NEWS ABOUT CORPORATE GOVERNANCE - May-June/2002

 Editorial

The CVM (Brazilian Securities Commission) continues its ongoing battle for good corporate governance in Brazilian companies. 

In early June 2002, the CVM issued a manual of corporate governance recommendations for quoted Brazilian companies. According to its current CEO, José Luiz Osório, the aim of the manual is to aid companies in the process of upgrading their corporate governance practices. This manual, (its complete text is available in the LCV website - www.lcvco.com.br), is divided into four areas.  The first covers transparency of the share structure and of the controlling groups.  It also makes recommendations to facilitate participation in shareholders’ general meetings.  The second part covers the role of the Board of Directors, the hub of Corporate Governance.  It also discusses the responsibility of the Audit Board, the means whereby shareholders can monitor company activities, despite being given scant attention by Brazilian corporate legislation.  There is enormous potential for this Board’s role and usefulness, provided its members are appropriately qualified to carry out their important role of monitoring company management performance – which includes both the Board of Directors and Executive Management.  The third part of the manual examines measures for protecting the interests of minority shareholders, including one of the most sensitive Corporate Governance points, transactions with parties related to the company.  The last part is devoted to recommendations for clearer financial statements, and also covers the company’s relationship with its independent auditors.  Although companies are not obliged to comply with these recommendations, annual management reports should disclose a company’s level of compliance with the recommended practices.  Says Osório, “We want companies to either practice Corporate Governance or explain why they don’t.”  This and other matters created unjustifiable market controversy that gave rise to arguments for and against the CVM initiative.  Disclosure of the level of Corporate Governance compliance is purely an optional suggestion, as are all the recommendations contained in the manual.  Nevertheless, all Brazilian quoted corporations are required to state whether or not they comply with the recommendations of the compulsory report, IAN (Annual Information), that is sent to the CVM and is available to the general public.  These reports include a space where companies have the option to describe their degree of compliance.  This practice will enable investors to determine Brazilian corporate compliance with good Corporate Governance practices. Since the manual includes recommendations, such as tag along rights for all shareholders, regardless of the type of shares held, and voting rights on material matters for all shareholders, among others, this controversy has seized the attention of the entire Brazilian market. In the words of attorney, Paulo Aragão,  “It is not the role of the government (Executive Power) to recommend that a company do something that Congress has just decided should not be done”. Aragão is correct. However, regarding recommendations to apply Corporate Governance practices, in addition to the minimal recommendations of Brazilian corporate legislation, the CVM has legal backing though recently approved legislation by the Congress and according to attorney Luiz Leonardo Cantidiano, who says “Law 6385 is quite clear in stating that it is incumbent upon the CVM to issue standards regulating the nature of compulsory data to be disclosed by quoted corporations”. However, the CVM has stood its ground, despite vehement opposition to the CVM initiative by some eminent legal scholars specializing in corporate law, and by ABRASCA (Brazilian Association of Listed Companies) as, in the words of its President, Alfried Plöger, “We are appalled.  The CVM unilaterally decided on all the recommendations, with no public discussion, without hearing anybody’s opinion”. The market and ABRASCA should be aware that the CVM consulted the IBGC (Brazilian Institute of Corporate Governance), Brazil’s leading authority on the matter and a point of world reference on Corporate Governance, and, to a significant extent, the suggestions in the manual echoed IBGC suggestions for the manual and the CVM intends to regularly update recommendations received.  Thus, several opportunities will arise for ABRASCA to submit its recommendations in favor of improved Corporate Governance practices in Brazilian listed companies. For the time being, the CVM has reaffirmed that it will maintain its position of “comply or justify” although, it will not penalize companies that decline to disclose their level of compliance, since there is no need, explains CEO Osório, “If the company fails to answer, this means it is not in compliance. This is an answer in itself”.  Meanwhile, the securities commissions of other countries, such as Mexico and Portugal, have issued their own manuals containing more general recommendations without the requirement for companies to publicly disclose their degree of compliance with such recommendations.  It seems that the CVM and its initiative will be in even more exalted company.  According to Joan S. Lublin of the Wall Street Journal, the NYSE, based on a decision to be taken on August 1^st, could well impose severe Corporate Governance requirements on US companies authorized to negotiate securities on the stock market floor.  Unlike Brazil, where a government autarchy is involved, for the US market, the requirement to apply improved Corporate Governance practices, a predictable response to the many recent corporate scandals, will include new requisites by the principal US stock market for company registrations.  Given the severity and scope of these new measures, it is worth quoting some of the regulations binding upon listed companies: “a majority of independent members of the board of directors; a stricter definition of a board member’s independence; regular meetings of non-executive directors; appointment of a non-executive director to conduct these meetings; approval by the investors of all share based remuneration plans; and the prohibition of broker voting on these plans, unless so authorized by their clients.” Although foreign companies that negotiate ADR’s on the NYSE will not be obliged to comply with the new rules, they are likely to be required to disclose their level of compliance with the Corporate Governance practice recommendations issued by the NYSE. Now, the decision of the NYSE Board of directors is awaited, although this global trend to improved Corporate Governance practices would seem to be irreversible.

IBGC (Brazilian Institute of Corporate Governance)

In addition to being a major Corporate Governance practice, the presence of independent board members increasingly contributes to improving the efficiency of any board of directors.  However, the scarcity of choice of candidates available to companies, whereby they can make their selection from a large number of potential directors to meet each company’s needs, has been a significant problem in this search for the right professional.  The IBGC is aware of the problem and has sought to fulfill its chief objective, to collaborate in upgrading the standards of Corporate Governance in Brazilian companies, aimed at their success and continuity.  Thus, through its Communication Committee under the coordination of Aline de Menezes Santos, the IBGC has launched a Board Member Database.  The Database is now accepting data on potential independent director candidates, only from IBGC members, in this site: http://ibgc.nexxia.com.br/cadastro/.   The Database will be available for consultation by the general public within thirty (30) days, and may be consulted by companies and other parties interested in seeking professionals for these positions, via a specific content area in the IBGC website, www.ibgc.org.br.

Increase in the search for external board members

A natural consequence of the application of good Corporate Governance practices in Brazil is the growing demand for external board members.  This is the case in both listed companies and in family firms.  In a recent article published in the business newspaper Gazeta Mercantil (full text available in the LCV website Technical Material section - www.lcvco.com.br), in which reporter Tânia Nogueira Alvares discusses the matter in detail, she also shows the results of interviews with eminent external board members, among them, deacon of directors, Roberto Teixeira da Costa. As announced above, in order to bring together companies seeking external directors and potential candidates for these positions, within thirty (30) days, the IBGC will include in its site, a database of professional résumés of professional directors provided voluntarily by these IBGC members. Explains IBGC executive director, Heloísa Bedicks, “Although these are not specific IBGC endorsements, we are making available the names of our members active in the board member market and who are available. This is an institutional task”. The article also identifies a growing trend in pension funds, despite there being no legal requirement thereto, to appoint independent board members, in response to the demand of pension fund members and the market in general. 

Robert Monks is encouraged by the present Corporate Governance trend in the US.

Bob Monks is considered by many to be the most important figure in the global Corporate Governance movement. Bruno Rocha, director of Dynamo Administração de Recursos, recently wrote an article that was published in a special edition of the RI – Relações com Investidores Magazine, for the Fourth National Meeting of Investor and Capital Market Relations.  This article was almost entirely dedicated to Corporate Governance.  Monks, of an upper middle class American family, with a solid intellectual and cultural background, became a successful executive and entrepreneur. At a certain stage of his career, he identified a huge distortion in US corporate life, whereby the future of most businesses was not decided by their owners, but by executive management.  Accordingly, he proceeded to battle for improved Corporate Governance practices in the US.  And, indeed, he succeeded: Recently, Monks wrote a letter to his friends, available in the LCV website Technical Material section (www.lcvco.com.br), proclaiming his satisfaction with the current state of Corporate Governance in the USA, during a period he calls “a productive time for Corporate Governance”.  Among other events, he mentions the firm management position of a group of Exxon Mobil shareholders, on a very relevant and critical topic – global warming, and the emphasis that major communication channels of the US business world give to the topic of Corporate Governance.  The Monks biography, now translated into Portuguese and published in a joint Editora Campus and Dynamo Administradora de Recursos edition, entitled, “A Traitor to his Class”, should be compulsory reading for anyone involved or interested in Corporate Governance.

Conflict of interest can carry a high price

It is a known fact that one of the recent topics that has most caught the attention of Corporate Governance, is Conflict of Interest.  Not only because it always harms the company, its shareholders, and other related parties, but also because it tends to be present in a subtle manner that is hard to detect and penalize. As defined by the IBGC, “A conflict of interests situation exists when someone is not independent in relation to the matter in question...”. Under the principles of Corporate Governance, a company’s investments analyst holds a prominent position, based on his/her knowledge of the share market, the company’s market, and the prestige in which he/she is held by thousands of market investors in their share purchase decisions. Recently, the US share market has been rocked by scandals involving traditional and distinguished brokerage houses, whose investment analysts had prepared reports commending and advising the purchase of shares of companies in which they did not believe. These spurious reports arose from the analysts’ interests in obtaining further business with investment banks.  This crusade in defense of the investors was started by New York State Attorney-General, Eliot Spitzer, who focused his investigation on Merrill Lynch, the world’s largest brokerage house.  The outcome of this scrutiny was that, despite claiming it had “done nothing wrong”, Merrill Lynch agreed to pay a US$100 million fine, allied to the possibility of potential losses arising from legal actions that could be taken by any investors alleging losses incurred.  The Attorney-General stated that conflict of interest indictments will be made against other Wall Street brokerage houses, but would reveal no names.

FBN - The Family Business Network

A highly respected Swiss based organization, dedicated exclusively to family firm matters, the FBN remains active in Brazil and throughout the world. This May in São Paulo, the Brazil Chapter, with Aliane Garcia Melgaço as its CEO and Antônio Carlos Vidigal, as its Executive Director, the Chairman of the World FBN, Alden Lank (a leading specialist in family firms worldwide) held its second Annual Brazil FBN Meeting, entitled “The Family and the Company: Lessons in Longevity”.  Speakers also included the representatives of the “Longevity of Sadia”, Carla Fontana, Diva Furlan, and Romano Fontana.  The FBN’s 13^th Annual World Conference will be held on September 11 and 12, 2002, in Helsinki, Finland, where its core topic will be “The Future of the Family Firm – Values and Social Responsibilities”.  Website for detailed information and registration: www.fbnhelsinki2002.com.

The growing interest of eminent global teaching institutions in Corporate Governance.

In May, the International Board of Europe’s INSEAD, of global renown in the teaching world, held its annual meeting in Singapore.  The topic of the meeting was “Local Associates – Global

Systems: Management’s New Challenge”.  The day after the opening ceremonies, three panels were held simultaneously, one of which was exclusively dedicated to Corporate Governance.  This panel was coordinated by Amphi Mork, and the debaters were Strategy Professor, Mary O’Sullivan, Business Administration Lecturer, Professor Gordon Redding, Chairman of Solvay, Baron Daniel, Heidrick & Struggles partner, Florian  Schilling, and Professor of International Business Administration, Hellmut Schütte. The Chairman of the INSEAD-Brazil board, A. Roberto Muller, represented Brazil.

Best Corporate Governance Practices

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

The Board of Directors  (cont.)

LCV NEWS - March-April/2002

LCV NEWS - January-February/2002

LCV NEWS - November-December/2001

LCV NEWS - September-October/2001

LCV NEWS - July-August/2001

LCV NEWS - May-June/2001

LCV NEWS - March-April/2001

LCV NEWS - January-February/2001

LCV NEWS - November-December/2000

LCV NEWS - September-October/2000

LCV NEWS - July-August/2000
LCV NEWS - May-June/2000
LCV NEWS - March-April/2000
LCV NEWS - January-February/2000
LCV NEWS - November-December/1999
LCV NEWS - October/1999
LCV NEWS - September/1999
LCV NEWS - August/1999
LCV NEWS - July/1999
LCV NEWS - June/1999
LCV NEWS - May/1999