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Dilma’s debacle

24 Dec 2014 By Stephanie Rogan

Petrobras, Brazil’s flagship corporation, is mired in a corruption scandal and has seen its stock halve over the past year. The alleged graft involved billions of dollars and went undetected for nearly a decade. Nothing short of firing current management and appointing more truly independent directors will allow the state-controlled oil giant, and really Brazil, to regain credibility with global investors.

Years of state meddling and lagging production have left Petrobras, led by Maria das Graças Foster, roughly $170 billion in debt. Minority shareholders lost their shirts in 2014 as the company’s market capitalization plunged by 45 percent to $52 billion, while an elaborate kickback scheme allegedly funneled money to political parties, including President Dilma Rousseff’s Workers’ Party and its allies in Congress, over many years.

Winning back trust will be a struggle when Brazil’s economy is already slowing, inflation rising and the government’s finances deteriorating. Rousseff’s handling of Petrobras – in which the Brasilia government wields a 60.4 percent vote – will define whether markets view Brazil as an investment opportunity or a trap for the rest of her second term.

Since the start of the investigation, dubbed Operation Car Wash, Rousseff has repeatedly vowed to stamp out corruption. Nonetheless, she has refused to fire her old friend and colleague Foster. Petrobras has taken some steps. In November it created a compliance department. But that Brazil’s largest company didn’t have one before is shocking.

The firm’s governance structure effectively makes it a publicly traded state agency. The first independent director was elected to the 10-person board less than two years ago. A second joined in April. This month Petrobras’ chief financial officer was fined for past attempts to stifle the influence of minority shareholders by allowing Brazil’s state development bank and government pension funds to vote for supposedly independent directors. Rousseff chaired Petrobras for seven years through 2010, when most of the alleged corruption took place.

This week, Rousseff told reporters that pessimism surrounding Petrobras is overblown and that the recent plunge in its share price was exaggerated. She said it was simplistic to assert the company’s top management knew about the graft. Brazilian officials estimate the company may have overpaid by billions of dollars in inflated contracts. Entire boards have been replaced for less.

Underplaying the scandal suggests Rousseff isn’t taking Brazil’s corruption problems seriously. Holding the Petrobras board accountable to its shareholders, and bringing in a new and credible management team, is the least Rousseff needs to do to reassert Brazil’s legitimacy as a recipient of the world’s increasingly less plentiful capital.


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