NEWS ABOUT CORPORATE GOVERNANCE - January-February/2002

 IBGC – Brazilian Corporate Governance Institute

- Despite the significant and ever increasing number of visits to its website, the IBGC (Brazilian Institute of Corporate Governance) is reformulating this site.  In view of the difficulties so many companies encounter in recruiting independent and qualified boards of directors to introduce or upgrade their Corporate Governance practices, the IBGC will include in its website a Bank of Board Members, comprised of IBGC members who are interested in and are available to join  new boards of directors.  Also, in line with its role of teaching and recycling board member data, as from March 14, the IBGC will give, for the eighth consecutive year, its celebrated Course for Members of Boards of Directors.  This course, specifically targeting members of boards of directors, shareholder-elected audit and advisory boards, shareholders, entrepreneurs, investors, fund representatives, CEO’s, and successors, is divided into ten (10) modules given always on Thursdays and Fridays of each week and ends on June 7, 2002. This course is a pioneer of its kind in Brazil; it is exclusively designed to qualify members of boards of directors, and has been attended by over 500 students, to the benefit of more than 80 companies.  Further information and enrollments at telephone no. (11) 3043 6000 or at e-mail address ibgc@ibgc.org.br.  But the most important IBGC news at present, is that, this year, its members will hold their Annual General Meeting on Wednesday, March 21, 2002. In the recent reform of its by-laws (in line with the principles governing good Corporate Governance), the IBGC included a democratic mechanism whereby its members can apply to join its Board of Directors, via a transparent election process, one whereby all interested members may voluntarily register their interest in being involved and contributing to its management. Each board member’s term of office is currently one (1) year, and re-election is permitted.  All members were advised of the time limit for this registration, which commenced on January 18 and ended on February 18, 2002, pursuant to the new statutes.  Within no more than fifteen (15) days prior to the Annual General Meeting, i.e., by March 6, 2002, the Appointment Committee will advise the members of the names of all registered candidates whose names will be put to the vote in the meeting.  It is important to note that any member may be represented by an attorney-in-fact, duly appointed in the Meeting, provided that this individual is also a member.  Votes may also be sent in writing by members who are unable to attend or did not appoint a representative at the meeting.

Awards for transparency via the Internet

- In their efforts to achieve greater transparency in the market, the trend is for the major listed companies to utilize the Internet for closer contact with their shareholders and potential investors.  At the same time, they are also democratizing access to information, thereby complying with another important prerequisite of good Corporate Governance – impartial treatment of all shareholders.  And the companies that most attracted attention in Latin America for their up-to-date and salutary Corporate Governance practices were distinguished in a recent ceremony in São Paulo, Brazil, sponsored by LatinFinance and MZ Consult. In the presence of a high attendance audience and many authorities connected with the capital markets of several Latin American countries, the winners received their accolades and the awards presented by LatinFinance and MZ Consult. The on line annual reports of Repsol YPF- Argentina, Banco Itau – Brazil, Banco de Chile – Chile, and the Vitro Group - Mexico, were considered the best in their respective countries, while the Banco Itaú on-line reports were considered the best in Latin America. The results for the five (5) best investor relation websites were: Argentina – PC Holdings, Grupo Financiero Galicia, Telefónica Argentina, Telecom Argentina, and Repsol YPF; Brazil – Banco Itaú, Unibanco, Ambev, Petrobrás Globo Cabo; Chile – Banco Edwards, Telefónica do Chile, CCU, Concha y Toro, and Enersis; and Mexico – Cemex, Grupo Elektra, Femsa, BBVA Bancomer, and Coca Cola Femsa. Once again, Banco Itaú was the winner for its investor relations website, considered the best in Latin America.  The most popular websites were chosen via electronic voting and were: Argentina’s Grupo Financiero Galicia, Brazil’s Petrobrás, Chile’s Banco Edwards, and Mexico’s Casas GEO. The website that received the most votes was the Petrobrás site, and, accordingly was ranked as the most popular in Latin America. During the ceremony, José Luiz Osório, President of the CVM (Brazilian Securities Commission), spoke on the problems encountered and the advances achieved in the Brazilian capital market, and on the important role played by good Corporate Governance in invigorating this market.  His full address can be found in the Technical Material section of the LCV website (www.lcvco.com.br).

Prospects for the Brazilian capital market

- Over the last few years, the Brazilian capital market has become increasingly constricted and has had to witness the exodus of much of its business to the stock exchanges of the more developed world.  This is true for many reasons, among them, low economic growth rates, soaring interest rates (the third highest real interest rate in the world!), inexcusably high taxes, insufficient legislation protecting minority shareholders, weak corporate governance, more and more companies withdrawing from the stock market, etc.  However, some recent events show that there is a light at the end of the tunnel.  Let us analyze the reasons for this cautious optimism in relation to the medium and long-term future of the stock exchange in Brazil: a) The Brazilian economy shows signs of entering upon a new sustainable growth cycle; b) The Brazilian Central Bank has reduced the prime rate and has indicated that, with inflation under control, the trend is for interest rates to drop; b) Congress is exempting stock exchange transactions from the CPMF (Tax on Banking Transactions); c) The new Corporation Law, extending the rights of minority shareholders, comes into force on March 1, 2002; d) The newly invigorated CVM, which will ensure a more closely monitored share market; e) Greater value

attributed by business to good Corporate Governance, evidenced by the compliance by several leading companies in Brazil to the Graded Corporate Governance Levels created by BOVESPA (São Paulo Stock Exchange). One of these is Petrobrás, Brazil’s largest company quoted in the domestic and international markets; and lastly, f) the start-up of operations of the New BOVESPA Market on February 1, 2002, negotiating the shares of CCR - Companhia de Concessões Rodoviárias (a highway concession organization), that recently went public and is directly negotiated in this market, where good Corporate Governance practices are a prerequisite. Other companies are expected to follow suit and negotiate their capital in this market, replacing those other organizations that withdrew from the stock market over the last few years, either because they lacked the philosophy of a publicly quoted company, or because they had no faith in the Brazilian share market.  Much remains to be done, to finally achieve a sufficiently strong share market in Brazil to gear its economic development.  Nevertheless, it would seem that the trend to withdrawal has been reversed just in time.

Activism by Brazilian pension funds as company shareholders is now compulsory.

- The growing importance of pension funds as agents responsible for forming long-term savings in Brazil and the world is undeniable.   And it is the actions of pension funds in the market that have led to capital becoming more democratic, via the phenomenon that that great thinker, Peter Drucker has named “the silent revolution”, insofar as company employees are being transformed into company owners.  This is thanks to their pension funds that acquire more and more shares and increasingly become shareholders with significant influence in the management of these companies.  Corporate Governance in the United States made a huge stride forward when, in defense of their investors’ interests, US pension funds abandoned their hitherto traditional quiescence as company shareholders and began to influence management, through demanding improved Corporate Governance practices in their investee companies. This movement arrived in Brazil in the early nineties and has grown, mainly, via the voluntary actions of some Brazilian pension funds, such as Previ, Petros, Sistel, Telos, and Valia, among others. A major breakthrough was that, as of December last year, activism by Brazilian pension funds as shareholders has become compulsory pursuant to the resolution issued by the Ministry of Social Security and Welfare – Council of Complementary Pension Management (Resolution MPAS/CGPC No. 1, of December 19, 2001). This resolution, transcribed in its entirety in the Technical Material section of the LCV website (www.lcvco.com.br), states that the following is incumbent upon private complementary pension funds: a) to actively exercise their shareholder rights, and b) to seek to add value to their investments, including via exercising their votes in shareholders’ meetings.  It requires pension funds to inform their participants or members, on a quarterly basis, of their presence at the shareholders’ meetings of companies in which they have investment and the details of the vote made, or the reasons for their abstention or absence, with particular attention to decisions involving related party transactions, or those that could especially benefit, directly or indirectly, any one company shareholder.  This new approach by Brazilian pension funds as shareholders in their investee companies will greatly contribute to the development of improved Corporate Governance in Brazil.

IAS - International Accounting Standards and Corporate Governance.

- For shareholders, the best performance indicator of a publicly listed company, is its value in the capital market. However, despite their limitations, company accounting records are an important mechanism for performance and control evaluation available to the shareholders, whether this is for their actions in shareholders’ meetings or to monitor the company’s operations via the board of directors.  Operating growth and an increased number of shareholders/partners per company, have led to a growing separation between ownership and management of such organizations.  This has added further importance to the accounting records as an evaluation and control tool, chiefly for those shareholders not directly involved in the company’s day to day operations.  However, the globalization of shareholders has caused an additional complication factor in utilizing this particular tool, as it is not understood or is little understood by the shareholders since accounting is “spoken” in many different languages around the world.  In 1973, to partially resolve this problem, a task force was established, and known as IASC – International Accounting Standards Committee, that, in 2001, was renamed IASB - International Accounting Standards Board.  This body’s overriding long-term objective was to create global accounting procedures and statements, via a convergence of local standards within a public interest commitment of transparency, one of the three pillars of Corporate Governance.  The IASB has more than 140 affiliated institutes in over 100 countries, and is mainly composed of a group of Trustees and a Board.  The Trustees are spread over a broad international base, composed of the following: six North American representatives, six European representatives, four Asian representatives, and three representatives for other regions, one of the last named being Brazil’s Roberto Teixeira da Costa. In turn, the Board consists of 14 members, 12 of them permanent members.  It is not based on geographic representation and comprises a minimum of five auditors, three representatives of companies, three users, and one academic.  The IIR Conferences recently held a conference on IAS in São Paulo - Brazil, where Luciano Carvalho Ventura spoke on the topic of “The IAS and Corporate Governance”, showing the importance of the IAS to shareholders, especially the global shareholder.  Notwithstanding the fact that, in Brazil there is general agreement as to the importance of harmonizing local accounting practices with international accounting standards, aimed at improving internal accounting practices, simplifying communication with potential international investors, and reducing the cost of capital in the long-term, there is still a long way to go.  The reform of Brazilian accounting standards, which will permit a convergence, or even improved conversion of financial statements to international standards, has been pending for ten years.  Everything points to this matter being voted by Congress next year, meaning that the new regulations will only come into force in 2004. This inertia is in sharp contrast to the speed at which the economy has become globalized and, especially, with the urgency with which the topic of accounting is being addressed in the US, after the Enron crash.

Absence of good Corporate Governance resulted in a sea of slime

- The business world has always been and will continue to be a universe of risk and uncertainties.  However, in no circumstances, can the recent crash of ENRON, the world’s largest energy company, classified last year as the seventh largest company in the USA, be attributed to normal risk and natural uncertainty factors inherent to the world of business.  This financial ruin revealed the existence of a sea of slime in the US and international business community for this Houston based company, present in over 40 countries, including Brazil and has caused incalculable economic disaster for thousands of shareholders, employees, suppliers, creditors, retired personnel, the government, and society in general.  The main reason it is considered to be the greatest bankruptcy in the history of the US economy, can be summarized in two words: accounting fraud - the reporting of vast fictitious profits (over US$ 1 billion for 2001) and failure to record enormous liabilities.  This scandalous accounting fraud happened and was concealed from the market, due to the omission of many and the deliberate action of countless individuals and organizations connected with the company, and chiefly, to the absence of true Corporate Governance.  In terms of omission the unanswered question is: where were the US government authorities, particularly, those involved in the capital markets? Also, where were the US pension funds that, in their increasing activism as company shareholders, are the true champions of good Corporate Governance? And what to say about that pride and joy of the USA, US accounting practices, that were unable to identify the errors and frauds, thereby protecting the interests of the company’s stakeholders?  And lastly, where were Wall Street’s brilliant market analysts?  In the context of intentional accounting fraud, unquestionably, the Board of Directors, the Executive Board, particularly, the CEO, and the Independent Auditors, are the main parties responsible for this gigantic duplicity. In this chain of dishonest actions and in the incestuous relationship between the members of these three Corporate Governance agents, everything that could happen happened.  From illicit gain through negotiating company shares based on insider information right through to the drawing up of enormous service agreements of manifest conflicts of interest, including the shredding of documents by that distinguished audit firm, Arthur Andersen. The main condemnations of this Board of Directors are: a) Bad choice of its Executive directors, with whom it fraternized and whom it did not efficiently monitor; b) It appointed an Audit Committee that was inexperienced, omissive, or dishonest; c) It did not enforce the required degree of transparency with the market on the part of the CEO, regarding company problems; and d) It lacked the necessary and responsible professional relationship with the independent auditors.  Regarding the alleged dishonesty of the CEO and other executive directors, they failed to comply with the three basic values of Corporate Governance, i.e., transparency with the shareholders and the market, impartial treatment of all the shareholders, and honest rendering of accounts to the company shareholders.  Lastly, the dismissal of the Arthur Andersen partner in charge of the Enron audit, the temporary suspension of three other partners involved in the work, and the offer to indemnify the injured shareholders, give an idea of the audit firm’s acknowledgment of its responsibility in this market scandal. And, as if this were not enough, we recall the existence, since 1993, of the mutual interests of ENRON, George W. Bush, and his team, whether these take the form of certain campaign donations for Bush and other Republicans, or by the company’s involvement in drawing up a national energy plan for the US Government, or by the appointment of several former company members to government positions. 

Consequences of the Enron case to date.

- To date, the initial consequences of the ENRON case are: at company level: a) In-depth investigation of the Board of Directors, one of whose members is a Brazilian, Paulo Ferraz, former CEO of Banco Bozzano Simonsen, with the dismissal of six (6) of its members to date; b) Resignation of the company’s founder and CEO, and principal party involved, Kenneth Lay; and c) The offer by Arthur Andersen, of US$ 800 million to offset the losses of company shareholders, creditors, and personnel, a proposal which is expected to be refused. At US government level: a) investigation carried out by six US Congress commission and three federal government bodies; b) increased rigor of accounting standards; c) harsher and speedier penalties for those members of boards of directors and of executive boards found  guilty; and d) changes in the pension fund system. At external auditor level; a) loss of credibility; b) enhanced vigilance, from now on, for conflict of interest where the same firm renders audit and consulting services, and for the use of insider information with illicit gain. On this last topic, the article “Post-Enron External Audits” can be found in the Technical Material section of the LCV website (www.lcvco.com.br). Lastly, the initial consequences for the capital markets are: a) investor mistrust in relation to other large companies quoted in the US stock market and, incredible as it may seem, the reduced risk of the emerging markets. In the words of Aberdeen Asset Managers director James Clunie, “There has always been some skepticism regarding the accounting methods of emerging markets but, unlike, first world companies, this risk is generally reflected in the shares”.  In the aftermath of the ENRON scandal, he believes that the actions of emerging markets are excessively penalized by Corporate Governance and accounting standards, which suddenly lose their severity when compared with the highly acclaimed standards of the developed western world.  The fact is that every time there is a major earthquake, the secondary aftershocks are felt for months or even years later.  Only time will show the nature and intensity of these secondary tremors.

The desperate need for a board of directors that genuinely monitors conflicts of interests.

Conflict of interest in business is a topic that has received particular attention in the context of Corporate Governance.  Firstly, because its presence in any company is a frontal assault on one of the three most sacrosanct Corporate Governance values, the impartial treatment of all shareholders.  Secondly, because it is present in many subtle guises and, consequently, difficult to identify and eliminate.  Under good Corporate Governance practices, the approach to conflicts of interest, particularly, those at director level (board of directors and executive management) must be handled by the board of directors, under the exacting and vigorous coordination of its Chairman.  This is particularly important in matters relating to the board members’ direct fees and bonuses.  This does not appear to have been the case with ABB, the Swiss-Swedish group resulting from the merger between Sweden’s Asea with the Swiss company, Brown Boveri, that, in 1988 began the trend of huge cross-border mergers and transformed two medium weights into a global competitor with the capacity to alarm even the USA’s General Electric. Recent specialized media attention has revealed that the company intends to issue a “friendly” request for restitution of part of the bonuses paid to two former CEO’s on their retirement.  The grounds for this restitution request are that the amounts in question, close to US$100 million, were excessive, illegal, unjustified, and, principally, were decided when both men were still members of the company’s board of directors. Percy Barnevik and Göran Lindahl maintain that these huge amounts were part of their contracts.  Nonetheless, ABB is demanding the return of a portion of these amounts that, by European standards, are scandalous in egalitarian societies, particularly those of Sweden and Switzerland.  it is deplorable, especially to see Sweden’s Percy Barnevick, latterly hailed as a champion of Corporate Governance, today making headlines in the economic press for having accepted more retirement payment than that to which he was entitled.  This partially explains why, in January of this year, Barnevik resigned from his position as Chairman of the Board of Directors of Investor, the Swedish holding company of the Wallenberg family.  Given these events, what happens to his position as a member of the board of directors of General Motors remains to be seen. And three members of the ABB Board of Directors, all of them members of Switzerland’s financial élite, have been dismissed.  One of these has been replaced by Brazil’s Roger Agnelli, CEO of CVRD­ - Companhia Vale do Rio Doce, who takes office in March 2002, yet another Brazilian on a global board of directors.  It would seem that, with ABB’s first loss (US$691 million) recorded since its foundation in 1988, the shareholders have finally woken up and decided to examine the company’s Corporate Governance practices.

Best Corporate Governance Practices

- Taken from the Code of Best Corporate Governance Practices - Brazil

The Board of Directors.

Authority

Brazilian Corporation Law establishes the authority of the Board of Directors.  Its principal tasks are the establishment of company strategies, the election and dismissal of directors, the supervision of executive management, and the recommendation and substitution of the independent auditors.

 

The activities under the jurisdiction of the Board of Directors should be identified in the company’s internal regulations, where the Board’s responsibilities and attributions are clearly defined, and situations of conflict with Executive Management, particularly the CEO, are prevented. 

 

To approve the company’s code of ethics.

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