Petrobras - Corporate Governance and Corruption Evaluation

AU | DIAZ | IOSIF | PENSKY | SANTAMARIA | WATMORE

Petróleo Brasileiro S.A. - Scandal, Infidelity and Corruption

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AU | DIAZ | IOSIF | PENSKY | SANTAMARIA | WATMORE 2

Today’s Agenda⏳

Company Profile

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Timeline of Scandal

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Why It Happened?

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Moving Forward

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✒ Petrobras Company ProfilePerfil da companhia Petróleo Brasileiro S.A.

Petrobras Company Profile“Integrated growth, profitability and social/environmental responsibility”

Current Profile

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We are an energy company operating in an integrated manner in the oil, gas and

energy industry

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World leaders in technology for exploration

and production in deep and ultra-deep waters

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Guided by three corporate directives: integrated growth,

profitability and social and environmental responsibility

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Mission

⚑☁

Providing products suited to the needs of its clients and

contributing to the development of Brazil and the countries where it operates.

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To act in the oil and gas industry in an ethical, safe and profitable way, with social and environmental responsibility.

Vision

✓2030 VisionTo be one of the five largest integrated energy

companies in the world and the preferred one by its

stakeholders.


Performance of the CompanyPetrobras has seen increases in both market share and productivity

Record ProductionOur average production in Brazil was 2.034 million barrels of oil per day (bpd) and 67.8 million cubic meters of gas per day (m3/d). Our best annual result ever achieved.

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New and Completed Projects4 new oil and gas production systems; 6 new delivery points of natural gas; 2 completed thermal power plants; entry into production of 3 internationally held oil fields.

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Growth of up to 21% in sales of gasoline, LPG, jet fuel and fuel oil.⏷

Efficiency GainsWe have implemented measures to improve the efficiency of our extraction and production processes. The total savings accrued through our Program for Operation Cost Maximisation (Procop) was US $8.5bn.

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Sales Growth

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👥 Board of DirectorsConselho Administrativo



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Corporate GovernancePetrobras is committed to good corporate governance practices

The Board of Directors is our guidance body and senior management. Its responsibilities include:

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• Setting strategic goals and guidelines; approving the strategic plan, the multi-annual plans and annual programs of expenditures and investments; supervising the management of officers and establishing their assignments; and evaluating performance results.

• The members of the Board of Directors are elected at the Annual General Meeting, being assured employees the right to appoint one member, separately, by direct vote of their peers.

• We currently have 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. The Chairman of the Board of Directors and President of Petrobras are not held by the same person.

• In November 2014, our Board of Directors approved the establishment of a Governance, Risk and Compliance Office, with three-year term, which began in January 2015 and is renewable. The mission of the new officer is to ensure procedural compliance and mitigate risks on our business, such as fraud and corruption, ensuring adherence to laws, standards and regulations, including the rules of the Securities and Exchange Commission (CVM) and the Securities and Exchange Commission (SEC).


Organisational StructureThe government plays a pivotal role in the management of the organisation

As required by law, the Brazilian Federal Government is our controlling shareholder. This means:

• The Federal Government holds the majority of our voting shares. • The Federal Government holds the power to elect a majority of

members of our Board of Directors and, through it, our management.

• The Federal Government has an influence on the strategic direction of our business and has license to enact macroeconomic and social policies through us.

• We can carry out activities that prioritise the Federal Government’s policies, instead of our own economic and business objectives.

• We cooperate with the Federal Government to ensure that supply and crude oil and oil product prices meet domestic consumption requirements.

• We can perform sales on terms that may adversely affect our operating results and financial condition.

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# Timeline: What Happened, and When?O que aconteceu, e quando?


The Scandal #

2014

March 2014 Arrest of Paulo Roberto Costa in

connection to a money laundering scheme that took place under his

watch as Petrobras’ chief of refining from 2004 - 2012.

Construction companies that won contracts from Costa’s

division overpriced the value of their projects by 3% and diverted these funds into slush funds for

political parties..

April 2014: Brazil’s Supreme Court authorises a request for congressional inquiry

into alleged corruption at Petrobras.

September 2014: After striking a plea bargain with

authorities, Costa names parliamentarians and other

officials as being involved in the corruption.


The Scandal#

October 2015: Petrobras’ external auditor refuses to sign off on the quarterly results.

November 2015: Petrobras receives a subpoena

from US SEC asking for documents relating to their investigation.

Police raid Petrobras offices and offices of some contractors. Police arrest 24 executives from Brazil’s

six largest construction firms.

January 28, 2015: Petrobras admits it is unable to calculate how much was stolen

from the corruption scandal. Police identified R$3.7b of

suspicious payments.

2015


The Scandal#

February 4, 2015 Maria das Gracas Foster (CEO) and five other Petrobras executives

resign.

February 5, 2015 “Operation Carwash” 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).

TODAY FEB 9


$ Why Did it Happen?Por que isso aconteceu ?


The Complex Intricacies of the Scandal$

Improper Accounting PracticesConcealed the fraudulent payments from the market

and made the company appear more attractive to

investors

Bid Rigging“The Cartel” made up Brazil’s biggest construction

firms: Camargo Correa, OAS, UTC, Odebrecht, Mendes

Junior, Engevix, Queiroz Galvao, Iesa and Galvao

Engenharia

Lucrative RewardsPetrobras Executives approved bids in return for

money

The Cover Up“Endemic” and “institutionalised” involved capitalising

the overpayments and bribes as assets

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Governance Failure

Weak Oversight Mechanisms• Through majority voting shares, the Government has

direct influence in the company’s choice of

management and operations

Procurement Law• Law No. 9,478 (August 6 1997) determines contracts

for the acquisition of goods and services must be

preceded by a simplified tender process

Government Influence• CEO ignored warnings: executive were able to

interfere directly in procurement processes • Lack of protection for whistleblowers

Political Appointments• Jobs used in exchange for political favours and

patronage

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➢ Moving ForwardAvançar com a nossa empresa


Mission Statement➢

Leadership through clarity and knowledge.❞ ❞


ValuesRe-ordering of priorities to emphasise ethics and transparency

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Proud of being Petrobras

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Ethics and transparency in everything that we do

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Results and readiness for change

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Sustainable development

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Stakeholder integration

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Audit Committee

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Exploration and Production

Financial Gas & EnergyEngineering,

Technology and Materials

Corporate and Services

Governance, Risk and Compliance

Board of Directors

👥 👥General Ombudsman Internal AuditingExecutive Board

President

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👥👥

👥 Legal Department

Institutional Communications

Cabinet of the President

General Secretariat

Petrobras Organisation Structure


Proposed Board of DirectorsA revised structure is necessary to prevent future governance failures

Chief Internal Audit Officer• Independent corporate executive • Responsible for:

• Internal audit • Quality management • Report of critical findings

Independent Directors - New Requirement• Recommended by Appointment and Remuneration

Committee • Must not have been a Related Party for the last 24

months

Chief Knowledge Officer• Continuous disclosure responsibility • Information Directive • Requirement to inform Board - Accountabilities

Chief Transparency Officer• Whistleblower responsibility • Chief risk responsibility • Finding and reporting abnormal behaviour

Board of Directors

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PoliciesThere are five key policy areas Petrobras is looking to amend

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Transparency and Knowledge Policy

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Audit

Appointment and Remuneration

Whistleblower Policy

Government Participation


Policies

Transparency and Knowledge Policy

Content • Duties • Related Party Transactions • Transparency • Disclosure Obligations (OECD) • Whistleblower Policy (See later slides)

Applicable Parties • Holistic Approach • Directors • EmployeesContractors • Stakeholders

• Suppliers • Resellers

Transparency

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Policies

Audit

Audit

Internal • Responsible to Board of Directors • Monitors Executive Board and Internal Operations • Chief Internal Audit Officer member of Board of Directors

• External • All reports of internal Auditor are reviewed by External

Auditor • Cannot have been a Related Party within previous 24

months

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Policies

Appointment and Remuneration

• Independent Directors – New Requirement • Recommended by Appointment and Remuneration

Committee • Must not have been a Related Party for the last 24

months

• Merit Selection

A&R

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Policies

Whistleblower

Whistleblower Policy

• Reporting Responsibility • No Retaliation • Reporting Procedure (Knowledge Officer) • Transparency Officer • Acting in Good Faith

• Confidentiality

• Extractive Industries Transparency Index (EITI) and ‘Publish What You Pay’ Campaign

• Anti-Corruption Policy • Register of Corporate Interests • Conflict of Interests Policy • Gifts Policy - Maximum SSS • Record-Keeping

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Policies

Government Participation

• Shares placed in Statutory Body • Independence from elected government • Petrobras no longer used to further government ambition/policies • Still receive dividends • Independent committee manages Government stake & directorships

• Exit/Sell-Down • Lobby government to divest shares so no longer have controlling interest • Increase price and dividends if privately held → continued revenue

stream • More likely to contribute to

• Corporate Shared Value • Macroeconomic goals not to be pursued at the cost of Corporate

Strategic goals • Sustainable Development

Government

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Welcome to the future of Petrobras

AU | DIAZ | IOSIF | PENSKY | SANTAMARIA | WATMOREAU DIAZ IOSIF PENSKY SANTAMARIA WATMORE

Presented to you by:

ROBERT AU DANNA DIAZ

LENNARD IOSIF MARISA PENSKY

HUNTER SANTAMARIA JEDD WATMORE

AUDIAZIOSIF

PENSKY

WATMORESANTAMARIA

Petrobras - Corporate Governance and Corruption Evaluation

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