The media is buzzing about the possible sale of a stake in the Russian government-owned oil company OAO Rosneft to BP Plc (BP, Financial). The UK oil giant might appoint a Russian director to its board, some reported in recent days. If the two companies do integrate, BP goes into the deal with better supervision of its senior management than Rosneft.
BP has already had some headaches from its joint venture TNK-BP. Last spring, for example, Russia's natural resources and ecology minister Yuri Trutnev slammed TNK-BP for polluting his country. On June 1 BP said it had notified Alfa Access Renova, which owns the other half of the joint venture, about its desire to sell its stake. After Rosneft announced its interest in July, media reported in recent days that BP was willing to put the revenues from a sale of its stake in TNK-BP toward increasing its stake in Russian oil giant Rosneft.
If BP takes this step, it is also investing alongside the Russian government, which owned a 75.2% stake in Rosneft as of Dec. 31, 2011. The presence of a controlling shareholder raises questions about the extent to which Rosneft management will be able to fulfill the needs of minority investors. While many publicly traded companies use stock-linked compensation in order to align their executives' interests, Rosneft does not describe such practices in its remuneration policy or its charter.
Meanwhile, most of Rosneft’s nine board members could find it challenging to supervise objectively. Among the four that the company describes as “independent” directors, the vice chairman Sergei Shishin is also the Senior Vice President of the state-owned VTB Bank, and from 1986 to 1988 he served in Afghanistan as a member of special units of the KGB. Another of the “independent” directors, Matthias Warnig, is managing director of Nord Stream -- a Zug, Switzerland-based consortium 51% owned by the half-Russian-government-owned natural gas supplier OAO Gazprom. These directors have clear ties to the government.
In contrast, 12 of the 15 members on BP’s board meet GMI Ratings' criteria of independence. While the board’s unusual size raises some issues as far as the distribution of responsibility and accountability among directors, at least BP doesn’t have a controlling shareholder. Also, BP discloses how much it compensates its executives, at the same time detailing the combinations of salary and other forms of payment received such as vested equity.
In another positive sign, BP’s financial data gives it an Accounting and Governance Risk (AGR ®) score of 59, indicating higher accounting and governance risk than only 41% of companies and putting the company in average territory. Rosneft does not disclose enough data for the calculation of an AGR ® score to be possible.
Of course, Rosneft and BP are both rated D on their corporate governance overall. BP has some way to go before it cleans up its act following the Deepwater Horizon drilling explosion more than two years ago, as we had already discussed last spring. And without knowing who specifically would be involved in any board changes following the possible deal between Rosneft and BP, it’s impossible to say to what extent the development would help or hinder either company’s corporate governance. Perhaps the Russian government has more information on that front.
BP has already had some headaches from its joint venture TNK-BP. Last spring, for example, Russia's natural resources and ecology minister Yuri Trutnev slammed TNK-BP for polluting his country. On June 1 BP said it had notified Alfa Access Renova, which owns the other half of the joint venture, about its desire to sell its stake. After Rosneft announced its interest in July, media reported in recent days that BP was willing to put the revenues from a sale of its stake in TNK-BP toward increasing its stake in Russian oil giant Rosneft.
If BP takes this step, it is also investing alongside the Russian government, which owned a 75.2% stake in Rosneft as of Dec. 31, 2011. The presence of a controlling shareholder raises questions about the extent to which Rosneft management will be able to fulfill the needs of minority investors. While many publicly traded companies use stock-linked compensation in order to align their executives' interests, Rosneft does not describe such practices in its remuneration policy or its charter.
Meanwhile, most of Rosneft’s nine board members could find it challenging to supervise objectively. Among the four that the company describes as “independent” directors, the vice chairman Sergei Shishin is also the Senior Vice President of the state-owned VTB Bank, and from 1986 to 1988 he served in Afghanistan as a member of special units of the KGB. Another of the “independent” directors, Matthias Warnig, is managing director of Nord Stream -- a Zug, Switzerland-based consortium 51% owned by the half-Russian-government-owned natural gas supplier OAO Gazprom. These directors have clear ties to the government.
In contrast, 12 of the 15 members on BP’s board meet GMI Ratings' criteria of independence. While the board’s unusual size raises some issues as far as the distribution of responsibility and accountability among directors, at least BP doesn’t have a controlling shareholder. Also, BP discloses how much it compensates its executives, at the same time detailing the combinations of salary and other forms of payment received such as vested equity.
In another positive sign, BP’s financial data gives it an Accounting and Governance Risk (AGR ®) score of 59, indicating higher accounting and governance risk than only 41% of companies and putting the company in average territory. Rosneft does not disclose enough data for the calculation of an AGR ® score to be possible.
Of course, Rosneft and BP are both rated D on their corporate governance overall. BP has some way to go before it cleans up its act following the Deepwater Horizon drilling explosion more than two years ago, as we had already discussed last spring. And without knowing who specifically would be involved in any board changes following the possible deal between Rosneft and BP, it’s impossible to say to what extent the development would help or hinder either company’s corporate governance. Perhaps the Russian government has more information on that front.
