Friday, March 19, 2004

The fall of Sir Philip Watts

The fall of Shell’s Sir Philip Watts -
The reasons why

To understand the true significance of the resignation of Shell’s top man Sir Philip Watts it is necessary to appreciate that in an era when Chief Executives of world scale businesses are vulnerable (and many have been fired) no Shell Chairman has ever before been removed early from his post. The reason for this is that Shell does not conform to the conventional model of a business that is followed by virtually all of its competitors and by most other businesses. Such a model would have a classic hierarchical structure with a single Head Office and Board of Directors. Shell has two Head Offices (or "Central Offices" as they are called in Shellspeak) in London and The Hague and two Boards of Directors. This is because the Group is technically two separate holding companies in alliance rather than being a single corporate entity. Companies' legislation requires that these two companies and boards have jurisdiction over the business and that they are accountable to shareholders. The reality in Shell, however, is that there is no real direction from these boards and although they comprise the same people as the senior officers of the Group, they are little more than wielders of legally required rubber stamps. This also reduces the role of the non-executive directors considerably compared with more conventional businesses. The Board meetings of the "Royal Dutch" and of "Shell Transport and Trading" are little more than ceremonial affairs - the real direction of Shell takes place elsewhere.

At the very top of Shell is the "Committee of Managing Directors" or "CMD". Although the collection of individual directors that made up the boards of the two parent companies actually have little responsibility in these boards for running, Shell some of the same directors (the executive "Managing Directors"), have almost untrammelled power when they are gathered together as the CMD. The CMD has been referred to as the "Praesidium" of Shell and whilst this is a rather Soviet sounding term it is accurate. On a day to day basis the CMD takes the key decisions which determine the Group's direction. In that respect it resembles the board of Directors of a conventional business - but without the checks and balances that come automatically from being directly accountable to shareholders or from having non-executive directors actively involved in decision making. Appointment to the CMD has always, before the departure of Watts, been a job for life - no Managing Director has ever been sacked for incompetence or pushed aside in a board room coup.

The Chairman of the CMD is the most powerful man in Shell and historically the appointment has alternated between a Dutchman (who is also Chairman of the Royal Dutch) and a Brit (who is also Chairman of Shell Transport and Trading). The CMD Chairman before Watts was Mark Moody-Stuart, a popular and successful leader who not only inspired great loyalty but who was (crucially) well respected by financial analysts and large shareholder groups. There was much speculation in Shell in the years before Moody-Stuart’s retirement as to who would succeed him - but most expected that it would be a Dutchman who would take over in line with precedent. The favourite was Martin van den Bergh an elegant, well connected and urbane figure with all the right credentials. He had, however, two disadvantages. He was approaching 60 years of age when Moody-Stuart retired and Shell has always followed a strict retire at sixty policy. This could have been relaxed but it was clear that for some there was also the problem that van den Bergh was rather in the same mould as Moody-Stuart – smooth and patrician. And that was how Watts came from way out of left field into the reckoning.

Nobody would ever accuse Phil Watts of being smooth and patrician. Where Moody-Stuart and Martin van den Bergh were products of elite schools and universities Watts was from a far more humble background. He was a hard-nosed technocrat with few social graces and with a style at odds with those (be they Dutch or British) who preceded him as Shell Chairman. In the (as it turned out) misplaced belief that Shell needed a period of a more brutal management style (Watts’s hallmark) he got the job. His failure is attributable to three main factors. Firstly the Dutch (who own 60% of the Group) were less than delighted when an Englishman followed an Englishman and their support for Watts was going to have to be earned by him - he never in Shell succeeded in this task. Second much of the role of Chairman is external and Watts never cut the right figure in the wider business world – in particular he was universally derided by the financial analysts. Third (and crucially) Watts had few Shell friends who would loyally fight his internal battles for him. There were the usual acolytes who made themselves useful to him in their own interests - but few of these proved loyal when the chips were down. Watts had trampled over too many others in his rise to the top to expect that the battalions of middle managers in the Group would fight to the death in his support. He became an increasingly isolated and lonely figure and in the end this affected his judgement – as the debacle over the revaluation of Shell’s reserves, which in the end brought about his downfall, showed.

Phil Watts was perhaps the most notable modern example of the Peter Principle (the theory that employees within an organisation will advance to their highest level of competence and then be promoted to and remain at a level at which they are incompetent) and the ructions following his fall will hang around Shell for a long time.