In the article “Thunder Signals a Rumpus on Olympus: Management inside Royal Dutch/Shell” Corzine (1998) scrutinizes and enlightens on the occurrences involving corporate governance at the Royal Dutch/Shell Group. The author informs us of group’s unique corporate structure in the joint venture. The companies have a supervisory Committee of Managing Directors (CMD) and a “Conference” board at top management that wields power, and controls operations. The dominant and influential board referred to as the conference has authority over CMD (Corzine, 1998). Appointment of retired members of the board to non-executive positions as pointed by the writer ensures continued influence of the retirees on the operations of the company. Mr. Cor Herkstroter, who turned down the offer to become a non-executive director after retiring as the chairman of CMD. The author mentions of a planned transformation in the management approach away from the old hierarchical model used by the old guards. According to Corzine, the planned transformation would lead to accommodation of new ideas and make management more efficient (Corzine, 1998).
The different models used in the management and administration lead to different meanings of corporate governance across countries. The main cause of discrepancy in definition results from variation in laws regarding ownership and control of companies (OECD, 2004). European commission defines corporate governance as “the system by which companies are directed and controlled way” (De Cleyn, 2008).Therefore, it encompasses the structure and roles of administrators and managers and the relations between them and the company’s shareholders and stakeholders. The following is a case study analysis of corporate governance at Royal Dutch/Shell Group.
History of Corporate Governance in Royal Dutch/Shell Group
In 1907, Royal Dutch Petroleum (RDP) and Shell Transport and Trading (STT) companies combined to form the Royal Dutch/Shell Group in a 60/40 joint venture, where Royal Dutch was the major shareholder. However, the companies’ shareholding remained separate with each maintaining its own set of shareholders. RDP is listed in the Dutch stock exchange and operates from Hague while STT is based in London and its shares trade at London stock exchange. Until 1958, the two companies operated with separate management boards, each guided by the resident laws. RDP had a two tier structure constituting of management and supervisory boards based on Rhine model, and was led by the president of the management board. On the other hand, STT had a one tier centralized board according to Anglo-Saxon model, and headed by a non-executive chairman. The group changed its corporate structure in 1959 and formed a five-member Committee of Managing Directors (CMD) with board members from each side. The CMD was to be reporting to another board that consisted of 21 members referred to as Conference. The organizational change also led to changes in the senior management and relationship with partners. Their own boards still maintained in operation and CMD acted as the senior most board with chairmen drawn from either the chair of STT board or the president of RD board (Kwee et al., 2011).
Challenges and Models of Corporate Governance at Royal Dutch/Shell Group
The corporate governance model has been pointed as the source of problems at the Royal Dutch/Shell Group. It has made acquisitions difficult due to different stock valuations together with decentralized operations and opaque financial information (Leuz, 2004).The existence of separate boards and separate shareholding made management to be cumbersome and ineffective due to consultations involved. The overstatement of oil reserves in 2004 was a large scandal at Royal Dutch Shell. Britain’s Financial Services Authority together with U.S Securities and Exchange Commission penalized the company $150 Million dollars due to giving the false report. The Conference forced the CMD chairman and the managing director and in their place, a sixteen-member board of external directors was established that led operations in the company. In 2005, the Royal Dutch/Shell Group restructured its management structure by forming a single board and created a chief executive officer position. Its head-quarter is at Hague but the primary listing of shares is at London stock exchange and also at New York stock exchange, USA. The decision was applauded by the investors and had increased confidence leading to rise in share value (Cummins, 2004).
The corporate governance models variation and the Anglo-Dutch merger caused a collision in management and necessitated for a common approach in governance. The Dutch Rhine-model called for the formation of the two tier board structure at RDP which led with a focus on a network-oriented system. On the other hand, the Anglo-Saxon-model is a market-oriented system with a one tier board. Therefore, STT management could have leaned on management focusing on investor protection and a strong corporate control in a liberal market. In order to increase shareholder value, the Anglo-Saxon management focuses on short term goals while the Rhine-model focuses on long-term goals for sustainability (Van Bekkum, 2010). The other challenge could result from the influence of ownership on corporate governance. The existence of the Conference members and the ownership equity could result in collision of strategies due to self-interest schemes. The merging and restructuring of the management and shareholding in 2004 was a good move towards realizing the benefits of unification. It increased investors trust in the operations of the companies and led to a common less bureaucratic model for efficient management. It was also necessary for a global company like Royal Dutch/Shell group to have a standardized corporate governance model.
Use of a steward model in corporate governance can ensure that administrators and management work diligently and avoid high-risk investments. The management should be allowed to work responsibly without interference by non-executive directors as seen at Royal Dutch/Shell group. It ensures that managers are competent, professional and independent from the supervisory board directors. The non-executive boards should mostly advice and not get involved in implementation of strategies. Existence of external directors and the Conference should be based on stewardship and on agency theory. It ensures that investors have trust on the company due to the fiduciary duty extended to them, and they also act as supervisory investors (Turnbull, 1997). However, in Royal Dutch/Shell group, the separate boards, CMD and Conference were redundant. Also based on shareholders model, the shareholders should be allowed to control and contribute in decision making. By treating them as principal agents, their investment should be valued by allowing them to have rights and supervisory authority (Charreaux, 2004). Good corporate governance should also treat shareholders equally regardless of their capital contribution. Accountability and following the law should be mandatory to avoid loss of shareholders investment through litigations. Timely disclosure of truthful information is also mandatory for honest dealings and investor trust and protection (OECD, 2004).