NEWS ABOUT CORPORATE GOVERNANCE - January-February/2003

Year IV – No. 26

Corporate Governance News

Editor: Luciano Carvalho Ventura

 Editorial

The indifference of many Brazilian company shareholders.

- Corporations in most countries have their own corporate identity enabling them to obtain financial resources, often in very high figures, essential for the growing scale of today’s corporate activities.  As a general rule, these are companies owned by investors that, unlike companies owned by individuals, are comprised of shareholders that do not necessarily know one another.  In the context of their capital investment, these can be majority or minority shareholders or group of shareholders, and both categories are the “owners” of the respective organizations.

- An interesting fact is that, in Brazil, regardless of their common role as owners of their companies, their roles and involvement therein differ significantly. Irrefutable proof of this statement lies in the fact that few minority shareholders, regardless of whether they own common or preferred shares, are present at general assemblies, supposedly the natural forum where all shareholders are legally entitled to take action. Moreover, it is here that management accounts are approved, members of the board of directors and the audit board are appointed and dismissed, and where the allocation of company profits is decided, to mention but a few basic shareholder rights. A recent survey, by Ricardo Guerses of Acioni$ta, of quoted Level 1 and 2, and New Market companies, all of them distinguished organizations, with a relatively widespread shareholder base by Brazilian standards, showed that, on average, only 9.2 % of common shareholders and 7.4% of preferred shareholders, attended the last few general shareholders’ meetings.  The reason for such minority shareholder non-attendance must be understood, because this appears to be unique to Brazil. An interesting example is the fact that the US company, Procter & Gamble holds its shareholders’ general assemblies in a baseball stadium, in order to accommodate the huge number of attending shareholders. Another is given by attorney Carlos Zanini, in his interesting article on this subject matter.  He points out that over ten thousand shareholders attended the last Daimler-Chrysler AGM held in Berlin.  Among these was an elderly couple from Hamburg, who, on being interviewed, stated that in their 26 years as minority shareholders, they had only once missed a general meeting, because it was held on the date on which their first great-grandchild was born.

- The motives for such low attendance at these general assemblies begin with the limited range of share distribution in Brazilian companies, leading to the absence of organized minority shareholder action, to total unawareness of the importance of a general assembly and even ignorance of their shareholder rights.  Thus, minority shareholders, who so frequently complain that Brazilian corporation legislation entitles them to minimal rights and provides insufficient protection, should become organized and appear at these general meetings. Even before the reform of Brazilian Corporation legislation that expanded non-voting shareholder rights, these shareholders were already entitled to demand information, to protest and pressure, and even elect a member to the company’s audit board.

- For more detailed information on expanded minority shareholder rights introduced by the reformulation of Brazil’s corporate legislation, it is well worth reading the excellent and timely article, “The Shareholder Season” by Mauro Rodrigues da Cunha.  The full text may be found in the Technical Material of the LCV site (www.lcvco.com.br).

The Brazilian Institute of Corporate Governance – IBGC

- At the end of last year, the IBGC held an Extraordinary General Meeting to restructure its by laws.  One of the aims of this revision was to increase the flexibility of the Institute’s election procedures by facilitating both the voting process and the candidature of any member for a position on the Board of Directors. During the next General Assembly, scheduled for March 31, the new board members will be elected in a significantly more democratic manner.  Under the new system, any member may freely put forward his/her name as a candidate for board membership and will no longer require the support and recommendation of the Indication Committee (abolished during the last reformulation of the bylaws), by March 1^st.  The IBGC will announce the names of the registered candidates as from March 6^th.

- It is absolutely vital that all members clearly understood the election procedure, as from the disclosure of the list of candidates:

1)     After disclosure, any member may vote for his/her nine (9) preferred candidates.  The recent restructuring of the bylaws permits a vote by fax, to be sent to an independent organization up to five (5) business days prior to the General Meeting.  The independent organization selected for this year is Deloitte Touche Tohmatsu, attention Mr. Michael Morrell, who will receive the completed forms on fax (11) 5181 8024. This firm will also be responsible for the receipt and final count of the votes during the General Meeting.

2)     If a member fails to fax his/her vote by the deadline date, he/she must appear personally at the General Meeting to register his/her vote, or must be represented by an attorney-in-fact, who must be a member and who may not represent more than three (3) members.

3)     Without in any way wishing to obstruct the right of choice of its members, the Board of Directors recommends certain categories that, in its opinion, best meets the IBGC’s strategic planning requirements.  These categories are: Shareholder of a publicly quoted Brazilian corporation; Shareholder or quotaholder of a family business; Member of the Board of Directors, CEO, Investor Relations Officer, Independent Auditor, Market Agent, Pension/Investment Fund Representative, and Attorney.

4)     Lastly, it must be understood that any member may select any nine (9) names, even if some of these have linked their names in the same category.  In other words, the vote is not for a group but for individual candidates.  The nine (9) candidates with the most votes, regardless of their category, will be elected to the IBGC Board of Directors to manage the Institute in 2003.

The BNDES - Banco Nacional de Desenvolvimento Econômico e Social (National Economic and Social Development Bank) offers solid benefits to Brazilian companies that implement good corporate governance practices in Brazil.

- Larger than the Interamerican Development Bank and almost as large as the World Bank, the BNDES is Brazil’s leading development bank.  Thanks to its size and methods, it boasts a strong guiding presence in the Brazilian economy.

- At the close of 2002, the BNDES approved its “Incentive for Implementing Corporate Governance Practices” Program, aimed at introducing good corporate governance practices into business, and at proving that good corporate governance practices can reduce capital costs.  In its unique position of leadership in the field of long-term financing, it also intends to create an example among the financial institutions that assign greater importance to good corporate governance in their client companies.

- With the exception of some compulsory requirements for granting these loans, such as, prohibition of loans, surety, or guarantee from subsidiary to parent company, when the companies have different shareholders, and controls over related party transactions, this will be a voluntary program.  It will offer special conditions to clients implementing specific practices at growing levels of requirements, as follows: Bronze package, Silver package, Gold package, and Platinum package. Inherent to each of these packages are loan conditions granted via three (3) types of benefits on a rising scale: extension of the total amortization period; greater BNDES involvement in financing the respective project; and reduced loan charges. These incentives are applicable to “all direct and indirect loans with the sole exception of the BNDES-Exim Post Shipping Loans” and shall apply for loan operations as from June 2003. Many Brazilian companies have already begun the process of analyzing and implementing improvements to their corporate governance practices, in order to obtain the benefits available under the program.  For further details, visit the site (www.bndes.gov.br) entitled Programa de Adoção à Praticas de Governança Corporativa (Corporate Governance Practice Implementation Program).

The role of entrepreneurs and administrators – board members and executive management – in today’s business world.

- The entrepreneurs who take the risk of founding companies are, and always will be, a quintessential and basic presence in the business world.  Nothing can replace their pioneering capability, their business dedication, and their persistence bordering on the intractable. 

- However, these features cannot be automatically bequeathed to subsequent generations, particularly, in cases where throughout his/her life, the entrepreneur succeeds in transforming the original small company into a medium or even large organization.  As from this point, the options are invariably to resort to partially or fully professional management and, in many cases, to attract institutional investors, usually private equity funds, or even to go public, which nowadays, mainly attracts pension and investment funds. It is at this point, for retirement or related reasons, with no family member groomed for succession to the position, that the founding entrepreneur withdraws from the scene, and professional administrators take over, regardless of whether they are members of the board of directors or executive managers.  This process is permanent in today’s business world, since new companies continue to be formed, although many die at birth, or never advance to middle or large size organizations.  In his interesting article, reproduced in full in the Technical Material of the LCV site (www.lcvco.com.br), Stephen Kanitz states that “Just as the separation of Church and State was a landmark in the political development of mankind, the separation of the capitalist entrepreneur from management of the company was an important step in the multiplication of democratic and pluralist companies”.  Despite an approach that cannot be generalized, Kanitz restricts his comments to the replacement of entrepreneurs by executives, while failing to mention the power and growing importance of boards of directors, which are the true and legitimate heirs to the entrepreneurs.  This will be the rule in the very near future, particularly when we consider the recent demands and prodigal salaries of many executives who are increasingly pressured by the shareholders and their most powerful representatives, the members of the board of directors.

Corporate Governance and Family Governance hand in hand.

- In the past, many family businesses were dependent exclusively on Family Governance in their attempts to administer potential shareholder/partner conflicts. Through mechanisms such as Family Meetings, Family Councils, Consortia of Cousins, Corporate Agreements, or even Family Governance Practice Codes, some of these companies succeeded in minimizing the unavoidable pitfalls of family firms.  History records a far greater number of failed rather than successful family firms, arising from an approach centered on the family alone, where the company comes second.  Recently, more enlightened family groups have begun to combine family governance with good corporate governance practices in their companies.

- An outstanding example of a family firm approach, via family and corporate action, is the José Alves Group that celebrated its 40^th anniversary in October 2002, under the auspices of “Consolidating the Present – Guaranteeing the Future”. The José Alves Group was founded in 1962 by entrepreneur José Alves and his wife Maria Dilda, and started up activities as a Wet and Dry Goods Wholesaler, through the Casas Alô Brasil in Uberlândia, Minas Gerais. Today, its CEO is José Alves Filho, who is responsible for the continuity of the work begun by his parents.  Upon its founder’s premature decease at the close of 1976, the group entered the second stage of its history by expanding and diversifying the activities of its companies.  It entered the franchise field, firstly in automobile sales, subsequently as a television and radio station, and then as soft drink manufacturer in the Coca-Cola Group. In 1993, the group restructured it business, whereby some corporate activities were relinquished into the hands of other group companies that better represented the family aims and skills. The market and economic consolidation of the group’s soft drinks industry was finalized and included the expansion of its activities with the implementation of bottle and mineral water activities in 1997 and 1999, respectively.  More recently, in the latter half of 2000, the José Alves Group entered the field of higher learning, with the first entrance examination of the Alves Faria College.

- In 1999, according to its current CEO, José Alves Filho, the Group implemented a Corporate Governance Plan, in line with the best Brazilian and International practices, and targeting the dynamic involvement of all shareholders in the future of the organization.  The preservation of its capital required allocating special attention to family relationships and succession under Family Governance rules, where successors are supervised and prepared to perform their roles in the Group, regardless of whether these are direct or indirect.  Lastly, according to José Alves Filho, the Corporate Governance and the Family Governance Systems, synchronized to be simultaneously implemented, are vital tools in the process of consolidating the present and guaranteeing the future of the José Alves Group.   

ANIMEC - Associação Nacional de Investidores do Mercado de Capitais (National Association of Capital Market Investors)

- Since 2000 when, allied to its intense efforts in benefit of a transparent and equitable Brazilian capital market, ANIMEC has bestowed an award based on its members’ votes, to those companies, bodies, agencies, or institutions that have, in some way, contributed to their development under the ANIMEC Seal. On February 24, ANIMEC held an event, very well attended by a public from the Brazilian capital market, under the general coordination of its CEO, Waldir Luiz Corrêa, to thank the companies, agencies, and individuals for outstanding performance during 2002, to the standards of ANIMEC and as approved by its associates.  The ANIMEC Seal for Publicly Quoted Companies – 2002 was granted to the following companies: Banco Bradesco (consistent investor relationship and monthly dividend payment policy); Itaúsa (first publicly quoted company to formalize a 100% tag along in its bylaws); Marcopolo (bylaws amended to meet corporate governance standards); and Souza Cruz (consistent dividend payment policy, where approximately 75% of annual net income was paid out). In turn, the ANIMEC Seal – Special 2002 was granted to the following bodies, companies, and individuals: ABAMEC/IBMEC (preparation and development of the Capital Market Steering Plan); Estado de São Paulo Newspaper Agency (share market reporting); Raymundo Magliano Filho (who fought consistently for CPMF exemption for stock exchanges, and for his outstanding work of popularizing stock exchange investments); and Senator Antônio Carlos Magalhães Jr. (author of the Draft Bill for Utilization of FGTS Funds to purchase shares in the stock exchanges). The award event was preceded by a further excellent seminar given by ANIMEC on the apposite Corporate Governance topic, “Conflicts of Interest vs. the Right to Vote”.

More awards for Internet transparency.

- In the ongoing search for greater transparency with the market, more and more companies are making use of the Internet. Those that have already utilized this important equity mechanism in making data available to their shareholders and to the market in general are making increasingly great efforts to upgrade their investor relationship sites. 

-The companies that have performed best in good corporate governance practices have received awards from investor relations organizations and from the market itself.  In a long awaited and heavily attended event, in January 2003, MZ Consult bestowed the TOP 5 Award to 340 Latin American and Iberian Peninsula companies for the best Investor Relations sites.  The PO Award+ was given for the most “popular” IR sites, in the opinion of the investors, analysts, and other capital market agents, and the RAO 1 Award for the best on-line annual report. 

- For the TOP 5 Award, the first placed in their respective countries were: G. Fin. Galicia, Argentina, Unibanco, Brazil, Enersis, Chile, Casas GEO, Mexico, and Banco Espírito Santo, Portugal/Spain. Brazil was highlighted since, of the best IR sites in the context of Latin America and the Iberian Peninsular, four were Brazilian, as follows: Unibanco, Itaú, Petrobrás, and Telesp Celular. This champion team was joined by Casas GEO, Mexico.

- In turn, the specialized public selected the following IR sites for the POP + award: Telecon, Argentina, Petrobrás, Brazil, CTC, Chile, Casas GEO, Mexico, Credicorp, Peru, and Telefonica, Portugal/Spain. Once again, Brazil came to the fore in this category, since the Petrobrás IR site was selected as the best by the specialized public in the Latin American and Iberian Peninsula context.

- Lastly, the five award winners in the best on-line annual reports for their respective countries were: Repsol YPF, Argentina, Itaú, Brazil, Banco Santiago, Chile, Volcan, Peru, and Telefonica, Portugal/Spain. Again, Brazil earned a place of distinction, since the best on-line annual report in the Latin American and Iberian Peninsula context was that issued by Itaú.

- The award ceremony that took place in São Paulo was preceded by an Investor Relations Seminar given by speakers and debaters from a number of different countries.  Further information on this event can be found in the respective site

(http://www.mzconsult.com.br/winners/index.html)

Brazilian cooperatives are beginning to take an interest in good governance practices.

- Since its inception, over 150 years ago in England, the cooperative system continues to flourish and is still seen as the ideal alternative for generating jobs, income, and wellbeing in general.  However, despite so many success stories in a number of countries throughout the world, Brazilian cooperatives, regardless of whether they engage in production, credit, or labor, do not grow at a rate compatible with the Brazilian economy and population.  Many reasons are given to justify the paltry growth in numbers of these excellent organizations.  Among these are the absence of a community conscience, lack of government support and interest, deficient legislation, innumerable frauds, and many failures arising from incompetent management. A closer examination of the reasons for the weak performance of Brazil’s cooperative system, currently a major priority of the Luiz Inácio Lula da Silva Government, shows that the above list of reasons fails to give another important motive – the absence of good  governance in most Brazilian cooperatives.

- Perceiving this poor cooperative management scenario, the CECRESP (State of São Paulo Credit Cooperative Center), under the leadership of Manoel Messias da Silva, gave a one-day workshop to discuss the governance model (one that, wherever possible, would be in line with best corporate governance practices) that would be ideal for the Center with representatives of its two hundred (200) affiliated cooperatives. The results of this workshop, coordinated by the corporate governance specialist company, LCV, will be submitted to the approval of the Center shareholders at its next General Assembly in March 2003. The proposed model also includes the “CECRESP Governance Practices Code”, currently being prepared, and which will be implemented and disclosed to the market in general.  This is likely to be the first cooperative governance practices code drawn up in Brazil and will probably be used as a model for all CECRESP affiliated cooperatives.

The Sarbanes-Oxley corporate governance revolution.

- We cannot, as yet, accurately predict what will be the impact of the new US Sarbanes-Oxley Law, approved by the US Congress and sanctioned by the President of the USA, George W. Bush, in July 2002, in response to the USA’s corporate scandal epidemic, on the corporate governance of US companies and other companies in today’s highly globalized world. The seven hundred (700) articles of this law represent the greatest legal change for US companies since the thirties.  Congress approved the law and delegated the task of its regulation to the SEC, which, as a result, now has more power than ever before in its long history as a regulating body.  The Sarbanes-Oxley Law will cover 14 thousand listed American companies in the USA, 1.3 thousand foreign companies, among them 33 Brazilian companies.

-However, this law brings to light a greater and more complex problem, one that soon must be effectively defined by the SEC.  This is the treatment to be given to foreign corporations that are listed and trade in the US capital market.  At first, European, Asian, and Latin American companies listed in US stock exchanges believed that the SEC would create more flexible requirements for them, as has always been the case in the past.  But, to date, the SEC is giving signals to the effect that there will be minimal flexibility, within an undefined concept of bowing to local legislations.  One recent example of such flexibility was that independent audit firms assessed by official bodies in their countries of origin and which are the independent auditors of non US companies listed in the US, would be exempt from inspection by the recently created PCAOP. This could be lost in view of the recent accounting scandal surrounding the Dutch supermarket group, Ahold NV, involving several billion Euros.  Although Ahold’s accounting transgressions appear to be limited to its US and Argentine subsidiaries, this scandal has exposed weaknesses in the Dutch regulating system.  These deficiencies have raised doubts about the ability of EU countries to supervise their audit firms.  This situation and a number of political reasons are likely to lead the SEC to withdraw this privilege for non US based audit firms.  

- At 2 p.m. on March 18, ABRASCA (Brazilian Association of Listed Companies) that has been working closely with its associates and with the CVM (Brazilian Securities Commission) will hold an event in the city entitled “The Sarbanes-Oxley Law – Options for ADR Issuing Companies”. In addition to talks and debates, the event will also include the presentation of a document of demands and suggestions to be sent to the CVM.  The latter will then meet with representatives of the SEC in the US.  Additional information available on tel. (11) 3107 5557  

The omissions and non-compliance of yet another board of directors undermines shareholder values and results in losses to stakeholders.

- According to a recent Ernst & Young report, the board of directors of what was once Switzerland’s flag airline, a Swissair, was the principal culprit for the airline’s demise.  The report stated that the board must have known in mid 2001 that the company had a deficit of close to three billion US dollars.  According to Ernst & Young partner, Ancillo Canepa, “Had this crisis been immediately and professionally administered and a personnel change implemented, there would have been a greater likelihood of recovery for the company”. He also said that the company’s halt of operations in October 2002 was not necessary in strictly financial terms, and that the board had authorized investments in insolvent European airlines, in some cases, in volumes contrary to EU legislation.  Nothing will fully offset the shareholders’ and stakeholders’ losses, but the company’s liquidator, Karl Wuethrich, said that the liquidating parties would take legal action against the board and senior management later this year.

Major topics in Davos - Corporate ethics and corporate governance

- At the end of January, leaders, politicians, and entrepreneurs from all over the world met at the Davos Economic Forum.  The principal focus of its business panels was to re-establish the confidence that had become severely undermined during the year’s succession of corporate scandals.  The consensus was that the widespread implementation of corporate governance, always centered on ethical business practices, would be a timely challenge and that the true owners of a company, its investors, increasingly critical of senior management which is gradually losing its independence, and will now be closely supervised by such investors, mostly in the person of their legitimate representatives, the Board of Directors.

CVM (Brazilian Securities Commission)

- Quote from “CVM Recommendations on Corporate Governance”.

II. STRUCTURE AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS (cont.)

Board Duties and Committees

II.2       The Board shall implement regulations on procedures relating to its attributions and the minimal number of meetings to be held.  These shall also govern specialized committees formed to perform in-depth analyses, particularly those relating to related party auditors and operations.  The Board shall carry out a formal annual examination of the performance of the CEO.  The board members shall receive in advance all materials required for their meetings assuring sufficient time depending on the degree of complexity of the topic in question. The Board regulations shall also establish rules on the method of summons for meetings, board members’ rights and duties, relationships with senior management, and procedures whereby board members shall request information.  The board shall have authority to request the services of outside specialists to aid in decisions when this is deemed necessary.  The statutes shall authorize any member of the board to call meetings in the event of need thereof, in the event the board member responsible for such summons fails to issue same.

The specialized committees shall be comprised of some members of the board of directors, to analyze its topics and prepare the respective proposed action, which shall be submitted to the approval of the board of directors.

Best Corporate Governance Practices

- Quote from the Best Corporate Governance Practices Code – Brazil.

The Board of Directors (cont.)

Independent Board Member

- The majority of the Board shall be comprised of members independent of the company.

- Independence shall be defined as follows: a) the member shall have no link with the company with the exception of capital investment; b) the member shall never have been an employee of the company or of any of its branches; c) the member shall not offer any service or product to the company; d) the member shall not be an employee of any body that offers any service or product to the company; e) the member shall not be the spouse or relative up to the second degree of kindred of any company director or manager; f) the member shall receive no fee from the company other than his/her fee as member and any dividends due (in the case of the owner of the company); g)the member shall strive for the good of the company and, consequently, for the good of all the shareholders; h) the member shall seek the greatest possible independence in relation to the shareholder, group of shareholders, or interested party who/which recommended or elected him/her to the position, in the knowledge that, once elected, his/her responsibility is the interest of the company owners as a whole.

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