NEWS ABOUT CORPORATE GOVERNANCE - March-April/2000

Brazilian Corporate Governance Institute

- On April 11, the IBGC (Brazilian Corporate Governance Institute), founded in 1995, and dedicated to maximizing the effectiveness of corporate governance, held its Annual General Meeting in São Paulo.  This was attended by the majority of the Institute’s one hundred and forty  (140) members.  The IBGC’s many activities throughout 1999 greatly reinforced its position as the mouthpiece for the corporate governance movement in Brazil.  In addition to launching the Better Corporate Governance Code, the IBGC continued its now traditional programs – the promotion of lectures, panels, discussion, and its Course for Directors.  On the international front, last May, the Institute coordinated the “Corporate Governance in Europe” seminar held in London and Paris.  Several members were also present at corporate governance events in Germany, Argentina, the USA, France, the United Kingdom, and Sweden.  In addition to its established events, in late April, the IBGC’s 2000 program will include a round table on corporate governance in Latin America, organized in association with the World Bank and the OECD.  In November, it will also hold the first Brazilian Congress on Corporate Governance.  Further details from tel: (11) 3043 7008, fax: (11) 3043 7005 or e-mail; ibgc@amcham.com.br

Brazilian Pension Funds and Corporate Governance

- In addition to being the solution to the investment monitoring needs of institutional investors, effective corporate governance can significantly increase the efficiency and value of companies.  This was clearly evidenced by three Brazilian capital market success stories.   Perdigão, controlled by Pension Funds since 1994, has, since then, grown at an average annual rate of fifteen percent (15%), employs over 16 thousand personnel, and has invested over R$ 500 million.  Last year, the company billed R$ 1.8 billion, earning close to R$ 50 million for its shareholders.  Usiminas, one of the first companies in Brazil to elect Pension Fund representatives to its Board of Directors, is one of the world’s most productive steel industries, with three pension funds as shareholders, and employing 10 thousand workers.  Last year, the profit accruing to the company’s shareholders surpassed R$ 300 million from a gross billing of R$ 2.4 billion. Then there is Embraer, one of the world’s most successful aircraft industries, with its 8,700 employees, which, last year, more than doubled its billing, recording a profit of R$ 412 million, three times greater than the previous year’s figure.  Naturally, such increased efficiency was very positively reflected in the market value of these three organizations.

The Power Wielded by the Controlling Shareholder

- There are some controlling shareholders of publicly quoted Brazilian companies who should exercise their powers more conscientiously, particularly since January 19, 2000 when the CVM (Brazilian Securities Commission) issued its Instruction CVM No. 323, dealing specifically with potential abuse of controlling power and with grave transgressions. Among the fifteen (15) examples of abuse of power, were practices that have become quite commonplace in some publicly quoted Brazilian companies, such as, the gratuitous or preferential use of company resources, services, or assets, obtaining funds through loans with excessively favorable interest rates or repayment schedules.  It should be borne in mind that the penalties provided for such infractions apply not only to the controlling shareholder but extend also to company directors, officers and members of its technical or consulting bodies who have colluded in such power abuse practices, as defined in the CVM Instruction.

Changes in Brazilian law for Corporations

- Some significant modifications in the process of being introduced by Brazilian Corporate Legislation are still being urgently discussed in Congress and with institutional investors.  Among these modifications are corporate governance practices, particularly, in relation to the protection of minority shareholder interests, a primary concern of the Brazilian Federal Government. The draft bill proposed by Representative Emersom Kapaz  (http:// www.kapaz.com.br) has been approved by the House of Representatives’ Economic Commission, and is to be debated by the Finance and Tax Commission and the Constitution and Justice Commission.  And, this time, the institutional investors, i.e., Brazilian and US pension funds and the big banks, have not been relegated to the sidelines, and are involved in these discussions.  Final approval of this draft bill is expected shortly.

National Association of Corporate Directors- NACD

- As has become the norm with executive positions, women are a steadily increasing presence on Boards of Directors.  This is particularly true in the US where an international level corporate governance association, the Corporate Women Directors International (CWDI) has been formed. On June 1 and 2, the CWDI and the NACD will give their seminar “Global Corporate Women Directors Colloquium” in Washington, DC. This seminar mainly targets women who are members or potential members of Boards of Directors.  The organizers expect this colloquium to be attended by over one hundred women CEO’s, from the USA, Canada, Australia, and Japan.  For more information, contact Irene Natividad - e-mail Globsummit@aol.com, or Roger Raber – e-mail rwraber@erols.com.

An excellent American example of Corporate Governance

- The Dow Chemical Board of Directors has appointed Michael D. Parker as the corporation’s worldwide CEO, replacing William Stavropoulos, who has been elected Chairman of the Board of Directors.  It is a fact that segregating the positions of CEO and Chairman of the Board to two different individuals is regarded as sound corporate governance practice.  The fact that this example is being set by as prestigious an organization as Dow Chemical cannot help but encourage more US corporations, the majority of which tend to disregard this salutary practice, to reconsider their power and control structures in terms of Corporate Governance.

The Growing Responsibilities of Directors

- Pension funds have become formidable institutional investors and are playing an increasingly active shareholder role.  In Chile, pension funds holding shares in the local telephone company, the CTC, are about take legal action against five members of the company’s board of directors who voted in favor of selling the residential Internet operations to the Terra Network for US$ 40 million. The price of this operation was deemed to be far too low and the matter was further exacerbated by the fact that the Spanish company, Telefónica is the majority shareholder of both CTC and Terra Network. 

A New Corporate Governance Player.

- Environmental issues have become important topics for Boards of Directors, especially in the developed world.  Recent events indicate that the trend is for this prominence to grow even more, particularly, in view of the arrival of Greenpeace in the world of corporate governance.  This non-governmental organization, active in 33 countries, with 2.8 million members and an annual budget of US$ 120 million, decided to resort to corporate governance to fight for its goals.  The group recently invested US$ 250 thousand in a share lot in its arch foe, Shell.  Despite, being minimally representative in terms of share quantity, it guarantees Greenpeace a seat at the next annual minority shareholders’ meeting.  On this occasion, taking full advantage of its minority shareholder status, the Group will endeavor to influence the company on its approach to environmental matters. Since Greenpeace is renowned for being one of the most radical and combative groups in defending its interests, Shell’s minority shareholders’ meeting next May, promises to be very eventful.

External Auditors and Conflicts of Interest.

- If the external auditors are an important factor in any Corporate Governance structure, mainly due to their salutary independence of company management and operations, any perceived conflict of interest must be severely dealt with.  In this context, the US Securities and Exchange Commission suggested to over fifty clients of one of the world’s largest audit firms, that they change auditors.  The alleged reason was that the personal investments of some partners of this firm in some of their audit client companies had increased to a degree that could compromise the integrity of these organizations’ balance sheets.  At least one major computer manufacturer has accepted this advice and changed its external auditors.

Better Corporate Governance Practices

Excerpt from the Better Corporate Governance Practices Code, Brazil.

* Qualifications for a Member of the Board of Directors.

-         Each Director must have personal integrity, the ability to read and understand financial statements, absence of conflict of interests, available time, and motivation.

-        The following combination of experience and background of Board Members is essential: experience in being a member of reputable Boards of Directors, i.e., those renowned for their excellence; CEO background; crisis management experience; knowledge of finances; knowledge of accounting; familiarity with the international market; strategic vision; and professional contacts of interest to the organization.

-         The majority of the Board of Director members must be independent directors.  The Board must have a wide range of business acumen and experience .