STF decides whether government can put politicians in charge of state-owned companies

The Federal Supreme Court (STF) scheduled a trial for this Wednesday (6) that will decide whether the government can appoint politicians to management positions in state-owned companies.

This type of appointment is prohibited by the State Law, but has been permitted since March due to a preliminary decision by then minister Ricardo Lewandowski. One month before the bet, he overturned the quarantine requirement for the participation of politicians in the management of state-owned companies.

For specialists in corporate governance, the eventual confirmation of the injunction by the plenary will nullify management and transparency advances made since the approval of the State Law in 2016.

Lewandowski’s injunction allowed, for example, the appointment of Aloizio Mercante to the presidency of the National Bank for Economic and Social Development (BNDES).

According to the Aggregate Report of Federal State Companies (Raeef), these companies have at least 753 positions of directors, presidents and advisors. Positions that, with Lewandowski’s decision, could once again be filled by political appointments.

Among other allies, Lula appointed the former governor of Minas Gerais Fernando Pimentel to the presidency of the state-owned company Emgea, linked to the Ministry of Finance, and the former governor of Pernambuco Paulo Câmara (PSB) to head the Banco do Nordeste.

There are doubts about what the appointments will look like if the injunction falls. The STF can make a modulation to guarantee the indications already made. If the injunction is endorsed by the plenary and the quarantine is abolished, what is expected is the gradual deterioration of management, with an increase in political influence in companies and the opening of loopholes for corruption schemes such as those observed in the past.

“The Law on State-Owned Companies brought progress towards the professionalization of corporate governance, which depends heavily on mechanisms that mitigate conflicts of interest. Eliminating the requirements that the law imposes for this mitigation is a setback”, assesses Danilo Gregório, manager of institutional and government agencies from the Brazilian Institute of Corporate Governance (IBGC).

Government appeals to STF ministers to release political nominations

Concerned with the Court’s decision, the Lula government made efforts to convince the STF ministers to vote for the unconstitutionality of the restrictions.

The Union’s attorney general, Jorge Messias, sent to the STF ministers on Friday (1st) an opinion arguing that the quarantine for politicians provided for in the law “establishes unreasonable and disproportionate discrimination – therefore, unconstitutional – against those who act, legitimately, in the governmental or party sphere”.

“Such restrictive scope proves to be inadequate and excessive, as it conflicts with the principle of administration efficiency in the search for highly qualified and managerial experienced staff – who are also found in the public sector, and not only in the private sector, which is equally subject to influences”, added Messias.

Law came to shield companies from political influence and corruption

Sanctioned during the government of Michel Temer (MDB), the State-Owned Companies Law emerged in the wake of billion-dollar corruption scandals involving mainly Petrobras, denounced by Operation Lava Jato from 2014 onwards.

“The law brought important results in the evolution of companies’ assets and financial results. It disciplined management, bringing more transparency and more aspects of integrity and an administration less biased by political or electoral interests”, states Gregório.

According to data from the Ministry of Economy of the government of Jair Bolsonaro (PL), as of 2018, the country’s six main state-owned companies had, for the first time in the decade, a sequence of profits for more than three years.

It was in the period between 2018 and 2021 that Petrobras, Correios, BNDES, Banco do Brasil, Caixa Econômica Federal and Eletrobras recorded the highest profits since 2011. In 2022, Petrobras’ net profit was the highest in the company’s history, at R$188 .3 billion.

For experts, the result was possible in part thanks to the State Law, as it induced management improvements and limited government interference – on issues such as fuel prices, for example.

Challenge to the State-Owned Law came from PCdoB

After Lula’s election, in December 2022, the PCdoB, a historic ally of the PT, filed Direct Unconstitutionality Action (ADI) 7331 with the STF against provisions that restrict political appointments to companies. The restriction is provided for in article 17 of the State Law.

The party’s argument was that “the rules undermine the exercise of constitutional rights to equality, freedom of expression and party autonomy”, in addition to removing from the administration of state-owned companies “professionals with the skills and experience necessary to implement the public purposes of these companies” .

In March, the ADI trial began in the virtual plenary session under the rapporteur of Minister Lewandowski. In his opinion, the minister accepted the thesis of unconstitutionality and ended the three-year quarantine requirement for party or electoral campaign leaders to assume these positions. For the minister, it was enough for them to leave their positions in order to be appointed.

Lewandowski argued that “the allegation that the contested provisions serve to reduce the risk of capture of the state-owned company by political, party or union interests, a factor allegedly responsible for some notorious cases of corruption, is not sustainable.”

Minister André Mendonça asked to be seen to evaluate the matter, but was overruled by Lewandowski’s monocratic decision suspending the articles of the law by injunction, paving the way for the Lula government’s appointments.

Judgment comes at a time of worsening state finances

The judgment of the State-Owned Law by the STF occurs at a time of deterioration in the finances of federal state-owned companies.

According to a report published in November by the Federal Budget Secretariat (SOF), the government forecasts a primary deficit of R$4.5 billion for a group of 22 companies controlled by the Union in 2023. The value is R$1.5 billion higher than authorized by the Budget Guidelines Law (LDO) for the year, which is RS 3 billion.

The calculation does not include the results of companies in the financial sector – such as Caixa and Banco do Brasil – nor Petrobras. In 2023, Petrobras’ net profit, the highest of all, was R$93.5 billion, 35% below that recorded in the first nine months of 2022. There are market factors, such as variations in oil prices, but the company’s management is also in evidence.

The company’s president, Jean Paul Prates, a former senator, who was also appointed thanks to Lewandowski’s injunction, is locked in an arm’s-length struggle within the board, made up of a majority of nominees from the PT and unions, with the board of directors, composed in part of names nominated by Centrão parties, under the influence of the Minister of Mines and Energy, Alexandre Silveira.

The dispute for power within the company, however, dissipates when the matter interests both sides. Anticipating the STF’s decision, Petrobras approved changes to its bylaws that, in practice, reduce barriers to political appointments for high-ranking positions. The changes strictly follow Lewandowski’s injunction.

The changes were proposed by the company’s board of directors and approved at a shareholders’ meeting with 55% of the votes – government representatives defeated those from minority shareholders.

However, by decision of the Federal Audit Court (TCU), following an appeal from the Novo Party, Petrobras is prevented from registering the reformulated statute with the Commercial Board before the Supreme Court judges the merits of the matter.

The shareholders’ meeting also approved the creation of a capital reserve for the payment of dividends, which threatens the distribution of extraordinary profits, a measure that displeased the financial market.

End of restrictions may be in line with revanchist policy

There are no predictions among political and economic analysts about the direction of the STF ministers’ votes.

But a decision to annul the provisions of the law would be in line with the Lula government’s revanchist policy of undoing all the institutional advances made since the Temer administration. One of the priorities of the current government is to suspend or even cancel privatizations.

In the legal sphere, experts see grounds for both annulling part of the law and validating it. “From the aspect of compliance and corporate governance, the ideal would be for the law to be maintained”, says Alan Kim Yokoyama, partner at De Vivo, Castro, Cunha e Whitaker Advogados.

“However, there is a legal basis for possible suppression, taking into account the equality and isonomy provided for in the Constitution”, he adds.

Anderson Novais, partner at Madrona Fialho Advogados, states that the issue should be addressed by Congress.

“At a time of conflict, when the Judiciary is often attacked for invading the powers of the Legislature, it would be good for peace between the Powers for parliamentarians to look into the matter”, he says.

Isabella Eid, associate at De Vivo, Castro, Cunha e Whitaker Advogados, corroborates the perception. “Legally, it is defensible for the matter to be dealt with in Congress, which has the competence to do so guaranteed by article 173 of the Constitution”, she states.

Two weeks ago, the Senate approved a proposed amendment to the Constitution (PEC) to limit individual decisions by Supreme Court ministers – such as Lewandowski’s, which suspended part of the effects of the State Law – in an attempt to limit what many classify as judicial activism of the Court.