NEWS ABOUT CORPORATE GOVERNANCE - May-June/2003

Year IV – No. 28

Corporate Governance News

Editor: Luciano Carvalho Ventura

 Editorial

Interest in  Corporate Governance continues growing worldwide.

- The reasons for the growing importance of Corporate Governance all over the world are many.  Among them, we highlight the following: a) the increasing strength of the capitalist system; b) the growing trend to savings; c) more widespread capital ownership; d) globalization of flows of capital; e) stronger capital markets; f) separation of management and ownership; g) companies need to avoid conflict of interests; h) shareholders exercising their citizens’ economic rights; i) the recuperation of power by shareholders, the business world’s leading players, against abusive executive power; j) the growth of pension funds and their activist role as company shareholders; k) methods for avoiding corporate conflict; and, lastly, and in our opinion, most important, l) the change in the economic relations of individual people, who are becoming increasingly released from a mere employment bond and forming an economic capital relationship with their companies. There is no doubt that Corporate Governance is the best tool for dealing with economic capital relations.  For this and other reasons, Corporate Governance is no passing trend in the business world and is here to stay.

- The expression, Corporate Governance, in its modern technical and practical form is relatively recent, although prehistoric man knew this system.  Simply by taking part in an economic activity with his peers, for example, a hunting expedition, the planting of food, or breeding of domestic livestock, he was living in a corporate relations system.  Thus, albeit in a rudimentary manner, Corporate Governance was present in these economic activities.

- In today’s business environment, Corporate Governance is one of the most relevant and discussed topics.  It has attracted innumerable agents and professionals.  Among the former, there are the directly involved agents (shareholders, directors, audit board members, the CEO, and the independent auditors), the regulating agents ( In Brazil, the CVM – Brazilian Securities Commission, the Stock Exchanges, the traditional Courts, and the Arbitration Committees), the induction agents (the Government and the capital market itself), and active agents (pension funds, Corporate Governance focused investment funds, minority shareholder associations, and Corporate Governance focused non-governmental organizations). In turn, the academic world that, traditionally, concentrated more on executives operating the company rather than on companies being managed by their own shareholders, as though the possibility of life above the CEO level either did not exist or was certainly less important or less complex than the environment below the CEO, now demonstrates an intense interest in Corporate Governance.  Among professionals, it is consultants, particularly those dedicated to Corporate Governance matters and lawyers, who have developed the greatest interest in this topic.

- In response to this surge of professional interest worldwide, in association with Suffolk University Law School, Boston, MA, CILS - Center for International Legal Studies (Website:www.cils.org E-mail: cils@cils.org) promoted its “Corporate Governance in an International Marketplace” Worldwide Congress in the charming birthplace of Wolfgang Amadeus Mozart, Salzburg, Austria, from June 26 through 29.  Every year, throughout its 25 years of intense activity, CILS has promoted a number of world congresses.  As a rule, these occasions are dedicated to legal topics and are attended by lawyers, many of them from distinguished firms, mainly from North America, Europe and Asia. The June conference, focusing on Corporate Governance had 53 attendees from 24 countries, all of them lawyers, with the exception of this editor who was invited to speak on “Corporate Governance – the Brazilian experience”. The impressive number of countries represented at this Congress that like the others, was held in various parts of the world, attests to a growing interest in the topic of Corporate Governance. The largest delegation came from the US, and was formed by eleven (11) lawyers.  Underscoring the universal interest in this topic, we list here the countries represented by a single delegate: South Africa, Saudi Arabia, Australia, Belgium, Brazil, India, Liechtenstein, Nigeria, Taiwan, Turkey, Russia, Singapore, and Sweden. The full text of the editor’s presentation is available in the Technical Material section of the LCV website (www.lcvco.com.br).    

IBGC – The Brazilian Institute of Corporate Governance

The IBGC continues its unremitting task of discovering, developing, and fostering best Corporate Governance concepts and practices in Brazil. After concluding its first strategic planning stage, with the aid of the GIV (Vision Implementation Group), it has started implementing its many action plans through task forces.  This will ensure that the IBGC will attain the level so desired by its members.  The  general coordination of the GIV is in the hands of IBGC Vice-President, José Guimarães Monforte. A highlight of IBGC activities is its Monthly Presentation that, this month, will be held on July 15, at the Gran Estanplaza São Paulo Hotel, at Rua Arizona, 1517, Brooklin Novo, São Paulo (next door to the WTC-SP), beginning at noon with lunch, presentation, and question and answer session beginning at 1230 and ending at 1400h.  Further details and reservations at tels. (11) 3043 7008/7009. Expectations for this talk are high and the person who will give it is the CEO of the Perdigão Group, Nildemar Secches, who will discuss “Corporate Governance in the Perdigão Companies”. The Perdigão Group is controlled by a group of Brazilian pension funds and is arguably the most successful turnaround case seen over the last few years in our country.  Additionally, the IBGC will give the tenth edition of its now traditional Course for Board Members on August 21.  In the past, this course has had a total attendance of close to 800 interested professionals.  On September 23, once again, the IBGC will give its Corporate Governance for the Family Business course in São Paulo.

The Telos Pension Fund good Corporate Governance example.

Telos, one of Brazil’s oldest pension Funds, was founded in 1973 and, next year will mark its 29th anniversary.  Today, the fund ranks in 13th position in the private Brazil pension fund ranking, with a net worth of R$2.2 billion (US$730 million) with 7,500 members and 4,000 beneficiaries. Its sponsor, a former listed company that went private, is Embratel - Empresa Brasileira de Telecomunicações S/A. With just a handful of other Brazilian Pension Funds,  Telos, takes an active position as a shareholder.  The difference between Telos and the other pension funds mentioned, is its new technique for being represented on companies where it is a major shareholder and where it has the authority to recommend members of the boards of directors and of the audit boards.  Together with her fellow executive boards, the present Telos CEO and former Secretary of Complementary Social Security, Solange Vieira, decided upon and implemented a series of Corporate Governance related measures.  These are an example to other Brazilian pension funds, regardless of whether they are sponsored by private companies, by listed, or by public organizations.  Under this group of measures the company: a) recommends individually, whenever such legal entitlement exists, members of the boards of directors; b) when this is deemed of interest, together with other minority shareholders, may form groups that, when added together, permit them to recommend board members; and, most of important of all, c) applies professional selection criteria in recommending board members, i.e., qualified directors who can add value to Telos’ investments in the companies in question. Solange Vieira further explained that Telos directors are not recommended for these boards since this type of activity is not a part of the role of a pension fund director.  Their involvement in such unrelated activities could hinder the manner in which they carry out their pension fund management work.  If this example of professionalism were followed by other pension funds, the quality of Corporate Governance in Brazilian companies would thrive.        

Sowing healthy seeds in fertile ground

- One of the major challenges for the gurus of Corporate Governance is to clearly show the benefits of implementing good practices.  In Brazil, few practical cases exist.  One company that merits highlighting in this context is Marcopolo, whose motto is “Thinking ahead is to create the future”. The company was formed in 1949 and went public in 1974.  Today, it is a world leader in the manufacture of bus chassis’ and one of the rare Brazilian multinationals operating in Mexico, Colombia, South Africa, and Portugal, in addition to exporting to over fifty countries.  In 2002, its overseas revenues represented 63% of total net income of R$ 1.482 thousand (US$494 thousand).

- In December 1998, FVL - Fundo Bradesco Templeton de Valor e Liquidez was formed under the leadership of market professional and Corporate Governance icon, Paulo Vasconcellos. The fund invested heavily in Marcopolo stock and, in its role of active portfolio manager, through good Corporate Governance practices, took an active role in the company to become a Corporate Governance consultant to Marcopolo.  This resulted in the 2001 appointment of Vasconcellos to the Board, as representative of the minority shareholders.  The then restructured board consisted of six members, four of them elected by the controlling shareholders and two by the minority shareholders, three (3) in-house and three (3) external, two of the latter also being independent. This new board became more active, held twice yearly meetings and became actively involved in the company’s strategy decisions.  In the 2002 General Assembly, as required under new Brazilian Corporate legislation, the controlling shareholders surrendered the triplicate list and permitted the preferred shareholders to freely elect their representatives.  Thus Vasconcellos was ratified as these shareholders’ representative. During the 2003 General Assembly, board members Paulo Bellini, Nestor Perottoni, Raul Tessari, José Martins, Pedro Damasceno, and Paulo Vasconcellos were re-elected to their positions. Vasconcellos seems to have been the healthy seed that found fertile Corporate Governance ground, represented by the Marcopolo controllers and management. And results were not long in coming.  In addition to an international expansion loan of US$38 million from the World Bank’s IFC, it was backed by words of praise from the IFC Latin American and Caribbean Department Director, Bernard Pasquier, to the effect that the “investment in Marcopolo will support the increased export strategy of an important player and employer in Brazil. This long-term investment will help to show the benefits of energetic Corporate Governance and corporate disclosure practices.”  In September 2002, on the eve of Brazil’s presidential elections, Marcopolo successfully launched a R$95 million share issue where close to 20% of the operation was placed with foreign investors. Allied to the company’s strong corporate foundations and well implemented Corporate Governance practices, a fundamental factor in the success of this operation, was its compliance with Bovespa (São Paulo Stock Exchange) Corporate Governance Level II requirements. The company’s success in obtaining funds and the subsequent valuation of its shares proved that, when a company records good results and implements means whereby its investors feel protected, the market clearly recognizes this difference.  Marcopolo is an example for any Brazilian company wishing to think ahead.

The importance of Corporate Governance for the family business.

Much has been written about the importance of Corporate Governance for family businesses, particularly as a tool for administering the corporate conflict risks that are so common in this type of organization.  In an interesting article, available in full in the Technical Material section of the LCV website (www.lcvco.com.br), Consultant Cláudio José Sá Leitão carefully analyzes this topic and cites examples of family businesses where “the absence of Corporate Governance values provokes corporate conflict that, all too frequently places in jeopardy the survival of many Family Businesses, due mainly to the lack of transparency in relation to shareholders and quotaholders not involved in management, or the inequitable treatment of family members with equal rights, or even lack of accountability on performance by those who are in management, all of which threaten the continuity of company operations”. It is indeed a shame that so many family businesses have still failed to recognize this powerful tool for minimizing potential corporate conflict, and pay a high price for such ignorance of or, even lack of interest in, good Corporate Governance.

- Founded in São Paulo, IBGT – Brazilian Institute of Management and Turnaround.

In São Paulo, under the direction of Jorge Queiroz, a leading specialist on turnaround, a group of professionals interested in this area recently founded the Brazilian Institute of Management and Turnaround, aimed at developing a culture for preventing the appearance and aggravation of performance, crisis, and insolvency problems in companies, and resolving those that actually arise. In the developed world, corporate recovery activities receive considerable attention since they play a crucial role in corporate and economic development.  This is because such actions are aimed at company continuity and to restoring feasibility, in addition to contributing to the maintenance and generation of jobs and taxes.  They also minimize losses to the government, creditors, and investors.  The IBGT started up activities by promoting a two-day (September 10 and 11) event at the American Chamber of Commerce in São Paulo, the First International Corporate Renovation Forum, to discuss the topic of “Restructuring Companies under the New Insolvency Law”.  One of the panels focuses on the role of Corporate Governance in preventing and resolving corporate crisis.  For further information and registrations, consult their website (www.ibgt.com.br).

The powerful FIESP (Federation of Industries of the State of São Paulo) has begun to take an interest in Corporate Governance.

Although elections for FIESP leadership only take place in August 2004, the race seems to have begun.  The current President, Horácio Lafer Piva, has already announced his support of the CEO of Sesi (Social Services to Industry), Cláudio Vaz.  Vaz has stated that one of the aims of his current management is to introduce the concept of Corporate Governance into Sesi.  If this occurs, it is entirely possible that the repercussion of this measure will raise the concern of many São Paulo industries with the quality of their own Corporate Governance practices. It would also be very positive if an opposition pre-candidate, Synésio Batista da Costa, currently president of Abrinq (Association of Toy Manufacturers) were to include this initiative in his campaign platform.

The CVM continues to train its personnel.

- In its role as the principal regulating and monitoring agent in the Brazilian capital market, the CVM constantly updates its personnel training programs.  Among the many training methods, since April 2001, it has held its “Technical Fridays”, in the form of one or two monthly talks/debates, based on topics suggested by its own staff.  With the work of invited or in-house speakers, these “Technical Fridays” both provide a direct contact between the CVM staff and financial or capital market specialists, and are an area for presentations of works developed by in-house staff, such as doctoral or masters’ theses or dissertations that would otherwise not be seen by colleagues.

- The CVM has already held 33 different events since April 2001 involving speakers, among them, specialists from the Pontifícia Universidade Católica, the Futures and Commodities Market, the São Paulo Stock Exchange, Banco Santander, etc. A talk was given on May 9th by Luciano Carvalho Ventura, a founding member of the Brazilian Institute of Corporate Governance, on the importance of Corporate Governance to the credibility and strengthening of the Brazilian capital market.

International Corporate Governance Network - ICGN

The ICGN, arguably the most important organization of its kind in the world, dedicated exclusively to Corporate Governance, will hold its Ninth Annual Conference in Amsterdam in the Netherlands from July 9 through 11, entitled “Making Corporate Governance Work”.  In addition to the involvement of many Brazilians connected with this topic, one of the panel debaters will be the President of the Brazilian Institute of Corporate Governance, Paulo Villares.  In conclusion, good news for all Brazilians interested in this topic.  The Tenth ICGN Annual Conference will be held in Rio de Janeiro, from July 7 through 9, 2004, under the sponsorship of the CVM, the São Paulo Stock Exchange, and the IBGC.  Further details on the ICGN may be obtained through its website (http://www.icgn.org).

CVM (Brazilian Securities Commission)

- Quote from “CVM Recommendations on Corporate Governance”.

III.            MINORITY SHAREHOLDER PROTECTION

Relevant Decisions

III.1      The majority of share capital, regardless of type or sort, should have the right to deliberate on decisions of high relevance, with each share representing one vote. Among decisions of greater importance, the following stand out: (1) approval of evaluation reports of assets to be incorporated into the company’s capital; (2) alteration of the company’s activity; (3) reduction of compulsory dividends; (4) mergers, spin offs, or incorporations; and (5) relevant transactions with related parties.

For certain decisions, such as those cited above, no voting restrictions on preferred shares should apply. This is because such decisions have an impact on the rights of all shareholders. For relevant transactions with related parties, the interested parties should not be allowed to vote.

Tag-along for Companies Incorporated Before Law 10,303, of October 31, 2001, Went Into Effect

III.2      The sale or transfer of shares representing a company’s control must be contracted under the condition that the buyer makes a tender offer for all remaining shares of the company for an equal price, regardless of type or sort.

According to the Corporate Law, the buyer is obliged to make a tender offer for all common shares not in the controlling group for at least 80% of the price paid for each control share. According to good corporate governance practices, the buyer shall give the same treatment to all types and sorts of shares. Therefore, the price offered to minority voting shareholders should be extended to all remaining shares of the company.

Tag-along for Companies Incorporated After Law 10,303/2001 Went Into Effect

III.3      For companies incorporated after Law 10,303/2001 went into effect the buyer shall offer the same price paid for the controlling group shares to all other shares.

The goal is that newly incorporated companies go beyond recommendation III.2, and, in case of a change in control, assure equal treatment to all shareholders, minority and controlling, regardless of their share type or sort.

Best Corporate Governance Practices

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

The Board of Directors (cont.)

2.20. Company spokesperson

The Board of Directors should name one person as the company’s spokesperson, eliminating the risk of disagreement between statements by the Chairman, the CEO and others. If the manager of Investor Relations is another person he/she should be delegated specific powers by the company spokesperson.

2.21. Evaluation of the CEO

Once a year, the Board of Directors should make a formal evaluation of the CEO’s performance.

2.22. Succession planning

The Board of Directors should always have an updated succession plan for the CEO and all other key persons in the company.

2.23. Director introduction

A new Director should be given an introduction program that should include a Board file with a description of the Board Member’s responsibilities, the latest annual reports, minutes of Ordinary and Extraordinary general Meetings, minutes of Board meetings and other company information. The new director should be introduced to his/her fellow directors, the CEO, Officers, top Management and other key personnel. The new Director should also visit manufacturing facilities and other places of business. Depending on the needs of the company additional programs should be included.

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