Introduction
There are many definitions of corporate governance, but Cadbury (1999) provides a conventional definition of this vital component of business management. Cadbury refers to corporate governance as systems through which directors direct and control a company. Corporate governance seeks to strike a balance between social goals and economic goals, as well as communal and individual goals. The ultimate goal of corporate governance is to align individual, corporation, and societal interests as much as possible. Some of the benefits of good corporate governance include putting in place a proper system of internal control and ensuring that no single person has too much power. Corporate governance enhances the relationship between a company’s directors, management, shareholders, and other stakeholders. In addition, good corporate governance improves transparency and accountability, thus ensuring that a company is managed in the best interests of various stakeholders (Hynes, 2008). This report analyses the corporate governance of Shell Group, which is an Oil and Gas multinational with headquarters in London. Besides dealing in oil and Gas, Shell Group has invested in renewable energy, which makes the company a significant player in the oil and gas industry. The changing expectations of the most important stakeholders are analyzed. The report also suggests transformative initiatives that should be included in the board’s agenda to secure the resilience of the company and ensure long-term success. The potential vulnerabilities that the company faces, such as agency problem and conflict of interest and recommendations to the board to avoid recurrence in the future is also covered.
The Changing Stakeholders’ Expectations
Besides shareholders, Shell Group’s most important shareholders are the employees, customers, suppliers, local communities, interest groups, and providers of credit. The expectations of each of these stakeholders have changed over the last few decades. For example, Shell Group’s customers expect the company to provide the same quality of products in order to remain loyal (Demise, 2006). In addition, customers are increasingly becoming aware of ethical, social, and environmental aspects of company behaviour, so they expect the company to act in the best interest. Interest groups such as environmental groups expect Shell to be an environmentally responsible company by maintaining national and international environmental standards. Environmental groups expect shell to recycle materials, avoid pollution, and avoid subjecting its employees to hazardous processes. Shell suppliers expect regular orders, fair prices, better terms of supply and payment, and more importantly, accurate information concerning the company’s overall financial health. In modern times, employees expect to be compensated well, treated with dignity, and be trusted by the employer (Demise, 2006). Employees also expect safer working conditions, job security, and opportunities to advance their knowledge and skills. Providers of credit expect timely payment of principal and interest on all outstanding loans. The local communities also have a special interest in the long-term success of the business. They expect Shell to create jobs for the local people where the company operates. Local communities also expect the company to safeguard the environment and improve transport and communication networks in the local areas.
Transformative Initiatives on the Board’s Agenda
Less than 3 years after assuming office as the board chairman at Shell Group, Sir Philip was fired in early 2004 after an audit revealed that the firm had overstated its proven reserves by almost 25% (Crowley, 2009). Despite the disclosures, Sir Philip denied any wrongdoing or any involvement in the overstatement. However, investigations established that Sir Philip was well aware of the overstatement, which led to his dismissal from the board. This incident had far-reaching impacts on Shell Group and other people associated with the company’s management. For instance, Berger and Montague law firm sued Shell Group for harming its stakeholders through misrepresentation of financial statements and deception of stock market value. The finance officer was also put under investigation by the Securities and Exchange Commission of America, which forced him to resign. Following this incident, Shell Group should undertake a series of transformative initiatives that should be a priority for the board to secure the resilience of the company and accelerate its repositioning in the market. To start with, corporate decisions must serve the interests of the company and lead to the sustainable creation of value. Structural changes are needed to ensure that other stakeholders are represented on the board. Furthermore, the roles of the board chairman and those of the chief executive officer need to be separated (Chau, 2011). The management must be given the independence to steer the company ahead, but their autonomy needs to be exercised on the basis of accountability. Power separation must also be made under a clearly defined scope of duties, responsibilities, and rights. Stringent internal and external controls should also be put in place to avoid the recurrence of scandals in the future. Shell Group’s governance structure must uphold integrity and transparency, and key elements such as accountability and stewardship should be emphasized in the company’s governance structure. These recommendations can be attained through effective decision-making processes by the executive and non-executive directors. However, caution should be exercised not to have excessive surveillance that can stifle the productivity of the existing corporate governance framework. The main goal of good corporate governance is to create value for stakeholders and the business.
Potential Vulnerabilities and Recommendations
The potential vulnerabilities facing Shell Group in relation to corporate governance include the agency problem and conflict of interests (Crowley, 2009). Agency problem occurs when one party (principal) engage another party (agent) to carry out a given mandate. The principal is the shareholders while the agent is the management hired to run the business on behalf of shareholders. The problem arises when there is a conflict of interest between the shareholders and the management. The agent can make certain decisions that are not in the best interest of shareholders and other stakeholders. Good corporate governance requires the management team to safeguard the interests of shareholders since the management is accountable to the owners of the company (Aglietta, 2000). Shell Group’s misrepresentation scandal under the helm of Sir Philip initially favoured shareholders as it led to the overvaluation of the company’s shares. In spite of this favour, the shareholders were the greatest losers after the revelation of the scandal as the company’s reputation was ruined, leading to a significant loss in the market value of the company stocks. After the restatement, Shell Group’s share price dropped by a whopping 8%, reflecting the impacts of poor governance. The agency problem that occurred in Shell Group can be attributed to several factors. For example, the agents managing the company have access to insider information that they can utilize to their advantage (Hynes, 2008). However, a great deal of problems originates from differences between the interests of managers and those of shareholders. The problem may persist if the shareholders are unable to deal with information asymmetries. The cost of monitoring makes it even more difficult for shareholders to verify the activities of the company’s management. Thus, the failure of shareholders and directors to monitor the actions of the management team caused the scandal. The problem could have been avoided if Shell Group had put in place sufficient internal and external oversight controls. Besides putting in place oversight systems, the agency problem and the conflict of interest can be addressed by introducing an equity ownership program. By ensuring that the management team become equity owners, managers are forced to embrace integrity and transparency in executing their duties.
Conclusion
In summary, Shell Group has a variety of stakeholders with different interests and expectations. Good corporate governance involves striking a balance between the interests of managers and those of shareholders and other company stakeholders. Addressing the agency problem and the conflict of interest at Shell Group requires the company managers to embrace good corporate governance practices when making key decisions that affect the business, the shareholders, and other stakeholders.
References
Aglietta, M. (2000). Shareholder value and corporate governance: some tricky questions. Economy and society, 29(1), 146-159.
Cadbury, A. (1999). What are the trends in corporate governance? How will they impact your company? Long Range Planning, 32, 12-19.
Chau, S. L. (2011). An anatomy of corporate governance. IUP Journal of Corporate Governance, 10(1), 7.
Crowley, M. (2009). Corporate Governance-Royal Dutch Shell, Terrorism and Reputational Risk. Legal Issues in Business, 11, 35-47.
Demise, N. (2006). OECD principles of corporate governance. In Corporate Governance in Japan (pp. 109-117). Springer, Tokyo.
Hynes, J. (2008). Corporate governance: theories, principles and practice. Oxford University Press, USA.
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