NEWS ABOUT CORPORATE GOVERNANCE - September-October/2002

Year IV – No. 24

Corporate Governance News

Editor: Luciano Carvalho Ventura

 Editorial

What corporate governance in Brazil can expect in the new Luiz Inácio Lula da Silva Government.

Luiz Inácio Lula da Silva was born into poverty in the rural outskirts of the State of Pernambuco, one of the youngest of eight children, to a family of farmers.  While he was still a child, the family moved to the state of São Paulo.  On October 27, 2002, his 57^th birthday, on his fourth attempt at running for the highest office in the land, Lula, a former metallurgical worker, union leader, the founder of the PT – Partido Trabalhista (Brazilian Labor Party), Federal Congressman, was elected President of Brazil.  He won with 52 million votes, close to 20 million ahead of the government candidate, José Serra, who obtained little more than 33 million votes.  This was the highest vote for any single candidate in the history of the world’s fourth largest democracy, and the second highest vote at world level after Ronald Reagan.  Lula has reached the Planalto Palace (the seat of government) with the support of over 61% of Brazilian voters, through a democratic election, with an entirely unprecedented transfer of power, and a huge eagerness for change on the part of the Brazilian population, an example for the rest of the world.  This historic victory of the first Brazilian president of humble origin, allied to his choice of vice president, a highly successful business entrepreneur, José Alencar, arose from his personal prestige and not from the reputation of his party, the PT which has been defeated on so many occasions. Lula’s supporters voted for candidates of other parties for the positions of State Governors, Senators, and Federal Congressman.  The election message was loud and clear: unlike his party, the new President has a clear mandate. As from the day he takes office, Lula, who delivered such a circumspect first address to the nation where he promised no miracles, will face enormous challenges.  On the economic front, he will have to reassure the domestic and international markets and shore up the vulnerable image of the Brazilian economy.  Politically, he will have to diminish the expectations of the more radical and minority factions that are the backbone of the PT, a leftwing party, and simultaneously negotiate the support of the other political parties in Congress to be able to successfully govern the country.  The political alliance that carried Lula through to success in the second round of voting and the expansion of this alliance, by the inclusion of a number of ideologies, allied to negotiations with a number of new parties, will transform what was intended to be a leftwing majority into a centristl-left government, for the next four years. And what will be the impact of this historic change in Brazilian politics on corporate governance?  In our opinion, the impact of this change will be positive for Corporate Governance in Brazilian companies.  In the first place, like their peers, several PT economists see Corporate Governance as a mechanism of protection for minority shareholders and not as one of protection for all shareholders.  It is entirely possible that since this distorted interpretation of Corporate Governance is aligned with the master rules of the PT, in the context of bringing the benefits introduced by the Brazilian economy, one of the ten largest in the world, to the minorities and other excluded areas, will induce Lula’s Government to reinforce good Corporate Governance practices.  However, the PT economists are also aware that the even distribution of wealth and, consequently, of income, is only possible with more democratic capital in a strong and widely distributed capital market.  And markets such as this only flourish in a good Corporate Governance environment.  Furthermore, in his first address to the nation, the president-elect reiterated his government’s commitment to the capital market in stating that “the construction of these new prospects for sustained growth and the creation of jobs, will require credit to be more widely available and cheaper, in addition to motivating the capital market...”.  In practical terms, several actions to strengthen the capital market were announced during the campaign and are part of a Capital Market Steering Plan drawn up by PT technicians and supported by 24 capital market bodies.  We highlight the following among these: a) Tax Reform which will consider the capital market  as an integral part of the productive chain and will bring current practices into line with the best global practices; b) Allocation of a percentage of FGTS and FAT funds to the share market, via appropriation of the savings available in these two funds created to benefit the worker, to foster the growth of the share market; c) an interest policy aimed at share market growth and competitiveness, and, lastly, d) enhanced investor protection through increased transparency of information, compliance with contractual relationships, protection of minority shareholders, and more pertinent legislation. Further to this last item, São Paulo’s PT Federal Congressman, Ricardo Berzoini, a member of Lula’s presidential campaign coordination committee, has publicly supported changes to Brazilian Corporation Law, such as increased rigor in corporate audits, extinction of non-voting shares and of 100% tag along value for all shares in cases of transfer of control instead of the present 80%, applicable only to common shares, under current legislation.  Additionally, any incentive for the growth of pension funds, also a program of the new government is likely to favor good Corporate Governance practices in Brazilian companies, since these powerful institutional investors apply increasing pressure for improved Corporate Governance practices in all capital markets.  The promised pension fund incentives will include, among other changes, more flexible regulation of capital market fund allocation processes, alignment of pension fund taxation systems with best international practices and tax exemption during the savings accumulation stages.  The new government is also expected to foster the creation of new pension funds, both those sponsored by private companies and professional associations and those created for municipal, state, and federal civil servants.

Thus, under Lula, Corporate Governance should flourish over the next four years in Brazil.  The final question is in relation to the degree of economic and political flexibility the new government will have and to the time required to implement the promised measures.

IBGC (Brazilian Institute of Corporate Governance)

- The IBGC’s organizational structure is comprised of its members, the board of directors, the executive board, permanent committees, and secretariat.

- This newsletter gives details of the Research Committee, a body which has become increasingly dynamic since Paulo Conte Vasconcellos was appointed as its general coordinator.  The Research Committee is aided by three sub-committees all of them involved in Corporate Governance research and related studies.  These are the Academic Studies Sub-Committee, headed by Douglas Cláudio Mônaco, the Capital Market Sub-Committee coordinated by André Barake, and lastly, the Corporate Law Sub-Committee, headed by Paulo F. Campos Salles de Toledo. In addition to the many projected or ongoing research projects, the Research Committee has launched a series of events exclusive to IBGC members, in the form of debates on current topics relating to Corporate Governance.  The First IBGC Debate Forum took place on September 24 and was attended by over 45 members. The highly relevant topic was the “Sarbanes-Oxley Law”.  Among the speakers were Ronaldo Veirano and Ivan Clark. The topic of the Second II IBGC Debate Forum to be held on November 28, will be “The Role of the Audit Board”, appointed by the shareholders.

- Further IBGC news is that the Third National Corporate Governance Congress will take place at the Blue Tree Convention Plaza, Av. Ibirapuera 2907, São Paulo, SP, on November 10 and 11.  As in prior years, distinguished Brazilian and foreign speakers will be present.  Further information and registrations at tel. (11) 3043 6000 or through e-mail address  ibgc@ibgc.org.br.

ABRAPP (Brazilian Association of Pension Funds)

From October 28 through 31, this association governing over 350 pension funds in Brazil, that jointly represent total assets of R$ 170 billion, held its 23^rd Annual Congress in São Paulo, with an attendance in excess of 2,000.  The Congress was opened by the Minister of Social Security and Welfare, José Cechin and by ABRAPP CEO, Fernando Pimentel and was attended by a number of other authorities.  The main topic of the congress was “Government Policy and the Growth of Pension Funds”.  For the first time the official program included a panel debating “Pension Fund Governance”, for which the speaker was Juan Yermo, Doctor of Economics and Executive Director of OECD (Organization for Economic Cooperation and Development - www.oecd.org). The OECD promoted an in-depth study of worldwide pension fund governance and recently published a document entitled “Recommendations for Pension Fund Governance”.  In Brazil, the pension fund governance topic was raised by Brazilian Central Bank CEO, Armínio Fraga, during the 21^st Congress held in Salvador, State of Bahia, in November 2000 and who will discuss this matter again in this year’s congress.  During last year’s congress in Vitória, State of Espírito Santo, Luciano Carvalho Ventura presented a work on this topic, entitled “Corporate Governance and its application to Pension Fund Management”.  The full text of this presentation is available in the Technical Material section of the LCV website (www.lcvco.com.br). Later, Eliane Lustosa, director of the Petros Pension Fund surprised an audience of 400 associates from 20 countries, at the Eighth Annual ICGN (International Corporate Governance Network) Conference, held in July in Milan, Italy, by her pioneer approach to the pension fund governance topic. The ICGN comprises the world’s largest institutional investors, mainly pension funds, that together manage over US$ 10 trillion.  It is general knowledge that pension funds, particularly in North America and the UK have applied steady and increasing pressure for improved Corporate Governance practices on companies in which they are shareholders.  Nevertheless, little has been said about the governance of these funds themselves, many of them with a net worth in excess of that of many large companies.  During her presentation, not only did Lustosa raise questions such as “How should pension funds be governed? Should they be as transparent and as responsible as they expect their investee companies to be?”, but also explained the current Petros Governance System. ABRAPP introduced the exemplary move of including a pension fund governance pension in its congress this year. Thanks to this initiative, it is possible that, at last, this topic will gain its deserved prominence within the Brazilian pension fund community.

The similarities between Germany’s Neuer Markt  and Brazil’s Novo Mercado (New Market).

- After five years of operations, the Deutsche Börse, responsible for operating the Frankfurt Stock Exchange took the unprecedented decision to close down the Neuer Markt due to the insolvency of many of its listed companies and the numerous legal cases brought by investors, that undermined confidence in this market.  At its peak, in March 2000,  the value of listed Neuer Markt companies totaled E 440 billion, dropping ninety-five percent (95%) from that date to the present.

- While the similarities between this market and Brazil’s Novo Mercado are restricted to the Corporate Governance practices required of their listed companies, the main difference between these two markets lies in the type of companies that daily register with the German Stock Market New Market and the type of organization that daily registers with the Bovespa Novo Mercado.   Whereas in Germany all companies trading their shares belonged to the new economy, in Brazil all twenty-four (24) companies listed are part of the good old economy.

The important “Liberty Fund” also promotes Corporate Governance.

- The Liberty Fund is another non-government organization to promote debates on Corporate Governance, in addition to others that are exclusively dedicated to the topic such as England’s Institute of Directors, the USA’s National Association of Corporate Directors, , and Brazil’s Institute of Corporate Governance.

Founded in 1960 in Indianapolis, USA, by attorney and entrepreneur, Pierre F. Goodrich (1894–973), the Liberty Fund is a private educational fund dedicated to studying the concept of a society of free and responsible individuals. The foundation develops, supervises, and finances its own educational activities, all of them involving the topic of freedom. Among its many programs, the following merit highlighting:  a) promotion of over 185 annual conventions in the USA, Canada, Latin America, Europe, and Australia; b)  publication of over twenty (20) books per year, classical titles generally, and c) the availability of an Internet page (www.libertyfund.org) giving free access to the catalogue of its publications and to the Library of Economics and Freedom, dedicated to advanced studies along these lines and an interactive tour to the “Goodrich Seminar Room,  Wabash College”.

- The Liberty Funds began activities in Brazil in 1983, with the creation of the First Liberal Institute in Rio de Janeiro, followed by Liberal Institutes in Rio Grande do Sul, São Paulo, Paraná, Minas Gerais, Pernambuco, and Brasília, all of them dedicated to spreading the benefits of liberalism.

- The Liberal Institute, RS (www.il-rs.com.br), currently headed by attorney Ricardo Borges Ranzolin, among whose vice-presidents are entrepreneurs, André Loiferman, William Ling, and Wilson Ling, selected the topic “Freedom, Responsibility, and Corporate Governance” for its “XI Liberty Fund Colloquium in Rio Grande do Sul”, from September 5 through 8.  Under the coordination of the Liberty Fund executive vice-president, Emílio Pacheco and Liberty Fund representative, Alejandra Salinas, fifteen (15) Mercosul professional and academic entrepreneurs debated Corporate Governance in a context of freedom and social responsibility.  Among the highlights were: Shareholders vs. Interested Parties and the social responsibility of companies; Corporate Governance and globalization; and non-profit organization government.  Brazil was represented by Carlos Rebello, Carlos Biedermann, Carlos Souto, Cândido Prunes, Jairo Gudis, Jairo Procianoy, João Juenemann, Leônidas Zelmanovitz, Luciano Ventura, Og Leme, and Raul Rosenthal. Argentina was represented by Eduardo Marty, Enrique Duhau, and Gustavo Lazzari.  Among the many conclusions reached, one merits highlighting: Corporate Governance has a close cause and effect link with freedom, democracy, and modern capitalism.

Major steps forward in Brazilian Corporate Governance.

Despite the enormous space for improvement in Corporate Governance in Brazilian companies, important Corporate Governance advances have occurred.  Among them, we highlight those relating to Brazil’s current legal structure that will undoubtedly contribute to improving the Corporate Governance environment.  These are the new Brazilian Corporation Law, the creation of the São Paulo Stock Exchange New Market, and pension fund investment regulation. Despite major changes from the original proposal, the country’s new Corporation Law that came into force on March 1, 2002, introduced the possibility of reform and included some important steps relating to the rights of minority shareholders.  In turn, the Novo Mercado, which requires the application of some good Corporate Governance practices (among them tag-along clauses and voting rights for all shares) has, to date, attracted twenty-four (24) companies and continues to arouse the interest of many other Brazilian open capital companies. In the context of pension funds, which are powerful Brazilian capital market institutional investors, the new regulations governing their investments now require increased transparency, and bring with them incentives and plans for defined contributions and, more importantly, investments in papers traded in the Novo Mercado. These achievements are well covered and discussed by Ricardo Weiss in his most recent article, “Advances in Brazilian Corporate Governance “ published in the September edition of the “Institutional Investors“ magazine. The full text of this article is available in the Technical Material section of the LCV website (www.lcvco.com.br).

The demand for and availability of Corporate Governance rating services is increasing.

- In its newsletter of October 18, Global Proxy Watch published an interesting article on world growth of Corporate Governance rating companies, describing their principals and respective areas of activities.  The article also announced the launch of GovernanceMetrics International - GMI, that, besides Standard & Poor (S&P), is the only worldwide company active in this field. LCV is mentioned as a company that evaluates the Boards of Directors and Corporate Governance practices of Brazilian companies. 

 The aim of GMI is to rate companies via a unique grading method of their Corporate Governance systems.  It will classify companies listed in stock markets, based on the degree to which Corporate Governance is practiced.  It has an offer of an enormous amount of capital resources, guaranteed by two major institutional investors in the market, one a European and the other a US organization. Its rating methods cover over 600 points and have been internationally tested over the last two years. 

- The GMI rating system will be launched next month with 500 US S&P companies and the organization intends, by the end of next year, to grade more than 2,000 blue chip companies in a variety of markets.

- The demand for its services is evidenced by institutional investors with assets in excess of US$2 trillion, that have already applied for the right to access its website, where all rating grades given will be available to subscribers.

- GMI was founded by Gavin Anderson, Gary Kraut,  Jon Lukomnik, Howard Sherman, and Stephen Davis, all of them with in-depth experience in the capital market and in Corporate Governance.  The CEO is G. Anderson and H. Sherman is Director of Operations. The full text of this article is available in the Technical Material section of the LCV website (www.lcvco.com.br).

CVM - (Brazilian Securities Commission) - Brazil

- Taken from CVM Recommendation on Corporate Governance.

I.            TRANSPARENCY OF OWNERSHIP AND CONTROL, SHAREHOLDER MEETINGS

Shareholder Agreements

I.3        The company should make available to all shareholders any shareholders agreements of which it is aware, including those to which the company is a party.

This recommendation aims to emphasize that knowledge of shareholder agreements, as well as company’s by-laws, is essential for shareholders to evaluate their rights and the workings of the company.

Shareholder Lists

I.4        The company should adopt and release standard procedures that enable shareholders easily to obtain the list of shareholders. The quantity of shares held should be specified in the list. In the case of request by shareholders with at least 0.5% of share capital, a contact address should also be provided.

Legal mechanisms already exist whereby the shareholders may obtain shareholder lists and their number of shares, but experience has shown that many shareholders face practical difficulties in obtaining such lists. The standardization of procedures aims to simplify access to such information. In addition, in order to facilitate its use, the list should also be made available through widely adopted electronic means.

Easy access to the lists is important because the law establishes minimal percentages of the capital to put into effect some relevant corporate actions (establishment of a fiscal board, calling for shareholder meetings, rendering of information and others), and access to the lists facilitates shareholder organization.

Contact addresses for correspondence may be electronic addresses. Shareholders who request and are willing to bear the costs can ask the depositary agent to send correspondence to all shareholders in their name.

Voting Process

I.5            Company by-laws should clearly regulate requirements for shareholders’ voting and representation at meetings, in order to facilitate participation and voting.

At the shareholder’s meeting, the company should adopt the principle of good faith when supervising a shareholder’s documentation and assume them to be truthful. No formal irregularity, such as presentation of copies, or the lack of notarized signatures or validated copies, for example, should be reasons to impede voting.

Best Corporate Governance Practices

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

The Board of Directors  (cont.)

2.11. Term of office

The Board Member’s term of office should be clearly established.  It should be short, preferably just one year long.  Reelection should be possible after a formal evaluation of performance.  Reelection should not be automatic.  All the Board Members should be elected at the same time.  

2.12. Age limit

Some people are unproductive even before 60 years of age.  Others are very productive at 75.  If the term is short and the evaluation method  is efficient, no age limit is necessary.

2.13. Change in the Director's main occupation

A Director’s main occupation is an important factor in choosing him/her.  When his/her main occupation changes, the Board Member should tender his/her resignation.  The nominating committee should analyze the convenience of proposing his/her reelection.

2.14. Remuneration

The fees of the independent and external Directors should reflect the time each is expected to devote to the company. The level of fees, on an hourly basis, should be compatible with the remuneration of the CEO including his bonus and fringe benefits.

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