Jeremy Warner's Outlook: Shell makes historic leap to unified structure, but will it do any good? It's a tough call

Citigroup punished, but what for? - Railtrack investors get their vengeance - Foreign investors flocking to Britain
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The Independent Online

Shareholders duly voted through proposals to get rid of Shell's dual domicile and capital structure yesterday, but if you can fully get your head around the supposedly simpler structure that's replacing it, then you are a better man than me. For many shareholders, it looks as if one form of complexity has only been replaced by another, while a minority - admittedly smallish - is seriously disadvantaged by the changes.

The genesis of these reforms lie one and a half years ago in the revelation that Shell, up until then a presumed model of corporate rectitude and good behaviour, had been deliberately exaggerating its disclosed reserves.

The fault was reasonably thought to be largely attributable to corporate governance failings, in part deriving from the confused chain of command that lay at the heart of the company's dual domicile structure. There were two boards, two listings and the company straddled two different jurisdictions - Britain and the Netherlands.

Shell seemed to be lacking in even the most basic standards of accountability, the absence of which had led not just to the scandal of the overstated reserves, but had caused the company to slip seriously behind its two leading competitors, BP and Exxon Mobil, in developing new sources of supply and keeping pace with key rations of industry performance.

The solution settled upon is to move to a unified board and a unified capital structure. In future, there will be just one Shell, not two, one board, and one domicile, allowing for more rapid fire decision making, better accountability, and hopefully a more entrepreneurial and performance-driven culture.

Yet the vagaries of the two jurisdictions' tax systems mean that Shell has been unable to escape the dual capital structure entirely. Shares in Royal Dutch Shell are to be replaced with A shares and those in the British half of the enterprise, Shell Transport & Trading, with B shares. This is because the Dutch government has a higher withholding tax on dividends than Britain. Just to add a further layer of tax complexity, British resident holders of Royal Dutch shares will have to pay capital gains tax when they swap into the A shares.

Already the B shares are trading at a significant premium to the A shares, this despite the fact that the company has promised to commit its entire buy-back programme to the A shares. One reason for the differential is that indexed British funds are being forced to buy large numbers of addition Shell shares so as to reflect that the company's weighting in the FTSE 100 is about to more than double. Confused? Who wouldn't be after all that.

Will these changes, costing some £63m to push through, make any difference to the company's performance? Theoretically, they should do, yet it's going to be some years before we know for sure. By that stage, Jeroen van der Veer, chief executive, and the everyone else responsible for yesterday's upheaval, will have moved on.

Citigroup punished, but what for?

The nearly £15m in fines and relinquished profits imposed by the Financial Services Authority on Citigroup is the largest ever such penalty in the City regulator's five-year history and is no doubt thoroughly deserved.

Yet the most striking thing on reading the FSA's "final notice" concerning an elaborate trading strategy for making money out of the European bond market is that the City watchdog has failed to make anything other than the most minor of charges stick. Indeed, on reading the evidence, it's hard to see what Citigroup did which was wrong at all, other than attempt to make a fast buck, which is surely the whole purpose of securities trading.

Citigroup prompted a huge furore in August last year by taking an abnormally large position in the European bond market, hedging it through futures contracts, and then driving the price down by dumping the stock wholesale. Rivals cried foul. Citigroup had manipulated the market for profit, they screamed. Well, there's a thing. Yet try as it did, the FSA has failed to prove a case of market abuse. Instead Citigroup is hung out to dry for "failures in systems and controls", and "failure to act with due skill, care and diligence".

It's not my role to condole reckless behaviour, for these trades were arguably that, yet traders are required to devise strategies that maximise profits and if there are anomalies in the system that allow them to do it, then generally they will exploit them. If all markets were perfect, and traders were utterly transparent in what they were doing, then nobody would make any money. It would be like playing a game of poker where all hands were exposed.

The episode undoubtedly inflicted some reputational damage on Citigroup and it has led to an overhaul in internal procedures to ensure that traders and compliance officers are cognizant of the dangers of extreme trading strategies. Yet I'm not sure the fine was entirely warranted, even if, in the manner of the enslaved, Citigroup has humbly thanked the regulator for its punishment. The responsible traders, on the other hand, will all be returning to their desks now that the investigation is over. Plainly Citigroup knows a good operator when it sees one.

Railtrack investors get their vengeance

No wonder Stephen Byers didn't get a job in the new Government, despite reportedly still being close to the Prime Minister.

We are just two days into the High Court action by former shareholders in Railtrack for malfeasance by the Department of Transport, and the allegations against Mr Byers and his advisers could scarcely get more damning. Even if the former Transport Secretary is cleared of the direct charge of malfeasance, it's hard to see how he could credibly be eased back into the higher echelons of Government after this.

In forcing Railtrack into railway administration, Mr Byers is accused of deliberately engineering a state of affairs by which he could get something for nothing, something for which he knew he should have paid.

Whether the charge of malfeasance sticks or not, the image emerges of a man who was only too happy to deprive investors of their rights as shareholders, believing, quite mistakenly, that public hatred of Railtrack was such that voters wouldn't mind if the Government rode rough shod over accepted democratic and legal protections.

Mr Byers was exactly the same when at the Department of Trade and Industry, where his decisions, particularly in the field of mergers, were so overtly political and ungrounded in consistency as to be almost laughable.

You cannot have someone so apparently careless of his duties as an elected politician running a government department. The terrifying thing is that but for the Railtrack Private Shareholders' Action Group, he almost certainly would be once more. They may not win, but whatever the outcome they are doing a public service by ensuring that Mr Byers never again gets the chance to "bury the bad news".

Foreign investors flocking to Britain

According to the Department of Trade and Industry, Britain last year enjoyed the highest ever number of inward investment projects - a curiously resonant 1066. In itself the number may not be terribly meaningful, yet recent OECD data showing foreign direct investment into Britain rising more swiftly in value terms than anywhere else in Europe seems to confirm the Government's claim that Britain is now seen globally as one of the best places in the world to do business. This has shot two foxes at the same time - one that our absence from the euro would make business less happy to locate here, and second that the Government's propensity to tax and regulate is making Britain a progressively less attractive place to invest. Both contentions seem to be wrong.