Operations of Royal Dutch Shell - Coursework Example

ROYAL DUTCH SHELL Contents Introduction 2 Discussion 3 About Corporate Governance 3 Board of Directors composition 5 Audit Report 7 Recommended practice 9 Conclusion 11 References 13 Introduction The study is focused towards analyzing different aspects of corporate governance structure. In this study operations of Royal Dutch Shell will be thoroughly analyzed in order to determine their corporate governance expectations. Royal Dutch Shell is an Anglo-Dutch multinational gas and oil company. It is usually called as Shell and has its headquarters located in Netherlands. The company mainly deals in natural gas, petroleum and various other forms of petrochemicals. Royal Dutch Shell was founded in 1907 and was incorporated in United Kingdom. This company was formed due to a merger between Shell Transport & Trading which is UK based firm and Royal Dutch Petroleum. In terms of revenue this firm is stated as the second largest company across the globe. It is even considered to be one of the most valuable companies across the globe. In 2013 GDP of Netherland’s was approximately $555.8 billion and Shell accounted for 84% of the total GDP. This company has always been in the profitable segment and perform all its operations in accordance with business ethics. In the area of gas and oil industry Shell is an active company and is vertically integrated. There is wide range of operations executed by the firm such as exploration, refining, production, marketing, petrochemicals, distribution, trading and power generation. All these operations are well performed by the firm since there is a constant support from management and effective strategies are developed. Royal Dutch Shell operates across the globe in about 90 countries and even possesses some small renewable energy activities in terms of wind and bio fuels. This study will outline the ways through which requirements or expectations of corporate governance are being applied by Royal Dutch Shell. There will even be some corporate governance theoretical framework included in this study so as to reflect upon the functioning of corporate governance. Discussion About Corporate Governance Corporate governance can be defined as system of practices, processes and rules by which organization can be controlled and directed. This approach basically involves taking into consideration stakeholder’s interests within an organization. There are some key personnel whose needs are addressed through this approach such as shareholders, customers, management, financiers, community, government and suppliers (Machan and Chester, 2008). Corporate governance even provides appropriate framework which is required in order to achieve set objectives. There are wide array of spheres which are encompassed within this approach such as management, internal controls, action plans, corporate disclosure and performance measurement (Smith, 2010). It is a mechanism through which all team members are aligned towards common objectives or goals. The importance of corporate governance structure can be classified on basis of different factors. Firstly changing ownership structure and this phenomenon has been greatly observed in the recent years (Walsh, 2007). In most large firms, mutual funds or public financial institutions are viewed as the largest shareholder. They effectively control managerial body of an organization and they even force top management to follow corporate governance structure (Phillips, 2011). Shareholders play a major role in terms of increasing accountability, efficiency and transparency of a system. They even request management to adopt best policies that are consumer friendly by nature in order to protect environment and social groups. Hence change in traditional ownership structure has resulted into the concept of corporate governance (Mullerat, 2010). Social responsibility has also gained significance in the current decade and management of any firm is highly concerned about this aspect. Board of directors play a crucial role while executing social responsibility activities. Top management protect rights of suppliers, customers, shareholders, employees and local communities (Crane and Matten, 2007). On the other hand, in current scenario many scams, corrupt practices or frauds have taken place that has affected business operations negatively. There have been a lot of scams related to misuse of public money that has occurred across the globe. These kinds of fraudulent cases have been occurring in companies, stock markets, financial institutions, government offices and banks (Christian, 2005). Corporate governance is a framework that helps to prevent any such scams or financial irregularities. Shareholders are regarded as inactive in context of managing their own firms. They are observed to participate in annual meetings and this leads to director misusing their power (Carroll and Buchholtz, 2014). This is another factor which clearly states that corporate governance structure is essential in order to safeguard all stakeholders. In current decade all firms are involved in selling their products to global markets. This is mainly done in order to attract foreign regulations and rules (Treviño and Katherine, 2006). All these factors require corporate governance framework so as to succeed, enter and survive in global market. Today there are lot of mergers and takeovers that is occurring throughout the world. This framework of corporate governance is needed to protect interest of all members during mergers or takeovers (Collins and Jerry, 2002). SEBI has even made the approach of corporate governance compulsory for many firms. This has been done so as to protect interest of stakeholders and other investors. It takes into consideration interests of all team members and is required for handling fluctuating business conditions. Board of Directors composition Royal Dutch Shell has set its position in the industry through innovation and advanced technology. At Shell team members are inclined towards developing technical capabilities and then sharing their expertise with others. The management believes that in highly competitive environment this form of technical advantage plays an important role. There were many positive developments observed across the company in 2013. Board members possessed a common vision which was to apply technology in daily business operations. The firm recently has entered into a contractual argument which is a production sharing contract and it was mainly done for the Libra oil field. This contract established a platform for the firm through which they could prove their deepwater exercise. They will be able to prove their expertise in one of the biggest fields across the globe. These wide spread operations that are performed by Royal Dutch Shell is due to consistent support from board of members (Jeffs, 2008). The Chairman of the company is Jorma Ollila who is Finnish national appointed personnel. He has been President of Nokia from past many years. Senior independent director and deputy chairman of the organization is Hans Wijers. He has acquired great deal of knowledge and expertise from earlier organizations. Hans Wijers has worked with Boston Consulting Group from last many years. The non-executive directors are mainly of British origin but some of the key personnel like chief executive officer or deputy chairman belong to Dutch origin. This clearly indicates that diversity in culture is well maintained within the system. In overall context individuals belonging to diverse backgrounds possesses wide set of thoughts or opinions and this can be effectively applied to strategic decision making. There are various committees within the organization and each of them has specific tasks or responsibilities (Annual Report, 2013). Deputy Chairman of the firm is regarded as the Chairman of Succession and Nomination Committee. On the other hand, Chief Executive Officer, Chief Financial Officer and non-executive director forms part of the Remuneration Committee. Both these committees are associated with well being of employees. It can be stated that both these units work in collaboration so as to achieve organizational objectives. Some of the non-executive directors are active members of audit committee. The main function of this particular committee is to generate financial reports and analyze all financial statement of the firm. This is done so as to ensure that no fraudulent case has occurred within the system (Friedman and Miles, 2006). Corporate social responsibility forms another committee of this firm and it comprises of a range of non-executive directors. The directors are solely responsible for preparing annual reports. These financial statements have to be aligned with applicable regulations and laws. There are certain factors which are taken into consideration by the Directors such as selecting standard accounting policies and then applying them in consistent manner (Clegg and Rhodes, 2012). On the other hand, they even focus on making accounting estimates and judgements prudent as well as reasonable. All the executive or non-executive directors are involved in framing and analyzing financial statements. These statements are well aligned with IFRS standards and gives fair or true view of liabilities, assets, profit margin and financial position of Royal Dutch Shell. Audit information is available to all board members in order to take sensible decision for long term success. However none of the board members are involved in auditing process and this is simply because to carry out a fair process. Any kind of misinterpretation of data is reflected in audit reports which are then passed to top management in order to take corrective action. The main focus of board of members of Royal Dutch Shell is towards future developments and investing considerably in research and development process (Solomon, 2005). Shell is even involved in large base of cash generating activities in terms of satisfying large base of diverse customers through their products. It is responsibility of board members of the company to address diverse set of interests or needs of shareholders. Audit Report The audit report of a company reveals all such areas where ethical standards have not been properly maintained. Royal Dutch Shell has been able to perform operations ethically across the globe. The audit committee works in collaboration with board members in order to maintain integrity of financial reporting, effectiveness of internal control system and risk management, compliance matters and related governance aspect (Ali and Kaynak, 2012). Audit committee even has effectively reviewed training session and determine methodology to classify hydrocarbon resources and to analyze assurance activities. There are certain issues highlighted in consolidated financial statements and there needs to be proper techniques incorporated so as to address such issues. As per the committee, the entire annual report is structured in such a fashion that it is easily understandable by all shareholders and the company’s performance can also be well analyzed along with business strategy and models (Lynda, 2012). The audit committee consists of certain key responsibilities towards the board as well as the company. Auditor’s performance and expertise plays a major role in strengthening a firm’s position. There are wide array of elements which should be incorporated by an auditor in order to analyze genuineness of financial reporting. External and internal auditors are actively involved in monitoring qualifications of team members. Certain comprehensive reports were received by auditors from the management which enabled them to execute the entire process smoothly. In terms of internal control there were certain key issues highlighted by the auditors. Regular reports are framed on various risks which affects firm to a great extent (Lynch, 2007). There are even reports structured on assurance and control so as to outline risk management techniques and overall effectiveness. It has been stated that Royal Dutch Shell stays competitive by structuring contingency plans. These plans support the firm to handle efficiently operational risks, financial risks or any other risks. Disposals and acquisitions are also an important area of analysis from auditor’s perspective. Management updates are received by the committee on different accounting frameworks for significant disposals and acquisitions. There were certain judgement areas which were taken into consideration by the committee such as recognition of tax treatment, required provisions and goodwill. Some tax matters were also carefully reviewed and this highlighted tax provisions release and deferred tax assets. Discounting rates upon being thoroughly reviewed indicated the fact that macroeconomic and internal assumptions are efficiently used in conjunction with wide set of discount rates. These factors have clearly stated that accounting policies and standards are appropriately maintained by the firm. IFRS standards are followed by the firm in order to prepare well structured financial statements. There is no such evidence of misinterpretation of data observed by internal or external auditors. This even indicates that ethical code of conduct has been well maintained in preparation of financial statements. Business ethics is greatly valued by the firm and it is highly reflected in all its financial statements. The audit committee of Royal Dutch Shell works in collaboration with the management. This form of work practice helps to eliminate loopholes from the system and enables increased work efficiency. High level of confidentiality is maintained by the auditors while accessing information as well as analyzing it to obtain better results. To be more precise the audit report has not been able to identify any such flaw related to investment activities in context of mergers or acquisitions. On the contrary, the report reveals that proper steps have been taken by the firm in the form of cash generating activities. These activities can be stated as a part of contingency plan whereby any kind of financial risk can be properly addressed. The consistent flow of funds can be guaranteed on the basis of these activities and product selling to different regions even helps to expand on the customer base. Recommended practice Royal Dutch Shell is regarded as the largest independent gas and oil companies across the globe in context of market capitalization. The company operates across many countries and has set a strong market position. Their main aim is to adopt best practices so as to enhance their operational performance. They have made productive investments in many countries with the major goal of achieving high business standards. The company is even focused on integrating its gas activities (Markides, 2013). While maintaining ethical standards the firm is even conducting its exploring functions of gas and oil from tight rock, coal and shale formations. Royal Dutch Shell encompasses diverse portfolio of chemical plants and refineries that supports the company to acquire value from natural gas and oil being produced. The firm has entered into a joint venture in Brazil and is currently the leading fuel retailer and bio-fuel producer in that region. In various businesses that have been encompassed by the firm, technology has played the most important role. Their wide range of business is supported by well framed corporate governance structure. In intensely competitive market segment the main focus of the firm is to be a leader in gas and oil industry. The company desires to meet demand of global energy but in the most responsible way. Their activities are designed in such manner that it focuses on delivering competitive returns and growing cash flow (Löber, 2011). Social responsibility, environment and safety are the key factors which are present within each and every activity of the organization. The top management is divided into different committees so that overall operations can be efficiently performed. For instance board members are held responsible for strategy formulation and closely monitor business operations. On the other hand, audit committee takes into consideration financial reporting and nomination committee focuses on composition of board. Since all the committees have specific tasks to be performed it reduces complexity within the system. The global energy industry has multiple opportunities which can be efficiently explored but proper strategic planning is required (Schminke, 2010). Major challenge for firms operating in this industry is to meet growing energy demand across the globe and simultaneously minimize social and environmental impact. Royal Dutch Shell has been able to apply expectations of corporate governance by focusing on long term perspective of the business. The company performs its business operations well so as to meet energy demand of customers but even allocates maximum percentage of its revenue in research and development process (Monks and Nell, 2005). On basis of this process the company is able to invent new technologies which can reduce emissions and increase efficiency in natural gas and liquid production. At the core of their strategy is commitment towards innovation and technology. The management believes that their main strength is development and application of advanced technology (Schwartz, 2011). Project management and financial skills allows the company to undertake large field development projects. It can be stated that the firm is not only concerned towards increasing their performance level but even is equally focused towards reducing environmental impact. Customer centric business is always witnessed to be successful for long term. This is because hidden demands of customers are carefully analyzed firstly and then proper strategies are framed so as to address such demands. Shell is a customer centric business since its business portfolio is based on innovative strategies which can efficiently satisfy customer demand (Voien, 2000). However societal responsibility is equally important for the firm. In order to be socially responsible the firm undertakes different activities such as providing basic necessities to local communities, giving donations or engaging into any form of charity. Apart from these activities the firm is equally concerned about facilities being provided to employees and standard services or products being delivered to consumer market (Thompson and Martin, 2010). Quality is not only maintained in their business operations but even in relationship building with all partners or stakeholders. Conclusion As per this study success of every organizational function is based on efficiency of corporate governance structure. There are various dimensions of this structure which helps to reduce complexity of tasks. In every firm board member play a crucial role in strategy formulation and execution. However there are many subdivisions in the top managerial position and each division has some specific tasks to be performed. Royal Dutch Shell has been taken as an example in this study that has adopted well proved corporate governance structure in order to achieve set goals and objectives. The firm comprises of highly expert personnel who has been appointed for chairman and director position. Their experience has been beneficial for growth and success of the company. There are even other members involved in the board who are responsible for executing specified tasks. For instance audit committee has different set of duties to be performed in relation to reviewing financial reports but nominations committee are more concerned about composition or structure of board. Their business operations are spread across the globe and management takes corrective actions in order to maintain set business standards. Ethics is an important aspect which is incorporated within strategy framed by the firm. The company aim towards being competitive and socially responsible. Board members are well aware about stakeholder’s interests and important partners are involved in some important decision making process. This study even reveals the fact that corporate governance structure is highly reflected in business operations. Apart from board members, auditors also play a major role in defining clarity which is well maintained while preparing financial statements. There is no such fraudulent symbol observed in financial statements and this indicates ethical code of conduct forms the basis of Shell’s business portfolio. References Ali, A. A. and Kaynak, E., 2012. Globalization of business. New York: Routledge. Annual Report., 2013. Royal dutch shell plc annual report 2013. Available at: http://reports.shell.com/annual-report/2013/servicepages/downloads/files/entire_shell_ar13.pdf [Accessed on 11th December 2014]. Carroll, A., and Buchholtz, A., 2014. Business and society: ethics, sustainability, and stakeholder management. Stamford: Cengage Learning. 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