NEWS ABOUT CORPORATE GOVERNANCE - September-October/2001
IBGC
– Brazilian Corporate Governance Institute
-
On October 16,
2001, Luciano Carvalho Ventura gave the monthly IBGC
(Brazilian Institute of Corporate Governance) talk to the members on
Corporate Governance Rating – Systems and Methods.
Afterwards an Extraordinary General Meeting was held, during which
a proposal to amend the Institute’s statues (available on the its site,
(www.ibgc.org.br) was approved.
The IBGC November program
does not include the regular monthly talk, since the Second Brazilian
Corporate Governance Congress will be held on Monday, November 12, in the
Convention Center of the Hotel Gran Meliá WTC São Paulo. Similarly to
last year, the Congress will open on Sunday 11th with a gala
dinner. Among the speakers,
the IBGC has already received confirmation of the presence of Robert G.
Monks, international activist and symbol of the minority shareholder
defense movement in the USA, and Dr. Stephen Davis, a distinguished
international Corporate Governance consultant. Further information
available at tel. (11) 3043 7008 or on our site: www.ibgc.org.br.
Brazilian
Association of Pension Funds
- ABRAPP
From
October 24 through 26, ABRAPP,
the Brazilian Association of Pension Fund held its 22nd Annual
Congress in Vitória, State of Espírito Santo, with an attendance of over
1,500. The overall topic was
“How to protect 50 million workers and attain 70% of the GDP”? and
more specific topics were covered, such as, the challenges of the new
pension fund regulations, new pension fund investment policies, and
the latest changes impacting the share market.
As in prior congresses, the topic of Corporate Governance was well
to the fore in several sessions. This
is due to its growing importance for pension funds, particularly because
they are most of the time minority shareholders.
This is a crucial time for Brazilian pension funds, thanks to
recent changes in the legislation governing their activities, including a
method for managing these bodies, and the tax treatment applicable to
their immense savings reserves. In additional to that,
on December 17 and 18, using a computerized voting system, ABRAPP
members will elect all members of tits Board of Directors
and a new management board with a two (2) year mandate,
Private
Equity and Corporate Governance
With
every passing day, the importance in a Corporate Governance context of
private equity investments and the interest of management in these funds
increases. This is due to
management’s growing role of minority shareholder uninvolved in the
operation, including investee companies going public and the opportunity
of results oriented investments. These
two situations, the nature of the minority shareholder with no involvement
in company operations, and the trend to go public, increasingly underline
the benefits of good Corporate Governance.
Although the Brazilian market still has far to go in relation to
the developed world, particularly, the USA, there are clear signals that
this type of investment is growing in Brazil.
In the USA in the early nineties, project finance funds earned
close to US$ 7.8 billion, and doubled this amount in a mere three years,
reaching US$ 13.6 billion. At
the end of the nineties, these risk funds had attained the impressive
figure of US$ 153.9 billion. This astonishing growth happed thanks to the
US, European, and Asian pension funds.
Alert as ever to new investment opportunities for Brazilian pension
funds, in Rio de Janeiro, from November 26 through 29, ABRAPP
will give its seminar on “Private Equity and Project Finance in Latin
America”. The presence of a number of investors with a net equity in
excess of US$ 200 billion has been confirmed.
Registrations may be made at the following telephone numbers: (55
11) 3043 8735 and (55 11) 3043 8763.
The
good example given by the Petros Pension Fund.
Ever
since 1991, when one Brazilian pension fund, in its role as a shareholder,
for the first time elected one of its members to the Board of Directors of
Usiminas, the discussion as to whether this should become standard pension
fund policy has raged. Today,
hundreds of members of boards of directors and of shareholders appointed
audit boards have been elected by Brazilian pension funds, although this
is still considered to be a highly controversial policy by some.
In fact, pension funds are not only entitled to but should become
involved, through electing members, to the boards of companies where they
are permanent and important shareholders, as a means of monitoring and
maximizing the profitability of their investments.
Moreover, if pension funds neglect to exercise this right, their
board members and directors could be found guilty of omission in their
functions, by any one of the pension fund members who deem such omission
to undermine the fund’s economic objectives.
However, for this action to be effective, it is essential that it
be carried out by appropriately qualified board members, regardless of
whether such directors are members of the pension funds that elected them,
or are professional board members in the market.
The ideal solution appears to be to select representatives
appropriate for each situation. This was the decision taken by Petros, the pension fund whose
principal sponsor is Petrobrás S/A, and is Brazil’s third largest
Brazilian pension fund, when it elected former Brazilian Central Bank
director, economist Sérgio Werlang, as a member of the Board of Directors
of Copene. The more this
policy is applied, the greater the interest will be in pension funds, and
not just because of their huge and growing capacity for allocating
long-term savings to business activities, but also for their ability to
introduce top level management onto company boards.
This is becoming increasingly important in today’s business world.
Remunerating
company officers based on their productivity
One
of the most challenging tasks of a board of directors is the selection,
evaluation, remuneration, motivation, and training of the company’s
officers. The importance of
this role derives from the fact that, despite its front-line
responsibility before the shareholders, the board of directors is not an
executive body. Its duty is
to guide and supervise executive actions, which are the responsibility of
executive management. In
other words, the Board of Directors performs its work of guidance through
the executive board. On the
matter of responsibility for monitoring without becoming involved in
company business, it is well to recall the American saying of the role of
a board member, one that is “nose in, fingers out”.
PricewaterhouseCoopers recently carried out a survey of 100 Brazilian
companies, and reached the conclusion that, by implementing a policy of
short-term incentives, such as bonuses, commissions, and cash awards,
although many companies have succeeded in increasing their executives’
productivity, this has not necessarily led to increased billing.
Accordingly, benefits policies that are partially fixed and
partially variable tend to increase executive productivity and can also
raise billing. Although the survey did not analyze the ratio between board
members’ fees and their productivity, it has become common practice for
US companies to pay a partially fixed and partially variable fee to their
boards of directors. This
places them significantly ahead even of Brazilian companies that already
implement the variable portion of board fees.
This is because, in the case of the US companies, the variable
portion mainly comprises company stock options, which increase the degree
of a board member’s long-term involvement and his/her concern with the
company’s value in the market place.
The
Brazilian CEO’s whom many Boards of Directors would eagerly appoint.
Brazilian
senior executives are increasingly making a name for themselves, based
either on their successful performance abroad or by replacing foreign
senior executives of multinational subsidiaries in Brazil.
Examples can be found in the recent election spearheaded by the
prestigious Brazilian newspaper, the Folha
de São Paulo in conjunction with six headhunting companies
specializing in senior executive search.
This survey consisted of electing the ten top Brazilian executives
“worth their weight in gold” in the market and who, many boards of
directors would unhesitatingly elect as the CEO of their companies. To
qualify for such election, the executive could not be a shareholder of the
company or of its controlling group, nor belong to the company’s
founding family. In other
words, they had to be market professionals.
Twenty-five names were submitted and ten of them were unanimously
selected by the six companies consulted.
These executives are: Fábio Coletti Barbosa, CEO of ABN
Amro Bank, Fernando Terni, CEO of Intelig, Fernando Tigre, CEO of SP
Alpargatas, Fernando Xavier, CEO of Telefônica, Jorge Rodrigues, CEO of
Embratel, Luiz Antônio Viana, CEO of Golbo Cabo, Maria Silvia Bastos
Marques, CEO of CSN, Manoel Horácio da Silva, former CEO of Telemar,
Nildemar Seches, CEO of Perdigão, and Paulo Periquito, CEO of Multibrás.
These professionals
earn up to R$1.5 million per annum
between direct salaries and benefits, and head companies with between
5,000 and 10,000 employees.
Senior
executive salary policy to become increasingly transparent in England.
The
British Government is pressuring Parliament to approve a bill permitting
shareholders to directly control the salaries of their companies’ senior
executive echelon, viz., a policy of full transparency.
According to Britain’s Minister of Industry and Commerce,
Patricia Hewitt, the trend is for shareholders to increasingly censure the
high salaries received by top management in exchange for a mediocre
performance. Significant disparities in salary increases have also been
revealed. For a country that,
to all intents and purposes, has no inflation, last year, the senior
executives of the UK’s thirty largest companies received, on average, a
salary increase of 67%. If this bill is approved, companies will be
required to disclose to all their shareholders, details of its senior
management’s remuneration and performance.
This movement is strongly supported by the UK’s National Pension
Funds Association, whose members control assets of close to
£450 billion, and who are becoming increasingly active in their
role of institutional investors to defend their minority shareholder
interests.
FFI – The Family Firm Institute
For
the first time since its foundation, the US-based FFI, the largest and
oldest institution dedicated exclusively to the family firm, held its
annual meeting outside the USA. It
was held in London from October 10 through 13, with an attendance of over
200. Among the speakers were
three Brazilians, all members of the BCA – Brazil Consulting Associates,
Antonio Carlos Vidigal, Luciano Carvalho Ventura, and René Werner.
They discussed some Brazilian family firm consulting case studies,
approached from several angles. These
were Corporate Governance, family governance, and the training of family
members to perform their roles in the company and in the family.
In 2001, the FFI will hold its annual conference in Dallas, Texas.
The Ford Board of Directors vs. its
CEO.
Recently,
the inventor of the automobile industry, the Ford Motor Company, the world’s
second largest automobile assembly company, experienced a showdown between
its CEO and its Board of Directors where the latter, specifically the
major shareholder, the Ford family that, with its Class B shares holds 40%
of the voting rights, won the day. The CEO, Jacques Nasser, a career
professional, was summarily dismissed and succeeded by William Clay Ford
Jr., or Bill Ford, as he is known, great-nephew of the company’s founder,
the legendary Henry Ford. The
rumor is that the Ford family was dissatisfied with company’s constant
losses. The final straw was
the fact that the dividends of the third quarter of the year were halved.
Bill Ford is the first family member to assume an executive position in
the company that bears his surname, since 1979, when Henry Ford II
resigned. In addition to his
charismatic surname, Bill Ford has a solid academic background.
He holds an economics degree from Princeton, an MIT doctorate in
Business Administration, and has carved out a brilliant executive
reputation in the company that he joined in 1979 as a product planning
analyst. In 1999, he was
appointed Chairman of the Board. If
indeed the Ford Board of Directors acted wisely in dismissing the former
CEO, only time will tell if it was equally inspired in its choice of his
successor. Regardless of the outcome, a huge step backwards has been taken
in the context of Ford’s Corporate Governance if Bill Ford continues to
hold the titles and the functions of both Chairman and CEO.
Meanwhile, at
DaimlerChrysler.
Anxious
about the company’s dismal business prospects, mainly after the
terrorist actives of September 11 in the US, the Board of Directors of
DaimlerChrysler formally requested its Chairman, Juergen Schrempp, to
postpone his retirement and to extend his term of office through 2005.
Despite the adversities faced by the company, the Board of Directors opted
for the more prudent approach of relying on the experience of the
architect of the 1998 merger of Daimler-Benz AG and Chrysler Corp. rather
than gambling on a change at the company’s highest executive level, in
this climate of uncertainty
in the business world, particularly the automobile industry.
The Nobel Economics Award and
Corporate Governance
This
year, the Nobel Prize, that distinguished posthumous legacy of Swedish
industrialist, Alfred Nobel, celebrated its 100th anniversary.
The Economics Prize was awarded to three US professors, Michael
Spence, George Akerlof, and Joseph Stiglitz. It is their brief that
markets are fallible and that the concept proposed by the eminent
economist, Adam Smith, “the invisible hand of the market”, does not
always necessarily ensure maximum market efficiency.
In other words, a sufficiently detailed degree of information on
which to base accurate decisions is not always available to buyers and
sellers of shares or any other asset.
Thus, markets must be monitored by government agencies to reach
their peak level of efficiency. It
is interesting to note that one of the root causes of inefficiency is
precisely the disparity of information available and, thus it becomes the
role of governments to penalize insider information traffickers.
The disclosure, motivation, and implementation of good Corporate
Governance practices, particularly in the context of transparency and
fairness, are strong potential support tools for such government agencies
as they monitor and intervene in the market seeking to upgrade its
efficiency.
Best Corporate Governance Practices
-
Quoted
from the Code of Best Corporate Governance Practices, Brazil:
Changes in Share Control:
Changes
in Share Control (cont.)
Since
the majority of Brazilian companies have a controller or controlling group,
the purchase of control or closing down of capital are currently two of
Brazil’s most critical corporate governance problems.
Use
of insider information
The
use of insider information to negotiate shares or quotas must be entirely
prohibited, and monitored by the Board of Directors.
Arbitration
Company
statutes must ensure that conflict between company owners be settled by
arbitration, in order to avoid litigation.
Family Board
Family businesses should agree upon a specific court to settle family context matters to ensure that they do not interfere with the governance of the company.
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