03 Dec Broken Shell: fixing transformation risks
In 2004, Shell, the world-renowned oil and gas company found itself at the centre of a scandal that threatened its trustworthiness and its survival, after it came to light that Shell’s committee of managing directors had been overstating oil reserves in Securities and Exchange Commission (SEC) filings by 20% and raised larger issues about industry practices.
Investors, such as insurance companies and pension funds, that invested money belonging to millions of ordinary people with small savings, pension plans and insurance policies, saw Shell’s share prices crash and £3bn wiped off their investment value. This prompted the business to initiate a shake-up in order to ensure that they wouldn’t repeat the same mistakes and meet the expectations of investors, which could lead to damaging re-evaluations.
As risk professionals, there’s always a chance that we will find ourselves helping our organisations go through drastic transformations to structure and governance. When advising the leadership team on steps for a successful change, there are a series of questions that we should ask ourselves about risk management context:
- What internal resistance could be faced when transforming our organisation?
- Are the right people in leadership carrying out the changes?
- When on the change management roadmap could events happen to skew our progress?
Change in the midst of a storm
At the time of the crisis, Shell was a 60/40 joint venture between Royal Dutch Petroleum Company and Shell Transport and Trading Company, run by a five-person committee of managing directors headed by Sir Philip Watts and Walter Van de Vijver as the head of exploration and production (EP). An investigation by Davis Polk & Wardwell, at the request of Shell, revealed a company torn apart by a power struggle between Watts and Van de Vijver. Both men battled for influence, their business cultures clashing, creating an environment in which staff feared for their jobs.
Watts asserted his authority as a decisionmaker, ignoring the warnings from Van de Vijver about the crisis. At a time where the head of EP could have alerted shareholders when he questioned that the health of the EP business was not as robust as the targets set under Watts, who had been the former head of EP, he instead joined forces to conceal the problems of the company.
The investigation also revealed a business that lacked internal controls and was run by two separate boards of directors, creating a broken down chain of command. Both by responsibility and authority, Mr Van de Vijver and Sir Philip were uniquely placed to address these issues. The two executives were viewed as the most powerful forces in Shell’s management. On one side, the present Chairman and on the other a leading candidate as Watts’ successor and the occupier of the position, head of EP, that had been the stepping stone to the role for the last two Chairmen.
After the scandal emerged, shareholders demanded the resignation of Watts and Van de Vijver and appointed Jeroen Van der Veer as the replacement Chairman. Van der Veer and the team of non-executive directors created a steering group that met 21 times over the next six months.
The steering group had to drive through major changes under intense pressure from investors and the media. Past organisational and governance issues were put in the spotlight and a strategic plan to completely transform Shell’s structure and processes, in the hope of saving the reputation of the multinational, was proposed. The project went on to be known as Shell Downstream-One.
ERM as the blueprint for transformation
Change is an inevitable part of the life cycle of a business, whether it is unplanned and comes as the direct result of an unexpected event that cannot be predicted, to transformational change that targets a company’s organisational strategy.
In these types of situations, an enterprise risk manager’s (ERM) role would be to help reduce the downside risk around the change implementation and increase the chances of positive outcomes taking hold. The risk professional provides information to the leadership team during the research and discussion phases of the activity, for shaping the subsequent strategic planning. The key risks that were identified in the strategic planning prior to the implementation of the changes, were that corporate culture could get in the way of good governance. It showed that there could be internal resistance from employees, stakeholders and investors to the adoption of a system that would require the transparency in their processes that they hadn’t shown for years.
The aggressive corporate targets that Van der Veer’s predecessors had set came into conflict with governance and control, attributed to the pressure from the operating unit management to follow the old Shell Group practices and not follow SEC guidelines. A clear example of a culture that had prevented senior management from following fiduciary obligations would be when Van de Vijver consistently pressed that the reserves booked during Watts’ time as head of EP were aggressive and premature, non-compliant with Shell Guidelines or SEC rules. He claimed that the booking of the reserves hindered his ability to meet business targets and reinforced an inaccurate perception in the market, but didn’t view the transgression as a regulatory or disclosure failing.
When Van der Veer and the committee announced a series of global, standardised processes that if introduced, would impact more than 80 Shell operating units, the measures proved unpopular as some countries/business units stood to lose market share. Many units were hesitant to accept the need for a new start as they felt that they were isolated from the identified problems. However, for a change of this magnitude to be successful, everyone had to adhere to the new systems and processes proposed. The Shell leadership team needed the entire company’s unflinching determination and focus on the transformation and this, in turn, required that people understood why the change was needed.
The truth is that transformation is not about downsizing, reengineering, and restructuring. It’s about people — about raising their aspirations and unleashing their potential. It’s also about learning, which is the cornerstone of any successful transformation.
Employees often resist change because they fear their jobs may be at stake or that they won’t be able to keep up with the new developments at the organisation. Such changes always bring about an initial reduction in productivity, engagement, loyalty and employee morale. Recognising this initial setback makes it easier for those driving change, to consider employee stress, anxiety and how to minimise unnecessary resistance, brought on by messaging that overlooks these issues.
Top management frequently makes the mistake of assuming that people will understand and support the changes they set out. A lack of empathy may cause them not to recognise that the people they manage will have had far less time to grasp the changes, to explore the strengths and weaknesses of the solution, the depth of consideration given to alternatives, that they lack a sense of control over outcomes, nor a deep understanding of why the status quo is not acceptable.
The main message of the change team was that simpler, standard processes across all countries and regions benefited Shell globally and that these trumped local, individual needs. That meant the introduction of things such as common invoicing and finance systems to more centralised distribution networks. By identifying and addressing the many objections that emerged from stakeholders who were set to lose control or market share, adoption of the new measures was accelerated.
Disruption and leadership
Operational disruptions are another risk factor of change. One strategy to minimise the impact is to regulate the right implementation pace, which varies depending on the size of the company and how complex the project or programme is. For Shell, the change management delivery team was made up of senior leaders, in-house subject matter experts, and implementation consultants, who had to demonstrate acute technical insights as well as modelling leadership behaviours to create a path for others to follow.
They briefed the people who would be impacted by the changes proposed; risks and potential problem areas were discussed and mitigated – before any real change was even delivered.
In all major change programmes, there’s always the danger that change management gets delegated; leaders distance themselves from the challenge of implementing the priorities they once advocated for, often taking pre-emptive decisions to remove themselves from the risk of visible failure. That can cause initiatives to fail as people mentally withdraw from the ‘battlefield’. In Shell’s case, the change leadership started and finished with Jeroen Van der Veer at the helm, who never drew back from emphasising how important full implementation of the Downstream-One programme would be.
Currently, Shell is in a significantly healthier position than when the transformation started. Confidence in governance and financial reporting was rebuilt during Van der Veer’s time as chief executive. He led the unification of the UK and Dutch companies, helping to streamline notoriously slow decision-making structures, something that has been ongoing even after his retirement as CEO in June 2009.
Addressing the internal resistance that would have come from employees scared that their jobs would be at risk but also, stakeholders that were bound to lose control or market share meant that the risk of a delayed or mismanaged change didn’t become a real threat to the company. Van der Veer’s appointment to the top leadership position, his understanding and focus on the implementation of the programme to transform Shell, made it easier to avoid disruption.
Strategic planning identified the key risks that they would have encountered during the transformation period. Allowing them to understand and reduce the impact they would have had on the company, further proving that risk professionals play a key role in the success of the transformation of an organisation.
Even though the theoretical challenges that accompany organisational change management are expected, the conscious use of risk identification from top management resulted in the success of Shell’s transformation.
The question for most of us is, have we positioned the risk function to be called upon in moments of deep strategic change?