Petrobras - Corporate Governance Analysis

Corporate Governance Analysis
2015

EXECUTIVE SUMMARY
Petroléo Brasileiro S.A., or Petrobras, is a multinational integrated energy corporation, ranked as
the 27th largest public company worldwide in terms of sales revenue (Petrobras, 2015). Despite the
company’s commercial success, its lack of a strong framework and culture of internal corporate gov-
ernance led to the emergence in 2014 of the scandal colloquially known as ‘Operation Carwash’; an
event that had profound financial implications for both Petrobras and the Brazilian economy at large.
This report provides an analysis of the issues within Petrobras’ corporate governance framework
that contributed to ‘Operation Carwash’. We will further evaluate the opportunities available to the
company to re-instill confidence not only in its shareholders, but also its consumers and the public,
and exemplify what it means for a company to have effective and strong corporate governance.
The factors found most responsible for the emergence of the scandal include, in the Brazilian gov-
ernance context, inadequate regulatory oversight caused by a concentration of ownership (Chavez
and Silva, 2009, p. 36), and more specific to Petrobras’ governance, an entrenched culture of unethical
behaviour, a lack of respect for regulatory standards among Petrobras’ top-level management and
executives, and an inadequate internal governance framework. These factors culminated in encour-
aging the company to exhibit low transparency, ineffective Boards, collusion and a lack of rights for
minority shareholders (Silveira and Saito 2009, p. 24). Whilst actions have been taken to establish
higher standards of corporate governance among Brazilian corporations, these remain largely vol-
untary, rather than mandatory (Silveira and Saito, 2009, p. 27), highlighting that the Brazilian corporate
environment still has a long way to go before its governance practices are aligned with international
standards.
From our evaluation, we recommend the following: a redevelopment of Petrobras’ core strategy, mis-
sion statement and values; a redesign of the company’s internal and external corporate governance
frameworks; and the implementation and strengthening of the company’s key governance policies
including: transparency, knowledge and ethics, whistle-blower protection, and relations with the Bra-
zilian federal government. These recommendations are intended to leverage the role of Petrobras’
Board of Directors as a provider of strategic leadership, adjust the company’s organisational con-
figuration to conform with international governance standards, and involve all stakeholders in the
organisation’s governance by making ethics and transparency a part of everyday company culture.
Robert Au
President
MGMT90038 Global Corporate Governance | 3

Founded in 1953 and headquartered in Rio de Janeiro, Brazil, Petrobras (Petróleo Bra-
sileiro S.A.) operates as a semi-public, multinational integrated energy corporation with
a focus on oil and gas exploration, production and distribution. In total, the company
oversees 135 production platforms, 15 refineries, 34,000 kilometers of pipeline and more
than 8,000 service stations across 17 countries (Petrobras, 2015).
A cornerstone of Brazil’s economy, Petrobras ranked as the 27th largest public com-
pany worldwide in terms of sales revenue in 2015 even despite the emergence of the
Lava Jato (Operation Carwash) scandal over the past two years (Forbes, 2015). Indeed,
its ranking as the 416th largest company overall would have been far higher had it not
been for the publication of a 2013 Merrill Lynch report describing Petrobras as the most
indebted company in the world (E&C, 2013).
OUR COMPANY
OVERVIEW

JAN
2014
JULY JAN
2015
JULY TODAY
Following his arrest in March
2014, Costa and another key
informant, Alberto Youssef,
struck plea bargains with au-
thorities and delivered the
names of numerous parlia-
mentarians and construction
officials involved with ‘Opera-
tion Carwash’ (Financial Times,
2015; New York Times, 2015).
As of August 2015, “117 indictments
have been issued” against individual
company executives, “five politi-
cians have been arrested, and crimi-
nal cases have been brought against
13 companies” in association with
the scandal (New York Times, 2015).
Petrobras’ external auditor subsequently
refused to sign off on the company’s quar-
terly financial statements throughout the
latter half of 2014, whilst police completed
a series of raids on the offices of Petrobras
and of construction companies linked to the
scandal. These raids culminated in the ar-
rest of 24 executives from Brazil’s major
construction firms (Financial Times, 2015).
‘Operation Carwash’ has had profound financial
implications both for Petrobras and the Brazil-
ian economy at large. The scandal is estimated
to have reduced the value of the company by
around US$70 billion relative to its 2010 Initial
Public Offering price (The Economist, 2014).
Prior to the scandal, Petrobras’ value ac-
counted for ~10% of Brazil’s gross domestic
product (GDP). Consequently, the revelation
of ‘Operation Carwash’ triggered a 1% con-
traction in Brazil’s GDP in 2014 (Forbes, 2015).
The principal political party implicated has
been the Workers’ Party, currently led by
Brazilian President Dilma Rousseff, who was
also Petrobras’ chairman during the time
the kickback scheme was in operation (BBC,
2015). Whilst President Rousseff has thus far
avoided implication in the scandal, the pub-
lic outcry over the revelation of ‘Operation
Carwash’ has threatened her leadership and
triggered a significant drop in approval rat-
ings (International Business Times, 2015).
‘Operation Carwash’ refers to a widespread money-laundering scheme that was re-
vealed in 2014 between Petrobras’ top-level management and high-ranking officials from
the Brazilian Federal Government.
OPERATION CARWASH
THE SCANDAL EXPLAINED
The primary actor in the scheme was Paulo Roberto Costa, Petrobras’ Chief of Refinery between 2004 to 2012,
who was found to have unfairly leveraged his relationship with six of the largest construction firms in Brazil.
Firms that won contracts from Costa’s division were found to have overvalued their projects by as much as
three per cent, creating excess capital for the company that was then diverted into slush funds for aligned
political parties (BBC, 2015). The total value of the bribes resulting from the operation has been pegged by
Petrobras officials at $3 billion (New York Times, 2015).
6

Brazilian Corporate Governance Overview
To understand the key institutional weaknesses within Petrobras
that led to the emergence of ‘Operation Carwash’, it is first useful
to examine corporate governance in the Brazilian context. Like most
emerging economies, Brazil’s private sector is characterised by in-
adequate regulatory oversight caused by a concentration of owner-
ship (Chavez and Silva, 2009, p. 36). This system has its roots in
Brazil’s 1976 Corporation Law, which permitted companies to issue
non-voting shares to two-thirds of their equity capital (Pargendler,
2012, p. 507). As a result, family groups and single large shareholders
have been able to raise equity without diffusing control, which has
in turn allowed the conflation of management and ownership within
the majority of Brazilian companies (Chavez and Silva, 2009, p. 36;
Silveira and Saito, 2009, p. 23).
This model of corporate governance exemplifies what Berle and
Means (1933, p. 70) describe as control through almost complete
ownership, where an individual or majority group simultaneously
serves as both owners and managers of a company. Subsequently,
this lack of separation between ownership and control encourages
low transparency, ineffective boards, collusion, and lack of rights for
minority shareholders (Silveira and Saito 2009, p. 24). Thus in Brazil,
concentration of ownership has been the underlying cause of poor
standards of corporate governance.
Furthermore, the governance issues associated with the concentra-
tion of ownership are particularly visible within state-owned enter-
prises (SOEs), such as Petrobras. While the family control model
has had a significant impact on corporate governance standards, it
is the Brazilian government’s objective of protecting its interest in
SOEs that has had the greatest influence on the country’s regulatory
regime (Pargendler, 2012, p. 515).
In the early 1990s, like most Latin American states, Brazil enacted
reforms to partially or fully privatise SOEs in order to attract for-
eign direct investment (FDI) and encourage competition (Paz, 2015, p.
792). However, the Brazilian government’s ultimate objective was to
increase its own revenues rather than promote dispersed ownership
(Silveira and Saito, 2009, p. 22). By adjusting the Corporation Law to
eliminate tag-along rights, the government sold its ownership blocks
in order to maximise the capture of control premium at the expense
of the rights of minority shareholders (Silveira and Saito, 2009, p. 22).
As Pargendler (2012, p. 505) argues, the government’s position as
both the controlling shareholder in its SOEs and the arbiter of Bra-
zil’s legal and regulatory regime presents a considerable challenge
to Brazil’s corporate governance standards. In addition, corporate
boards in Brazil are prone to interference with government policy,
which gives tacit approval to the practice of collusion between man-
agers and politicians (Rabelo and Vasconcel, 2002, p. 323).
CORPORATE GOVERNANCE
ANALYSIS

CORPORATE GOVERNACE
ANALYSIS (CONT.)
In light of the disadvantaged position of minority sharehold-
ers in the Brazilian business environment, a number of vol-
untary corporate governance codes have been established
to increase the confidence of foreign investors. In 2000, the
Sao Paulo Stock Exchange, known locally as Bovespa, cre-
ated a listing segment designed for companies seeking to
adopt higher standards of corporate governance practices
and transparency requirements not required under the Bra-
zilian Corporation Law (BM&F Bovespa, 2015). Consisting of
three listings, Level 1 requirements incorporate improved
methods of disclosure and ownership dispersion rules,
while Level 2 includes tag-along rights for minority share-
holders (BM&F Bovespa, 2015). The most stringent listing is
Novo Mercado, which involves the adoption of both Levels
1 and 2 as well requiring companies to issue voting shares
only (BM&F Bovespa, 2015). SOEs including Petrobras were
among the first to go public on Novo Mercado during the
privatisation process (Pargendler, 2012, p. 2940).
The two other main corporate governance codes in Bra-
zil are the Instituto Brasileiro de Governança Corporativa
(IBGC - Brazilian Institute of Corporate Governance) and the
Comissão de Valores Mobiliarios (CVM - Brazilian Securi-
ties and Exchange Commission). Created in 1995, the IBGC
code applies the four basic principles of transparency, fair-
ness, accountability, and corporate responsibility to six sec-
tions of governance including ownership, board of directors,
management, independent auditing, fiscal council, and con-
duct and conflict of interests (IBGC, 1995). The CVM code
promotes protection of investors through transparency, ac-
countability, and monitoring (Securities and Exchange Com-
mission of Brazil, 2015).
While the above mentioned codes represent a move toward
promoting improved corporate governance practices, they
remain voluntary rather than mandatory (Silveira and Saito,
2009, p. 27). With the exception of Novo Mercado, which is
based on a contractual framework wherein companies can
be issued with warnings, fines, suspension of trading, or can-
cellation of registration for violating the terms of their listing
title, none of the codes include enforcement mechanisms
(Silveira and Saito, 2009, p. 31). Furthermore, as Pargendler
(2014, pp. 7-8) points out, Novo Mercado stipulations can be
amended for SOEs under the Corporations Law, which au-
thorises the government to “direct the activities of the com-
pany so as to attend to the public interest that justified its
creation.” While an improvement to the Corporation Law in
2001 adjusted the ratio of non-voting shares that corpora-
tions can issue from two-thirds to 50 percent, the new re-
quirement is only applicable to companies established after
31 October 2001 (Silveira and Saito 2009, p. 26). In all, this
highlights that the Brazilian corporate environment still has a
long way to go before its governance practices are aligned
with international standards.
8

CORPORATE GOVERNACE
ANALYSIS (CONT.)
Two primary issues within Petrobras’ corporate governance framework ultimately led to the development of ‘Op-
eration Carwash’: (1) an entrenched culture of unethical behaviour and lack of respect for regulatory standards
among Petrobras’ top-level management and executives; and (2) an inadequate internal governance framework
Corporate Governance Issues at Petrobras
As mentioned above, the primary issue of corruption and unethical corporate behaviour is by no means isolated to Petro-
bras. Such practices are prevalent across numerous public and private corporations in Brazil and are reflective of a nation-
wide absence of sound regulatory frameworks. Scholars believe that a voluntary self-regulated system in Brazil has failed
to raise corporate governance practices to international standards (Silveira and Saito, 2009, p. 27-32).
Whilst this culture of corruption is widely acknowledged at a macro level, lax internal governance standards at Petrobras
engendered an environment that fostered corrupt activities among individuals in management positions. The ability of man-
agers such as Paulo Costa to leverage pre-existing relationships with construction firms through Petrobras for both personal
benefit and the benefit of aligned political parties is emblematic of a corporate structure that lacks respect for regulatory
norms.
In large part, the issue of inadequate internal governance frameworks is attributable to the role of government in shaping
Petrobras’ Board. Petrobras’ Board currently has “ten members, seven of whom are appointed by the Federal Government
(including the Chairman of the Board), one by the minority holders of common shares, one by the holders of preferred shares,
excluding the controlling shareholder, and one by the employees” (Petrobras, 2014, p. 14). With distinct ties to the governing
political party, this board structure allows for potentially unethical collusion between government and Petrobras officials,
including the type seen in ‘Operation Carwash’. Furthermore, it serves to increase the degree of discretion enjoyed by the
Federal Government as controlling shareholder, a position that can and has been taken advantage of by unscrupulous politi-
cal figures (Pargendler 2014, p. 8).

Importantly, both of Petrobras’ key governance failings highlight the importance of a strong and independent Board of Direc-
tors, as the primary role of such a body is to supervise the company on behalf of the shareholders (Australian Institute of
Company Directors, 2015) and to set the strategic guidance of the company (the Strategic Role) (OECD, 2015).
We therefore recommend the following changes in order to prevent and overcome further governance issues:
1. Redevelopment of Petrobras’ core strategy, mission statement and values;
2. Redesign of the company’s internal and external corporate governance frameworks;
3. Implementation or strengthening of the following key governance policies within the company:
o Transparency, knowledge and ethics;
o Whistle-blower protection;
o Relations with the Federal Government.
Each of these recommendations will be outlined in further detail below.
With reference to the corporate governance issues pertaining to Petrobras and the wider Brazilian economy, we have pro-
posed a holistic set of recommendations that offer a comprehensive means of overcoming the scandal.
MOVING FORWARD
RECOMMENDATIONS
10

Firstly, we recommend that Petrobras redevelop its core strategy, mission statement
and values to emphasise ethics, transparency and integrity at all levels of its operations.
This recommendation is intended to leverage the role of Petrobras’ Board of Directors
as a provider of strategic leadership: a new vision and values promoted by the Board
has the potential to stamp out the poor internal culture at Petrobras that both fostered
and enabled ‘Operation Carwash’, replacing it with one of integrity and ethical behaviour.
IMPORTANCE OF OUR
CORPORATE MISSION
STATEMENT & VALUES STABLE FOUNDATION
Core values offer a stable foundation
for decision-makers to turn to in the
face of uncertainty and change, an is-
sue of growing significance in today’s
unpredictable business environment.
OFFERS INSPIRATION
Core values offer inspiration and
the potential to unite and motivate
employees.
DEFINED BOUNDARIES
Core values provide overarching
constraints on strategic decisions by
defining the boundaries within which
employees, including managers, are
given the freedom to innovate. In turn,
this discourages individuals from act-
ing unethically.
CLEAR OUTLINE
Core values provide a clear outline of
what the company, stakeholders and
shareholders will and will not accept.
Specifically, we recommend that Petrobras adopt an or-
ganisation-wide mission statement of “Leadership through
clarity and knowledge,” demonstrated through the follow-
ing core values:
1. Ethics & transparency across all operations;
2. Pride in being Petrobras;
3. Sustainable development;
4. Results and readiness for change; and
5. Stakeholder integration.
These values acknowledge Petrobras’ position as a glob-
al leader in the integrated energy industry, whilst striving
toward transparency and ethical behaviour. By placing
these values at the core of Petrobras’ operations, the
Board intrinsically emphasises the importance of ethical
and sustainable behaviour at every level of the organi-
sation – and that development and profit should not be
sought at their expense. Additionally, prioritising these
goals will reinforce adherence to and support for the
stricter governance controls and policies outlined in rec-
ommendations (2) and (3).
We also recommend that Petrobras adopt a values-based
vision statement outlining what the company hopes to
achieve in the near future. Collins & Porras have outlined
the benefit of what they term a “Big, Hairy, Audacious Goal
that requires significant change to be achieved as a driv-
ing force for [an] organisation” (1996, p. 66). As Petrobras’
“BHAG”, we would recommend working toward an ideal of
being “Corruption-free by 2020.” The concept is to pro-
vide a unifying goal for employees and to assist in key
decisions by management and the Board.
Finally, in implementing these changes, individual busi-
ness units will be encouraged to develop subsets of these
statements and values to further support and develop the
required change within the organisation.
STRATEGY & VALUES
RECOMMENDATIONS
Whilst a company’s vision and values can at times seem tangential to business objectives, stud-
ies show that companies that enjoy enduring success most often possess core values and a core
purpose (i.e., a ‘mission’) that remain fixed, while their business strategies and practices “endlessly
adapt to a changing world” (Collins & Porras, 1996, p. 65).

[OUR] VALUES ACKNOWLEDGE
PETROBRAS’ POSITION AS A GLOBAL
LEADER, WHILST STRIVING TOWARDS
TRANSPARENCY AND ETHICAL
BEHAVIOUR
12

Having thus addressed the symbolic role that the Board plays in corporate governance, it is
equally imperative to address structural issues within Petrobras’ corporate governance frame-
work. Significant adjustment to Petrobras’ organisational configuration is inhibited as much
of the company’s structure is determined by law (Petrobras, 2015); however, we have worked
within these limitations to develop a set of recommendations that strengthen Petrobras’ govern-
ance while adhering to legal requirements.
Structure
As seen in Fig. 1, Petrobras currently has an Executive Board that sits below a supervisory Board of Direc-
tors, further overseen by an external Audit Committee.
CG FRAMEWORKS
RECOMMENDATIONS
Fig. 1:
Petrobras organisational
structure. Source: ‘Or-
ganization Chart,’ Petrobras,
retrieved 15 October 2015,
www.petrobras.br/en
The Board of Directors is comprised of independent directors appointed by Petrobras’ stakeholder groups,
including the Federal Government, labour unions, and preferred and minority shareholder groups; while
the Executive Board is comprised of the President of the company and the Vice-Presidents of the re-
spective divisions of the company. The Executive Board’s activities are audited by the company’s Internal
Auditing department, whose report is delivered alongside the Executive Board’s to the Board of Directors.
We recommend the following changes to the current structure:
1. The creation of a new Appointment and Remuneration Committee to sit alongside the Audit
Committee, in order to address issues of conflict of interest associated with the appointment of previous
Directors (discussed further in recommendation (3)).
2. The addition of a Chief Knowledge Officer, a Chief Transparency Officer and a Chief Audit Officer
to the Executive Board, emphasising the increased importance of these measures within the organisation.
These officers, and other members of the Executive Board, will be subject to the same additional appoint-
ment and remuneration criteria outlined in recommendation (3).
Membership
As well as their structure, the membership of Petrobras’ Board of Directors and Executive Board will
determine the effectiveness of these Boards (Ryan & Wiggins, 2004). Like many domestic legal systems,
Brazil’s corporate legislation places minimal constraints on who can be a Director of a private or public
company (Brazilian Federal Law no. 6,404). Thus, the responsibility for setting and enforcing standards for
Directors falls upon individual companies as a means of self-regulation. We recommend that Petrobras
apply the following standards in order to ensure that the members of each of its Boards are adequately
qualified to hold their positions.

Board of Directors
1. Members of the Board of Directors should be rec-
ommended to relevant stakeholders by the Appointment
and Remuneration Committee, rather than being chosen by
the controlling shareholder.
2. Directors cannot have been a ‘Related Party’ of the
organisation within the 24 months before their appointment.
3. Directors must have sufficient experience in an
industry relevant to the position in which they will serve,
aiming for representation from a broad range of industries
including legal, engineering, business, social services, gov-
ernment relations and the sciences.
4. Directors must have academic qualifications at a
level appropriate to the position in which they will serve,
and if not, must be prepared to undergo “on-boarding” via a
relevant management course from a qualified independent
organisation.
5. Directors must be an existing member of a relevant
industry body, relating either to the position in which they will
serve or to management at a Board level.
Executive Board
1. As with the Board of Directors, members of the
Executive Board should be recommended to the Board of
Directors by the Appointment and Remuneration Committee
rather than selected by the majority shareholder.
2. Members of the Executive Board must possess key
knowledge contacts within the organisation.
3. Members of the Executive Board must meet a
transparent set of key selection criteria based on merit, per-
formance, industry knowledge and expertise.
4. Members of the Executive Board must undergo
significant training as part of the “on-boarding” process to
gain familiarity with the requirements and responsibilities of
an executive position (including ethics and governance train-
ing).
These standards will ensure that Board members not only
have sufficient skillsets to occupy their nominated positions,
but will also bring with them significant reputations in their
fields that they will fear losing – this imperative, called the
management of reputation capital, has been shown to re-
inforce good corporate behaviour (Klewes & Wreschniok,
2004).
Finally, as described above, we recommend giving significant
care to the “on-boarding” and ongoing training of new Direc-
tors. Studies show that extremely high-performing compa-
nies pay extraordinary attention to managing what might
be called the socialisation process for their employees and
management – the development of a strong organisational
culture mutually reinforces the development of strong gov-
ernance standards within a corporation (Nadler, 2004).
Membership criteria
Notably, the membership criteria outlined above place a sig-
nificant emphasis on demonstrated industry experience and
skills. Whilst this may limit the pool of available Directors to
a certain extent, we believe that given the size, scope, and
complexity of Petrobras’ operations, demonstrated knowl-
edge and performance across the company’s technical ar-
eas of operation are a crucial indicator of a Director’s future
performance in the role (Carter, Simkins and Simpson, 2003).
We also emphasise appointing Directors with a diverse
range of experience - both geographical, cultural, and across
industries - as it has been demonstrated that when a Board
demonstrates a significant diversity of experience, company
performance improves along both business and governance
metrics (Carter, Simkins and Simpson, 2003). Boards with a
diversity of experience are also negatively correlated with
corruption (Upadhyay, 2014; Rhode and Packel, n.d.). Finally,
a diverse Board provides strategic benefits by allowing ac-
cess to a broader range of markets and networks and by
boosting reputation (Brammer, Millington and Pavelin, 2009).
Finally, we emphasise that Board members should be able to
demonstrate a commitment to activist directorship (Millstein
and MacAvoy, 1998). Referring to Nadler’s discussion of es-
sential Board “types”, the “activist” Board might sit some-
where between the “engaging” and the “intervening” Board:
while frequently involved in decision-making and quick to
provide operational guidance to management, it nonethe-
less does not interfere with management’s capacity to make
independent business decisions (Nadler, 2004; Millstein and
MacAvoy, 1998). We believe that given the challenges Petro-
bras faces at present, and the significant changes it will need
to undertake in order to mitigate the impacts of ‘Operation
Carwash’, the company requires strong, active and participa-
tory leadership. An activist Board, when designed well and
comprised of qualified individuals, can be a significant tool
for successfully implementing organisational change (Beer
& Eisenstat, 2000).
CG FRAMEWORKS
RECOMMENDATIONS (CONTINUED)
14

Implementation or strengthening of key governance policies
As mentioned above, we recommend that Petrobras implement or strengthen native policies in the following areas:
1. Transparency, knowledge and ethics;
2. Whistleblower protection;
3. Relations with the Federal Government.
Details of each of these policies are outlined below.
A key component of these new policies is that they involve the imposition of new requirements upon all of Petrobras’
stakeholders to various extents, from the executive to the operational level. As one of the world’s largest public companies,
Petrobras already possesses relatively comprehensive risk management and governance policies administered through its
Governance, Risk and Compliance department (Fig. 1). However, these policies were not enough to counter the widespread
and significant unethical practices that occurred during ‘Operation Carwash’. Therefore, we recommend strengthening these
policies by making them a contractual obligation to engagement with Petrobras: adherence to each policy would be a pre-
requisite to doing business with Petrobras on any level, whether as a Director, executive, employee or contractor. These
obligations would also apply to all suppliers, partners and resellers within the Petrobras network. Not only would this allow
for stronger enforcement of Petrobras’ governance policies, it would also serve to involve all stakeholders in the organisa-
tion’s governance by making ethics and transparency a part of their everyday induction and training, thus assisting in the
elimination of bribery and corruption within the organisation (Rose-Ackerman, 1999). Similar efforts by other companies have
been shown to have a high efficacy rate in minimising both the opportunity for and prevalence of corruption within organisa-
tions (Rose-Ackerman, 1999).
Further, we recommend that all Petrobras stakeholders are required to undertake new training and initiation programmes
that address and explain the new policies as part of their implementation. Ongoing integration and communication are shown
to be significant components of enacting cultural change within a corporation and maintaining a strong corporate culture
(Martin, Frost and O’Neill, 2006).
KEY GOVERNANCE POLICIES
RECOMMENDATIONS

Transparency, Knowledge and Ethics
The Transparency, Knowledge and Ethics policy emphasises the obligation of
Petrobras and individuals within Petrobras to act in an open and transparent
manner across all operations. Given the industries that Petrobras operates
across, and given the Brazilian Federal Government’s status as both a ma-
jority shareholder and a significant stakeholder, there are some limits to the
extent of information that Petrobras can legally divulge. Still, in order to foster
accountability and help develop confidence in the organisation among inves-
tors and the public, we recommend that Petrobras adopt the continuous dis-
closure obligations of the Australian Stock Exchange (ASX), recognised by the
OECD as one of the most stringent reporting regimes in the world (Interna-
tional Monetary Fund, 2015). This will ensure that if Petrobras “is or becomes
aware of any information ... that a reasonable person would expect to have
a material effect on the price or value of [its] securities, [it] must immediately
tell ASX that information” (ASX, 2015). This ensures that all information that
should be publicly available is available.
In addition to strengthening the company’s disclosure and information-sharing
obligations, we recommend that employees and, where applicable, contrac-
tors of Petrobras should be required to abide by the same ethical standards
that are imposed on the Board and executives. These include:
1. Duty of good faith;
2. Duty to act in the best interest of the company;
3. Duty to avoid conflicts between the interests of the company and the
employee’s own interests (related party transactions); and
4. Duty to act honestly, and to exercise the requisite care and dili-
gence in all operations.
These duties would be integrated into Petrobras’ native employment policies,
such that if they are violated the employee in question would be liable in a
civil context as well as facing potential criminal liabilities.
Whistleblower Protection
A whistleblower is defined as an individual that exposes any kind of information
or activity that is deemed illegal, dishonest, unethical, or otherwise improper
within a public or private organisation (Johnson, 2003). Whilst a whistleblower
is often typecast as someone who exposes poor internal practices to an ex-
ternal regulator, an effective internal whistleblower policy is largely agreed to
be an integral piece of a company’s corporate governance framework, as it
enables the company to foster a culture of effective due diligence regarding
corrupt or illegal practices (Johnson, 2003). We therefore recommend that
Petrobras strengthen its existing whistleblower policy by installing whistle-
blower officers at all levels of the company, who are readily available and
responsible for receiving reports of illegal or unethical behaviour.
KEY GOVERNANCE
POLICIES
RECOMMENDATIONS (CONT.)
16

THE TRANSPARENCY, KNOWLEDGE
AND ETHICS POLICY EMPHASISES THE
OBLIGATION OF PETROBRAS TO ACT IN
AN OPEN AND TRANSPARENT MANNER
ACROSS ALL OPERATIONS

RECOMMENDATIONS (CONTINUED)
An effective whistleblower policy should possess the following features:
1. Reporting responsibility - individuals have a duty to report any illegal or unethical behaviour by or involving a
Petrobras employee, contractor or other stakeholder that they may observe or otherwise become aware of;
2. No retaliation - individuals must be able to expect that a report to the whistleblower officer will not be met with
retaliation or punishment, either directly or indirectly, at any level of the company;
3. Reporting procedure - clear procedures must be followed in the reporting of all incidents to the whistleblower of-
ficer;
4. Good faith - all reports to the whistleblower officer must be made in good faith, i.e. the individual who makes the
report must have every reason to believe the information s/he is reporting is true;
5. Confidentiality - all reports to the whistleblower officer are made in complete confidence and should be kept in
complete confidence.
This policy is designed to encourage individuals within Petrobras’ network to report incidences of illegal or unethical be-
haviour that have a reasonable basis for claim; to ensure that the reporting individuals are not retaliated against; and to
establish policies that ensure all allegations receive sufficient follow-up. Importantly, there is an obligation of confidentiality
on all parties involved in the process, as well as a requirement that both the reporting and investigation parties act in good
faith (Near, Dworkin and Miceli, 1990). We believe these requirements sufficiently facilitate reporting and follow-up whilst
addressing the risk that allegations will be made against individuals as a form of personal retribution.
Relations with the Federal Government
As a state-owned enterprise (SOE), Petrobras is required by law to maintain the Brazilian Federal Government as its con-
trolling shareholder. This means that the Federal Government holds the majority of the company’s voting shares and, under
current policies, has the power to elect a majority of the members of its Board of Directors. Further to this, Petrobras dis-
closes in its 2014 Management Report that the Federal Government “has license to enact macroeconomic and social poli-
cies through [Petrobras],” that Petrobras “can carry out activities that prioritise the Federal Government’s policies, instead
of [its] own economic and business objectives,” and, of most concern, that Petrobras “can perform sales on terms that may
adversely affect [the company’s] operating results and financial condition” (Petrobras, 2014, p. 14).
This legally unavoidable situation represents a significant risk factor for the development of corruption within Petrobras’
company culture, particularly at the top levels (Transparency International, 2013, p. 2). Indeed, the relationship between
Petrobras and the Brazilian Federal Government was almost certainly a facilitating factor in the political kickbacks that oc-
curred during ‘Operation Carwash’: the government’s control over the membership of Petrobras’ Board would have allowed
it to keep renewing the mandate of officials like Paulo Roberto Costa for years on end.
That said, SOEs are not necessarily condemned to problems with corruption and cronyism. Insights from consultancies Mc-
Kinsey & Company and PwC show that well-governed SOEs can perform as well or better than private companies, in some
cases even cracking the Fortune Global 50 (McKinsey, 2009; PwC, 2015). However, appropriate layers of checks and balances
must be implemented between persons in office and persons in key positions at SOEs; and transparent disclosure of all
deals, contracts and other transactions between SOEs and current state officials is crucial (OECD, 2010; 2009).
18

Thus, while Petrobras is required under current law to maintain a structure that includes ownership by and partnership with
the Brazilian Federal Government, we recommend the following changes to Petrobras’ fiduciary and business relationship
with the government:
1. Government shares placed in a statutory body. This will serve as a means of establishing “a clear separation be-
tween the state’s role as market regulator and owner of the company,” which is “an essential requirement to ensure [good]
corporate governance in SOEs” (Transparency International, 2013, p. 3). Placing government shares in an independently
managed statutory body will help ensure that the state’s “ownership functions [are] separated from the responsibility for
industrial policy”; i.e., that Petrobras is no longer obliged to act as agent of macroeconomic policy for the Brazilian Federal
Government at the expense of its own operations or objectives (Transparency International, 2013, p. 3).
2. External audit of government appointees to the Board of Directors to ensure they comply with the standards for
appointment and remuneration outlined in recommendation (2).
3. Increase the proportion of “shared value” projects in Petrobras’ relationship with public sector. PwC (2015) notes
that since SOEs are inherently hindered from operating on a purely profit-oriented model, they are best served by leverag-
ing the policy-oriented aspect of their mandate to pursue shared value projects in collaboration with public and third-sector
organisations (p. 7). In the case of Petrobras, taking on an increased number of shared value or development projects in
partnership with the government could recast the perception of Petrobras’ relationship with the public sector from one of
cronyism to one of collaboration toward broader social and economic goals.
4. Lobby the Federal Government to alter legislation to move toward privatisation of SOEs. Though unlikely to see
results in the short term, it is worthwhile for Petrobras to lay the groundwork for a policy of lobbying for the privatisation of
SOEs in Brazil, as the nation’s increasing participation and influence in international economic organisations may eventually
see the government adjust its policies to fall in line with the liberal capitalist model favoured by the West. This will have to
be done tactfully and incrementally so as to avoid coming into direct conflict with the state, as occurred when the CEO of
the Brazilian mining firm Vale was forced by the government to depart his position for being too “independent-minded” (The
Economist, 2012).
RECOMMENDATIONS (CONT.)

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All stock images provided by www.istockphoto.com
22

Melbourne Business School, 2015
MGMT90038 Global Corporate Governance
5,455 words
Robert Au
Danna Diaz
Lennard Iosif
Marisa Pensky
Hunter Santamaria
Jedd Watmore
FOR PETER VERHEZEN
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Petrobras - Corporate Governance Analysis

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