View from City Road: Shell takes a dent in Japan

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The Independent Online
SHELL'S image as a huge ice-breaker with the ability to sail serenely through problems that would sink lesser ships has been holed below the water-line.

The company's jointly owned Japanese associate faces potential losses of about pounds 900m from unauthorised currency trading over a four-year period.

The initial damage to Shell amounts to about pounds 131m and will be absorbed in the results for 1992 due later this week. With its rock-solid balance sheet and pounds 3bn annual profits, Shell is big enough to withstand the financial impact of the losses, as yesterday's small share price fall of 6p to 575p suggested.

But the real blow is to Shell's reputation as a tightly managed company that has side-stepped some of the glaring mistakes made by its rivals. Many investors have been attracted to the company's shares by their perception of it as a safe blue chip.

Many could now be forgiven for being deeply unsettled by the skeletons discovered in Japan. As other companies like Allied-Lyons have found, foreign exchange losses can throw into doubt the entire headquarters operation.

Although Shell had no direct management control over Showa Shell - as a Tokyo-listed company it has been run independently - the affair highlights the problems of scrutiny over far-flung joint ventures.

Ironically, joint ventures have been widely regarded as one of Shell's strongest assets, giving it access to markets that are traditionally hard to enter. But they entail considerable risk, as last weekend's events show.

That said, just one sixth of the group's net income is derived from associate companies. Some of its best-known joint ventures, such as in the North Sea with Exxon, are unquoted entities that allow proper financial monitoring by both owners.

With hindsight, Shell should have done more to protect its investment in Showa Shell. It may have left it too late this time, but with the company involved in similar ventures - in Canada and Australia - the risk of further losses is ever-present.

For that reason, too, heads should roll at Showa Shell. Change at the top would do much to reassure Shell's international investors.

(Photograph omitted)