Analysis of Royal Dutch Shell Group - Case Study Example

Order 159248 Topic: Royal Dutch Shell group assignment Introduction: This paper seeks to research the firm to provide a critical review of its performance in terms of growth, profitability and liquidity in the past five years. This will also evaluate the importance of Corporate Governance in global corporations like Shell. In addition, the paper will also appraise the need for global harmonization in the preparation of the Financial Statements of Royal Dutch Shell group, which has shares quoted on more than one stock exchange. A part of the paper will look into the issue of the diversity of location from which Shell operates that offers challenges in the management of international business finance owing to differences in Corporate Cultures. 2. Analysis and Discussion 2.1 Research the firm to provide a critical review of its performance in terms of growth, profitability and liquidity in the past five years. IFRS US GAAP Financial ratios 2005 2004 2003 2002 2001 Return on average capital employed 25.6 20.1 14.4 13.6 15.6 Return on sales 7 5.8 4.8 4.5 6.5 Return on equity 26.7 22 16.3 14.2 15.4 Current ratio 1.2 1.1 0.9 0.8 1.1 Long-term debt ratio 7.2 8.8 10 8.9 2.7 Total debt ratio 11.7 13.8 19.4 21.5 8.1 Gearing 12 15.4 27.5 32.7 6.2 IFRS US GAAP Basic Earnings per Share (Net income per share) 2005 2004 2003 2002 2001 Basic earnings per €0.07 ordinary share 3.79 2.74 1.81 1.41 1.45 Reference: (Royal Dutch Shell, n.d.). Profitability , after slightly decreasing from 2001 to 2002, has been continuously growing for the years from 2002 through 2005. Such was very evident in terms of return on average capital employed which was recorded at 25.6%, 20.1%, 14.4%, 13.65 for the past four years mentioned respectively. This was also consistent in terms of return on sales which was recorded at 7, 5.8, 4.8 and 4.5 percent respectively. The behaviour of the ratios is also consistent with those of the return on equity which were recorded at 26.7, 22, 16.3, and 14.2 percent for the four consecutive years mentioned respective. It would appear that in all indications, management appear to have delivered value to stockholder for the years mentioned (Royal Dutch Shell, n.d.). The behaviour of the profitability is followed by the pattern of one time decrease in liquidity from 2001 to 2002 but after that, the increase started to take off from 2002 through 2005 which recorded a current ratio of 1.2, 1.1, 0.9, and 0.8 respectively for the years 2005, 2004, 2003 and 2002 respectively. In terms of financial leverage there was also a slight deterioration from 2001 to 2002 but from 2002 onwards, the improvement for the past four year is very noticeable. Long- debt ratios were recorded at 7.2, 8.8,10, and 8.9 for the years 2005, 2004, 2003 and 2002 respectively. Even the gearing ratio, the a deterioration was noted from 6.2 in 2001 to 32.7 in 2002, but the latter ratio continuously improved for the past 4 years . What is very clear is the company’s profitability leads the other ratios to their supposed rates and hence there is basis infer that the ratios are believable and therefore they must have basis in reality. 2.2 Evaluate the importance of Corporate Governance in global corporations like Shell. Before we answer the question we have to take a definition of what corporate governance means. For this purpose we will take the broader perspective including that of John Cioffi, which states that “corporate governance structures the allocation and exercise of power and decision making authority among managers, shareholders and employees – the principal groups involved in corporate affairs defined by a tripartite legal structure of company law, securities regulation and labour relations law” (Cioffi, 2003) and that of O’Sullivan which states that “corporate governance shapes who makes investment decisions in corporations, what types of investment they make, how they make decisions and how returns from investments are distributed (O’ Sullivan, 2003). (Baker, n.d.) Based on the above definition we now evaluate global corporations like Shell. The importance of corporate governance therefore would indicate that global corporations like Shell do have responsibilities on their investment decisions that should ensure the attainment of the objectives of the various stakeholders of the organization. To evaluate Shell as global corporation let us take what it claims to be its principles as against what can be gathered as available evidence on the basis of its claims. The company claims that its General Business Principles are part of everything it does do. It claimed it principles have existed in their written form since 1976, and have remained highly consistent ever since, because the core values on which the Principles were originally based have endured. It had changes in 1997 and 2005 and these “changes are largely revisions rather than radical alterations as the existing principles still represent the way Shell wishes to do business but some areas have been strengthened.” It claimed to have eight Principles, which apply to all its” business affairs and describe the behaviour expected of every employee.” Claiming further that the Principles are based on company’s core values of honesty, integrity and respect for people, they also indicate how the company “promote trust, openness, teamwork and professionalism, and pride in what it does. It said, “As a global group of companies we have a responsibility to be a good corporate citizen: to listen and respond to all points of view.” One of the key changes that the company adopted include the “emphasis on social performance and engagement with communities” The changes took were made in 2004. In investigating available evidence on the matter, it was found that “In July 2004 the SEC took strong action against three European corporations involved in cases of financial malpractice. The first cases involved civil charges that Royal Dutch/Shell exaggerated its energy reserves leading to a $120 million fine (Schroeder and Ascarelli, 2004).” (Baker, n.d.). What the above indicate that Royal Dutch Shell was far from perfect as evidenced by the fact that it was involved in civil case involving cased of financial malpractice. What seems to be good however is that the change on business principle appeared to be in reaction to what happened in 2005 making shell liable. The importance of corporate significance for Shell could have been appreciated more if the company has realized the need for its social responsibility through corporate governance. Being unmindful therefore of such realities make companies not only civil liable but also criminally liable. 2.3 Appraise the need for global harmonization in the preparation of the Financial Statements of Royal Dutch Shell group, which has shares quoted on more than one stock exchange. It could be stated that there is a need for global harmonization in the preparation of the financial statements of Royal Dutch Shell group, which has shares quoted on more than one stock exchange. This based on the premise that different countries have different cultures and with different reporting system. What could happen if there is not global harmonization in the preparation of the Financial Statements of Royal Dutch Shell group? Uddin (n.d.) said, “ The present lack of common accounting requirements around the world serves as a significant impediment to the globalization of capital markets by restricting an investor’s ability to make informed decisions about investment alternatives. For investors and other users to compare investment opportunities and, indeed, for a company to benchmark itself against its competitors, a common accounting and financial reporting framework is needed.” Thus Uddin (n.d.) saw the need all over the globe International Accounting Standards (IAS) in the absence of domestic standards. Thus the author said said, “The potential for IAS to provide the basis for comparable national and cross-border financial reporting is increasingly clear.” May 2000 saw the recommendation by the International Organization of Securities Commissions for regulators to allow multi-national issuers to use IAS for cross-border offerings and listings, subject to the provision of supplemental data. In February 2001, we have the European Commission proposed a requirement that Europe’s listed companies to prepare their consolidated financial statements in accordance with IAS from 2005 onward. (Uddin, n.d.) (Paraphrasing Made). Countries from Asia to Latin America have their national governments, regulators and accountancy professionals are actively consider the reduction of the differences with national accounting rules and from IAS. On this context harmonization has become imperative for global corporations (Uddin, n.d.)(Paraphrasing made) 2.4 The diversity of location from which Shell operates, offers challenges in the management of international business finance owing to differences in Corporate Cultures. Discuss When a business plans they create scenario as one of the basis of their strategy. The emergence of globalization has required better corporate governance and more stringent social responsibility on the part of manage. With some business failing on their business class model alone, many companies now realize the importance of social responsibility by the practice of corporate governance. Some companies would therefore create a scenario, where “countries are seen as taking a more interventionist role in their economies, basing their policies and actions more on cultural values and practices than on economic principles and objectives. Characterised as a "prism" model, markets would continue to matter, but their importance would be balanced by a recognition that governments may need to intervene to assure that social needs are addressed (Davis, 2002 and Royal Dutch Shell, 2002)”. OECD (n.d) suggested, “In this context, fiscal, investment and related policies would be managed more actively to assure they were consistent with and contributed to a country’s vision of society. For business, the diversity in framework conditions among countries would require tailoring initiatives to local conditions, while recruiting and developing competent local staffs to implement strategies. Globalisation would therefore continue, but would be subject to greater scrutiny” (Organisation for Economic Co-Operation (n.d.) In the light of these realities and other given fact that Shell operates globally under different culture which may require different values, it is expected that company must be able to address concerns as necessary part it business. As part of its strategy, Shell must be able to be able to achieve sustainable development among different cultures. To attain sustainable development, the company agreed to engage with its stakeholders in understanding to manage the impacts, both positive and negative, that its operations and products have on society and the environment today, and for the company to identify business opportunities for the future. It therefore committed itself to have sustainable development contribution coming “from finding environmentally and socially responsible ways to meet the world’s future energy needs.” (Royal Dutch Shell, n.d.) Conclusion: Royal Dutch Shell is a global corporation which has business operations around the world which have different cultures. Since financial information assumes different culture and since each culture assumes a unique way of financial reporting it would mean there is indeed a need to make for a global harmonization in the preparation of the financial statements of Royal Dutch Shell group, which has shares quoted on more than one stock exchange. As to how will this be resolved could be done through the international financial reporting standards. There need therefore for IFRS has become indispensable because of globalization. References: Baker, A. (n.d.) IPE, Corporate Governance and the New Politics of Financialisation: Issues Raised by Sarbanes-Oxley. Cioffi, J (2003) “Expansive Retrenchment: The Regulatory Politics of Corporate Governance Reform and the Foundations of Finance Capitalism,” Paper prepared for workshop, ‘The State after Statism: New State Activities in the Age of Globalization and Liberalization, University of Berkley, California, November 2003. O’Sullivan, M (2003) “The Political Economy of Comparative Corporate Governance,” Review of International Political Economy, 10:1, 2003, pp.23-72. Organisation For Economic Co-Operation (n.d. )Global Industrial Restructuring {www document} URL http://www.oecd.org/dataoecd/59/47/1947035.pdf. Accessed March 18,2008 Royal Dutch Shell (n.d.), Company Website {www document} www.shell.com, Accessed March 18,2001 Schroeder, M and Ascarelli, M (2004) “Global Cop: New Role for SEC: Policing Companies Beyond US Borders,” Wall Street Journal, July 30. Uddin, S. (n.d.) Global Harmonization of Accounting Standards, {www document} URL http://www.icmab.org.bd/pdf/may-jun/Salim.pdf., Accessed March 18,2008 Read More