Almost a year after a corruption and bribery scandal surrounding Brazil’s largest company, Petroleo Brasileiro (Petrobras), began to unfold, the serious implications for both Petrobras’ and Brazil’s reputation are beginning to come to light. While the scandal seems to develop new headlines on an almost daily basis, it has already sucked in prominent current and former executives of the company and some of the largest Brazilian construction companies, as well as members of parliament, who saw this national champion as a cash cow to finance their jet-setting lifestyles.
In an unprecedented move, an entirely new management team was put in place on Friday, February 6, 2015. The task for the new managers to redress the company’ fortune will be difficult as the lasting impact of the scandal has not yet been fully understood and the company’s access to international capital markets, especially with the low oil prices, has been seriously hampered.
In a cryptic, one-sentence press release dated February 4, 2015, Petrobras announced a meeting of its board of directors scheduled for two days later to elect a new board following the sudden resignation of the CEO and five additional executive directors, which were not named until their replacements had been coopted. While the resignations should not have come as a surprise in light of the magnitude of the scandal, the timing and the lack of clear disclosure caught some observers off-guard.
BACKGROUND
In March 2014, Brazilian police and prosecutors announced they were investigating the siphoning off of funds from Petrobras contracts involving former senior Petrobras executives, some of Brazil’s largest construction companies and members of the country’s ruling Worker’s Party. Under “Operation Car Wash,” more than two dozen executives from six large construction companies were arrested for inflating bids for Petrobras contracts and paying bribes to members of parliament. The severity of these shenanigans are such that Brazil’s Public Prosecutor’s Office set up a special purpose website describing “Operation Car Wash” and the charges filed. As of February 5, 2015, the site listed 279 pending proceedings, 150 people and 232 companies under investigation, 18 criminal charges having been filed against 86 individuals and involving reported embezzlement of R$2.1 billion (approximately US$752.6 million). As the company’s shares are also listed on the New York Stock Exchange, the US SEC is also conducting a parallel investigation and at least four class action suits have been filed against the company in the United States.
The company’s woes deepened after PricewaterhouseCoopers, its independent auditor, refused to sign off of the 3rd quarter 2014 results because they did not adequately quantify the material impact these scandals had on the financial statements. Although Petrobras released unaudited Q3 2014 results on January 27, 2015, the audited version needs to be published by April 2015 or the company will run afoul of its obligations to its debtors. On January 30, 2015, Moody’s Investor Service reduced Petrobras’ debt ratings from Baa2 to Baa3 and on February 4, 2015, Fitch downgraded the company’s debt ratings to BBB- from BBB, with a negative outlook.
POLITICAL REPERCUSSIONS
The scandal–the largest in Brazil to date–has grave repercussion for the presidency of Dilma Rousseff. Not only are members of her ruling party coalition involved in the bribery charges, Mrs. Rousseff was chairman of Petrobras (2003-2010) during the period these actions occurred and she was also instrumental in appointing the embattled CEO, Maria das Gracas Foster, and supported her even after the scandal broke. Additionally, the federal government controls approximately 60.5% of the Petrobras’ voting rights and is known to have a direct influence in the company’s choice of management and operations.
When the executives’ resignations were announced, the company’s share price finally rose again on the hopes that they would be replaced by candidates with fewer political ties to the current Brazilian government. To the disappointment of the market, this did not happen. Instead, on February 6, 2014, Petrobras announced that the CEO position would be filled by Aldemir Bendine and the CFO position by Ivan de Souza Monteiro. They are, respectively, the CEO and SVP of Financial Management of Banco do Brasil, a bank which is majority controlled by the Brazilian government. With the implication that the Brazilian government plans on retaining close control over the company, the shares dropped another 8% after the announcement.
2015 OUTLOOK
This year will be a crucial one for the company as all eyes are on the new CEO and his management team. The new management team’s first order of business should be to establish the write-off from the fallout of the scandal. This will enable the company to file audited accounts for the third quarter 2014 and regain its credibility and access to the international markets in order to pursue its strategic development projects. In order for the markets to gain confidence in Mr. Bendine’s leadership, the write-off amount should also come from the new management team. The previous suggestion by then-CEO Foster, on January 23, 2015, of R$22 billion was vetoed by board member affiliated with the government as Mrs. Rousseff’s administration reportedly deemed the amount too high. Over the next few months shareholders will gain insight into whether Mr. Bendine will be running Petrobras independently or if the federal government will continue to call the shots behind the scenes. If Brazil’s government insists on obfuscating the truth about the governance failures that led to Petrobras’ fall from grace, it may soon find investors leery of expanding their exposure to Brazil. On the other hand, the government could use this as an opportunity to implement lasting governance reform to reassure investors of the strength of its institutions. We are not entirely convinced of the course set by the actions taken so far. Authors: David Lahire and Andrew Gebelin [1] Martin Blanc. “Will The New Petroleo Brasileiro SA (ADR) CEO Face Government Intervention?” BidnessETC. February 10, 2015.