Oil & Gas Journal: Pension funds sue Shell brass, auditors, seeking damages, policy changes 

Judy Clark

Associate Editor

28 June 04

HOUSTON, June 28 -- In a move that could indirectly impact a number of companies, two US-based pension funds filed suit Friday against 27 directors and officers of the Royal Dutch/Shell Group and their accounting and audit firms PricewaterhouseCoopers International and KPMG International.

The action followed financial losses and scandal associated with Shell's cutting its proved oil and natural gas reserves four times since Jan. 9 for a total downgrade of 4.47 billion boe for 2002 reserves—23% of its proved reserves as stated Dec. 31, 2002—and 500 million boe for 2003. The reserves debacle exposed an underlying industry-wide problem in reserves booking that many companies must now address (OJG, Apr. 5, 2004, p. 43).

The suit accuses the Shell executives of "breach of fiduciary duty, abuse of control, mismanagement, fraud, and unjust enrichment," among other charges.

"We are aware of the lawsuit and will consider it, but have not received the complaint," said Shell spokesman Andy Corrigan.

The suit also alleges that the accounting firms, which had unlimited access to information in all of the companies, were guilty of "accounting malpractice" and "professional negligence."

KPMG International spokesman Gavin Houlgate commented simply: "We stand by the quality of our audit work." PricewaterhouseCoopers could not be reached for comment.

More investor control

The pension funds seek monetary damages against each defendant and propose that they "disgorge salaries, bonuses, stock awards, profits, and special benefits resulting from their breaches of fiduciary duties owed to the companies and shareholders." The suit also calls for new controls and limits on insider stock sales, for greater internal audit controls, and a change in the way executive compensation is awarded.

The suit was filed in New Jersey Superior Court in Middlesex County on behalf of the UNITE National Retirement Fund, based in New York City, and the Plumbers and Pipefitters National Pension Fund, based in Virginia. The latter has 115,000 beneficiaries and nearly 150,000 active participating members who have invested in the Shell Group through its pension program.

The reporting debacle, which resulted in the resignation of former officers Chairman Philip Watts, Chairman of Exploration and Production Walter van de Vijver, and Chief Financial Officer Judith Boynton, impacted net income averages, which Shell's Group Audit Committee in April said was "about $100 million/year" (OGJ Online, Apr. 20, 2004). The suit claims that future cash flows were overstated by more than $100 billion.

In addition to damages, the funds seek to force dramatic changes in company governance such as new internal controls, increased transparency of executive compensation, and improved board accountability to investors.

"The Shell Group of companies has an arcane structure that for years has frustrated investors' attempts to obtain reliable information and influence the board's policies," said Bob Monks, corporate governance advisor to Lerach Coughlin Stoia & Robbins LLP, counsel for the shareholders pressing the suit.

Those stakeholders are demanding the right to nominate three directors and to vote on combining the boards of The Hague-based Royal Dutch Petroleum Co., which controls 60% of the Group, and London-based Shell Transport and Trading Co. (ST&T), which holds 40%. Although the two companies merged in 1907 to become the Shell Group of Companies, they continue to maintain separate boards in the Netherlands and the UK, and investors can still buy shares in either the Dutch or British parents of the group.

Group-proposed changes

Shell earlier this month announced that it intended to consider the views of shareholders and outside advisors in a study of proposed changes to the Shell Group's structure and governance.

Currently the Group is run by a committee of managing directors, with seven top executives appointed by the boards of directors of Royal Dutch and ST&T.

A steering committee comprised of members of each board and aided by senior Group executives will conduct a review of more-simplified board structures, including a single, unified board, Shell said. They also will examine means of improving the decision-making process and accountability, and "enhancing effective leadership" for the Group as a whole.

The chairmen of both boards are scheduled to give a progress update Monday at the annual general meetings of Royal Dutch and ST&T and to make the review results public in November.

In addition, Shell said that the Royal Dutch board at its annual general shareholders' meeting in 2005 would propose abolishing the company's priority shares, which currently give holders the exclusive right to easily nominate directors to the board.

Ironically, these changes are all included in the demands cited in the shareholders' lawsuit.

"Although we read lately of Shell's reported willingness to change the way it does business, in our experience Shell has been long on promises and short on delivery," said Bruce Raynor, president of UNITE and chairman of the board of its pension fund.

"We intend to see this through and keep up the pressure to make sure meaningful, beneficial changes are actually implemented at the end of the Group's review. Directors of foreign companies cannot be allowed to sell and list securities in the United States and then violate Sarbanes-Oxley without being held accountable," Raynor continued.

New director appointed

The Shell Group meanwhile also is continuing to rebuild its executive force, following the director resignations (OGJ Online, Mar. 11, 2004).

Peter Voser, chief financial officer of Asea Brown Boveri (ABB) Group of Companies in Zurich, Thursday was named a Shell Group managing director and the company's new finance director, both effective Oct. 4. He succeeds Judith Boynton. Voser had served for 20 years with Shell in a variety of financial positions prior to his work with ABB.

Shell reported Friday that former Chairman Watts would receive a lump sum severance payment of more than £1 million. The figure is based on Watts' salary as an employee until his normal retirement date in June 2005, although he will receive no director's salary for that period.

Shell said Watts will receive no performance-based bonus linked to 2003 or 2004 and has forfeited various stock options and share grants, but he has the legal right to other stock options valued at more than £114,237 and to an annual pension of £584,070 based on contributions he has made to that fund during his 35 years with the company.