NEWS ABOUT CORPORATE GOVERNANCE - July-August/2000

 IBGC – Brazilian Corporate Governance Institute

- Close to 120 delegates from 26 countries were present at The Shareholder's Role in Corporate Governance in Emerging Markets and Transition Economies event held in the US, from July 10 through 12, in New Haven, Connecticut.  It was sponsored by the Southern Connecticut State University, the World Bank/OECD Global Corporate Governance Forum, and Davis Global Advisors, Inc., in association with ICGN - International Corporate Governance Network, Asian Corporate Governance Association, Commonwealth Association for Corporate Governance, and the IBGC (Brazilian Corporate Governance Institute). The event brought together professional representatives of several institutions from a variety of geographic regions, to discuss the main corporate governance challenges faced by the emerging economies in the 21st century. The Brazilian scenario was introduced by IBGC Executive Director, Sandra Guerra on the International Cooperation in Corporate Governance panel.   Brazil was well represented by six delegates from very different business areas, further underscoring Brazil’s deep interest in this topic.  At national level, the IBGC is holding another event on September 21, in the City of São Paulo, as part of its Monthly Talk Series Program.  On this particular occasion, IBGC member, Antônio Carlos Vidigal will present the results of his recent doctoral thesis, examining the continuity of the family business.  He will also discuss a relevant and highly complex corporate governance matter, that of evaluating the performance of boards of directors and individual board members. In addition to his doctorate obtained at the Lausanne Business School, Dr. Vidigal has in-depth experience of board membership of many family businesses.  He is also the author of several books, among them “Long Live the Family Business”.

The Internet simplifies adherence to Corporate Governance values

A company’s transparency before its shareholders and the market in general is one of the most important principles of good corporate governance practices. It is also an essential prerequisite for complying with another major objective in this field: the equitable treatment of all shareholders.   A recent trend observed is the increasing number of publicly quoted companies in Brazil that, through their websites, are putting into practice a policy of increased transparency before their shareholders and the market.  This is reflected, among other ways, by ensuring the availability of more detailed information, either more rapidly or at lower cost.

In conjunction with these organizations’ pioneering policy, mainly due to influential investor demand, the Brazilian capital market is beginning to attract consulting services specializing in the relationship between the business organization and the market. These consulting firms have developed websites showing balance sheets, business data, and other data of interest to the small shareholder or potential investor.  Examples in the US are Bowne (www.infoinvest.com) and Citigate Dewe Rogerson (www.latamsource.com), both of them present in Brazil, and Corporate Communication Broadcast Network – CCBN, a leading Investor Relations Consulting firm in the US, in the process of opening its Brazilian office. These international consulting firms will compete mainly with the Brazilian consultancy, Intellinvest, that provides data on publicly quoted companies and whose website (www.srinvestidor.com) has been operational since late July 2000. Lastly, the president of the IBRI (Brazilian Institute for Investor Relations), Arleu Anhaldt, announced the institute’s forthcoming site on publicly traded company data.

Changes in Brazilian Corporation Law

There have been further delays to the draft Brazilian Corporation amendment bill.  This bill aims to introduce vital changes in corporate governance practices, most especially the protection of minority shareholders.  It is unlikely to be approved in full in its current form this year.  This controversial bill contains modifications essential to updating business legislation.  According to many specialists in this field, its introduction would attract no less than US$ 60 billion in international share market investments.  Investments of this caliber, so vital to an emerging economy like Brazil, would come not in the form of loans but as long-term capital, ideal for financing Brazilian business.

The excellent example provided by the German Stock Exchange.

In view of the lethargic progress of the approval of changes in the Brazilian Corporation Law Com, Bovespa (São Paulo Stock Exchange) is seeking to create a new market that only trades common shares and whose fundamental rules protect minority shareholder rights.  This new market will be based on the successful Deutsche Boerse experiment.  Almost three (3) years ago, the German Stock Market created the Neuer Market for small high-growth potential companies.  During this time, the number of listed companies soared from two to 302, jointly representing a global value of US$ 170 billion. Success on this scale would have been impossible had it not been for the thousands of investors, attracted by the strict and up-to-date regulations governing these listed companies.  Highlights among these new regulations are the requirement for full transparency, the use of US or international accounting standards and, most important of all, the sale of common shares only, thus complying with the good corporate governance practice of one share one vote.

Virtual Consulting Council

The first virtual consulting service, a pioneer concept in Brazil, was introduced by Spencer Stuart partner and director, Guilherme Dale.  This was effected through a new company, BoardCo.com (www.boardco.com.br) whose basic mission is to ensure the access of small and medium companies to this vital prerequisite to modern business. Strategic counseling is already in place in the form of eight (8) virtual councils, plus several others still pending.  These services operate almost entirely via the Internet, the fastest possible means that, in addition to reducing time spent, represents a drop in costs and increased flexibility in setting up agendas with the parties involved, the entrepreneurs on one side and a multitude of boards of directors, presidents, and CEOs of Brazilian and multinational companies, on the other.

Corporate Governance in the Family Business

Corporate governance principles are being increasingly applied to family businesses.  The reason for this is two-fold: firstly, these principles significantly aid in managing the type of conflict so common in family businesses, and, secondly, because there is no basis for applying differential treatment to the rights of market shareholders and the rights of the family business shareholders or partners.  Thus, corporate governance has become a matter of growing interest in institutions dedicated to the study and research of the family business.  A major institution in this field is the US-based FFI – the Family Firm Institute.  On October 25 through 28, it will hold its 13th Annual Presentation in Washington, DC.  As part of the same event, there will be a panel at the Brazilian Embassy, including Ivan Lansberg, a well-known corporate governance specialist, and other eminent Brazilian speakers.  The topic will be the family company in Brazil in its many contexts, including corporate governance.  The same panel will be presented in São Paulo, by the Brazilian speakers, also under the coordination of Antônio Carlos Vidigal and René Werner, on September 18, from 6pm to 9pm, at the First Meeting of the Study Group sponsored by the Family Firm Institute. Further details available on tels. (11) 3862 1586/3862 1586.

International Corporate Governance Network

The ICGN (International Corporate Governance Network) held its greatly sought after sixth annual gathering in New York from July 12 through 14.  The event was attended by 350 delegates from 25 countries, including Brazil.  The Brazilian delegation included entrepreneurs and professional board members, in addition to IBGC (Brazilian Corporate Governance Institute) representatives.   The seventh World Meeting will be held from July 11 through 13, 2001, in Tokyo, Japan.  

The growing risks faced by the CEO

The CEO or President of any company with an active board of directors is an important link in the company’s corporate governance system.  Prior to the early nineties, the relationship between the average board of directors and the company’s CEO tended to be amicable and, above all, lasting.  In some cases even, it was the CEO who controlled the board and not vice-versa.  At that time, every time a company announced a mass personnel reshuffle, share prices would rise, since such action was viewed by the investors as a saving.  But, recently, in view of the current soundness of the US economy, the trend is for shares to increase, not with mass dismissals, but with a change in a company’s CEO.  A survey for the period comprising August 1999 through June 2000, carried out by the Chicago-based top executive relocation firm, Challenger, Gray & Christmas, discovered that no fewer than 706 publicly traded companies had replaced their CEO.  Naturally, several had simply reached retirement age or had upgraded professionally, but the vast majority had been dismissed by their boards.  Other studies confirm this trend.  One survey revealed that forty percent (40%) of new CEO’s lose their jobs within eighteen (18) months.  An MIT (Massachusetts Institute of Technology) study concluded that, for the same weak performance, the probability of a CEO being dismissed in 1996 increased threefold over 1985.  Nowadays, it takes no more than two or three quarters in which profits fail to increase by fifteen percent (15%) annually, and share prices do not meet expectations, for the CEO, who is seen as being exclusively responsible, to be summarily dismissed.   A case in point is US Procter & Gamble’s 36th CEO, Durk Jager, fired in June last year.

The long awaited quantifying of good corporate governance.

Although it has long been evident that corporate governance adds value to publicly traded corporations, this aggregate had not previously been measured.  This omission was recently rectified by a survey carried out by the McKinsey consulting firm, entitled “Investor Opinion Survey” available on the McKinsey site (www.mckinsey.com.). After hearing the opinion of 200 resource management organizations all over the world, that administer asset portfolios together representing an impressive US$ 3,25 trillion, this survey reached some interesting conclusions. The first of these was that the degree of importance of management was directly related to the company’s financial performance, and that investors are willing to pay a premium of between 18.3% and 27.6% for the shares of good corporate governance practice companies.  The second conclusion was that the total premium payable by investors in a company increases in direct proportion to the degree of weakness of its corporate governance structure.  Says McKinsey consultant, Jean-Marc Laouchez, responsible for the survey in Latin America, “Premiums are higher in Latin America and Asia because there is still considerable room for improvement in corporate governance, thus adding value to their business organizations.  In the US and the UK where corporate governance is well developed, the premium is lower”.  According to this survey, the average share premiums paid in some emerging countries are as follows: Venezuela (27.6%), Colombia (27.2%), Indonesia (27.1%), Thailand (25.7%), Malaysia (24.9%), Korea (24.2%), Brazil (22.9%), Mexico (21.5%), Argentina (21.2%), and Chile (20.8%).