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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The Twin-Board Structure

The uniqueness of Shell's organizational structure was that, from 1907, the company remained a joint venture, run by a twin board of directors, rather than a single corporation.

The 60:40 joint venture partnership and separate identity of the partners remained intact for nearly a century.

When the 'oil reserves' controversy broke out, analysts wondered whether the company had become a victim of its own illustrious and unparalleled history as the most complex organization in the corporate world with authority divided between The Hague, London and Houston.

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Due to such division of corporate authority, analysts also called Shell one of the world's three most international organizations, the other two being the Roman Catholic Church and the United Nations Organization...

The Drawbacks

Analysts commented that Shell lived in a world of its own with "a history of cumbersome bureaucracy, opaque governance and prickliness to outsiders. "Many analysts found the functioning of twin-board structure very complex to understand.

Even investors felt that the system was obscure, lacking clarity and transparency. Far-flung and decentralized operations managed by a complex reporting system made financial disclosures a tough task and led to manipulations...

The Restructuring

The reserves scandal compelled Shell to conduct a comprehensive internal review into its governance structure. After much deliberation, the management came to the conclusion that the only way to win back investor confidence, ensure greater transparency and avoid accounting failures in future was to overhaul its corporate governance system.

The two boards unanimously agreed to propose to their shareholders the unification of the Royal Dutch/Shell Group of Companies under a single parent company.

It was decided to abolish the twin-board structure by creating a single management body with greater powers and responsibility...

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