Companies often pay lip service to good corporate governance but it is not necessarily top of the list for investors when deciding which stocks to buy or sell. Oil services firm Petrofac (PFC) is just the latest example of why you ignore the way a company is run at your peril.

Shares in the company have nose-dived as the Serious Fraud Office (SFO) swooped on the company and chief operating officer Marwan Chedid was suspended over alleged bribery, corruption and money laundering centred on contracts in Kazakhstan.

Massive share price impact

Since news of the SFO investigation first broke on 12 May the company has seen more than £1.2bn wiped off its market value.

What is particularly damaging is the SFO does not accept the findings of the company’s internal investigation into this matter in 2016 and does not consider it has ‘co-operated’ with its own investigation.

Given the parts of the world they operate in, resources companies are particularly prone to these sorts of issues. Royal Dutch Shell (RDSB) is currently contending with corruption allegations of its own in Nigeria.

Leaked emails released in April appeared to validate claims of corruption over an $1.3bn oil deal in the country in 2011.

There is speculation Petrofac could face a fine of as much as $800m from the SFO but more significant is the impact the scandal could have on its ability to do business in the future.

Loss of credibility

Once credibility is lost it can be extremely difficult to win back, broker Canaccord Genuity says ‘a worst-case scenario would see value dropping to barely more than the disposal value of the remnants of the IES division, somewhere around 100p a share.’

Identifying the risks of corporate scandals before they occur is tricky but it is worth paying attention to the environmental, social and governance (ESG) information in an annual report. Make your own judgement on whether a company is taking these factors seriously.

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