The Observer: Trial of two cities: London or the Hague?  

Investors who want to crack Shell's structure must decide, writes Oliver Morgan

Sunday June 20, 2004

Disgruntled institutional investors intending to rattle the directors' cage at Royal Dutch/Shell's annual meeting this month face a basic question - where do we go?

This is not a reference to Shell's decision to move the AGM from the planned Westminster venue (capacity 4,000) to the Docklands ExCel centre which can take 20,000 - a change that reflects expectations of a packed and rowdy meeting as often quiescent institutions join the ranks of irascible private investors to ask difficult questions in the wake of the reserves downgrading scandal.

It is more a question of which city? London, to vote on resolutions proposed by Shell, the UK arm of the dual-listed company, and to be rude to Lord Oxburgh, its chairman; or the Hague, to vote on Royal Dutch proposals and put its chairman, Aad Jacobs and president Jeroen Van der Veer on the spot?

One 'rebel' investor says: 'Most institutions will probably have shares in both Shell and Royal Dutch, so could send people to both. The question is, have they thought ahead, because it is important.'

The reason it is important is that it goes to the heart of investors' main concerns with the group - its Byzantine corporate structure.

Investors have concerns about the relationship between the company's various bodies and whether the complicated lines of accountability caused the reserves scandal.

Last week the company moved to reassure investors that it took these issues seriously by bowing to pressure to give details of its own review into them. On Wednesday, Eric Knight, an influential US-based active fund manager, wrote to the Financial Times demanding the company publish basic facts about the review.

On Thursday Shell divulged some of what Knight had demanded: who was on the review panel; the terms of reference; a November deadline for reporting back; and an update at the 28 June AGMs.

Problem solved? Geoff Lindy of the National Association of Pension Funds thinks not: 'It is very useful progress, but by definition, it is not solved, otherwise you would need this inquiry.'

Indeed, although institutions are grateful, how Shell made the announcement underlines the need to harry the management.

Robert Talbut of fund manager Isis, which plans to attend the Shell meeting (it has 1 per cent of the shares) and may go to the Royal Dutch one (it owns less than 1 per cent of these), says: 'It is helpful but disappointing that it comes after shareholder pressure. It shows that you have to keep up the pressure. We want to know when they will publish the full text of the Davis Polk and Wardwell report [US lawyers who investigated the reasons for the reserves downgrades]. And we want to know when Shell will become an outperforming company again.'

Another investor says: 'Throughout this process we have got the impression that they want to get away with as little as they can. It is a question of trust and the fact that trust has broken down.'

That breakdown, he continues, comes back to how seriously the company takes the structural issues and whether it comes up with answers. 'This is where there is a fundamental difference - between shareholders asking about structures, and management taking the view that it is a few bad apples [a reference to Sir Philip Watts and Walter van de Vijver, who resigned in the wake of the downgrades, and who, according to emails revealed by DP&W, were involved in lying to keep reserves up].'

The 28 June AGMs will underline the point - and the question 'Where should I go?' highlights the problem. Many UK institutions will hold more shares in Shell. But one active fund manager who holds both says: 'I'm going to the Netherlands. The people who really count will be there, Aad Jacobs and Van der Veer.'

This view reflects a belief that Royal Dutch is using its financial and structural weight to dominate the reform process, believing that the reserves scandal was caused by the UK side of the business (many of the downgraded barrels were originally booked by Watts when he was head of exploration in the late 1990s).

But this has its own drawbacks. Talbut says: 'There is a feeling that there is a blockage in the review process, and it is in Holland.'

In other words, while Oxburgh and his non-executive colleague Sir Peter Burt have emphasised their enthusiasm for change in meetings with investors since the first downgrades in January, they have not had the power to deliver it. Meanwhile, Jacobs has managed investor expectations more conservatively - and is the one with the power.

The agendas for the two meetings are different because different laws determine what must be included. As a result, shareholder voting services - which advise how to vote on resolutions - take very different lines.

The NAPF's service expresses concerns about remuneration policy, draws attention to five specific problems with the group structure and reflects concerns about the conduct of the review. But it recommends votes in favour of all Shell resolutions.

Meanwhile, Institutional Shareholder Services, a US-based group advising Royal Dutch shareholders, recommends voting against motions 'discharging directors of responsibility for their supervision for the year 2003'. This motion, required in Dutch law, is effectively a vote of confidence in management by shareholders and is not required in the UK.

ISS senior vice-president Stanley Dubiel says: 'We do not think shareholders should discharge the directors. There may be lawsuits and if the directors were discharged, plaintiffs would have to explain to courts why they did so. We are also expressing dissatisfaction at how the board conducted itself last year.'

He adds that, because Royal Dutch directors have influence over Shell via the committee of managing directors, the ability not to discharge reflects a structural bias in the company that favours Dutch shareholders.

'UK directors are being held accountable by Royal Dutch shareholders, while Dutch directors are not held accountable by Shell shareholders.'

For investors really interested in getting the structure right and looking for a clincher as to where to turn up, perhaps that is it.

Split personality

The company is a joint venture between Royal Dutch, which owns 60 per cent, and Shell. Each company has a separate board (the Dutch one has two: supervisory and management) subject to different laws and governance codes. There is a group called the conference, which comprises the Royal Dutch supervisory board and the Shell management board, which meets to discuss strategy and performance. There is also a three-strong executive committee of managing directors: Van der Veer, Rob Routs of Royal Dutch and Malcolm Brinded of Shell. Royal Dutch directors hold preference shares in Royal Dutch, but this will be abolished next year.

http://observer.guardian.co.uk/business/story/0,6903,1242821,00.html