NEWS ABOUT CORPORATE GOVERNANCE - July-August/2003

Year IV – No. 29

Corporate Governance News

Editor: Luciano Carvalho Ventura

 Editorial

The Global Corporate Governance Forum

- The Global Corporate Governance Forum was jointly founded by the World Bank and the OECD (Organization for Economic Cooperation Development).  Its chief objective is to foster and disclose high Corporate Governance standards and practices at world level, particularly in developing countries and economies in transition, and it works closely with the IFC (International Finance Corporation), the financial branch of the World Bank’s private sector.  Coordinated by Anne Simpson, the Forum’s work program was launched in 2002 in Monterrey, Mexico, during a UN organized event.  Its three main tasks are: a) To develop a contacts network; b) To disseminate best Corporate Governance practices; and c) To develop skills and leadership potential.

- As part of its task of developing its contacts network, the Forum is a source of Corporate Governance contacts between developed and less developed countries.  An example of this are the Corporate Governance sponsored round tables held in Asia, Latin America, Russia, and Eastern Europe.

- The Forum’s mission to intensify best Corporate Governance practices and its influence can be identified in the high level dialogues it has established between the authorities and business leaders in countries such as Brazil, China, Colombia, Russia, and South Africa.

- Lastly, the Forum has carried out several Corporate Governance skills and leadership development programs.  Highlighted among these is its “Train the Trainers” on Corporate Governance Program, held for the first time in 2002 in Washington, DC, targeting Asian Corporate Governance leaders.  Led by Professor Ira Millstein jointly with the Yale School of Management’s International Institute of Corporate Governance, represented by Professor Florencio Lopes-de-Silanes, this Program was attended by thirty-five representatives of the following nine Asian countries: Singapore, China, the Philippines, Hong Kong, Indonesia, Korea, Malaysia, Thailand, and Taiwan. This year, the Program was held from July 27 through August 2, again at the World Bank in Washington DC, and was attended by thirty-five representatives of the following seven Latin American nations: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.  Brazil was represented by twelve professors from the Brazilian Institute of Corporate Governance, all of which guarantees that the Forum will attain its goals of disseminating good Corporate Governance practices. 

 - Next year, the Forum will hold its event for Corporate Governance leaders of Central Europe and Asia, among them, Bulgaria, Poland, Rumania, Russia, and neighboring countries.

-Our next editorial will discuss other important roles played by the International Finance Corporation in promoting good Corporate Governance practices at world level.

The IBGC (Brazilian Institute of Corporate Governance)

- The IBGC is preparing for its Fourth National Corporate Governance Congress to be held at the Grand Hyatt Hotel São Paulo, Av. Nações Unidas, 13301, Brooklin, São Paulo, SP. The Congress will open with its inaugural dinner on November 9, will continue throughout the 10^th, and, as in past years, will include distinguished Brazilian and international speakers.  Luiz Fernando Furlan will give the inaugural dinner speech and Minister Antônio Pallocci is expected to speak the following day.  The international presentations will be given by Randall Morck of the University of Alberta Business School, Canada, who will discuss Corporate Governance in family businesses, and Harvey Goldschmid of the SEC (US Securities and Exchange Commission), who will speak on minimizing risk through Corporate Governance.  Registrations may be made as from now by requesting the Registration Form from Fax (11) 3043-7005 or via email at ibgc@ibgc.org.br.  Attendancenat this year’s Congress is expected to be greater than last year’s record of 280.

- And, more news about the IBGC: The Institute’s Southern Chapter was recently opened and will cover IBGC activities in the States of Rio Grande do Sul and Santa Catarina. The following members were elected to the Chapter’s Coordination Committee: Jairo Gudis, João Verner Juenemann, Telmo Schoeler, and Werner Bornholdt.

The ILAGC (Latin American Institute of Corporate Governance) is inaugurated

 - During the “Training the Corporate Governance Trainers” Program last July in Washington, DC, sponsored by the IFC (International Finance Corporation), the financial branch of the World Bank’s private sector, the Latin American Institute of Corporate Governance was founded.  It is comprised of representatives from Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Says the Chairman of the IBGC and first CEO of the ILAGC, Paulo Villares, “Our goal is for all Latin American countries to implement best Corporate Governance practices through regularly exchanging experiences”.

The IBGT (Brazilian Institute of Management and Turnaround) to hold a mega event in  São Paulo.

This organization, recently founded in São Paulo by a group of professionals involved in restructuring insolvent companies, under the leadership of a leading turnaround specialist, Jorge Queiroz, has already begun activities by sponsoring a two-day mega event (September 10 and 11, 2003) at AMCHAM (American Chamber of Commerce, São Paulo), the First International Forum for the Renewal of Companies, where the main topic will be “Restructuring Companies under the new Brazilian Corporation Law”. One panel will examine the role of Corporate Governance in preventing and resolving corporate crisis.  For further information and registration, please visit the website (www.ibgt.com.br). Recuperating companies in difficulty is a crucial part of economic and corporate development since its goal is to ensure the continuity of a company’s business, by restoring its viability and contributing to maintaining and generating work and taxes.  Additionally, this prevents losses to the government, creditors, and investors.

ABRAPP (Brazilian Association of Private Complementary Pension Funds).

From October 27 through 29, ABRAPP, whose members include more than 350 pension funds in Brazil, will hold its 24^th Annual Congress in the Convention Center of the Gran Meliá WTC Hotel, São Paulo, for an estimated public surpassing its previous record of 2,000 attendees.   The main topic will be “The Role of Complementary Pensions as a Path to Social Inclusion”. According to a letter from ABRAPP CEO, Fernando Pimentel, ICSS CEO, Arnaldo Niskier, and SINDAPP CEO, José de Sousa Teixeira, “The 24^th Brazilian Pension Fund Congress will discuss topics such as the United Kingdom’s experience in regulating Pension Funds, Brazilian tax reform, and potential impacts on the formation of pension savings, investment policies, and an integrated approach to actuarial commitments and social liability, in addition to Pension Fund evaluation and decision processes”.  ABRAPP is an association of over 350 Brazilian pension funds that, as of May this year, jointly hold assets in excess of R$ 200 billion,(US$ 66.6 billion) 2.5% greater than the total for the preceding month.  During the year, accumulated growth through May was 8.5% and 22.5% for the preceding 12 months.  The system’s asset portfolio was distributed as follows: fixed income funds - R$ 78.3 billion - (US$26.1 billion)   - 42.4% of the portfolio; shares - R$ 28 billion (US$9.3 billion)  -15.2%; public securities - R$ 27.1 billion (US(.0 billion) - 14.7%; variable income funds - R$ 20.5 billion (US$ 6.8 billion)  -11.1%; real estate - R$ 11.3 billion (US$ 3.7 billion) - 6.2%; other - R$ 4.5 billion (US$ 1.5 billion) - 2.5%; and debentures - R$ 3.9 billion (US$1.3 billion).

- Under the Lula Government, the private complementary pension system has entered a new cycle in Brazil with the launch of officially authorized funds, a number expected to double over the next five years, according to ABRAPP and government projections.

Brazil’s CJF  (Federal Council of Justice) recommends creating dedicated Chambers to settle corporate conflict. 

- As economic relations increasingly include capital relations, in addition to traditional employment bond relations, the need has arisen for the creation or improvement of “Corporate Justice”, but without creating a “monster” like Brazil’s Labor Laws for example. 

There is no doubt that in modern society, employment bonds are losing importance and gaining flexibility, while capital relations play an increasingly vital role in economic relations.

- In an exemplary move aligned with the need for a favorable environment for good Corporate Governance practices, some Brazilian jurists have voiced concern for the need for more rapid solutions to corporate disputes that can lead to credit problems, halted production activities, and increased unemployment.  A proposed solution offered by STJ Minister, Ruy Rosado, as part of a group of proposals for updating the Brazilian judicial system to be studied by Congress, recommends the creation of mediation or reconciliation chambers for corporate conflict problems.  Rosado highlights cases of differences between partners that “drag on” for years in the courts and finally bankrupt the company.  The fact is that Brazil already has a legal alternative, an arbitration system for corporate conflict, one that has been extremely successful for family businesses and which listed companies are loath to implement.  If Congress approves the modern arbitration chamber system, this option is the fastest means for resolving corporate conflict in companies that do not implement good Corporate Governance practices.  Experience has shown that the best prevention for this type of conflict is still good Corporate Governance.   

A further example of support for the Corporate Governance movement is that of the all-powerful FIESP (Federation of Industries of the State of São Paulo).

Recently, current FIESP CEO, Lafer Piva announced his support for candidate Cláudio Vaz for the August 2004 elections. Vaz has already stated that one of the aims of his management is to implement good Corporate Governance practices in the Federation.  There is no doubt that, if this occurs, its impact will cause many São Paulo industries to focus more seriously on the quality of their own Corporate Governance practices.  In turn, jointly with a number of other organizations, Lafer Piva’s management aligned with his candidate’s platform, will hold a seminar promoted by Animec (National Association of Capital Market Investors) at FIESP, entitled “Boards of Directors and Audit Boards: Positioning and Recent Performance by their Members”, on September 10, 2003, from 0830 through 1300h.  Information and registration at tel (11) 3168-9286.

The SEC is strictly applying the Sarbanes-Oxley Act.

The SEC has won its arm-wrestling match with American attorneys. With 218 against 201 votes, the American Bar Association approved a proposal to break the legal confidentiality of attorneys’ clients in cases of financial fraud.  This change in the US Legal Code of Ethics allows, but does not enforce, attorneys to break confidentiality in cases of knowledge of financial fraud.  However, in practical terms, from now on, US attorneys may no longer invoke professional confidentiality and their code of ethics as impediments to complying with the requirements of the Sarbanes-Oxley Act. These amendments to the code of conduct of the ABA are a direct result of this Act, which is already in force and requires legal counsel to inform the SEC of any suspicions of illegality or fraud in the accounting records of the listed corporations to which they render services.

Global Governance Rating System launched in the US.

GovernanceMetrics International – GMI, an independent unrequested governance rating agency has made available to its investor clients, a rating of 1,600 global companies, of which 1,000 are American and 600 of other nationalities, from a total of the following fourteen countries: Germany, Australia, Canada, Spain, the US, Finland, France, the Netherlands, Italy, Japan, Portugal, the UK, Sweden, and Switzerland. Canadian companies achieved the highest average rating (7.2), closely followed by the UK (7.1) and the US (7.0). The worst ratings were those of companies in Switzerland (4.2), France (4.1), and Japan (3.5). According to GMI methodology, which includes 600 analysis points, among the 1,600 companies analyzed, only seventeen attained the highest rating, i.e., a score of ten. Fifteen of these were US companies and two Canadian, as follows: Alcan Inc (Canada), BCE Inc. (Canada), Chevron Texaco Corporation (US), Chubb Corporation (US), Colgate - Palmolive Company (US), E.I. Dupont de Nemours & Co. (US), Eastman Kodak Company (US), Exxon Mobil Corporation (US), Gillette Company (US), McDonald’s Corporation (US), Occidental Petroleum Corporation (US), PepsiCo (US), Pfizer Inc. (US), Pinnacle West Capital (US), Praxair Inc. (US) SLM Corporation (US) and The Allstate Corporation (US).  This sample will be amplified and the results periodically monitored by GMI.

CVM (Brazilian Securities Commission)

- Quote from “CVM Recommendations on Corporate Governance”.

III.            MINORITY SHAREHOLDER PROTECTION (cont.)

Transactions Among Related Parties

III.4      The board of directors should ensure that transactions among related parties are clearly reflected in the financial statements and were carried out in writing and under market conditions. The company’s by-laws should prohibit service contracts among related parties with remuneration based on sales/revenues and, in principle, loan agreements with any shareholder in the controlling group or related parties.

Regardless of the usual caution adopted to certify that contracts are established the best possible manner, it is imperative to give transparency to contracts between related parties, in order to enable shareholders to supervise and follow the actions of the company. This does not preclude a company’s duty to broadly publicize such contracts to the market, in declarations of fact and when publishing financial statements.

Contracts between related parties should be in writing, detailing the main characteristics (rights, responsibilities, quality, prices, commissions, deadlines, and others). During shareholder meetings to discuss such contracts, if minority shareholders deem it necessary, they can ask for a written opinion from an independent entity, to be paid for by the company.

In principle, loan agreements between the company and related parties should be prohibited. The company should not grant credit to related parties. Such operations are frequently not carried out under prevailing market conditions, (terms, rates and guarantees), and therefore are not in compliance with legal requirements. If the related party seeks credit, it should do so with third parties, and not through the company.

Service contracts among related parties between the company and any shareholder in the controlling group or related parties should be in line with the interest of all the company’s shareholders. Specifically, such contracts should not be based on sales/revenues, since then part of the remuneration of the controlling shareholders or related parties will not depend on the company’s operational performance.

Best Corporate Governance Practices

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

The Board of Directors (cont.)

2.24. Documentation for the Board meetings

Board meeting efficiency depends heavily on the quality of the documentation handed out beforehand to the Directors. Decision proposals must be adequately explained and supported. All documentation must be in the hands of each Director before the weekend prior to the meeting.  Board Members must have read everything and be prepared for the meeting.

2.25. Agenda

The agenda of the board meeting should be prepared by the Chairman of the Board, based on suggestions from Directors and discussions with the CEO and Officers.

2.26. Minutes of the Board meetings

Minutes should be clearly worded and should record decision made. Any Board Member may request that a dissident opinion be recorded. The minutes should be submitted to formal approval by the Board of Directors.

In case of conflict between Directors, the minutes should be signed before the end of the meetings during which the disagreement occurred.

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