under pressure or annoyed he can be quite abrasive."
Sir Philip denied having had a fierce ambition to reach the top of Shell, which he has served in 14 countries: "It just emerged. I've always felt the best thing is to do the job you're doing at that moment really well."
He agreed that he was a hands-on leader who liked to be involved in details. "In the nature of this job, you fly around in a helicopter most of the time. I think you need to land the helicopter, walk on the ground, touch base with reality, but you should be mainly flying. You need to get up high enough to see it all in perspective but also to look over the horizon." However, commanding all he surveys has been hampered by Shell's decentralised corporate structure - a factor that contributed to the misjudgments in bookings made from 1996 to 2002, when he was head of exploration and production.
A recent Shell advertisement, "Why Green is Good", says: "A company which cares as much about how it makes money, as how much money it makes, will make money." Sir Philip may be correct in the long term, though he may no longer be around then as chairman of the company he loves, to enjoy the vindication.
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