To Float or Not to Float: Aramco IPO a Bellwether for State-Owned Enterprise Governance

The twists and turns around the possible initial public offering (IPO) of some portion of Saudi Aramco have been monitored by the press like a sporting event. London is in the lead! Wait, New York is gaining! What’s this? Now there’s a push for an exclusive listing on the Saudi exchange!
 
No doubt the stock exchange that wins the race, if indeed the company moves forward as announced, will have cause for celebration. The IPO is expected by many to be the biggest in history, and would be a boon to whichever market the company chooses to host it—just think of all the fees for advisors and underwriters. As large as the immediate burst of activity will be on the selected exchange, the long-term influence of Aramco’s decision on Saudi Arabia and the global governance of state-owned oil companies promises to be just as significant.
 
I wrote about the governance impacts of a potential Aramco flotation more than a year ago, and the fundamentals have not changed. But the debates that have leaked to the media bring the implications into sharper focus. Selling shares to the public will require the rulers of the kingdom to cede some level of the now-total control it exercises over the company.
 
Listing on any of the prominent international exchanges that have been discussed—including New York, London, Toronto, Tokyo and Hong Kong—will require a sea change in terms of what Saudi Aramco discloses to the public. The 2017 Resource Governance Index shows that Saudi Aramco is opaque even by the imperfect standards of state-owned enterprises. It ranked 44th among the 52 national oil companies assessed by the index for public accountability and transparency. Aramco has not traditionally published detailed information on its finances, revenues, operations or practices.
 
Until now, it seems Aramco executives haven’t felt like they needed to publish this information. Observers believe the Saudi government has strong mechanisms for internal control over the company, and its skilled management and the country’s vast oil endowment have enabled it to thrive without meaningful external accountability. That must change if the company moves ahead with an international listing. Private investors need detailed, verified information in order to make precise assessments of share value—including of a company’s assets, revenue flows, risks and plans. Because the credibility of this information is critical to the core functioning of an exchange, major stock markets have detailed rules spelling out exactly what and how a listed company must report.
 
The precise rules of the major exchanges vary. The New York Stock Exchange, for example, is seen as having a slightly tougher set of disclosure requirements than the London Stock Exchange, and makes it easier for shareholders to sue companies in order to press for changes. But listing on any of the prominent international exchanges would require dramatic changes to the way that the company reports.
 
International investors will also want to know more about Saudi Aramco’s non-commercial activities. Similarly, investors will perceive as risky any political, rather than purely commercial, orientation of company management. Private shareholders in Brazilian oil company Petrobras were burned by the company’s entanglement in a massive public-procurement scandal that reached the highest levels of the Brazilian state; would-be shareholders in Aramco will seek signs of managerial independence.
 
And over time, outside shareholders would put further pressure on the company to reform its corporate governance and make decisions on an increasingly commercial basis. I spoke recently with a former executive at Statoil, the Norwegian state oil company that listed shares in New York and Oslo in 2001. Though the state retained a majority shareholding in the company, the executive told me that “as soon as we had our IPO, the orientation of the company management changed dramatically, and all our decisions came to be organized around delivering value to the shareholders.”
 
In many national oil companies that have taken these steps—not only Statoil but companies such as Colombia’s Ecopetrol and Kazakhstan’s KMG—these kinds of internal reforms have delivered long-term efficiency gains that have benefitted citizen shareholders as well. This could strengthen incentives for strong performance and commercial focus within Aramco as it pursues an ambitious-but-uncertain long-term strategy including a growing emphasis on supporting economic diversification in Saudi Arabia.
 
Saudi Aramco management appears unsure about whether to list internationally. From an outsider’s perspective, it seems that concerns about increased transparency and decreased control could be at the root of the indecision. Other options reportedly under consideration include listing exclusively on the domestic Tadawul exchange, or selling shares privately rather than via a public listing. The Saudi elite may want to retain an unfettered hand in managing the company’s path to innovation – which will inevitably include some trial and error – without additional prying eyes. If the company spurns an IPO on one of the leading international exchanges, an opportunity for Saudis to have a clearer view into this dominant entity will have been lost.
 
Beyond impact on Saudi Aramco itself, decisions around the IPO promise broader repercussions. Most significantly, regulators in the U.K. are considering a reduction in the corporate governance requirements for state-owned companies (SOEs) that list a minority of their shares on the London Stock Exchange. The changes would allow an SOE to qualify for the London exchange’s “premium segment” without meeting the current requirement that at least 25 percent of shares be opened to the public, and to reduce shareholder influence on the selection of independent directors. Such changes could also end up applying to other SOEs that list in London, reducing the corporate governance impacts of an IPO.
 
More generally, other state-controlled oil companies are likely to watch Saudi Aramco’s decision closely, and to track the company’s experience moving forward. The company is such a giant, and has been so closed, that if it succeeds as a more-open public entity, other SOEs are likely to follow.
 
Patrick Heller is an advisor at the Natural Resource Governance Institute (NRGI).