Man at the controls

Shell’s group controller can scarcely believe the things he was allowed, even encouraged, to do 30 years ago as a first year graduate trainee at the oil giant’s central finance department. With an economics degree in his pocket from Amsterdam’s Free University but absolutely no experience he was set loose on the foreign currency markets.

‘I was making financial arrangements between the UK, Germany and Switzerland,’ says Jan de Kreij. ‘I was making a margin, could borrow SFr30 million (z15.5 million) and put it somewhere else with relatively little supervision.

There was no segregation between the back office and the front office.

We had not heard of those things then.’

Sumitomo, Barings and Daiwa aside, that just couldn’t happen in today’s heavily regulated corporate environment. De Kreij himself, whose job it is to set and monitor the framework of controls that ensure Shell’s financial probity would be the first to jump on it if it did (he refers to himself as the group’s ‘financial conscience’).

Even so, those early years in The Hague and later in the Dutch East Indies and Nigeria have left their mark. Controls are essential to the integrity of the company but, de Kreij argues, they must not bind or smother. There has to be room for manoeuvre and scope for personal initiative particularly for people who are just joining the company now but will be the senior executives of tomorrow.

Striking a balance

De Kreij (pronounced Kray) talks as though he believes there’s some sort of golden mean in terms of control. Overdo it and you not only bump up costs but also slow down the pace of business which causes frustration and, paradoxically, a loss of real business control. At the other extreme, too loose a framework almost guarantees problems.

He explains: ‘The task of the controller is to steer within the spectrum towards the area of “sound control” where things go right requiring few checks and corrections but lead to good decisions.’

Shell has grown out of an alliance made in 1907 between the Royal Dutch Petroleum Company and The ‘Shell’ Transport and Trading Company – the two agreed to merge their interests on a 60:40 basis while keeping their separate identities – into one of the world’s largest companies. The group operates in more than 120 countries, employs over 100,000 people and has interests in oil, natural gas, chemicals, coal and other businesses like forestry.

Four men make up Shell’s senior finance management team. The group treasurer, the head of taxation, the director of finance, who is also one of the all-powerful group managing directors, and de Kreij. The controller’s primary responsibilities are threefold. As well as setting the business control framework that must be adhered to by every company in the group, he also takes ultimate responsibility for all financial information provided both externally and internally. For instance, he has to give the annual report his ‘stamp of approval’ before the directors will sign it off.

And finally, he gives guidance on and approval to the interpretation of standards and policies.

Making sure the annual report is a true and fair reflection of Shell’s operations (he does the same sort of thing in-house as the auditors do externally) may be the most public aspect of his work but just as important, he thinks, is his responsibility for monitoring the standards of internal reporting. When individual businesses appear before Shell’s ruling body, its committee of managing directors, either for discussions about policy or decisions on investment they often come equipped with a report which, among other things, shows how they measure up against key performance indicators.

Not only must De Kreij make sure they do this properly but it is also his job to keep a constant weather eye on the performance indicators themselves.

‘Essentially I have to be able to say, when the business goes to the committee of managing directors, that the information which they use is true and fair as management information,’ he explains. ‘But I also have to ask whether in a changing world the particular indicators still reflect the essentials of the business. You’re a sort of devil’s advocate, challenging whether the key performance indicators which are seen as describing the business are really valid.

‘The business might come forward and say “this isn’t the appropriate indicator” and we’d have a dialogue over whether the indicators are “fit for purpose”.’

The bottom line

Though De Kreij’s work often sounds esoteric, many of his decisions will have very direct consequences on Shell’s bottom line. Late last year, for instance, he and his colleagues had to wrestle with the new American statement of Financial Accounting Standards (FAS 121). The way FAS 121 was implemented wasn’t just administratively important, it impacted directly on the group’s finances.

‘Although FAS 121 is clear in its purpose, for the oil industry it needed definition of how groupings of assets were made in order to calculate the degree of impairment of an asset (a future value lower than the current book value). Different groupings (for example, an individual well or a field of interconnected wells or service stations) would make hundreds of millions of dollars difference. And since impairment requires a future cash flow calculation, we as controllers had to agree with the businesses what were reasonable assumptions for the oil industry in the next 20 years on things like refining margins, oil prices, cost trends and so on.’

Accounting standards

The application and interpretation of accounting standards can be a minefield, says de Kreij, and one where, for a business the size of Shell, misinterpretations can create huge losses. The group’s 1995 income of nearly z4.4bn was the highest it has ever recorded and 7% up on the previous 12 months.

Though downstream earnings slumped more than a quarter – sales volumes rose but failed to offset lower refining margins, upstream (exploration and production) rose by 21% because of the happy combination of a boost in oil prices and higher sales volumes of both crude oil and natural gas.

Potentially just as dangerous is a sort of accounting laisser faire which makes little attempt to ensure that businesses don’t stray from the straight and narrow. ‘Lack of an appropriate control framework can lead to the collapse of businesses like Barings. Given the size and attractiveness of Shell it is not immune to lapses and it’s one of my jobs to ensure the appropriate reporting of such mishaps. But more importantly that there’s a quick learning process throughout the group.’

Though a great deal of what de Kreij has to deal with boils down in the end to financial controls, as group controller he also has to devise how standards can be set and performance measured in less easily quantifiable things like the use of human resources and environmental matters. The recent furores over both the Brent Spar storage and loading buoy and Shell’s Nigerian operations have brought home to him both how crucial these things are, and how tricky it is to make sure that everyone gets balanced information on them.

‘What do we report in the annual report on environmental matters? When we make a statement on the financial side, the quality of the statement is assured. We can measure it. But money is a lot more easily measurable than a number of items in the environmental area. On the financial side we’ve developed systems to measure it but it’s taken 30 or 40 years for financial accounting standards boards to come up with standards and measurements.

‘Incidents like Brent Spar have certainly made me focus on a number of questions. I think it’s made us ask what are the key performance indicators?

Are the key performance indicators which have existed in health, safety and the environment the most appropriate ones and how do we report to the outside world on this? We’re not as sophisticated in the environmental area, so we need to make far bigger strides than we’ve seen elsewhere.’

And with de Kreij on the case Shell won’t have to hold its breath for anything like four decades before there’s an appropriate framework on environmental issues.

Malcolm Brown is a freelance journalist