Introduction from the Chair

Society is also changing, which we welcome, accelerating its perspective on what companies should be doing, increasing the pressure and encouraging us to rise to the challenges ahead as the world moves to an environment supported by lower-carbon energy products. Shell agrees with the importance attached by its stakeholders to the issue of climate change and Shell’s future success depends on effectively navigating the risks, opportunities and uncertainties presented by the energy transition. All businesses, governments, and even individuals must work together and have a role to play in shifting demand away from carbon-intensive resources. However, oil and gas will not only be needed by some parts of society for many decades to come, they are key cash generators that support our investment through the energy transition and underpin delivering our ambitions aligned to the goals of the Paris Agreement while providing a world-class investment case to Shell’s investors.

Board Leadership and Shell’s Purpose

The UK Corporate Governance Code (the “Code”) provides that the Board should promote the long-term sustainable success of Shell, generating value for shareholders and contributing to wider society. The Board believes that Shell’s efforts give it an effective framework to play its part in the energy transition as a growing, successful, commercial organisation. In the Board’s view, this framework will allow Shell to provide the energy solutions that consumers will want and buy through this period of uncertain change. The Board also thinks that Shell will be able to reduce the carbon intensity of the energy products it supplies.

The Code asks us to report on our business purpose, which is provided at the start of this Report. However, we have carried the concept of purpose through other reporting areas to provide a further understanding of our operations and the benefits of particular activities.

The key themes of the Code are used in this Report to form the framework for articulating our narrative and we have sought to provide a genuine understanding of how governance supports and protects the business and our stakeholders.

The impact of the Code on Shell’s existing governance processes and reporting practices, as well as certain implementation recommendations, were reviewed and considered by the Nomination and Succession Committee, at the end of 2018 and over the course of 2019. Its findings were then discussed and agreed with the Board. Overall, it was considered that while Shell was already applying the principles and the spirit of the Code, the Board recognises that enhanced reporting in this area could help make this clearer for stakeholders. The Board’s approach to certain provisions (as explained in further detail below) is considered appropriate, when taking into account circumstances based on a range of factors that are particular to Shell, including its global nature, size, complexity and history. To provide greater insight into our current governance practices, we have highlighted some provisions in section “Statement of Compliance”, and signposted where more information can be found in the report and, where possible, explain how we see our practices evolving over time.

The importance of stakeholder engagement has received greater external focus in recent years. Given the nature of our business, engagement is considered key to our operations and has been a key focus for some time. How and why we engage with our stakeholders is also provided in section “Stakeholder”. The Board’s discharge of its duty in relation to key stakeholder interests, including those of our workforce, and an explanation of how it considered these when making principal decisions is set out in section “Workforce Engagement” in the Strategic Report. Additionally, in section “Board” we provide information on our Board activities and highlight which stakeholder we considered. We have also enhanced our reporting on our workforce engagement methods. We believe that constructive relationships built on mutual respect and transparency helps Shell attract and retain employees while supporting greater productivity and operational efficiency. Ensuring that the employee voice is heard in the boardroom in practical ways is key to understanding the broader impact of business decisions including with respect to company culture.

The Board clearly recognises the importance of culture and its link to delivering Shell’s purpose and strategy. Given our culture’s importance it requires long-term commitment. The Board believes that our people and safety culture is strong, something we take pride in. Moreover, our culture reflects the values of the business – honesty, integrity and respect for people – which underpin all the work we do and is embedded within our Strategy and Purpose.

Division of responsibilities

How the Board and its Committees support the business operations is provided in section “Governance Framework” with more detail within the Terms of Reference for each Committee, which are provided on our website. Each year the Board Committees’ Terms of Reference are reviewed and updated, as required. This year we have also changed the name of our Corporate Social Responsibility Committee to the Safety, Environment and Sustainability Committee (SESCo), reflecting the Committee’s focus on safety and environmental matters, including climate change and sustainability. The updates have been made in consideration of external developments.

The importance of independent judgement on the Board is a fundamental governance principle and one supported by the Board. The Code provides circumstances that it considers are likely to impair, or could appear to impair, a Non-executive Director’s independence, and tenure is one of these. At the time of the 2020 Annual General Meeting (AGM), Gerard Kleisterlee, Senior Independent Director, will reach a tenure of nine years since his appointment to the Board by shareholders. However, as he was appointed to the Board by the Directors some seven months ahead of his first election by shareholders, his independence for the period of October 2019, to the 2020 AGM requires deeper evaluation under a new Code provision. Within our statement of compliance with the Code in section “Statement of Compliance” we provide the questions the Board considered when testing Gerard’s independence.

Composition, succession and evaluation

The Director biographies in this Report provide insight into our Directors’ careers, skills and experience. Further, our Board diversity reporting extends past gender and nationality, and outlines the varying sector experience across the Board.

At the 2019 AGM, Neil Carson was elected to the Board by shareholders. An overview of his induction programme is provided in section “Board”. At the end of the 2020 AGM, both Gerard Kleisterlee, Senior Independent Director, and Linda Stuntz, Independent Non-executive Director will retire from the Board after nine years of service. They both leave strong leadership track records, and the Board is deeply grateful for their many years of dedicated commitment to the business. As we announced on January 29, 2020, Euleen Goh will become Deputy Chair and Senior Independent Director when Gerard retires and Neil Carson will become Chair of our Remuneration Committee.

The Board completed its annual performance evaluation in December 2019, which was facilitated externally. The process again proved to be a valuable exercise, generating reflective discussions and planned actions. The process was led by me and undertaken by Independent Board Evaluation. In section “Board Evaluation and Activities” we have sought to provide insight into the process, the outcome and some of the areas we plan to enhance.

One of the Code provisions introduces a recommended nine-year limit to the tenure of the Board Chair. As this is a provision directly relating to me, our Senior Independent Director, Gerard Kleisterlee, provides an explanation in section “Statement of Compliance” of how the Board considered this provision and when the Board proposes that my tenure concludes.

Audit, Risk Management and Internal Control

The Audit Committee assists the Board in maintaining a sound system of risk management and internal control and oversight over Shell’s financial reporting. A variety of standing matters and more specific topics are discussed by the Audit Committee throughout the year. As part of the year-end reporting process, the Audit Committee advises the Board on the adequacy of the system of risk management and internal control in place, the appropriateness of the viability statement and going concern basis of accounting. The Audit Committee also advises on whether this Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for stakeholders to assess Shell’s position and performance, business model and strategy. More information on the Audit Committee’s activities, highlights and priorities can be found in its report.

Remuneration

In 2020, shareholders will vote on our revised Directors’ Remuneration Policy. Under the new Policy, we have focused on simplifying remuneration structures to improve clarity and transparency while maintaining the existing connection with our business strategy. In keeping with recent governance developments and societal views, we are placing increasing emphasis on the discretionary management of pay to ensure reward outcomes are appropriate. We will also be asking shareholders to vote on the energy transition metric which links reward with our ambitions to reduce our Net Carbon Footprint. Further information can be found in section “Remuneration Policy”.

Finally, we hope that this new format of document provides a clearer format for our reporting and enhances the understanding of our governance processes for our stakeholders. I would also again like to thank my fellow Directors, my colleagues and our workforce around the world for their continued and considerable efforts to the success of the Company.

Chad Holliday
Chair
March 11, 2020