Revising State-Owned Companies Law is a step backwards in the fight against corruption, says IBGC

​The comings and goings in the nominations for Petrobras’ board in recent days tend to cause an increase in investors’ perception of risk about the directions that will be given to the company in an election year.

If a sharp deterioration in the prospects for the business did not occur, this is due, in the opinion of experts, to the improvements in the company’s governance brought about especially by the State-owned Companies Act.

On Tuesday (5), the president of the Chamber, Arthur Lira (PP-AL), defended the revision of the Law on State-owned Companies, after businessman Adriano Pires gave up taking over the presidency of the oil company.

Political interference in nominations

According to Pedro Melo, general director of the IBGC (Brazilian Institute of Corporate Governance), the State-Owned Companies Law, which came into force in 2016, represents a milestone in the evolution of governance practices of public companies and mixed capital companies.

One of the biggest advances of the legislation, says Melo, was to reduce the risk of capture of the state company by political-partisan interests, a factor responsible for notorious cases of corruption, inefficiency in the allocation of public resources and in the fulfillment of electoral and personal objectives, in detriment to the company’s objectives.

After statements that defend the revision of the law, the IBGC says that pressure should not be accepted for changes in requirements and legal prohibitions to facilitate the appointment of people with political-party activity or in conflict of interest to positions in the administration and fiscal council of companies governed by Law 13.303/2016.

“In addition to going against good practices, such flexibility would result in a setback in the governance of public companies and Brazilian mixed capital companies and in the integrity and anti-corruption agenda”.

On Wednesday night (6), the Ministry of Mines and Energy presented the names of José Mauro Ferreira Coelho to preside over Petrobras and Márcio Andrade Weber to command the state-owned company’s Board of Directors.

Path to the OECD

The IBGC director recalls that article 17 of the State-Owned Companies Law establishes requirements and prohibitions for occupying the positions of members of the board of directors, directors and supervisory board. These requirements, he adds, increase the qualifications necessary for the occupation of these positions and mitigate the risk of conflict of interest between the company and the hired professionals.

“The State-Owned Companies Law was internationally recognized, being one of the essential pillars for Brazil’s accreditation in the OECD [Organização para a Cooperação e Desenvolvimento Econômico]”, says Mel.

A source close to foreign minority investors who prefers not to be identified says that the risk of political interference does not only affect the market’s view of Petrobras, but has a broader impact on the perception of institutional security to do business in the country.

With the changes at the helm of the company and the coming and going of nominees, the message that passes to international pockets, says this source, is that of disorganization and a distance from the investor base.

Profit to shareholders x social concern

According to Augusto Sales, a professor at FGV Ebape (Brazilian School of Public and Business Administration of Fundação Getúlio Vargas), when the topic of governance is discussed more broadly in the Brazilian market, an increasingly recurring question concerns which ultimate goal that a company should pursue.

“Should the focus be more restricted to maximizing shareholder profit? Or, in addition to generating profit, focusing on other relevant elements for society more broadly? It is a popular discussion not only in the public sector, but also in the private sector, with the advancement of discussions on responsible investments from a social, environmental and governance perspective”, says FGV professor Ebape.

In the expert’s opinion, there is even a space provided for in the company’s statute so that market operations are not exclusively focused on generating returns for shareholders, but also with a social concern. “What cannot happen is for the State to abuse this role. It is necessary that the direction is within the company’s business strategy”, says Sales.

For Sérgio Lazzarini, a professor at Insper, the debate on the social role of a state-owned company the size of Petrobras is legitimate. Even because, if the objective is solely profit, privatization may even be the best way, says the expert.

“What the Executive has to do is not to make a self-deception, to think that it is possible to coexist with a financially healthy Petrobras that also controls gasoline prices. This does not exist”, says the Insper professor.

One way out, he says, could be through subsidy mechanisms along the lines of what was done by the Temer government, via funds directed from the Treasury, in order to prevent the state-owned company from assuming any losses. “The legislator needs to know that he doesn’t have a free lunch,” says Lazzarini.

According to him, there seems to be a certain “lack of understanding” among politicians in Brasília in general about the role to be played by a state-owned company within the country’s economy from the perspective of best governance practices.

The statements made by deputy Arthur Lira about revisiting the State-Owned Companies Law are “quite worrying, not least because it is the one who is helping to avoid the most blatant interference”, says Lazzarini.

Ways to shield state-owned companies from external interference

For the FGV professor Ebape, a way out to preserve Petrobras’ independence from political interference could occur if the board of directors assumed more leadership in choosing the new nominees.

“The succession process shouldn’t be something controversial or attract attention, it should be natural as it happens in many other organizations. Especially because, when there are uncertainties related to an organization, the market’s perception of risk increases”, says Sales, adding that, just as the independence of the BC (Central Bank) was approved, state-owned companies should also have the same prerogative to adopt the strategies they deem the most appropriate depending on the current economic situation.

“It is worth noting that even with established forecasts [no estatuto da Petrobras] of possible use by companies to serve public interests, this path considerably increases the market’s perception of risk and jeopardizes planned investment plans. In these situations, however, the Union cannot evade its responsibility, as the controlling shareholder, to compensate for all the losses that will be borne by the company”, says a position released last month by Amec (Association of Investors in the Capital Market).

In any case, despite recent changes made by the Bolsonaro government in a messy way, market analysts believe that Petrobras’ new board should not make changes to the company’s pricing policy.