Reform at Gunpoint

18 June 2004



Shell Abandons Priority Shares

Those who rule the oil company Royal Dutch Shell made a big concession to the peasantry, more commonly known as investors, when they proposed the abolition of "priority shares." Until this happens, some shares will carry more votes than others. The reform is good news for the business, and it is only unfortunate that the concession came as the result of hard times at Shell.

A letter in the Financial Times on Wednesday appeared to spark the initiative. It was not just any "Dear Sir" note, but rather it was signed by pension fund giant Calpers and asset manager Knight-Vinke. Essentially, they threatened to make the annual shareholders' meeting grossly unpleasant for the board with hostile awkward questions unless they got more information on a recent review of corporate governance at Shell. In brief, the shareholders (who actually own the company) wanted to know such basic information as which executives are handling the review, to whom do they report and what the scope of the review happens to be.

Normally, institutional investors go along with boards of companies in which they have invested money, but Calpers has been flexing its muscles lately at Shell and elsewhere. Knight-Vinke's website says, "the separation of ownership and control provides managers with the opportunity and ability to act in their own self-interest rather than the interest of shareholders . . . . [There is] significant scope for active investors to achieve superior returns by instigating change and promoting better corporate governance." In other words, "the board better remember who hired them."

None of this would have come about, however, if Shell hadn't lost about $5 billion of its value as the result of an admission that it had overstated its oil and gas reserves (which basically is future revenue) by about 20% -- four reserve downgrades since January. Shareholders are pretty relaxed about things that don't harm revenues or earnings too much -- $5 billion is too much. Management then compounded the problem by undertaking the review of the mess they had gotten into with undue secrecy.

The "priority shares" are a prime example of the sort of corporate governance issue that never arises until a problem puts a spotlight on it. While it is reasonable to create within the capital structure preferred shares that have primary call on dividends (and usually less weight in voting), priority shares are merely a way of packing the ballot box -- often to the advantage of the board and as Knight-Vinke notes, that isn't always the same as the interests of the shareholders.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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