New board a continuation of Aramco’s history of strong governance
Saudi Aramco’s new board of directors marks a new landmark for the company’s corporate governance, with the addition of international oil executives, including its first female board member.
The restructuring of Aramco’s board is a bold move that’s drawn commendation in the international media. It’s worth noting though that it marks a continuation of the company’s strong governance culture it has built up since its inception. Aramco’s founders were the biggest oil companies in the US of the age, who were both partners with the Saudi government but also competed with it in the international market.
To protect their interests, these companies developed a governance system to settle dispute between themselves and with the Saudi government. That system of governance saw some changes with time, particularly following the completion of the company’s nationalization in1980. But many aspects of that governance remained intact, and are still in place today. So what are the main features of Aramco’s governance through the different periods of its history?
To recap, Aramco began life as a Delaware-based US company in 1946, owned by SOCAL, Exxon, Texaco, and Mobil, all of which were listed companies. As such, they were required to report financial statements every quarter, so Aramco’s books were presented for public inspection in the same manner. From day one, therefore, Aramco reported its finances based on international standards and on quarterly basis. The company’s early board was made of two representatives of each of the four shareholders, with five from Aramco itself. In 1959, the company elected its first Saudis to the board, Abdullah Al-Tariki, the country’s oil minister, and Hafiz Wahbah, an adviser to King Abdulaziz and later a Saudi ambassador to the UK.
Aramco’s board met once every quarter but its Executive Committee met every month. This committee was made of Aramco chairman and CEO along with one director of each of the four shareholders and one Saudi director.
The structure changed following the company’s nationalization. “Financial emphasis was becoming more long-range,” said Frank Junger, Aramco’s former president, in his book “The Caravan Goes On.”
“Mandatory quarterly reporting would no longer be required… Aramco was inexorably being pulled into a different strategic outlook.” Following nationalization, the company’s board of directors was enlarged gradually and more Saudis were appointed to the board, starting in 1976. By 1986, the board was controlled by Saudis, and few Americans and foreigners were there; most of them were retired executives from the shareholders.
It’s worth noting that Aramco's represents a continuation of the company’s strong governance culture it has built up since its inception.
The management style of ministers also evolved. While Hisham Nazer, oil minister from1986-1995 used not to interfere with the company’s operations, others who came after him were more informed about the operations of the company, given that they all came from the company’s senior management.
One of the points of the strength of Aramco’s old-school boards was that they were made up of senior managers who had an intimate knowledge of the minutiae of the company’s operations.
More recent boards would only meet twice a year to approve capital and operational budgets, while the Executive Committee would still meet regularly to approve matters of great importance.
Sunday’s board reshuffle comes as part of Aramco’s preparations to become a listed company this year or next; in addition to the headline-grabbing (and well-deserved) appointment of Lynn Elsenhans (former chairwoman, president and CEO of US-based refiner Sunoco), the new board contains Peter Cella, former president and CEO of Chevron Phillips Chemical, and Andrew Liveris, director of DowDuPont and CEO of the Dow Chemical Company.
The senior management of the company is represented by the chairman and CEO, with the rest of the board is made up of government officials or international figures who mainly come from the downstream and the chemicals side of the business.
Such a move reflects the major transformation that Aramco is going through as it focuses more and more on refining its own crude instead of producing more from its vast reservoirs. Will this board be the board that takes Aramco public, or will there be more changes ahead before the listing occurs? No one can tell for sure, until that first day when Aramco’s shares begin trading.
- Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter: @waelmahdi.