LCV

NEWS ABOUT CORPORATE GOVERNANCE - January-February/2004

Year IV – No. 32

Corporate Governance News

Editor: Luciano Carvalho Ventura

Editorial

The Corporate Governance Global Forum is as active as ever.

The Corporate Governance Global Forum was founded by the World Bank jointly with the OECD (Organization for Economic Cooperation and Development), mainly to foster and disclose high Corporate Governance standards and practices at world level, with particular attention given to developing countries and economies in transition. The Forum works closely with the World Bank private sector’s right arm, the IFC (International Finance Corporation, and is coordinated by Anne Simpson. Its three major tasks are: a) Developing its contact network; b) Disclosure of best practices; and c) Development of skills and leadership.

At the end of last year, the Forum crowned three (3) years of intense activity with a work conference held from November 2 through 4, at the World Bank’s Paris offices. The aim of this meeting was to review the lessons learned on Corporate Governance system reforms, exchange experiences on best practices, and review the Organization’s Best Corporate Governance Practices for the OECD, to be applied as an international Corporate Governance practices benchmark. These can be accessed by visiting the OECD website (www.oecd.org). It is worth noting that, despite the fact that the Corporate Governance Global Forum was founded principally to focus on disclosing high Corporate Governance standards and practices to developing countries and economies in transition, the Enron and WorldCom scandals in the US and Ahold and Parmalat infamies in Europe have shown that improvements are needed much closer to home. This was borne out by OECD Director-General, Donald Johnston, in an interview with the Wall Street Journal, where he stated: “Never did we contemplate the need to discuss this in the US and Europe, but now the developed world is more acutely aware of the problem”.

This meeting in the fabled City of Light was the first time that Corporate Governance leaders from 43 developing countries were able to disclose high Corporate Governance standards and practices at global level, particularly, in the case of developing countries and transition economies. Attendees included representatives from countries in Africa, Europe, Central Asia, Latin America, and the Caribbean among others. Present also were representatives of active Corporate Governance organizations such as the Center for International Private Enterprise, The Commonwealth, International Finance Corporation, UNCTAD, and OECD members.

All parties involved in Corporate Governance or in some way interested in the topic, should not fail to visit the Corporate Governance Global Forum website (www.gcgf.org).

IBGC – The Brazilian Institute of Corporate Governance.

The IBGC will hold its Annual General Meeting at 1415h on March 30, 2004, in the Bilbao Boardroom, Floor C of the WTC/Meliá Convention Center, at Av. das Nações Unidas, 12551, Brooklin, São Paulo/SP. The Meeting will include election of the Board of Directors, which, pursuant to good Corporate Governance practices, is held annually, and where any member may be re-elected for an unlimited number of terms of office. The expectation this year is that, despite the many manifestations of support for his re-election due to his many great achievements, the incumbent Chairman of the Board, Paulo Villares, will not be a candidate, thereby leaving a vacancy for the Institute’s highest position. The reason given is that Villares wishes to devote more time to the LACGI (Latin American Corporate Governance Institute), of which he was elected President upon its foundation in July 2003 in Washington, DC.

On the same date March 30, at its monthly meeting at a lunch at noon at the same location, the IBGC will launch the third edition of the “IBGC Best Corporate Governance Practices Code”. Eliane Lustosa, a Member of the Board of Directors and Coordinator of the IBGC Code Review Committee, will give the presentation. Hers is a familiar name in the world of Corporate Governance, holds a Master’s Degree in Economics and a Doctorate in Finances from PUC in Rio de Janeiro, was formerly Financial and Investments Director of Petros (the Petrobrás Pension Fund), Brazil’s second largest pension fund in terms of assets, and is on the board of a number of companies.

International Corporate Governance Network - ICGN

- Arguably the world’s leading dedicated Corporate Governance organization, the ICGN was jointly founded in the mid-eighties by a number of organizations, among them, the California Public Employees Retirement System (CalPERS), the College Retirement Equities Fund (TIAA-CREF), the Council of Institutional Investors in the USA, the Association of British Insurers, the Cadbury-Hampel Committee on Corporate Governance, the UK National Association of Pension Funds, the Corporate Governance Forum of the Center for European Policy Studies in Brussels, in addition to prominent US attorney, Ira Millstein and other eminent world Corporate Governance leaders such as Bob Monks and André Baladi. It was formally established on March 29, 1995, in Washington, DC and, since then has regularly given its annual world conferences in London, Paris, San Francisco, Frankfurt, New York, Tokyo, Milan, and Amsterdam. Latest estimates show that the assets administered by ICGN members are in excess of US$10 trillion. This figure speaks for itself and underscores the degree of ICGN’s importance and strength in the global financial market. This year, its tenth world conference will be held in Latin America for the first time, in Rio de Janeiro, from July 7 through 9, sponsored by the IBGC, the CVM (Brazilian Securities Commission), and Bovespa (São Paulo Stock Exchange). Further information can be obtained by visiting the IBGC website (www.ibgc.org.br) or the ICGN website (http://www.icgn.org).

The hugeness of the USA pension funds and their growing influence on Corporate Governance

As early as 1995, the world’s leading business thinker, Peter F. Drucker, pointed out the ongoing progress of the socialization of wealth in the most capitalist economy in the world, the US. In his still very up-to-date work, “The Invisible Revolution”, by using solid facts and data, Drucker showed that, as a result of the impact of pension funds on the US capital market, certain sectors of the US economy owned by workers, were larger than those of many so-called socialist countries. Affirming that “In reality, America is the world’s first and only Socialist State”, even then, he predicted that, “in 1985, at the very latest, employee pension funds will own at least 50% of the share capital of US companies”. And yet again, the Master of Masters was not deceived, if we consider the current gigantic proportions of US pension funds and their share of US corporate capital.

The increasing size of US American pension funds has only further highlighted the accuracy of Drucker’s forecasts.

In December 2003, the assets of the 1,000 largest US pension funds totaled US$4.8 trillion, an increase of 11,6% over December 2002, when they amounted to US$4.3 trillion. The ten largest US pension funds, measured in billions of dollars, are: California Public Employees (US$148), Federal Retirement Trust (US$118), New York State Common (US$106), California State Teachers (US$103), Florida State Board (US$92), General Motors (US$89), Texas Teachers (US$77), New York State Teachers (US$73), New Jersey (US$63), and General Electric (US$61).

But one increasingly common trend today, that not even Drucker foresaw in 1955, is the degree of influence held by the workers via the managers of their pension funds, on these companies’ management policies.

Anyone involved in the Corporate Governance environment is aware of the importance of the role of pension funds, ever since CalPERLS was founded, in improving Corporate Governance practices in companies worldwide. It is no exaggeration to state that, without pension fund support, global Corporate Governance would not have arrived at the stage it is at today. The greater the pension funds’ institutional investor power exercised and the more active role played as company shareholders, the better the Corporate Governance practices implemented by the companies.

In conclusion, one imagines that Drucker would be curious to know Karl Marx’s interpretation of this silent revolution, in which no blood was shed and which socialized the capital of so many US companies; where the so-called working classes have been transformed into company owners, through their pension funds and, more importantly, have gained influence over the management of these companies, again through the directors of the pension funds, which have become increasingly insistent on good Corporate Governance practices.

Meanwhile in Brazil.

ABRAPP (Brazilian Association of Private Pension Funds) has advised that, in 2003, member pension funds’ assets increased by twenty-six point nine percent (26,9%), as

compared with the previous year. Accordingly, Brazilian pension fund assets grew from R$189.28 billion (US$65.27 billion) in 2002 to R$ 240,139 (US$82.81 billion) at the close of 2003. Despite differing enormously from developed world figures, the ratio of otal pension fund assets to the GDP increased from fifteen point eight percent (15.8%) to eighteen point two percent (18.2%). This was partly due to the extraordinarily good performance of these institutional investments. According to a Risk Office Consultants survey, the average yield for last year for the fifty (50) pension funds analyzed reached thirty point seventeen percent (30,17%), significantly in excess of actuarial targets, which are generally an accurate inflation index, plus six percent (6%), which last year represented a figure in the region of fifteen percent (15%) to seventeen percent (17%).

The increased strength of Brazilian pension funds is excellent news for Corporate Governance, since, in both the US and Brazil, these powerful and active institutional investors are performing an increasingly vital role in improving Corporate Governance practices in business as a whole. In the words of the ABRAPP President and CEO of Sistel, Brazil’s fourth largest pension fund, with assets totaling R$10,5 billion (US$3.62 billion), “pension funds are at the stage where returns are important, but a transparent relationship with company is vital when the investment decision is taken.” Pimentel believes that companies implementing good Corporate Governance practices tend to have more liquid shares in the market and, according to him, this adds value to the company and encourages profits.

A 169-year old Brazilian Company

The November/December 2003 edition of the LCV News included an article on the Japanese company, Kongo Gumi, which, thanks to its fourteen (14) centuries of business activities, was formally recognized by Family Business Magazine as being the world’s oldest family business. In comparison, other hitherto famously longstanding companies, are mere babes in arms.

In fact, the family businesses accepted as being the oldest in the world are, in order of age: Italy’s arms manufacturer, Beretta, active for 477 years, Japan’s shipbuilding and mining company, Sumitomo, in business for 373 years, Germany’s school and office material business, Faber Castell, aged 242, and the United Kingdom’s Rothschild, which has been active in the financial market for 204 years, trailed by the US garment manufacturer, Levi’s, active for 150 years.

There is no question that companies in existence for over one hundred (100) years are not exactly in the majority and thus merit the admiration of those who are fully aware of the difficulties of ensuring continuous long-term business succession. And this does not apply only to family businesses, but to all businesses.

In Brazil, Mongeral Previdência e Seguros, founded in 1835, thus attaining 169 years of uninterrupted business activities, is, without doubt, the oldest company in the country. According to its current CEO, Helder Molina, an insurance and pension guru, the main contributing factor to Mongeral’s longevity is identical to that of Kongo Gumi: an unswerving focus on its principal business, that is and always has been pensions and insurance.

In conclusion, it is worth noting that Mongeral reached its 169^th anniversary in a young country that has only existed for 500 years and has a turbulent economic and political history. This only adds to the merit of its longevity when compared with companies founded and based in countries with cultures dating back thousands of years.

CVM (Brazilian Securities Commission)

Extract from “Recommendations of the CVM on Corporate Governance”

IV. ACCOUNTING AND AUDITING

Management’s Discussion and Analysis

IV.1 Each quarter, along with the financial statements, the company should release reports prepared by management with a discussion and analysis of the factors that most influenced results, indicating the main internal and external risk factors to which the company is subject.

The management’s discussion and analysis report should explain significant changes in the financial statements. Relevant events of the period shall be commented on, from the accounting/financing and strategic points of view. The company should also guide shareholders about perspectives on its business environment and detail policies adopted by management to create value for shareholders. Risk factors should cover those risks inherent to the company, risks provided by the competition, and those resulting from macroeconomic factors in its fields and regions of operation.

Composition and Performance of the Fiscal Board

IV.2 The fiscal board should have a minimum of three and a maximum of five members. Holders of preferred shares and holders of common shares, excluding shareholders in the controlling group, should have the right to elect an equal number of members as the controlling group. The controlling group should renounce the right to elect the last member (third or fifth member), who should be elected by the majority of share capital, in a shareholder’s meeting at which each share represents one vote, regardless of its type or sort, including controlling group shares. The fiscal board should adopt by-laws covering its duties, with a focus on analyzing the relationship with the auditor. The by-laws should not restrict any member’s individual initiatives.

According to principles of good corporate governance, the fiscal board’s majority should not be elected by the controlling shareholder. In addition, with the aim of efficacy, by-laws should stipulate the frequency of board meetings , the method for calling such meetings, that meeting materials be provided in advance, rights and duties of board members, relationship with management and auditors and procedures to request information. The fiscal board should also meet when requested by representatives of the minority shareholders, if such a request is deemed to be well grounded. The board of directors should provide appropriate means for the good functioning of the fiscal board, such as notices and locations for meetings, agenda organization and assistance with information requested by members of the fiscal board.

Best Corporate Governance Practices

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

As from the next newsletter (March/April -2004), this section will publish copies of the third edition of the “IBGC Best Corporate Governance Practices Code”, to be formally launched at an event on March 30, 2004.

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