Oil and Troubled Waters

When a crisis forces outside directors to navigate major changes, investors and directors must adopt new roles. The largest such case to date provides some useful lessons. The Royal Dutch/Shell Group was a 60/40 joint venture between Royal Dutch Petroleum and Shell Transport and Trading. It was run by a five-person committee of managing directors (CMD) reporting to a group called Conference, which consisted of all 21 board members and was headed up by the CMD’s chairman. When Conference realized that the committee had been overstating oil reserves in SEC filings, it asked the CMD chairman and a managing director to resign, and the venture’s 16 outside directors found themselves driving through major changes under intense pressure from investors and the press. Investors and directors worked together and separately to resolve organizational and governance issues. I can offer six lessons, based on interviews with directors and investors involved in this process: Organize for effective engagement. In April 2004, Royal Dutch/Shell formed a carefully balanced steering group that met 21 times over the next six months to address concerns about governance. The group comprised CEO Jeroen van der Veer and two Dutch and two British outside directors; it was chaired by John Kerr, a consummate diplomat. In parallel, investors created two committees to coordinate their views. The steering group met often with the investor committees and with other investors. Group members listened, took careful notes, and were as open as possible. The frequent constructive contact helped nurture relationships and build investor support. Build agreement on the easier questions first. The most contentious issue was whether and how to unify the companies. The steering group deferred that question and focused instead on defining what the roles of the chairman, the CEO, and the other board members should be. As directors and investors worked through their concerns, they fostered trust and achieved greater clarity about each other’s positions. That new collegiality laid the groundwork for a unanimous decision to unify. Recognize the subtle dynamics of persuasion. Investors initially thought that they had to convince Shell. But they realized it was more a question of influencing a process in which some decision makers were rather more on board than others. The investor meetings with steering group members helped develop their views and also helped them persuade other colleagues. Pay attention to the balance of investor noise. Most investors worked quietly behind the scenes with the steering group. But one committee’s activities were often reported in the press, and one investor ran his own publicity campaign. Although any more noise might have been counterproductive, those voices, combined with a stormy annual general meeting in which major investors spoke adamantly, probably helped convince everyone that governance changes were essential. Establish effective, defined checks and balances. When one person used to chair both the CMD and Conference, he was able to dominate the agenda and suppress real scrutiny. That changed once the chairman, the board, the chief executive, and the various committees were given clearly defined roles. Shell also concluded that 16 outside directors were too many—individuals didn’t feel accountable enough, and meaningful debate was difficult—so it reduced the number to ten. Don’t ignore governance or relationship problems. Investors knew about some of these governance issues before the crisis occurred; they could have pushed for changes earlier. Even if they’d been unsuccessful, they could have factored those concerns into their investment decisions. Board members, for their part, must have been aware that relations between the two managing directors involved were strained, as were their relations with certain investors and analysts. Had these concerns been addressed, Shell might have been spared considerable embarrassment. The storm has passed. Today, Royal Dutch Shell is a unified company valued at over $200 billion, with a modern board and proper checks and balances. Investors who worked with Van der Veer, Kerr (now deputy chairman), and their colleagues during the governance reform process say that the directors and the investors built up a healthy respect for each other and that the channels of communication remain open. “It was a good engagement and outcome,” remarked one investor. Said another, “Sometimes you do get what you want.”

Oil and Troubled Waters

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