Petrobras and Banco do Brasil join governance model of state companies

The two largest state-controlled companies listed on the Brazilian stock market, Petrobras and Banco do Brasil, have decided to adopt initiatives to shield their governance by joining additional commitments for good practices. Both requested exchange operator B3 for a certificate of inclusion in the program Highlight in Governance of State Companies.

Petrobras went further and announced it is beginning studies to join B3’s Level 2 of corporate governance, the segment with the strictest requirements for companies that have preferred shares.

Yet this is not the first time that the oil company has made such a move. Fifteen years ago, in 2002, when Pedro Parente, now its chief executive, was chairman of the board, Petrobras adopted all measures for this migration, but had the initiative vetoed by the Office of the Attorney General of the National Treasury (PGFN).

Together, Petrobras and Banco do Brasil account for about 11.5% of the Bovespa Index and have nearly R$260 billion in market capitalization, out of a total of R$2.24 trillion for all companies in that bellwether index.

Of voluntary participation, B3’s program for state companies — launched over a year and a half ago — establishes a series of guidelines to try and raise the governance, control and transparency level of these companies.

For the program certification, the company must comply with requirements such as having and disclosing guidelines about the composition of board, management and fiscal council. Moreover, it must have policies on diversity of experiences and skills and the minimum of 30% of independent board directors.

State companies also need to establish and publicize internal mechanisms to avoid that their managers act in benefit of public policies that go beyond the public interest defined in the creation of the company and in its social objectives.

The concern with the governance of state-controlled companies gained relevance after Operation Car Wash uncovered a giant corruption scheme at Petrobras, whose estimated loss in the company’s financial statements was at least R$6.2 billion. The importance of the matter made Congress pass the Law of Responsibility of State Companies (Law 13,303) in June 2016.

The board of Banco do Brasil in December approved joining B3’s program for state companies. On July 5, the bank’s shareholders will vote on the matter in an extraordinary general meeting.

Petrobras has not yet released dates, but already said it has adopted all measures required by B3 for state companies. “For us to be able to apply for the governance program of state companies, we’ve worked for more than a year. Now, we will begin the process related to Level 2,” Mr. Parente said in a press conference. He said the company would study which measures need to be implemented.

The current management wants to show the governance established at the company is what best serves the interests of Petrobras and its shareholders. “We will create conditions so that what happened in the past will not happen again in the future.”

Mr. Parente also stressed that, with the steps taken toward a more effective governance, he expects the company to have more favorable financing terms. “We do expect it to bring benefits such as funding costs etc.” he said, adding that the improvement in costs that the company has been noticing now reflects more “the entirety of the effort” and not a specific matter.

In 2002, when it tried to join Level 2, Petrobras faced a big discussion about two rights granted to preferred shareholders in that special listing segment and obtained from the stock exchange, at the time, the permission for some exceptions.

The company would not establish in its bylaws the tag-along right for preferred shareholders, as Level 2 demands — the right that secures to shareholders the control premium through a mandatory offer in case of sale of most of the voting stock.

João Nogueira Batista, who was chief of investor relations in 2002, explained that it was established that, as a company controlled by the federal government, this debate would have to be carried out in Congress as part of a discussion about privatization, if it were to happen.

The other big issue, which led to the PGFN veto, was about voting rights for preferred shares in some special matters, like mergers, alterations of shareholder rights, modifications of social object, dividend policy, among others.

The president of the Securities and Exchange Commission of Brazil (CVM), Leonardo Pereira, said that Petrobras joining Level 2 would be a very relevant development for the Brazilian market. “An excellent message to the other state companies,” he said.

Mr. Nogueira Batista said joining the governance segment would work as a sort of shielding to Petrobras’s shareholders, something that was also pursued during his term — even though the migration had not materialized.

In the attempt of lowering barriers that emerged at the time, Mr. Nogueira Batista said a solution was to adopt a set of governance guidelines that the board would have to follow in certain circumstances, in a sort of code of conduct, in place of establishing in the bylaw the voting right for preferred shareholders. Mr. Cunha said that code was entirely modified and the original is nowhere on the internet.

Source: Valor Econômico