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Successful pressure for board reform at a Brazilian global oil giant has led to a strategic turnaround and strengthened corporate governance.

Historically, the Brazilian government has stacked the company's board by appointing nine of the 11 seats and allowing minority shareholders, including state-controlled pension funds, to vote for the remaining two. In 2008, it significantly increased production after making major oil discoveries in offshore pre-salt fields. To exploit its discoveries, the Brazilian oil giant more than quadrupled its borrowing levels over the next five years to a peak of about $140bn in 2014, compared to just $30bn previously. Increasing its leverage ratio from one-times to five-times. By 2015, with leverage rising faster than production, mounting interest costs put extreme pressure on cash flows ahead of the $12bn in principal payments it was due to pay in 2016. Added pressure was caused by its debt squeeze coinciding with slumping oil prices and the epic Car Wash corruption scandal becoming public.


Hermes EOS pressed for board changes at global oil giant


Independent director nominees selected to the board in 2013


Reduced leverage target by the end 2018

In 2013, Hermes EOS and a group of international investors were successful in seeing their two genuinely independent director nominees elected to the board of the oil company. Since then minority shareholders have been able to nominate and elect independent directors at each AGM. By 2015, at the height of the Car Wash scandal, the Brazilian government itself put forward independent board directors in lieu of the traditional state appointees. In addition, the company's new corporate strategy, revealed in September 2016, emphasises debt reduction and focuses on reducing leverage, selling assets, pursuing partnerships and joint ventures, increasing cash flow and reducing accident rates. This has resulted in a decline in leverage, free cash flow being generated for several consecutive quarters and Moody’s upgrading the company's debt with positive outlook.

These case studies are examples of companies we have either held or engaged with. 
Source: Hermes Investment Management