Keppel O&M bribery case: Small pain for share price, but bigger governance questions loom

Keppel O&M bribery case: Small pain for share price, but bigger governance questions loom

While investors seem to have shrugged off the bribery scandal surrounding Keppel Offshore & Marine, the case raises bigger issues about the company’s governance and its reputation may have taken a hit that requires a longer time to mend, experts said.

keppel corp
Keppel's logo in the central business district of Singapore. (Photo: Reuters/Edgar Su)

SINGAPORE: Shares of Keppel Corp may have shrugged off the shocking bribery scandal involving its rig-building unit, but a recovery of the company’s reputation could require a longer time and more work with the case throwing up bigger questions about its corporate governance. 

Keppel Offshore & Marine (Keppel O&M) disclosed on Dec 23 that it would pay a hefty penalty of US$422 million (S$567 million) as part of a global resolution with authorities in three countries to resolve bribery charges. 

According to court documents released by the US Justice Department, the offshore and marine arm of Keppel Corp "knowingly and wilfully conspired” to pay bribes to Brazilian officials and politicians in exchange for business deals. 

The illicit payments, amounting to US$55 million made between 2001 to 2014, helped Keppel O&M to secure 13 contracts from Brazilian oil firms Petrobas and Sete Brasil. 

The bribes were disguised as large commissions to a consultant in Brazil, who in turn made payments to people who had influence over the deal-making.

Following the shocking disclosure, Keppel’s stock took a hit when markets reopened after the Christmas break. Shares of the conglomerate on Dec 26 sank as much as 5 per cent before clawing back losses to close 2.4 per cent lower at S$7.29. 

But the counter managed to regain its footing after that and has managed to retrace lost ground to end the first trading week of 2018 at levels higher than where it was before the sell-off. Keppel shares ended Friday (Jan 5) at S$7.77, compared to its closing level of S$7.47 on Dec 22. 

Market watchers mostly described the post-Christmas sell-off as a knee-jerk reaction as investors grappled with the news.

Moving forward, while some of the market’s attention will fall on the release of Keppel’s full-year earnings at the end of the month, investors may have “left it all behind in 2017”, said KGI Securities Singapore analyst Joel Ng. 

Echoing that sentiment, CMC Markets analyst Margaret Yang said the staggering fines, while shocking, would be mere “short-term pain”. 

The optimism stems from analysts’ expectations that the financial impact from the scandal would be negligible. 

Keppel in its Dec 23 statement said it will make a provision for the fines in the current financial year, which it described as an “extraordinary item” that would have a “one-off” impact on the group’s earnings. 

The penalty would account for about 4.5 per cent of Keppel's third quarter net asset value and the conglomerate would have financial resources to pay the penalty, noted OCBC analyst Low Pei Han.

The company’s recent divestments of its stakes in the Keppel Cove and Nantong projects in China will also help to offset the fines, added Mr Ng. The analyst from KGI Securities has maintained his "buy" call on the stock.

“I think the impact of the fines is largely manageable. Investors will generally be looking at Keppel’s growth going forward in 2018 and 2019.” 

Nomura analyst Abhishek Nigam said that while the staggering fine is “undoubtedly a negative from a financial standpoint”, it will likely have a minimal impact on Keppel’s operations in Brazil or its ability to bid for future contracts. 

In fact, the resolution could be seen clearing up much of the uncertainty and “removing a key overhang” on Keppel, added Mr Nigam who also has a “buy” call on the stock. 

Also helping to brighten the outlook include factors such as improving fundamentals in the offshore and marine sector (O&M) on the back of rebounding oil prices and expectations for Keppel’s property business, which constitutes its key earnings driver, to hold up. 

Mr Ng said: “In the long run, the property business will remain the major contributor to earnings but even on the O&M side, the sector is picking up. We are starting to see capital expenditure coming back and more projects being rolled out.” 

“We are confident that the management will be able to deliver on the growth plans,” he added.


But corporate governance experts that Channel NewsAsia spoke to are less sanguine. 

Given how the corrupt payments were undetected over a protracted period, the saga highlights serious questions about the efficacy of the company’s auditing and internal governance, said Associate Professor Lawrence Loh, director at the Centre for Governance for Institutions and Organisations at the NUS Business School. 

“The bribes themselves are naturally an area of critical concern. But what is more disturbing is the extremely long period that these have been happening without being detected." 

Assoc Prof Loh noted that the “substantive nature and monetary quantum of the contracts” that facilitated the bribes would have thrown up red flags. “The current debacle thus presents a most urgent call for the company’s governance to get to the root of the matter,” he added. 

Bribery allegations involving Keppel O&M first emerged in February 2015 when Brazilian media reported claims that Keppel FELS, a wholly-owned subsidiary of Keppel O&M, and Sembcorp Marine’s shipyard in Brazil had made bribe payments to Petrobras directors and the Workers' Party in Brazil. 

Both companies refuted the allegations then.

After this, Keppel repeatedly refuted the allegations until October 2016 when it announced that it recognised "certain transactions" associated with the company's former agent in Brazil "may be suspicious" following internal investigations. 

When asked about its previous denials, a Keppel spokesperson told Channel NewsAsia that it began its internal inquiry led by external counsel when allegations first surfaced in 2015. 

The denials by Keppel then, and in July as well as August 2016, were issued after taking into consideration the relevant evidence available at that time. 

“As the inquiry continued and suspicious transactions in Brazil were uncovered, Keppel promptly announced in October 2016 that it had notified the authorities in the relevant jurisdictions and offered to cooperate fully and extensively in the investigations. Keppel also encouraged all its employees to cooperate fully with the authorities,” the spokesperson added. 

But Mr Toru Yoshikawa, Professor of strategic management at the Singapore Management University’s (SMU) Lee Kong Chian School of Business, said the saga has raised doubts over the “firm’s credibility and also about its executives’ attitudes towards corporate ethics i.e. denying any wrongdoing until it is exposed with evidence”. 

“It is natural that executives in charge react strongly and try to deny any wrongdoing when they are being accused. But it is critical for executives and the board to step back, conduct internal investigation, and report their finding to the public as soon as possible, which they did not do this time,” he added. 

Echoing that sentiment, Assoc Prof Loh said that while Keppel’s early reactions were based on information available then, they have now “backfired” with the subsequent developments. 

“The initial denial thus further added to the damage that has been now inflicted,” he said.

Corporate governance experts said the scandal has caused a dent in Keppel’s reputation and remedying it would hinge on how the firm responds to the public scrutiny.

“There is definitely a dent on its reputation, but it is not a shipwreck,” said Assoc Prof Loh. “With the resolution and resolve, it should demonstrate visibly that there are proper policies and procedures in place and in force.” 

Keppel’s spokesperson said the company has “moved quickly” to strengthen its regulatory compliance measures and has rolled out an enhanced programme across the group. 

Specific measures include an enhanced code of conduct containing detailed anti-corruption provisions and guidance on dealing with intermediaries.

Source: CNA/sk