The Westwood headquarters of Occidental Petroleum Corporation has a tomblike feel. No milling around or banter in the hallways—nothing extraneous. Maybe I happened to have caught them on a slow day, but the muted vibe fits into the kind of corporate culture that Oxy has become known for. Long gone are the antics of former chairman and chief executive Armand Hammer, who seemed just as interested in raising Arabian horses and hobnobbing with the Soviet hierarchy as in finding oil reserves. When Ray Irani took over as CEO after Hammer’s death 20 years ago, he put an end to the distractions and went to work turning a profit.
He’s been quite good at it. Today Occidental is L.A.’s largest publicly traded company (based on the value of its stock) and among the most admired of the major energy corporations, with operations in the United States, South America, North Africa, and the Middle East. Last year it earned almost $3 billion, compared with a loss of $1.7 billion in 1990. Market value jumped from $5.4 billion in 1990 to $66 billion in 2009. It carries low debt, follows conservative accounting methods, and has lots of available cash that’s regularly distributed to investors.
But Occidental is not an easy company to love. It’s boring. It’s slow. It has no direct connection with consumers (Oxy doesn’t sell gasoline—oil products are sold to other companies and then distributed at the retail level). It doesn’t buy commercial time during the Super Bowl, and you won’t find the company’s name on a basketball arena. It has next to no civic visibility in its home base of Los Angeles—and little interest in pursuing any. Executive recruiters told Business Week last year that Oxy is “an autocratic environment where managers at the oil giant simply wait for dictates from on high.” Two activist shareholders have complained that senior executives enjoy nearly free rein because of the board’s “entrenchment and ossification.”
All this, however, pales next to what has been the biggest rap against Occidental: how much its chief executive gets paid. Even by the elevated standards of corporate CEOs, it’s outrageously high. In 2009, Irani took home $31.4 million (a shade below the pay of New York Yankee superstar Alex Rodriguez), and over the past decade his compensation totaled nearly $900 million, according to The Wall Street Journal. Only a handful of U.S. executives have collected so much for so long.
The folks at Occidental have a ready explanation: Irani has been getting paid huge amounts of money because the company has been making huge amounts of money, and under Irani’s employment contract, performance is what counts. Nothing wrong with that, but it’s the proportionality of performance and pay that’s at issue. His $31.4 million in 2009 compares with the $27.2 million that was made by the CEO of Exxon Mobil, even though Occidental’s revenues were $15.4 billion and Exxon Mobil’s were $310.6 billion. Actually Irani had cleaned up during the times when Occidental didn’t do so well, with the board paying him $95 million one year just to bury his old contract in favor of a richer agreement. Since then Irani’s compensation package has been a maze of bonuses and incentive programs. “If I buy a factory and I overpay for it, that’s not good for shareholders. If I do that with human capital, that’s not good, either,” says Robin Ferracone, executive chair of the San Marino consulting firm Farient Advisors and the author of Fair Pay, Fair Play. “Oxy is like a poster child for bad behavior.”
The company has turned a deaf ear to such criticism. It’s been the story of Irani’s career, going back to 1983 when he made a stink over his salary before being hired as the head of Oxy’s chemical division. Hammer went along with the pay demands because he recognized how valuable the guy would be, and that remains the company line. Irani, who grew up in Lebanon and received a doctorate in physical chemistry from USC when he was 22, has always been known for his smarts and tenacity. “He’ll give you a look when he’s not happy about something, and it can cut through steel,” says a senior executive (employees address him as Dr. Irani). A notorious stickler for detail, he’ll stop a PowerPoint presentation because a figure on page 43 doesn’t correspond with one on page 23. Irani, who is 75, is anything but a glad-hander around the office, preferring to work with a limited group of managers who then pass on his directives.
He’s also not keen on doing interviews (Irani wasn’t made available for this column). The company did offer me a 20-minute phone interview with chief operating officer Stephen Chazen, who will be the new CEO. Chazen was hired in 1994 after a lengthy stint in the financial industry, and he seems to have a less imperious air (you can call him Steve). But he, too, wants to keep as low a profile as possible. “Ray’s outgoing and showy compared to me,” deadpans Chazen, who has vowed not to have his picture in the company’s annual report, de rigueur for any chief executive. “My goal in life is to continue to walk over to the coffee shop and have no one recognize me.” On airplanes he likes to tell his seatmates that he’s in the insurance business. That usually puts an end to any small talk.
During our short session, he’s surprisingly talkative, except on the matter of executive compensation (Chazen took home $13.5 million last year). When I ask how such a successful corporation could have such a lousy reputation, he insists that it’s a style thing. “It comes from the fact that the company doesn’t spend a lot of time with self-promotion,” he says. “We don’t have a PR firm going around taking pictures of Ray Irani with 24-year-old movie stars cutting ribbons.” Oil companies, Chazen adds, “are never going to be popular. You just have to understand that that’s the deal.”
Occidental Petroleum started in 1920 and scraped along for years as a small, often unprofitable California driller that was traded on tiny West Coast stock exchanges. Hammer, a physician by training whose entrepreneurial interests had included pencils, pharmaceuticals, and Russian artwork, at first viewed Occidental more as a tax shelter than as a way of making serious money. In 1956, he and his wife loaned the company $50,000 to finance the work at two California drills, and much to his surprise, oil was struck. He then started snapping up Oxy stock, and by 1957 became the company’s biggest shareholder—as well as its CEO. Occidental under Hammer was never a pure energy play: In the early 1970s, he arranged a long-term barter agreement with the Soviet Union in which Oxy would supply phosphate fertilizer in exchange for ammonia (he considered it his contribution to détente). The company later acquired a large meatpacker and spent $95 million to fund the construction of a museum adjacent to the Wilshire Boulevard headquarters to house Hammer’s art collection (shareholders went to court to contest the use of corporate dollars for the museum). Once Irani was in charge, he sold off nonenergy assets and dumped his predecessor’s pet projects, including a $480,000 contract for a fourth authorized biography of Hammer. Another sign of pragmatism was the company’s decision not to pursue what had been a 22-year squabble with the City of Los Angeles over the right to drill at a site in Pacific Palisades.
Corporate discipline is a big deal in the oil business. The process of looking for fields, acquiring land, drilling holes, and transporting the extracted product can easily take ten years, and there’s no guarantee of how much oil will be found or what it will be sold for. (That helps explain why net income rose from $5.4 billion in 2007 to $6.9 billion in 2008 and then plunged to $2.9 billion in 2009.) If the fields are overseas, there could be additional delays negotiating financial terms with host governments. The trick for Irani, and now Chazen, has been to determine the allocation of capital—basically which projects should be funded and which should not. “There is no other decision that matters,” says Chazen. “It’s probably 80 percent of your outcome.”
Shareholders certainly haven’t been hurting. Anyone purchasing $100 worth of Oxy stock at the end of 2004 could have cashed out at the end of last August for $275. That same $100 invested in companies making up the S&P 500 stock index would be worth $97. Occidental is slavishly devoted to its stock, to the point where it tries to give investors $2 back for every dollar it keeps in earnings. That’s an unusually rich pledge, which is another reason why Wall Street analysts like the company.
But the public mood has soured so much on big business—especially excessive executive pay—that Irani’s carte blanche governance has been impossible to ignore. “If you’re like a monument unsusceptible to change, like Dr. Irani, then your shareholders begin to get unhappy with you,” says Paul Hodgson, a senior research associate with the Corporate Library, which monitors publicly held companies. The last straw was the board’s allowing Irani to work past the company’s mandatory retirement age of 75. Perhaps a showdown was inevitable when shareholders were given, for the first time, a chance to cast ballots on executive compensation practices. At the annual meeting on May 7, 2010, a majority refused to rubber-stamp Irani’s paycheck. The vote was nonbinding, so Oxy didn’t have to act on the results, though they did shake up the corporate world. Irani was effectively being told, “Enough is enough.”
Several weeks later Relational Investors and the California State Teachers’ Retirement System, both Occidental shareholders and vocal critics of the company’s executive pay policies, sent a letter to the board that demanded change. They threatened to contest management’s control by nominating at least four new directors. “CEO pay at Occidental functions essentially as a corporate giveaway program,” the two organizations wrote. “We are convinced that shareholders would overwhelmingly support our candidates to replace members of the current board, including its chairman.”
The threat got Occidental’s attention. Board member and former U.S. senator Spencer Abraham spent the summer smoothing relations with investor groups, and in August Chazen was promoted from chief financial officer to chief operating officer, a signal that he would be Irani’s successor as CEO. An October board meeting made it official. Whether a change at the top will affect the company’s insular culture is another matter, however. During a brief interview on the day of the announcement, Abraham told me that Irani “might chronologically be 75, but in terms of performance he’s at the top of his game.” A carefully worded press release noted that while Irani had informed the board “of his desire to relinquish the [CEO] position,” he would stay on as executive chairman until 2014. So the reforms are likely to be grudging. But they’re badly needed, if only to show that Occidental can make money for its shareholders without ticking them off in the process. First order of business will be a pay cut for Irani. Instead of his compensation being capped at $93 million a year, he’ll be able to make a maximum of only $28 million.