Corporate Governance
Pursuant to the provisions established in Section 21 of Article 26 of the By-laws and Section 26 of Chapter 3 of the Code of Good Governance, Ecopetrol’s Board of Directors, on behalf of the Company President, has presented the General Shareholders Assembly with the following report on compliance with the Code of Good Governance:
Modifications to the Code of Good Governance
In a meeting held on December 11, 2009, the Board of Directors authorized several modifications to Ecopetrol’s Code of Good Governance in order to clarify certain aspects relating to the Board of Director's Committees, redefine the networking strategy with Stakeholders, include other entities that exercise a certain degree of control over the Company and update the functions of the Office of Disciplinary Control.
The modifications to the Code were reported to the Stakeholders and the market in general by way of a notice published as relevant information and in a widely circulated national newspaper.
Important Changes at Ecopetrol
Structure of Equity Interest
During the year 2009, holding by individuals decreased by 0.90% (363 million shares), mainly due to the increase in value of the price per share, the termination of payments in installments and the creation of collective portfolios.
Ecopetrol Corporate Group
On occasion of the declaration made by the Ecopetrol Corporate Group, the Company has defined strategies, policies and procedures to make sure subordinated companies adhere to the Group’s corporate objectives in order to be able to guarantee a high degree of transparency, competitiveness and ethical direction to promote mutual confidence with its Stakeholders.
In order to fulfill the minimum guidelines of corporate governance, Ecopetrol established providing support for subordinated companies in the design and release of their Codes of Good Governance as one of its milestones for the year 2009.
In 2009, Ecopetrol carried continued to develop its investment strategy and consolidate its Corporate Group. The company stepped up its involvement in offshore exploratory blocks and production fields. In the refining segment, it increased its share in the Cartagena Refinery, strengthened its strategic position in the most important oil transport conduit in Colombia and consolidated a suitable investment system for the execution of projects and business overseas.
The Corporate Group’s structure can be looked up on Ecopetrol’s website www.ecopetrol.com.co
Important Changes in the Corporate Frame of Reference
Code of Ethics
In 2009, the Code of Ethics was adjusted in order to ensure compliance with international standards and was broadly disseminated among the Company’s Board of Directors, workers, suppliers and contractors.
In order to deal with cases or situations involving possible non-ethical conduct, the following channels of communication were opened for interested parties: e-mail codigodeetica@ecopetrol.com.co, the ethics and transparency hotline 018000 918418, phone number 2345000, fax 2344100 and personalized service by the leader on the matter. Similarly, the Board of Directors approved the Ethics and Compliance Process and the creation of the Ethics Committee.
Compliance with the Code of Good Governance
Rights and Equal Treatment of Shareholders
Political and Economic Rights
During the annual Shareholders Assembly held on March 26, 2009, shareholders exercised their political right to participate in the deliberations of the highest decision-making body and approved an annual dividend per share of $220 pesos (made up of an ordinary dividend of $115 and a bonus of $105), payable in three installments in the months of April, October and December.
Identification of the Main Shareholders
In compliance with the corporate governance practices, Ecopetrol’s website reported the Company’s capital structure, specifying the 20 shareholders with the most shares.
Shareholder and Investor Service Office
Ecopetrol has a Shareholder and Investor Service Office located in the city of Bogotá, Calle 81 No. 19A-18, Edificio Country, 2nd Floor, where shareholders’ requirements are attended to. Ecopetrol also has the following channels to serve its shareholders and investors: toll free line for the issuance of shares program nationwide, 01 8000 113434, in Bogotá, 3077075; e-mail accionistas@ecopetrol.com.co or investors@ecopetrol.com.co (for Ecopetrol investors); fax 429 24 92 in Bogotá.
In 2009, a total of 33,547 requests were received through the different channels made available for shareholder service, including: 99.9% of the requests were dealt with and settled satisfactorily; the other 0.1% was not due to the lack of documentation that had to be provided by the shareholder to carry out the respective procedure.
Economic Relations with the Majority Shareholder
Ecopetrol’s economic relations with the Nation, its majority shareholder, consolidated in 2009 through agreements and contracts, were carried out within the scope of the limitations established by Law, regulations on conflict of interest and market conditions. It is important to point out that the intent of these relations is not to benefit the Nation as Ecopetrol’s majority shareholder, nor do they go against the interests of minority shareholders. On the contrary, in its contractual relations with the Nation, Ecopetrol leverages the fulfillment of its corporate objectives, plays a role in the construction of a Social State based on the Rule of Law, and strengthens its model of Corporate Social Responsibility.
According to the information provided by different areas of the Company, approximately 213 agreements and/or contracts were signed or in force with the Nation in 2009. To this effect, the agreements and/or contracts with the entities that form a part of the executive branch of public power nationwide were taken into consideration.
General Shareholders Assembly
In compliance with the provisions established in the By-laws, Ecopetrol published the notice of the General Shareholders Assembly, which was held on March 26, 2009, in widely circulated national newspapers on February 24, 2009. On Sunday, March 22, 2009, management reminded shareholders of the date of the Assembly using the same medium.
During the legal statutory period of 15 business days prior to the meeting of the highest decision-making body, all pertinent documents were made available to shareholders in order for them to exercise their right to inspection. For further transparency, the company published all supporting documents of the Assembly meeting on its website.
The Assembly had the quorum required by Law and the By-laws to validly deliberate and make decisions. Shareholders exercised their right to vote and the topics of the agenda subject to votes were passed. The course of the Assembly was broadcast live on TV (institutional channel) and Ecopetrol’s website.
It is important to point out that eight out of nine members of the Company’s Board of Directors attended the assembly, and several modifications to the Internal Regulations of the Assembly were passed therein.
The Minutes were signed by the President of the Assembly, the Secretary and the members of the Alternate Committee to Review and Approve the Minutes designated by the shareholders.
In compliance with the stock market regulations applicable to Ecopetrol, a copy of the Minutes was sent to the Colombian Financial Superintendence in due time. The full text of the Minutes was made available to Shareholders on the Company’s website. The decisions contained in the Minutes that were subject to registration, were duly listed at the Chamber of Commerce.
Board of Directors
At the General Shareholders Assembly held on March 26, 2009, shareholders elected the plancha suggested by the Nation, represented by the Ministry of Finance and Public Credit, using the electoral quotient system for a one-year period, consisting of 6 independent members and 3 non-independents. In compliance with the corporate governance practices, the independent members of the Board of Directors elected as independents committed in writing, upon accepting the position, to maintain their capacity as independents while carrying out their functions.
In compliance with the provisions established in Article 5 of Law 1118 / 2006 and the Nation’s Declaration in its capacity as Majority Shareholders, renglones 8 and 9 of the Board of Directors were filled respectively, by the representative designated by the Departments Producing Hydrocarbons developed by Ecopetrol and the representative designated by the 10 minority shareholders with the most shareholding.
Pursuant to the decision adopted by Ecopetrol’s General Shareholders Assembly on March 27, 2008, the attendance fees for the members of the Board of Directors for meetings of the Board and/or internal Committees to be attended in person would be 4 minimum monthly wages (MMW), which was the equivalent of $1,987,600 Pesos in the year 2009, and $2,060,000 in the year 2010, minus the VAT and the Industry and Commerce taxes withheld at the source. Attendance of meetings via teleconference is paid at 50% of the fees established for meetings attended in person.
On another note and in compliance of the best practices of corporate governance, the following is a list of the number of Shares of Ecopetrol held by Board members to December 31, 2009:
The Secretary General sent the documents of the Board and Committee meetings in time for the thorough fulfillment of the Board members’ functions. At each meeting, compliance with the quorum established in the Company’s By-laws was verified and the respective agenda and minutes of the previous meeting were approved.
The minutes of Board meetings are numbered and kept in a binder, stamped by the Bogotá Chamber of Commerce in consecutive order; the binder is safeguarded in the archives of Ecopetrol’s Secretary General.
Average sessions were 8 hours long, and the sessions held outside Bogotá went on for 10 hours.
In compliance with the best practices of corporate governance, the Board of Directors was evaluated qualitatively and quantitatively.
On the qualitative self-evaluation, an average of 99.75% of the members stated that the behavior during the course of their functions for the period was as required. In addition, in order to have an idea of the Board members’ understanding of specific topics reviewed in the internal committees, and pursuant to the plan for improvement suggested in 2009, management implemented qualitative self-evaluations for the Board’s Committees.
The results on the quantitative evaluation were 95.23% (level of fulfillment of the goals established on the Board’s Balanced Scorecard).
For further information regarding the operation of the Board of Directors, refer to the extended Report published on Ecopetrol’s website.
In 2009, three accountability public hearings were held
in Orito, Cucuta and Cartagena
Chief Executive and Other Officers
Pursuant to the provisions established in the legal regulations, besides the Board of Directors, Ecopetrol’s management consists of the Company President, Vice Presidents, Managers, Directors and all officers in general who, based on the responsibility of their positions, act on behalf of the Company. Ecopetrol’s website lists the professional attributes and labor history of the Company’s management.
Administrators or senior executives play a role in achieving the corporate objectives through the strategic management of their respective areas and the performance of different activities. They are evaluated based on the indicators established in the Balanced Scorecard of their respective areas and the terms established in the performance agreement signed with their supervisor.
The Board of Directors assessed the performance of Ecopetrol’s President, Javier Gutierrez Pemberthy at 93.11% considering the objectives achieved on the highest ranking indicators on the Company’s Balanced Scorecard and the evaluation of his leadership and organizational skills.
The Company has clear policies for the selection and payment of senior executives. Since Ecopetrol is one of the most attractive companies to work for in Colombia, it has very demanding selection processes.
With a view to be more attractive on the labor market, the Company strengthened the employment value proposal in 2009, consisting of attributes relating to pay, benefits and opportunities for development and wellbeing, which are considered the most important variables by candidates from the oil and gas sector when considering a job offer.
In order to attract and retain the personnel required by the strategy, the Board of Directors approved a fixed payment policy benchmarked in the oil sector, which it has been applying since 2007, which led to a decrease in resignations of the target population dropping from 69 people in 2007 to 18 over the last year.
In addition to fixed pay, workers are rewarded with variable bonuses that have no impact on wage to reward them for their results of the areas meeting organizational goals and considering that the Company is result-oriented.
It is important to point out that Ecopetrol's compensation policy does not include special mechanisms of payment or remuneration in Company stock for its workers or administrators.
Corporate Social Responsibility
The purpose of Ecopetrol’s Corporate Social Responsibility Policy is to strengthen and manage relations with stakeholders in a responsible manner, based on the recognition of their needs and expectations, and the implementation of practices for mutual benefit to guarantee their confidence in company and its reputation, along with the long term sustainability of the business.
In order to do so, Ecopetrol establishes a result-based commitment with all stakeholders. In 2009, the average fulfillment of the commitments acquired with stakeholders was 85%. The results of management by stakeholders can be referred to in the Sustainability Report.
Accountability
During the year 2009, Ecopetrol’s Stakeholders had the chance to come closer through the Citizen Participation Offices located in Bogotá, Barrancabermeja, Yopal, Apiay, Neiva and the Mobile Brigades carried out in Orito, Ortega, Tumaco, Bucaramanga, El Centro, Castilla, Acacias and Monterrey.
In addition, service was provided to Stakeholders through the Contact Center: 234 5000 in Bogotá, and 018000918418 for the rest of the country. They also had access to other channels such as e-mail participacion.ciudadana@ecopetrol.com.co; quejasysoluciones@ecopetrol.com.co, and the company’s website www.ecopetrol.com.co in the “Online" link.
In 2009, over 10,700 citizen requests were received, including rights to petition, simple petitions, complaints and claims. In 2009, 96% of the requests and 99% of the rights to petition were dealt with within the established periods. Finally, Public Accountability Hearings were held in Orito, Cucuta and Cartagena in the months of May, July and December, respectively.
Transparency, Fluency and Integrity of the Information Provided to the Public
Posting of Information on the Website
All year long, shareholders and investors had access to financial information, credit rating, corporate governance practices, the company’s capital interest, stock performance, dividend policy, dividend payment date, projects underway, the conformation of the Board of Directors and Auditor Reports on this medium.
In 2009, the website was accessed an average of 7855 times per day. The most visited sites were “Work for us”, “Suppliers” and the “Shareholders” page. The financial information provided on the website is updated on a quarterly basis, and it is the same information presented to the Board of Directors. The information is collected and prepared pursuant to the professional practices, criteria and principles on which the financial statements are based and are just as reliable.
During the live broadcast of the General Shareholders Assembly held on March 26, 2009, the website was accessed 3752 times from 25 different countries.
Dissemination of Relevant Information to the Colombian Financial Superintendence and the Securities and Exchange Commission (SEC)
In 2009, in its capacity as a securities issuer in Colombia and the United States, Ecopetrol reported 128 statements of Relevant Information to the Colombian Financial Superintendence, along with 76 press releases and 40 documents using the 6-K Form as required by the Securities and Exchange Commission (SEC). All the statements were released in a timely manner and are available on the Comprehensive Stock Market Information System (SIMEV in Spanish), as well as the Company’s website.
Control Structure
External Control
Auditor: The General Shareholders Assembly held on March 26, 2009 authorized the contracting of Pricewaterhousecoopers Ltda. as Ecopetrol’s Auditor for the 2009 period and authorized the Board of Directors’ Auditing Committee to assign additional jobs throughout the year. The firm had a qualified team, demonstrated quality in the services provided in 2008, has extensive expertise in the industry and the Company, and certified its independence as regards conflicts of interest, inabilities and incompatibilities.
Inspection, Surveillance and Control Agencies: Ecopetrol provided the information required by government regulation agencies exercising a certain degree of control over the Company, such as the Superintendence of Domestic Utilities, the Colombian Financial Superintendence and the Superintendence of Companies.
The Colombian Treasury Inspector’s Office: The Plan for Improvement corresponding to the Financial Audit for the 2007 period consisted of 184 actions, 95% of which have been carried out to December 31, 2009 with a fulfillment of 98%.
Risk Rating Agencies: Fitch Ratings Colombia S.A. reiterated its domestic AAA rating for Ecopetrol’s corporate debt. The securities rated in the corporate debt category are considered securities of the highest grade. Risk factors are practically inexistent, according to the agency’s rating scale.
Similarly, Fitch Ratings, Standard and Poors and Moody’s Investor Services, rated Ecopetrol BB+, BB+ and Baa2 respectively, for its foreign currency debt. Ecopetrol’s rating is based on the Company’s solid financial profile, a high perception by agencies regarding the probability that the Colombian Government will provide the Company with sufficient, timely backing if required, in addition to its leading position in the oil and gas industry in Colombia, as well as its proven access to capital markets.
Internal Control
Internal Auditing Division: The General Audit Plan 2009 was fulfilled 100%. Business, financial and supporting processes were evaluated pursuant to the Planning approved by the Board of Director’s Auditing Committee, and opportunities for improvement were identified to strengthen the Internal Control System of the processes audited.
The areas in charge prepared Plans for Improvement focused on mitigating the critical risks of the processes and improving the effectiveness of controls, in accordance with the recommendations made by the Internal Auditing Division.
Internal Control System: In 2009, Ecopetrol carried on with its efforts to strengthen its Internal Control System based on the COSO (Committee of Sponsoring Organizations of the Treadway Commission) international standard. The strengthening project has included initiatives such as SOX (financial and accounting controls), the implementation of the COBIT (Control Objectives for information and Related Technology) reference framework for IT management and the incorporation of international practices in the Internal Auditing function.
As a final result for the 2009 period, the Internal Control System reached a 3.1 level of maturity that enabled company management to set up internal controls on all the organization's processes, evaluate them on a periodic basis and determine and act on significant matters of control.
Risk Management
Ecopetrol has a Comprehensive Risk Management System focused on playing a role in the fulfillment of objectives, the preservation and creation of value for the Company and responding to unexpected events.
In 2009, the Risk Record of all the Company’s processes at level 0 were updated in accordance with the new process map defined that year. 50% of the risks were concentrated at the High level and 9% were Very High. Moreover, Ecopetrol’s Corporate Risk Map was created, consisting of the following 12 risks:
The company has mechanisms in place that allow for prevention,
management and disclosure of conflicts of itnerest
Conflicts of Interest
Ecopetrol has concrete mechanisms to prevent, handle and disseminate conflicts of interest that may arise among shareholders (majority and minority), administrators and officers in general, as regards their own interests and those of the Company.
In order to avoid incurring in a conflict of interest, the following administrators and officers carried out the procedure established by the Company in 2009 and revealed situations that could give rise thereto:
The Ministry of Mines and Energy abstained from participating in topics relating to the National Hydrocarbon Agency as it was still president of the Executive Council of the organization.
Ecopetrol’s Vice President of Supplying and Marketing abstained from participating in decisions relating the possible contracting of the company Sentido Verde by the Refined Product Management Unit under its responsibility.
An officer from Ecopetrol’s Directorate of the Provisioning of Goods and Services abstained from participating in the contracting processes related to the lines of materials provided by the suppliers Seguridad Protección & Soldadura and Tuvacol.
Ecopetrol’s Acting Director of Security abstained from participating in negotiations for contracts and/or agreements with the company Metapetroleum.
Ecopetrol has alternative mechanisms for dispute
settlement that will facilitate coexistence among shareholders
Dispute Settlement Mechanisms
Ecopetrol has alternative mechanisms to settle disputes to promote foreign investment, commercial relations and facilitate coexistence among shareholders, stakeholders and Company management. These mechanisms are direct settlement, amicable mediators, conciliators and the board of arbitration.
Controversies with Shareholders
Pursuant to the provisions established in Article 3 of Law 1118 / 2006, Ecopetrol’s stock issuance and placement program would include two first rounds, which could be accessed by the special beneficiaries as discussed in Article 3 of Law 226 / 1995, that is to say, Ecopetrol’s pension trusts, territorial entities and all Colombian citizens.
However, after reviewing the database of the people who were awarded shares, it was found that 25 applications submitted by foreigners and 6 by companies, which were not the target audience of the first public stock offering, were accepted.
In the first place, placement companies were approached to ask them to take the steps necessary to return the shares. 22 of the 25 cases involving foreigners have been settled amicably; the remaining 3 are being dealt with through the legal advisor. Similarly, 4 of the 6 company cases were settled amicably.
Controversies with Associates
In 2009, Ecopetrol and several of its Associates in Association Contracts decided to use alternative mechanisms to settle controversies. The following is a summary of some of these processes:
Securities Trading
In compliance with the provisions established in Article 404 of the Business Code and the Code of Good Governance, during the course of the year 2009, Ecopetrol’s Board of Directors gave 34 authorizations for the purchase or sale of shares to Company administrators.
Shareholder and Investor Claims
In 2009, no claims were reported regarding compliance with the Code of Good Governance through the hotlines and e-mails available to shareholders and the general public.
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