The U.K. oil giant BP p.l.c. (NYSE:BP) said that it agreed to sell its stake in TNK-BP to OAO Rosneft (OTC:RNFTF). As part of the deal, BP expects to have two seats on Rosneft's board, in a development that could slightly strengthen the Russian government-owned oil company's corporate governance without actually curing its continuing problems.
BP will sell its half of TNK-BP in exchange for $17.1 billion in cash and a 12.84% stake in Rosneft, the U.K. company announced yesterday. BP intends to use $4.8 billion of the cash consideration to acquire an additional 5.66% of Rosneft from the Russian government, which, including an existing holding, will bring BP's total ownership in Rosneft to 19.75%.
Rosneft is "improving its management processes and corporate governance. As a major investor, BP looks forward to being able to contribute to Rosneft's success and add value through our participation on the board," BP's CEO Bob Dudley said in the Oct. 22 statement.
To be sure, BP is not widely seen as the place to go for help on this one. Indeed, research into BP's environmental, social, and corporate governance (ESG) risk led us to downgrade the company before the Deepwater Horizon fiasco. But Rosneft's corporate governance is in a sorry state, so CEO Dudley's point has some validity.
As we said in September, most of Rosneft's nine board members could find it challenging to supervise objectively. Among the four the company describes as "independent" directors, Vice Chairman Sergei Shishin and Matthias Warnig are deeply involved with other Russian state-owned companies. This dynamic could potentially improve if BP's two seats on Rosneft's board replace government-friendly faces with outside ones.
That said, even BP isn't conflict-of-interest-free when it comes to the Russian government. For example, the company is hoping to use this new strategic link with the Kremlin through Rosneft to secure other business in the country, the The New York Times reported Oct. 22, citing an anonymous source close to Rosneft who said BP would wind up having a closer relationship with the firm than foreign rivals.
While Rosneft's new board relationships are likely to be complicated, many of its other corporate governance problems remain unresolved. For example, the government's presence as a controlling shareholder still raises questions about the extent to which Rosneft management will be able to fulfill the needs of minority investors. And Rosneft does not describe the use of stock-linked compensation to align executive interests in its remuneration policy or its charter.
In part due to such concerns, Rosneft is rated "D" for its ESG overall. (The company has no AGR score that would indicate the extent of its accounting and governance risk in comparison to peers.) Perhaps BP's new board members will manage to provide some interesting input and advice, but their presence won't do much to dent Rosneft's corporate governance problems overall.