Oil giant’s response also raises corporate-governance concerns

Oil giant’s response also raises corporate-governance concerns

WHEN Eni, Italy’s oil major, this week revealed a return to profit in the fourth quarter and a long-term commitment to keep the barrels flowing, there was much to cheer. Three years on from Claudio Descalzi’s appointment as CEO, Eni has made spectacular oil and gas discoveries even as its peers retrenched amid the oil-price slump. Sanford C. Bernstein, a research firm, says only half in jest that it is “evolving into an actual oil company”.

But a cloud hangs over the firm, which is 30% state-owned—and over Mr Descalzi (pictured) personally. He is caught up in an Italian probe into alleged corruption in a deal Eni struck in partnership with Royal Dutch Shell in Nigeria, just as he is seeking reappointment as CEO in April. The company’s response to the scandal, especially its treatment of independent board members, raises questions about its commitment to good corporate governance.

In 2011, Eni and Shell jointly paid $1.3bn for a huge offshore oil block, known as OPL 245, which has more than 9bn barrels of probable reserves. Over $1bn of this flowed to a shell company. That firm, Malabu, was widely known to be owned by a former Nigerian oil minister, Dan Etete, who had acquired the rights to OPL 245 for a song while in office.

The companies have always insisted that their deal was with the government, not Malabu. However, it is clear that some executives knew it was a two-part affair in which they paid the government, and the government funnelled the money to Malabu. Nigeria’s then attorney-general has since described the government’s role as that of an “obligor” in a transaction between a unit of Shell, Eni and Malabu. In January Nigerian authorities seized the OPL 245 oil block, labelling it the “proceeds of crime”. The country’s anti-corruption commission alleges that Eni and Shell “conspired” to send payment as a “bribe”, and is seeking charges against their local subsidiaries. They deny wrongdoing and have appealed against the seizure.

Last month, after a long investigation, Italian prosecutors led by Fabio De Pasquale, who secured the conviction of Silvio Berlusconi, Italy’s former prime minister, for tax fraud, requested that five current and former Eni executives, including Mr Descalzi, face trial for corruption. Also on the charge sheet are several middlemen, Mr Etete and Eni and Shell themselves. Separate charges are being sought against four men who worked for Shell at the time, including its then head of upstream, Malcolm Brinded. A judge in Milan must now decide whether to indict the accused. The first hearing is scheduled for April 20th.

The allegations are eyebrow-raising. Prosecutors allege that over $500m ended up in front companies for Goodluck Jonathan, Nigeria’s then president, with $466m diverted to a chain of bureaux de change in what might be the biggest-ever cash transaction. Mr Jonathan denies wrongdoing. A “notification” filed by prosecutors also describes “retrocessions” (ie, kickbacks) allegedly received by Eni and Shell executives, including a $50m cash delivery to one Eni executive’s home in Abuja.

The accused all deny wrongdoing. Eni’s board has expressed “total confidence” that the firm and Mr Descalzi are innocent. After drawing on the prosecutors’ full dossier, an American law firm commissioned by Eni has found “no evidence of corrupt conduct”, the company says. A Shell spokesman says: “We don’t believe a request for indictment is justified and we are confident that this will be determined in the next stages of the proceedings.”

Despite the allegations, Eni continues to attract “buy” recommendations from many analysts who would like to see Mr Descalzi reappointed. There has, however, been disquiet over Eni’s treatment of board members who ask difficult questions. Some investors expressed dismay when Luigi Zingales, an independent director, left the board in 2015, citing “irreconcilable differences of opinion”, apparently over how the company tackled corruption risks. Mr Zingales, a professor at Chicago’s Booth School of Business, had joined the board hopeful that he could help change things. He left disillusioned.

More worrying still is the treatment of Karina Litvack, another non-executive director with strong governance credentials—and a tendency to ask tough questions about alleged graft. Last year she was removed from a board control-and-risk committee that has access to OPL 245 case files. The reason, Eni said, was that Ms Litvack had a possible conflict of interest, because she has been implicated in a case of alleged defamation against the company. But that case is full of oddities. The defamation is supposed to be against Eni and Mr Descalzi, but it is not clear who the allegations came from (Eni says it was not from the company). Intriguingly, Eni wants the defamation case file to be admitted as evidence in the main OPL 245 case, despite not having seen its contents.

To many outsiders, the episode looks trumped-up. One investor says the defamation case appears to be a “brazen attempt to silence board critics”. Eni denies this. Another notes that it smacks of double standards for Eni to allow executives accused of corruption to stay in their jobs while insisting that a director ensnared in a vague defamation case relinquish a role.

Stephen Davis of Harvard Law School and the International Corporate Governance Network, an investor-led organisation, sees the case as “a test of the responsiveness of Italian public companies to a changing world”. He notes that Italy’s voto di lista mechanism, which guarantees minority investors the right to nominate directors and to communicate with the board, gives shareholders a voice they don’t have in, say, America—in theory at least. Investors say that Eni’s chairman, Emma Marcegaglia, has listened to some of their concerns. Minority investors plan to renominate Ms Litvack to the board in coming weeks (as one of three they are entitled to put on the slate). But whether she will be reinstated to the control-and-risk committee remains to be seen.

The cloud of alleged corruption will hang over Eni for some time. The judge who must decide whether to send the suspects to trial in the main case may not make the decision until the end of the year. The good news is that since the OPL 245 deal, new rules in Europe have forced public companies like Eni and Shell to disclose payments in such transactions. The bad news is that in America, Republicans have repealed a rule requiring listed companies to do likewise.

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