Fate of Vale, Petrobras CEOs [Roger Agnelli, Jose Sergio Gabrielli] Hinges on [Brazil] Politics – by Brian Ellsworth and Guillermo Parra-Bernal

The National Post is Canada’s second largest national paper. This article was originally published in the Financial Post on January 25, 2011.

Former President Luiz Inacio Lula da Silva harshly criticized Agnelli for slashing
investment and firing 2,000 workers after the 2008 financial crisis. Vale raised
capital spending again following heavy government pressure.

RIO DE JANEIRO — Markets dictate that corporate managers who create the most value for shareholders keep their jobs. But for Brazil’s two biggest companies, state-controlled oil firm Petrobras and mining giant Vale, the reality may shape up to be exactly the opposite.

Roger Agnelli, who over a decade helped transform Vale into the world’s leading iron ore producer, is under fire for not creating enough jobs in Brazil and rumors are swirling that President Dilma Rousseff could lobby for his ouster.

In contrast, Jose Sergio Gabrielli may stay on as Petrobras CEO despite a US$38-billion tumble in market value last year sparked by a plan that boosted government control over the company despite complaints from private shareholders.

Although Brazil is still a hot destination for emerging market investments, the apparently diverging fate of the two chief executives is a reminder that political interference is still a risk in Latin America’s largest economy.

As Brazil flexes its economic muscles and boosts its global influence, investors fear its companies could be vulnerable to government pressure to lead economic development efforts at the expense of private shareholders.

Government policy toward the two companies this year will serve as a bellwether for political risk under Rousseff, a former Petrobras board member who pledged during last year’s election campaign to boost the state’s role in the economy. Industry sources consulted by Reuters have consistently identified the fear of a government-backed drive to replace Agnelli as a key risk for Vale this year.

Though the government cannot fire him, it has considerable sway in Vale — it owns most of controlling shareholder Valepar and can exert indirect pressure by withholding concessions or pushing for regulatory changes.

“The government wants companies to look at projects in terms of their political dividends and not in terms of their feasibility,” said Adriano Pires, an oil expert with the Brazilian Center for Infrastructure. “The reality should be the opposite: Gabrielli should be under pressure and Agnelli should be asked to stay on.”

Both executives have been crucial in turning their companies from former bloated state firms into global powerhouses, but have shown different priorities in meeting the needs of both private investors and government shareholders. Maintaining that delicate balance is key in Brazil, where government leaders hope industrial policy can end centuries of boom-and-bust cycles that contributed to economic instability.

Prodigy banker

Agnelli, 51, clinched Vale’s top job after 19 years as an investment banker with Banco Bradesco, a Vale shareholder. Known for his discipline and hot temper, he instilled a culture of meritocracy that turned Vale into Brazil’s No. 1 exporter and a Wall Street darling.

Former Vale executives say one key to his success was accurately predicting the rise of China as a major minerals consumer. Revenues have risen 13-fold since Agnelli became CEO, and Vale is slated to invest a record US$24-billion this year.

Profit at Rio de Janeiro-based Vale, which under Agnelli diversified by expanding into nickel and fertilizers, jumped 250% in the third quarter of 2010. “I get paid to produce results, and the results are there, aren’t they?” Agnelli recently told Valor Economico newspaper.

But running Vale as a multinational miner has put him on a collision course with the government, which wants to shift from commodity to manufactured exports to create more jobs at home.

Politicians want Vale to invest more in steel mills, which could hamper relations with its biggest clients: steelmakers. Former President Luiz Inacio Lula da Silva harshly criticized Agnelli for slashing investment and firing 2,000 workers after the 2008 financial crisis. Vale raised capital spending again following heavy government pressure.

Agnelli’s raised eyebrows in October by accusing members of the ruling Workers’ Party of trying to install loyalists in jobs at the firm and seeking a bigger say in its decisions.

His “authoritarian” style has upset clients in Europe and Japan, as well as regional governments and politicians that are crucial for a company that depends on concessions, according to former employees. His possible departure involves more than just politics.

“This is a process of ten years of strain over a number of issues. You can’t just say ’the problem is Dilma doesn’t like Roger’ — that’s oversimplifying it,” one source said.

Vale has denied any plans or discussions to replace Agnelli, but the issue is a main topic of speculation in Brazilian business circles. At a dinner organized by a major U.S. firm at Sao Paulo’s upscale Fasano Hotel in November, the local head of a foreign mining firm said Agnelli’s comments about the Workers’ Party “were stupid.”

“He put himself on the tightrope unnecessarily. If I were a shareholder, I would be angry,” said the source, who requested anonymity. Many suspect Agnelli won’t make it past May, when his two-year tenure is up for renewal. It is usually a formality, but not this year.

Possible replacements include Sergio Rosa, former Vale chairman, Wilson Brumer, CEO of steelmaker Usiminas, and Fabio Barbosa, chairman of Santander Brasil, sources told Reuters.

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