NEWS ABOUT CORPORATE GOVERNANCE - November-December/2002

Year IV – No. 25

Corporate Governance News

Editor: Luciano Carvalho Ventura

 Editorial

The importance of Corporate Governance for the Family Firm.

- Family firms and Corporate Governance have existed for a long time, although the modern approach to these two concepts is relatively recent. History shows us that they date back to prehistoric times. In his involvement with an economic activity jointly with family members, such as a hunting expedition, planting to feed the family, or breeding domestic animals, prehistoric man was actually forming a family firm.  Similarly, although this organization bore no resemblance to today’s legally established family firms, it was likely to involve similar dynamics and problems.  In the same context, since it deals with relationships between partners, Corporate Governance was also present in these economic activities.  Furthermore, if we recall that the Family Firm Institute, the world’s oldest organization dedicated exclusively to family firm studies is nearly twenty (20) years old, and that the expression Corporate Governance was used for the first time in the USA, a mere fifteen (15) years ago, we see that the modern approach to such age-old topics is indeed very recent.

- There is no generally accepted definition for the family firm; companies whose principal values coincide with those of a family and where the share control is held by one ore more families, are usually considered to be family firms. The presence of partners or heirs as company executives or board members, and the involvement of more than one generation, thereby stating the company’s intent to continue in this fashion, are also essential requisites of a family firm.  As a general rule, family firms develop from the success of a single entrepreneur, whose strongest personal qualities are, among others, the capacity for risk-taking, dedication, persistence, and independence, all to a above average degree.  But, only rarely are these above average attributes automatically consolidated into the organizations thus created since few family firms outlive their founders.  In fact, statistics point to the fact that the majority of these companies are short-lived, since only thirty percent (30%) continue into the second generation and a mere ten percent (10%) survive into the third generation, a sure indication that the succession procedure is one of the major risks faced by family firms.  In turn, Corporate Governance, even given its many definitions, is generally understood to be the system that governs relationships between partners, all relationships between partners and their companies, and the manner in which the partners manage such companies.  The main contributions of Corporate Governance to a company are transparency, fairness, and accountability for company results for all partners.

- In the past, few Brazilian family firms practiced good Corporate Governance or even had boards of directors as a management tool.  In the rare cases where a board of directors existed, it was completely inoperative.  Today, this scenario is changing.  Many family firms now apply Corporate Governance practices and the larger firms have become increasingly reliant on active boards of directors where some members are totally independent of the company.  Examples in Brazil are Banco Itaú, Sadia, WEG, the Pão de Açúcar Group, the Gerdau Group, Sulamérica de Seguros, the Tavares de Melo Group, Santher, the Maeda Group, the Caramuru Group, the José Alves Group, and Y. Takaoka.  The last-named was the first Brazilian family firm to draw up its own Corporate Governance Practices Code.  And why the increased interest of more and more Brazilian family firms in applying Corporate Governance practices?  The answer lies in the capacity of good Corporate Governance Practices to add value to this type of organization, by increasing the wealth of shareholders and partners, and by circumventing or, at least aiding in administering, typical family firm conflicts. When major or longstanding conflicts arise, the trend is for family firms to take one or more of the following steps: a) do nothing, probably the worst option; b) split up, a slightly better choice although reduced size tends to increase the vulnerability of the succeeding companies; c) sell the business, a choice made by many families with little evidence that this is the best option, often due to the need to negotiate the sale of the company at a significantly depreciated rate; d) remove the family from company operations, thereby incurring the risk of suddenly bringing in professionals who know little of the culture and the business itself, circumstances that usually occur in a context of minimal internal controls and mainly based on the confidence factor. All of this can be avoided, or administered via a good Corporate Governance system that should be implemented or improved on a timely basis.  This is particularly important for family firms where the potential for corporate conflict is high, since their partner relationships include a significant emotion factor.  Furthermore, this environment involves two bodies with totally different objectives: the company seeks added value for its partners and family strives to protect its own members.  In this context, modern Corporate Governance Practices must be implemented at times of harmony and not during a power struggle.  This new approach must also consider the time required for these practices to take effect, and must have the support of all company associates.

- On analyzing the principal values of Corporate Governance in relation to family firm dynamics, we note that it is the very absence of these values that creates the potential for so much conflict and at times, places the survival of family firms in Brazil and anywhere else in the world, at such risk.  In fact, lack of transparency with family members uninvolved in the management of the firm, is often the catalyst.  Sometimes, the inequitable treatment of family members with equal rights, or the lack of accountability for results by those holding management positions to those who do not, can also cause so many family firm conflicts, to the point of jeopardizing the continuity of the business.

Among the many benefits accruing to family firms implementing Corporate Governance Practices, is reduced succession risks and improved management, thanks to the installation of a board of directors that includes some qualified independent members.

- Another benefit arises from giving the principal shareholders or partners, opportunities to become active in company management, without being involved in its operations.

- Good Corporate Governance Practices can upgrade a family business’s image, where certain areas of the market do not regard the company very favorably.  Good Corporate Governance improves a company’s image in this context, regardless of whether these market sectors are customers, suppliers, the government, or banks.  Furthermore, many Brazilian family firms are now merging, some under pressure of accelerated globalization and others, in search of synergy for their business to enable them to deal with rapidly increasing competition. Others seek associations due to family conflict or even to lack of competence or interest on the part of their shareholders and partners that lead to the sale of the company.  In many such circumstances, good Corporate Governance Practices have increased the attraction of such companies seeking associations or even outright sale.

- Lastly, good Corporate Governance has shown itself to be a highly useful, possibly essential, tool for the complex mission of transfer of power in family firms over generations, the dream of their founders.

IBGC – The Brazilian Institute of Corporate Governance

- The IBGC is more active than ever.  After starting 2002 with 247 members, an impressive figure for an organization founded only seven (7) years ago, in December 2002, the IBGC boasted no less than 356 members. But the activities of the IBGC have been chiefly directed at events for its members and others interested in Corporate Governance in general.

- In addition to its routine events, such as presentations and courses, from December 10 through 12, 2002, the IBGC held its Third Brazilian Corporate Governance Congress in the city of São Paulo.  This was attended by a record public of 280 individuals, a higher number of attendees than those its corresponding association in the US, the NACD – the National Association of Corporate Directors, an older organization with a higher membership, succeeds in attracting to its national congresses.  Among the many eminent foreign and Brazilian speakers were Alastair Goolbey, Chairman of the Hermes Focus Fund,  Mike Lubrano, Head of the IFC Corporate Governance Department, Florêncio Lopes-de-Silanes, Director of Corporate Governance at Yale University, Luiz Cantidiano, CEO of the CVM (Brazilian Securities Commission), Eduardo Guimarães, Banco do Brasil CEO, and Eliane Lustosa, Financial Director of Petros.

- On November 28, under the general coordination of Paulo Conte Vasconcellos, the Research Committee held the II IBGC Debate, attended by 66 individuals, giving them the opportunity to discuss the controversial topic of “The Role of the Audit Board”. On this occasion the debates were opened by João Laudo de Camargo, a partner of the firm of attorneys, Bocater, Camargo, Costa e Silva Advogados Associados, and by  José Roberto Mendes da Silva, Vice-President of Bardella S/A. Camargo discussed the legal aspects of the Audit Board, a unique shareholder management tool, required by Brazilian corporate legislation.  In turn, Mendes da Silva presented what, to many, is a successful case, that of the Bardella Audit Board. As a continuation of its long-term planning, on December 12, under the general coordination of internationally known Organizational Architecture Consultant, Victor Pinedo, the IBGC invited all its members to discuss the strategic planning  currently under preparation.  This was well attended by members who had the opportunity to contribute to the formulation of the Purpose, Values, Mission, and Action Plans.  And to appropriately close off the year, on this same date, the IBGC held an Extraordinary General Meeting to revise its by-laws.  The purpose of this reformulation, among others, was to increase the flexibility of its election procedures, thereby simplifying the voting and candidature of any member to the IBGC Board of Directors.

Another good Corporate Governance example given by Petros.

- The Petros Pension Fund, one of the largest in Brazil, gave the market yet another good example of Corporate Governance.  Under the leadership of its Financial Director, Eliane Lustosa, a workshop given on December 5 in the city of Rio de Janeiro, entitled “Corporate Governance and Pension Fund Investments” and the distribution, at this same event, of an Investment Governance Manual, crowned yet another year of good Corporate Governance promotion and activism of this fund as an institutional shareholder. Over seventy (70) people involved with this topic attended the Workshop.  The manual highlights the role and responsibilities of members of boards of directors and audit boards recommended by Petros to the boards of companies in which it holds a substantial investment. Affirmed Eliane Lustosa, “In its capacity as an institutional investor committed to its trusteeship in the management of its members’ assets, Petros constantly seeks mechanisms that encourage good Corporate Governance practices in its investee companies, such as, recommendation of independent and appropriately qualified Board members, transparency in management and rendering of accounts by management of such companies”. This investments governance manual is divided into seven chapters and, according to Lustosa, “contains data applicable to carrying out the work and a description of the critical points relating to the qualification of the following professionals: Members of Boards of Directors and Audit Boards, Investment Analysts, Representatives at Condominium Meetings, Investment Fund Representatives, and Investment Planning Consulting Analysts.  The manual will shortly be available on the Petros website (www.petros.com.br).

The Family Business Network - FBN

- A distinguished organization, the FBN membership is comprised of members of families owning their own businesses, and is dedicated exclusively to topics relating to family firms.  Headquartered in Lausanne, Switzerland, it was founded in 1990 and today boasts 2,039 members from 60 different countries.  The majority, eighty-four percent (84%), are members of family businesses, and the remainder are consultants, professors, and service providers, such as bankers, auditors, attorneys, among others.

From September 11 through 14, the FBN held its 13^th Annual World Conference in Helsinki, Finland, with an attendance of 500 members from 24 countries, among them 15 Brazilians.  The Brazilian Chapter of the FBN was officially represented by its Executive Director, Antônio Carlos Vidigal. 

The chief topic of the conference was “Corporate Accountability”, which, by its very nature included the topic of Corporate Governance and its mechanisms for combating financial and accounting scandals, such as those that occurred in the US this year.  There appears to have been a consensus that, since it is a fact that family firms also run such risks, Corporate Governance can aid significantly in their administration.  Fifty-seven (57) works were presented during the conference, and are available in full on the FBN website (www.fbn-i.org). Nest year’s conference, the FBN’s fourteenth, will be held in Lausanne, Switzerland, back at its headquarters, after thirteen annual conferences held in several different European countries.

A study reveals that Spanish companies are dragging their heels in corporate governance.

- According to the CNVM - Comisión Nacional de Valores Mobiliarios (Spain’s equivalent to the US SEC and Brazil’s CVM), despite Spain’s spectacular economic growth over recent years and the growing globalization of the Madrid Stock Exchange, Spanish companies have made little headway in complying with good Corporate Governance standards.  This is a conclusion reached after an annual study carried out by the CNVM, published in the Expansión newspaper.  Only twenty-nine percent (29%) of the country’s listed companies cooperated in this study, whose main objective was verification of Corporate Governance Practice implementation as required under the CNVM code. Although it is true that compliance with this code is not compulsory, this study disclosed the degree to which listed Spanish companies must improve their Corporate Governance standards.  This mainly applies to the transparency of their Corporate Governance practices in relation to the market, to the significant aspect of excess power concentrated in the hands of the CEO, and the limited role of the independent members of boards of directors.  To be fair, there have been improvements since 1997, the year in which this study was first made.  Among these improvements are better communication with the market, a greater number of unqualified audit opinions, and better performance by boards of directors.  If Spain continues its process of sustained economic growth, it will require considerably more capital for which domestic saving will be insufficient.  In this event, Spanish business must upgrade its Corporate Governance practices if it wishes to successfully attract major international institutional investors that increasingly require compliance with this particular standard.

Even in Japan, Boards of Directors show their muscle.

- All over the world, boards of directors are increasingly displaying their power, particularly in their relationship with the CEO and other senior executives.  Nowadays, it is common for the traditional independence of the CEO to be placed in check by the board of directors, which almost always emerges as the winner in such disputes. Parallel to this movement, another board member has grown in importance, despite the collegiate nature of a board of directors.  This is the Chairman.  However, not even these powerful individuals are immune from majority board decisions. This example comes from Japan, a country not renowned for its excellent Corporate Governance practices. Tadahiro Sekimoto, the NEC CEO during the eighties, who transformed the company into Japan’s largest computer manufacturer, prior to being elected Chairman of the Board of Directors in 1994, was summarily dismissed by his fellow directors, due to their dissatisfaction with his leadership, his relationship with management, and with his public criticisms resulting in losses, despite not being the company’s official spokesman.

CVM (Brazilian Securities Commission)

- Extract from “CVM Recommendations on Corporate Governance”: 

“.II. STRUCTURE AND RESPONSIBLITIES OF THE BOARD OF DIRECTORS

“Role, Composition, and Term of Office of the Board of Directors.

“II.1      It shall be the duty of the board of directors to protect the assets of the company, to strive to attain its business goals, and to guide management to maximize returns on investments, thereby adding value to the organization.  The board of directors shall be comprised of between five and nine technically qualified members, at least two of whom shall have financial experience and the responsibility to monitor in detail the accounting practices implemented by the company.  The board shall have the highest possible number of members who are independent of company management.  For companies under shared control, a board of directors with more than nine members is justifiable. The term of office of all members shall be uniformly for a period of one year, and reelection shall be permitted.

“The recommendation regarding the number of members of a board of directors shall take into account that the board must be large enough to ensure full representation, but not so large as to undermine efficiency.  Uniform terms of office facilitate representation of minority shareholders on the board of directors.”

Best Corporate Governance Practices

- Extract from the Brazilian Best Corporate Governance Practices Code.

“The Board of directors (cont.).

Happy New Year.

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