There is no laid out rule that clearly states what and how the reserves of oil is to be estimated, though there are guidelines given by SEC for the purpose. SEC guidelines were also not met by the reserves estimation that was declared by the executives of the company and they knew it all along. Continuing pressure on non-declaration of the actual reserve estimation in line with the law, made them to come out and accept a revision in their reserves. This made the share prices tumble and the company started losing its standing in the market place. Whereas compared to its competitors the company should have been rated low even in 1997, but the executives of the company for holding up their company's performance, raised the reserves ratio and other key performance indicators of the company.
This could be looked at as the pressure on the company to really escalate figures. Though this cannot be construed to be a valid reason for artificial escalation of the figures, it is the predominant reason why the reserves were shown bloated. The corporate governance at the company has been lacking the guts face up to the situation. The major cause of the problem is that the executives could not stand up for a loss of face in the initial run and still thought even after knowing that wrong representation has happened, the second note from Vijver to Watts on 22 Jul 2002 indicates that the company executives were planning really to cover up this even in the last minute. They expected to cover up the entire additional reserves indicated using either of the project maturation, license extensions and new exploration successes. It is important therefore, to note that the corporate governance in the company at its top level had sinister views. The overall company performance itself was in a quandary and to hide the same these fictitious reserves have been brought up.
The lack of appropriate planning to counter the fall of reserves, the lack of judgment on the part of the executives to bring about changes in the company so that such performance degrading would not have happened are the major causes for the failure of the company. This is essentially a failure of the corporate governance. Secondly, a well governed organization will have its own corporate correcting and auditing mechanism that will bring even the top management under its purview. If someone should direct the company in a wrong direction, then the company should have a mechanism to throw it up early on or immediately after its occurrence. This will be the ideal control mechanism. In a well governed company that will be the case. A failure of corporate governance is obvious here since such a mechanism has failed to exist in the company or has failed to be active.
b) After 2000-01, Shell management decided to come out because of the constant nagging fear that they might really be caught making this mistake and lying to people consistently. Vijver, the CEO of the Shell EP, was also of the view that the RRR of the company has to be maintained since it would a major performance index that share holders will look at when deciding on the price in the market. The disclosure of the reserves had to happen since because of the disclosure that was done in a memorandum prepared by the staff of the EP. There was also an observation in the memorandum by the law firm, Cravaith, Swaine & Moore that the