1

Corporate Governance
Royal Dutch Shell
2

Contents

1. Introduction 3

2. Royal Dutch Shell Case Study Analysis 4-6

3. Corporate Governance and Its Disclosures 7-10

4. Conclusion 11

5. References 12-14
3

Introduction
The main aims of this report to identify and discuss the importance of the corporate governance
and its disclosures. In order to that I have used one of the corporate which is Royal Dutch Shell
and in the first paragraph I have discussed the issues and importance of the corporate governance
to the company. Also I have discussed further about governance issues relates to the Royal Dutch
Shell. Furthermore I have argued that advantages and disadvantages to the organization due to
good governance and bad governance. Also in the second part I have analyze some academic
theories relates to the corporate governance and its disclosures. Finally I have discussed the some
of the committee reports such as Cadbury report, Combined Code of practice and Greenbury,
Turnbull and Hampel report to show the importance of the corporate governance

The main purpose of this report to evaluate the governance of the organization and I have used
Royal Dutch shell which operates in the United Kingdom. This report consist analysis of
corporate governance structure of the shell as well as shell issues relates to the board of the
organization. Furthermore this report discusses the positive and negative view of the corporate
governance which implement in the shell organization.

In the late 1980’s corporate governance become more important as fundamental shift in power
relationship such as firm managers and firms shareholders relationship. It because shareholder
increased their authority over managers, demanding that managers respond sooner to poor
financial performance and changes in competitive environment. Also Stockholders become so
unhappy about the organization managers action over the decisions due ineffectiveness and
slowness of the actions.

According to the stapledon (1996) defined corporate governance is system which gives direction
and control to the organization. Especially it refers examination of the control in the organization
as used by its managers and directors. According to the Francis (2000) corporate governance
should set up good example to the lower hierarchy staffs that company is going right directions.

Furthermore company law input that board of directors to prepare financial report carefully and
that need to be accurate and reliable which should reflect true view of the company. According
to the company law board of directors are responsible for safekeeping of accounting statement of
the organization and ensure the records are true and precise. Also they are the in charge for
making necessary actions to avoid fraud and other risks. Apart from the board of Directors
Company also have committees inside the organization corporate governance. Such as well
settled guide which discuss the their roles and scope of the authority in the company with
independent directors who should be non executive, remuneration committee handle the outline
of the company remuneration policy which will review by the board and they will review the
remuneration packages which are given to executive directors.
4

Background of the Corporate Governance

Business activities in the world have often affected the interest of the corporate governance.
Because in the business world every activities need to be taken care of appropriately in order to
offer relevant and effective protection for the investors and public interest. Violation of corporate
governance ethics could affect severe financial losses to the company as well as level of
economics development of the country. In order to keep the all the business with corporate
governance ethics need to be legalized in the country such as many multination firms activities
need to carefully monitor to keep the good governance in the country.

As discussed earlier this report concern of corporate activity in Royal Dutch shell and discuss the
issues and importance of the corporate governance to the company and country. Corporate
activities can be defines as complex network of actions and initiatives which need careful review
and monitoring by the authorized parties such as government. Because government need to
carefully monitors those who not following corporate governance in order to keep the faith of the
stakeholder and general public about the investment. In the context of corporate governance firm
beginning from the principals which should be applied to govern the firms up to relationship
with employers such as board of directors and the employees. According to the coordinative
model which vastly used in japan and Europe interest of the participants such as corporate
activities like employees, customers and suppliers can be considered to play vital role in the
formulation of corporate governance laws and regulation. Companies which operate in the
current society has to outcome series of problems in the company internal and external
environment. In the modern world regulation of company activities can be effective only if
company takes consideration of various aspects of the activities which occur in those markets.

Previous studies and research suggest that important difference can be observed in all aspects of
the company activities in accordance with social and cultural parts of the specific region. In the
United Kingdom regulation of firm activities is realized through the application of series of
legislative and texts including orders. United Kingdom have history of corporate governance
since the industrial revolution. Britain is country which have very important of history in
company activities. Due to the higher interest in corporate governance Britain have implied lot of
attention to the development of suitable legal framework for the regulation of all various aspects
of the corporate governance.
5

Corporate governance legislative text are below,

 Common law rules where state directors fiduciary duties.

 Statute (companies act 1985)
 The memorandum and article association.
 Listing rule which required all the companies listed on the official list such as aim rules
 Combined code of corporate governance which was supported by tunbull guidance and
the smith guidance plus good practice review from higgs review.
 Non legal guidelines which were issued by the institutional investors behalf of the
investors such as association of British insurers, National association of pension funds
and pension and investment research consultants.
 Public companies laws when takeover, takeovers and mergers rules on the panel apply.
 Financial Service Authority’s code of market conduct.

Corporate governance in the Britain consists and regulated by series of legal texts and the most
vital of which is combined code on corporate governance. This code includes some provision
which refer to all particular aspects of corporate governance. In some cases additional
provisional required for mergers and take over.
6

Royal Dutch Shell Case Study Analysis

Royal Dutch/Shell group was founded in 1907 by combination of assets and operations of the
Nederland based royal Dutch petroleum company and the British based shell transport and
trading company. History of the company goes back to 1833 when Marcus opened shop in
London which was selling sea shells. Business became developed venture which was later
managed by his son and later he was interested on supplying kerosene to be used for lighting and
cooking from the developing fields in the Russia and their target market was china and Far East.

Royal Dutch Shell is second largest oil exploration and production company in the world when it
comes to revenue. It headquarters based in the Nederland while registered office located in the
London United Kingdom. Royal Dutch shell is one of the global groups of energy and
petrochemical companies which trying to meet the energy needs of the world.

Twin Board Structure was one of the unique features of the Royal Dutch shell as it remains since
1907 like joint venture where company has twin board of directors rather than Single
Corporation. This joint venture was lasted nearly a century. In 2004 Royal Dutch Shell has
announced some serious issues with their company. In their financial statement company has
overstated oil reserves result huge drawback to the company in globally. It was 4.47billion worth
barrels of oil in April 2004 originally stated that proven oil and gas reserves in 2002. In February
2005 about 1.37 million barrels were removed from its statement. When the oil reserves come to
discussion analysts were surprised as Royal Dutch Shell become victims of own corporation
complex structure as Royal Dutch shell was the most complex organization in the corporate
world due to twin board structure.

After the announcement of inflated oil reserves in the early years and that became downgraded
nearly four billion from shell proven gas and oil reserves from their financial statements. These
issues were brought so much criticism to the company for complex twin board structure from
analysts and investors. Also experts called this scandal due to lack of accountability and window
dressing or manipulation of organization statements. Also it claims that there was a loophole in
twin board structure in shell.

After this scandals Shell was least favorite among the investors and public. So in order reinstate
the investors’ confidence and public image about company shell had announced merger between
Royal Dutch/Shell groups’s of companies under single entity in October 2004. Some key points
of proposals to reinstate investor’s faith on the organizations.

 Examine how the twin board governance structure of company has impacted in lower
accountability and transparency.
 Shell organization restructuring analyze
 Examine the option available after merge Royal Dutch/Shell group of companies under
one entity.
7

After the announcement shell have downgraded nearly four billion barrels of shell
proven oil and gas reserves. Shell have accounted one fifth of the total reserves of the
company and that is largest ever in any oil company in the world. After the
announcement shell stock plunged badly as the scandal of the oil and gas reserves
overstatement. United Kingdom authorities have started investigation such as Securities
and Exchange Commission have started enquiry about the overstatement of oil and gas
reserves of the shell. Furthermore British financial regulators led by financial services
authority also started investigation. In order to restore the faith of investors and
creditability or company image to be restore shell have hired private independent counsel
which was Davis, Polk and wardell to investigate the issues.

Internal reviews disclosed in April 2004 stating that top managers were knew about
inflated reserves for years and they were planning how to hide that information from
shareholders. This scandal had led shell company top managers to exit from the company
and it affects the company credit rating which was fall in the credit ratings. Not only has
the shareholders confidence about company had it impacted on the company image.
Most analyst have pointed out these scandals were caused lack of standard policies with
regard to reporting and categorization of reserves. Also lack of third party auditor
involvement and shell complex twin board structure have allowed for the scandals. Also
twin board with committee managing directors had resulted in accountability of the
company. Lack of clearly defined roles and responsibilities of the top management have
allowed happening misrepresentation easier. Changing their twin board structure to one
single board would have benefited to the shell corporation.

Main drawback of the Royal Dutch shell was twin board structure which was allowed
misrepresentation of their reserves and lack of define roles and responsibilities for the
top management. Shell system was lacking clarity and transparency. Also decentralized
operation which manage by complex reporting system have made way to the
manipulation of reporting’s.

As restructuring of wounded shell they had conducted major internal review about shell
governance structure. After huge argument over whether to keep or change the
management structure they have decided to replace the twin board structure with single
board structure hoping shell could achieve greater transparency and avoid accounting
failure in future while reinstating investor’s confidence. Two boards was agreed to
propose these important changes to its shareholders for good will of the company. As a
result it was decided that to remove twin board structure and replace one board structure
with more powers and greater responsibility.
8

Soon after shell decision of changing their twin board structure little criticism came from
financial experts about the merger. As experts stated that they felt proposal for the
merger might not have far reaching advantages due to lack of major structural changes
planned and that would open up the nomination and election process for independent
board seats in the organization. Also some facts such as equity distribution, the share
exchange ratios and dividend distribution along with tax implications in the new merger
is complex for the normal shareholders to understand. Also experts argued that new
company could allowed for cultural clashes between the Dutch and English managers as
single board need to include bi national directors. Also newly appoint board not clearly
said that how they going to tackle the difference in the shell operational style.
Furthermore they stated that good governance is about competence and a management
team that would abide by corporate ethics in the company. So there is no difference
between twin and single board structure as both are immaterial. Also they stated that
twin board structure was lasted nearly a century so no point blaming the twin board
structure for the scandals. So they sated that change board structure just to get investors
and public confidence back and single board structure may not achieve greater benefits.
9

Corporate Governance and Disclosures

Corporate governance can be defined as processes, or laws by which business are

operated, regulated and controlled. Corporate governance internal factors include
officers, stockholders or constitutions and on the other side which is external factors
which are consumer groups, clients, and government regulations. Well determine
corporate governance will provide platform which could benefited to those who are
concern of the organization who believe which will adhere and accept ethical standards
and best practices as well as formal laws. Basically corporate governance will provide
fair, accountability and transparency of the organization performance. In the recent past
corporate governance came in to discussion because of some major corporate scandals
such as Royal Dutch Shell overstated oil reserves. Those scandals were aroused due to
abuse of corporate power and misuse. Major part of the corporate governance is provide
defense system which could avoid fraud or unethical activities arise in the corporate
world (Malin A C, 2010).

In the corporate world stockholders cannot be well protected by only contract. There are
two theories which will protect shareholders one is the law which enable managers to act
in terms with best interest of the shareholders. Second one is governance which is set of
provisions enable shareholders to use their power to compel those in operating control of
the organization with regards to shareholder best interest. Corporate governance secures
the best interest of the investors by providing fair, transparency and accountable
organizations reporting. Corporate governance directed and control organization to
follow certain rules and responsibilities and it avoid fraud and unethical transaction. Also
it defines rules and procedure for making decision in the company corporate affairs.

The combined code on corporate governance can be explained as set of principles of

corporate governance which were formed especially to the corporation listed on London
stock exchanges in order to maintain code of best practices. Combined code overseen by
financial reporting council. Listing rules themselves are given full statutory authority
under the direction of financial services act 2000 in order to give public assurance such
as how public company comply with the code and what are the reason not to applied the
code. This code encourages private companies to follow these rules in order to secure the
good governance. Combined code use principal based method which include general
guideline to ensure that companies following best practice. Combined code is concern
with good governance practice of the corporation to ensure there is no fraud or unethical
activities in the organization. Combined code was formed initially from the Cadbury
10

report 1992. The Cadbury report was accountable for some major corporate scandals
associated with major governance failure in the United Kingdom.

Greenbury report (1995) is one of the corporate governance reports which were initially
followed with Cadbury report which was the product of committee established in the
United Kingdom in order to secure business and industry on governance failure. Mainly
it focuses over the director remuneration and role of executive directors and non
executive directors and institutional shareholders (Monks R G, Minow N, 2004).

Guideline for the companies,

Directors
Requirement for the non executive directors and appointment should be run by NEDs
and independence should be assured by checking previous or present or business links.

Remuneration
In this part decide the director’s remuneration package in the general meeting which was
according to the company’s act 2006. It may decide performance related pay in the
general meeting.

Accountability and audit is major concern of the report as it concern about the audit
committee. This was mainly composed of only independent non executive director in
order to secure the high standard of integrity. There are more points have been added
after the large corporate scandals.

Relation with shareholders this part of the report concern how well business keep good
relationship with the owners by keep informing about business affairs.

Institutional Shareholders which emphasis on deal with unique part of the united
kingdom financial markets structure which was controlled and influenced by institutional
investors.

In the year of 2007 financial reporting council have stated that only 33% of listed
companies were fully compliant with combine code practices which was poor response
to the corporate governance as it’s clearly showed how poor corporate governance is.

Greenbury committee code of best practice concern of the following facts specifically in
order to keep good governance.
11

 The establishment, membership and status of remuneration committee to

maintain good governance.
 Determination of the remuneration policy for executive directors and other senior
executive in the company.
 Disclosure part of the remuneration policy and approval details part of the
remuneration policy.
 Also it concern over length of service contracts and determination of
compensation part when theses terminated.

Greenbury committee recommends that all public companies should perform Remuneration
committee and not compliance with this practice should explain why in the next annual report.
This could avoid potential conflict of interest. As board of directors make us of Remuneration
committee which will help to determine the non executive directors on their behalf and
shareholders behalf and this will enable to publish company policy on non executive
remuneration and other special remuneration packages for each executive directors including
pension rights and compensation of payments.

Cadbury Report (1992) came to discussion after the Maxwell scandals. Cadbury report have
suggested some recommendations on the arrangement of organization board and accounting
system to mitigate some corporate governance risk and failures. This report was well adopted in
United States and European Union and the world. Annual audit is one of the most important
points in the world of corporate governance. As annual report shows the separation company
management from its ownership which required directors to report on their stewardship to the
shareholders by preparing annual report and financial statements and sending them to
shareholders. Audit provide platform where external party will conduct check on the way how
financial statements were prepared and presented. Audit provides assurance to those who are
keen on financial interest in companies. The most suitable way of ensuring that companies
are accountable for their actions is though more disclosures of the company by board and
audit carried out with strict accounting standards.

The Hampel Report (1998) was initially formed to review the corporate governance system in
the United Kingdom Hampel report were use to merge, harmonize and simplify the Cadbury
report and Greenbury recommendations. It recommends that all companies should clarify in
their annual report and in accounts a description statement of how they apply the relevant
principals to their company circumstances. This may give responsibility for company board of
directors and good corporate governance lies with company board of directors.
12

Turnbull Report (1999) has suggested that keeping good internal control system could avoid
fraud and keep good governance. So keeping good internal control system may detect and
defense any chances of frauds and unethical activities. Also this report clarify some disclosures
which are,
 Board will be responsible for the system of internal control
 Also in place for identifying, evaluating and managing significant risks to the business.

According to the Turnbull report 1999 it states that what are the good system of internal control
should include as follows

Nature and extent of the risk face by the company

The limit and categories which company acceptable
The like hood of the risk concerned about materializing.
Company ability to reduce the incident and the impact on the company risk that do materialize.

Effective monitoring and continuous basis good internal control system could reduce the
possibility of the fraud and unethical activities. Also company should make annual assessment of
internal control in order to ensure that internal control system is clean.
13

Reformed Corporate Governance Structure

After the shell corporate governance scandal company have lost the trust of investors and public.
In order restore the faith shell needs to rebuild their corporate structure. After several talks shell
management decided to ensure greater transparency and to avoid the accounting failure in the
feature in order to reinstate good corporate governance with more responsibility and power. So
twin board structure agreed to single management board with greater responsibility with power.
After February 2004 company has revised 20% of its total proven reserved base and they
disclosed that they will conduct company own audit of the facts and circumstances. It report will
be disclosed public in end of the march. Until the further investigation shell have dismissed their
head of exploration and production, finance director and CEO of the company. These steps have
started question regarding role of the reserve report in general. And also it highlights the issues
of importance of corporate governance and control from the problems of reserve statement
service. Auditing report focused on the company corporate governance and control and
highlights of company strict guidelines.

Audit report has concluded that the substantial booking reserve was occurred due company lack
of control and corporate governance. Report also stated that due to pressure of operating unit
management the company follow it own methods rather than to follow SEC guidelines. Report
further stated that how corporate target come in to conflict with control and governance due to
lack of control in the company. After the corporate governance issue shell takes lot hardships to
reinstate the faith on the investors’ confidence. In order to gain the confidence shell has
published audit report which discloses main aspects and issues of the corporate scandal. Shell
have reform their twin board structure with single board with transparency and accountability of
the company. Also to ensure the company heading right direction they have follow corporate
governance principal rather than their own practice.
14

Conclusion
As an internal review of the shell corporate structure which carried out by Shell Corporation in
20014 stated that merge of two parent companies in to single entity is to win back the investors
faith on the organization. Furthermore Including good internal control system in the organization
with set of procedure and rules could achieve more transparency and avoid accounting failures
and will boost the company image and shareholders interest on the company. Good corporate
governance could achieve through effective internal audit function to ensure that company is
following right procedures and comply with the laws. Commitment to ethical governance by
board of will enhance the company prospects of the company ethical infrastructure. Objective of
this report to analyze the corporate governance implemented in the Royal Dutch shell.

Further Shell corporate governance ethics need to be priorities in order to maintain good
corporate governance. Company need to step up good corporate governance so it could effective
overcome frauds and scandals. Shell main issues were twin board structure following their own
policies rather than following one board policies. So due to the lack of control and direction
issues shell had paid the price by loosing investors confidence and public faith. Royal Dutch
shell need to be show the public by adhering good governance principles in order to show the
company transparency and accountability.
15

References
1. New UK Corporate Governance Code in force from 29 June 2010

2. Takis katsoulakos and Yannis Kat soulacos, Emerald Group publishing Ltd, Volume. 7 no. 4

2007, pp-355-369,

3. Uche Nwabueze and Joan Mileski, Emerald group publishing Ltd, Volume 8 no .5, pp 583-

594

4. Oil spill Panel's Reilly Fault Regulator, Wall street Journal (online), New York, March 4th,

2011

5. Leblanc R & Gilllies J (2003), the coming revolution in corporate governance, Ivey Business

Journal

6. Ross, M (2008) 1st April, Fraud Red Flags

7. Mallin A C (2010) 3rd edition, Corporate Governance

8. Guler Aras & David Crowther (2009), a Handbook of Corporate Governance and Social

Responsibility

9. Robert G Monks and Nell Minow (2004), 3rd edition, Corporate Governance

10. Joseph. B. White, Proquest Document ID: 2282002181, Source, Newspaper

11. Institute of Chartered Accountants for England and Wales, What is Corporate Governance?

Why is Corporate Governance Important, 2002?

12. London School of Economics, 2004, London's Place in the UK Economy, 2004.
16

.13.London Stock Exchange, 2006, Response to Financial Reporting Council's Review on the

combined code

14. London Stock Exchange, 2006, Non Executive Director Definition

15. Maier, S, 2005, How Global is good Corporate Governance, Ethical Investment Research

Services.

16. Market and opinion Research International, 2003

17. Office of the Director of Corporate Enforcement, 2006, Stakeholders.

18. Picard, R, The Rise and Fall of Communication Empires, The Journal of Media Economics,

p23-

19. PriceWaterHouseCoopers, 2004, Sarbanes-Oxley Center: The Act and Strategies for

Compliance

20. Report of the committee, Financial Aspects of Corporate Governance, December 1992, Gee

Publishing

21. Richardson, Nwankwo, Richardson, B, S &S, Understanding the Causes of Business Failure

Crises Generic Failure Types: Boiled Frogs, Drowned Frogs, Bullfrogs and Tadpoles, Sheffield.

22. Rinninsland, R, 2003, Understanding the Act of Sarbanes Oxley 2002, Council for

International Tax Education Inc.

23. Rouston, K, Regulation in the post Enron World, Financial Services Authority, International

Corporate Governance Review, 2003, Euro Money publishers

17

24. Shaou, J, 2001, The Maxwell report: a revealing picture of life in the City of London, World

Socialist, Published by the International committee for the Fourth International (ICFI).

25. Stock Market Crash, South Sea Bubble, 2005, [online.]. From: http://www.stock-market-

crash.net/southsea.htm

26.Tricker, R.I, Corporate Governance, Practices, procedures and powers in British companies

and their boards of Directors, The Corporate Policy Group, Oxford, Gower publishing Group.

27. Booms, B. H. 1981, Marketing Strategies and Organisation Structures for Service Firms, in

Marketing of Services, J. H. Donnelly and W. R. George, Eds. Chicago: American Marketing Association