Outlook: Relief for John Rose as Rolls-Royce begins to come of age

Shell/Phil Watts; PPL's breakthrough Ê

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Rolls-Royce shares fly as 11 September clouds lift

City attacks Shell's 'brusque' chairman

Just as everyone thought the jam tomorrow story that has always been the aero engines group Rolls-Royce, was actually about to start delivering the jam, along came 11 September and investors reasonably took the view that it was jam delayed yet again. As it turns out, the 11 September effect has not been nearly as bad for Rolls-Royce as it might have been. Sales of engines are down by nearly a third, but the order book is still growing, aftermarket demand for spare parts and services remains strong and net debt is falling.

Admittedly, the profit and loss account for the first half of this year doesn't look quite so flattering. Overall sales are down, even taking account of the joint venture services businesses, and so are profits. The company would like you to focus on what it calls "underlying" profits, which aren't too far adrift of last year, but taking the old fashioned idea that performance should be judged on the basis of profits before tax, the numbers have plummeted from £137m to £33m.

Never the less, John Rose, the chief executive, has good reason to congratulate himself. Over the last decade, Rolls-Royce has transformed its position from a poor third in the aero engines market into a vibrant number two, snapping at the heals of the market leader, General Electric. What's more, the business strategy of building the installed base of Rolls-Royce engines to a level where it produces a substantial annuity in aftermarket sales of spares and services is plainly beginning to work. Aftermarket sales were 41 per cent of the total in the half year, helping to protect the company from the downturn in new engine sales.

Worries remain. The pension fund deficit at £700m is alarmingly high, and if nothing changes, Rolls may be forced to top up the fund to the tune of £35m a year in each of the next three years. Nor has Rolls managed entirely to quash the accounting concerns that have swirled around the company post the collapse of Enron. Questions remain about the way the company accounts for its risk and revenue sharing partnerships to fund new engine development. There is also some £700m of debt that sits off balance sheet in the group's various joint venture service companies. All of it is non recourse to parent, but that doesn't stop the whispering.

Even so, the company looks financially safe enough, its market position is secure, and the strategy seems sound. Investors can be confident the jam really is about to arrive. The wait will have been worth it.

Shell/Phil Watts

Phil Watts, executive chairman of Shell, must have read last month's bizarre, three-part hagiography in the Financial Times on Lord Browne, his opposite number at BP, with irritation and not a little envy. While the rest of us were reaching for the sick bag, Mr Watts must have been thinking, "Why not me? Lord Watts of Leicester, the Shell king, the man behind one of the world's greatest corporations, one of Britain's most admired business leaders, a miracle worker, a charmer, a schmoozer, a networker, a fixer, hugely liked by all and just an all round bloody genius and demi-god".

No such luck. The contrast could hardly look greater. While the City just loves Lord Browne, many investors and analysts say they are already disillusioned with Mr Watts. He's only been at the job 12 months, but he already seems to have got up everyone's noses. He's being described by some big investors in the City as "brusque, a poor communicator, and generally defensive when dealing with critical questions". Those delicate flowers that call themselves fund managers apparently don't like his direct, no nonsense approach to meetings, and although they are not yet calling for his head, they want him to reform his style.

Chief executives are these days expected to be super heroes. It's taken as read that they've got to be brilliant operational managers. But they are also meant to be inspired strategists, cheerleaders, team builders, party animals, media savvy talkers and politically wise activists. Those who don't properly schmooze their investors are likely quite quickly to get cast aside. As Sir Richard Greenbury, former chairman of Marks & Spencer found out to his cost, you can get away with treating your investors with disdain only as long as the earnings and dividends keep rising.

The chief executive who won't talk to his investors but produces the results anyway will always carry a certain cache and respect for a while. The message will be conveyed that he's far too busy running a successful business to be bothered with all that investor relations stuff. But when the music stops, as eventually it always does, then he's going to be in trouble. The chief executive who's invested in communication might escape with his job. The one who hasn't gets accused of arrogance and is thrown to the wolves.

As it is, there are already doubts about Mr Watts beyond his communications skills. His acquisition strategy has yet to be adequately explained or justified. Nobody's yet managed to figure out why he paid top dollar for Enterprise Oil, a deal made to look all the more inept by the fact that the Government adversely changed the North Sea oil tax regime mid way through the bid. The patchwork of other bolt on acquisitions has also only served to confuse. As if all this were not bad enough, Mr Watts added to growing City exasperation by casually and inexplicably cutting his production targets.

The Shell chairman none the less needs to be given the benefit of the doubt. His record as a manager is excellent, and though it is often hard to detect change in an organisation as large as Shell, the behind the scenes transformation over the past five years has been dramatic. From having some of the worst operational ratios in the industry, as well as some of the poorest returns on capital, Shell is now up there with Exxon and BP. Mr Watts was behind the upstream restructuring that made this possible.

Shell has always been something of a law unto itself, a standalone, nation state of a company with an in built insensitivity to the demands and ways of a changing world. That's why it fell so far behind operationally. Shell's culture of insular arrogance also led directly to the debacle of Brent Spa, as well as a number of well publicised environmental and human rights infringements in Nigeria. It didn't seem to occur to Shell how damaging these public relations disasters might be to the company's wider interests.

Again, all that has changed. And again, Mr Watts has been a leading light in the company's drive towards adequate standards of corporate citizenship and environmental protection. You won't find Shell's name on the Greenpeace website any longer and its reputation among consumers is second to none. It's only in the area of investor relations where the old arrogance seems to persist. There's more work yet to be done before Mr Watts can be sure of his FT three-parter.

PPL's breakthrough

For the second time in a year, PPL's cloned piglets are front page news. And for the second time in a year, PPL is being publicly criticised by the Royal Society in jumping the gun by claiming a breakthrough in the cloning of pigs to supply organs for human transplants. PPL is short of finance and will soon need to raise more. It doesn't help its cause, or that of the rest of the biotech industry, by making exaggerated claims.

jeremy.warner@independent.co.uk