WALTER VAN DE VIJVER was worried, and was about to express his fears in an e-mail to his boss.

“I am becoming sick and tired about lying about the extent of our reserves issues,” he told Sir Philip Watts.

The top two executives at Shell, the Anglo-Dutch oil giant, had been locked in a bitter struggle since Watts became chairman of the committee of managing directors and Van de Vijver had succeeded him as managing director for exploration and production.

Commentators regularly voted Shell one of the world’s most admired companies. But it wasn’t a company — it was a joint venture between Royal Dutch Petroleum, which had a 60% controlling interest, and Britain’s Shell Transport and Trading, which had the rest.

It was run by the committee of managing directors. Non- executives met the other directors in a 21-strong body called the conference, which Watts also chaired.

They were unaware of the clash between Van de Vijver and Watts. The row centred on the over-aggressive booking of oil reserves. When executives realised they had exceeded what was allowed by US Securities and Exchange Commissiion (SEC) rules, the plan was to “manage” the position over time. It became clear this would not work.

At the end of December Shell called an emergency meeting of the group audit committee to discuss reserves. The issue was so sensitive that no agenda papers were sent out.

A month later Shell shocked the market by announcing its reserves would be cut by 3.9 billion barrels, or 20% of the total. The shares fell 7.5% on the day.

The company’s big shareholders decided to take action. The Association of British Insurers (ABI) formed a special committee to address the questions, and the National Association of Pension Funds (NAPF) formed a case committee.

On February 2 about a dozen investors met a Shell delegation led by Lord Oxburgh, the senior non-exec. The issues raised included reserves replacement, communications, the structure of the company, credibility of the senior management team, and the SEC standards.

It was made clear that Royal Dutch had a veto on structure, and if shareholders wanted change, investors would have to be diplomatic.

On March 24 the NAPF case committee met Shell directors and received a frank picture of Shell’s governance issues. Not only did Royal Dutch hold a majority stake in the venture, but it had priority shares whose holders had sole right to nominate people for vacancies on supervisory and management boards, and the right to block any changes to the articles of Royal Dutch. The shares were controlled by members of the Royal Dutch management and supervisory boards. It was legally impossible for shareholders to force a change.

If it looked as if the British company was ganging up with shareholders to cause structural change, it would be counter- productive. Investors were impressed with the openness of the non-executive directors, but concerned that the company was controlled by bureaucracy and not by the boards.