The Wall Street Journal: SEC Probes Shell's Bonus Awards

Agency Seeks to Determine

If Managers Had Incentive

For Overstating Reserves

By CHIP CUMMINS, SUSAN WARREN and SUSAN PULLIAM

Staff Reporters of THE WALL STREET JOURNAL

March 11, 2004 4:29 a.m.; Page A3

The Securities and Exchange Commission is examining whether bonuses and other incentives may have encouraged managers at Royal Dutch/Shell Group to overstate the company's energy reserves, said people familiar with the situation, as the agency's probe continued into an accounting firestorm that has rocked the oil industry.

The SEC probe is at an early stage and no findings have been reached. The agency is looking at the extent to which Shell tied bonuses awarded to executives to the booking of oil and natural-gas reserves by the company. Reserves -- estimates of the amount of oil and gas a company thinks it can pump and sell -- are critical to investors' assessments of an energy company's value.

Among the questions the SEC is asking is how many Shell executives received such bonuses and how high up the management chain these bonus awards went, according to these people.

Shell's audit committee, which is conducting an internal probe into the reserve issue, also requested detailed information from company management about whether reserve bookings affected employee bonuses, according to a person familiar with the situation. But the committee -- made up of nonexecutive directors from the separate boards of Shell's two parent companies -- was told that while reserve bookings played a role in the bonus scheme, the bookings didn't materially affect any individual's compensation, according to this person.

A Shell spokesman said the company was cooperating with the SEC's review but it would be inappropriate to comment on it.

Shell's shock disclosure on Jan. 9 that it would slash its reported oil and natural-gas reserves by 20% raised questions about whether senior executives or managers at Shell's various operating units around the world had financial incentives to overstate reserves. Early last month, Philip Watts, Shell's ousted chairman, said the bonus plan wasn't a factor in the reserve overbookings.

Last week, Shell's twin boards ousted Sir Philip and Walter van de Vijver, head of exploration and production, after being briefed on the preliminary findings of an internal review into the reserve issue. Company correspondence, unearthed by the audit committee's review, indicate Sir Philip and other senior executives knew of potential reserve shortfalls at least two years before disclosing them, people familiar with the situation said.

Shell executives in the exploration-and-production business, including the company's top reserve auditor responsible for vetting reserve bookings from Shell's many global units, received bonuses based in part on the amount of energy reserves the company replaced each year. But the reserve-related weighting -- the part of the bonus affected by reserve bookings -- was small, ranging from nothing through the late 1990s to 15% last year, according to the person familiar with the Shell audit committee's probe.

The weighting, in turn, was part of a "scorecard" used to rate a business unit's annual performance, and that rating would affect annual bonus calculations. The reserve weighting didn't result in "material" payouts to executives in the company's exploration-and-production business, this person said.

Bonus plans for senior executives -- including the company's top managers -- didn't have any weighting related to reserves until last year, this person said.

Shell has repeatedly declined to comment about when Shell's current top executives -- including Chairman Jeroen van der Veer and Chief Financial Officer Judy Boynton -- were first aware of significant reserve issues. Shell also has declined to discuss the audit committee's preliminary findings.

A.G. Jacobs, chairman of the two boards' audit committee, has said in a statement only that the audit committee has recommended to other board members and independent auditors "that they should feel confident in relying on the representations of the group's current senior management."

In his statement, Mr. Jacobs said the committee already was sharing information about its preliminary findings with the SEC.

Euronext, the European stock exchange, and the Dutch financial-markets regulator have indicated they will look into Shell's reserves issue, though neither agencies said it had launched investigations. British regulators, including the Financial Services Authority and the Department of Trade and Industry, declined to comment Wednesday on whether they are looking into the matter.