Governance Problems at Royal Dutch/Shell

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Case Details:

Case Code : BSTR155
Case Length : 17
Pages Period : 2000 - 2005
Organization : Royal Dutch | Shell
Pub Date : 2005
Teaching Note :Not Available
Countries : UK, Netherlands
Themes: Corporate Governance
Industry : Petroleum and Petrochemicals

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

The internal review report released by Shell on April 19, 2004, stated that the top managers at Shell knew about the inflated reserves for years and had been arguing about whether and how to lie about it to the company's shareholders. The controversy led to the exit of top managerial personnel and a fall in the company's credit ratings8. Apart from shattering investor confidence, the reputation of the company was also badly hit. Analysts were of the opinion that apart from lack of standard policies with regard to reporting and categorization of oil reserves; and absence of third party audits of oil reserves to ensure transparency, one major reason for the crisis was Shell's organizational structure.

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They found that the bi-national Dutch/English ownership structure of Shell with two boards and a Committee of Managing Directors had resulted in lower accountability. Absence of clearly defined roles and responsibilities of the top management made misrepresentation easier. A few analysts believed that Shell would benefit greatly by changing its organizational structure so as to have a single board.

Background Note

The Royal Dutch/Shell Group was formed in 1907 through the merger of the assets and operations of the Netherlands-based Royal Dutch Petroleum Company (RD) and the British-based Shell Transport and Trading Company (STT).

The history of Shell dates back to 1833 when Marcus Samuel opened a shop in London, selling sea-shells. This business quickly developed into a thriving trading company which was later managed by his son, Marcus Samuel Jr. His business visits to the Far East made him realize the potential for supplying kerosene to be used for lighting and cooking, from the developing Russian oilfields, to the large markets in China and the Far East...


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8] On April 22, 2004, Moody announced that it was downgrading long-term debt ratings of the Shell group from Aaa to Aa1 because of the company's weaker position in relation to its competitors due to the lowering of its proven energy reserves. Another credit rating agency, Standard and Poor, had already downgraded its rating for the group from 'AAA' to 'AA plus.' Soon after Moody, Fitch also downgraded its ratings for the group to 'AA plus' from 'AAA.'


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