LCV

NEWS ABOUT CORPORATE GOVERNANCE - July-August/2004

Year IV – No. 35

Corporate Governance News

Editor: Luciano Carvalho Ventura

Editorial

The hugely successful 10th Annual International Corporate Governance Network (ICGN) Conference in Rio de Janeiro.

- For the first time in its history, from July 7 through 9, 2004, the ICGN held its 10th Annual Conference in the southern hemisphere, specifically in beautiful Rio de Janeiro, Brazil. This prestigious organization has a wide range of members including, among others, institutional investors of the level of the California Public Employees Retirement System (CalPERS) and the College Retirement Equities Fund (TIAA-CREF), in addition to influential professional associations such as the US Council of Institutional Investors, the UK’s Cadbury Association of British Insurers and the National Association of Pension Funds. The Conference boasted a record attendance of 602 Brazilians and foreigners, exceeding the expected 500 attendees and greatly surpassing the prior record of 440 in Tokyo, Japan in 2001. The inaugural reception was held on Rio’s most famous post card venue, the Sugar Loaf Mountain and the Gala Dinner at Rio’s most traditional and luxurious hotel, the world famous Copacabana Palace, the Palace on the Sand, inaugurated in 1923. There were no less than 50 speakers from sixteen countries (who took turns giving 12 sessions of panels and presentations) at this splendid event, sponsored by the IBGC (Brazilian Institute of Corporate Governance), the CVM (Brazilian Securities Commission) and Bovespa (São Paulo Stock Exchange). For the first time, in response to recommendations by many associates, including the editor of this newsletter, the ICGN’s most longstanding Brazilian member, the ICGN agreed to expand the debate on Corporate Governance, by extending this topic to State Owned Enterprises and family businesses. In addition to the innovation of these panels, attention was also given to the growing importance of the independent board member, thanks particularly to the Sarbox Act and to the panel that debated the new role of the independent board member, with the apposite title of “Super Heroes on the Board? The Challenge Faced by Independent Board Members.” The unquestionable star of this panel was Brazil’s Paulo Vasconcellos, for his presentation, available in full in the LCV website (www.lcvco.com.br). Many Corporate Governance experts regard Vasconcellos as one of the most brilliant independent board members of the new generation of Brazilians active in this professional field. Recent estimates point to the fact that assets administered by ICGN members now exceed US$10 trillion. This figure speaks for itself in underscoring the importance and strength of the IGCN in global financial markets. The venue and date of the 11th Annual Conference, whose core topic will be “Ownership and Conflict: A Constructive Dialogue to Create Long-Term Value”, have been decided and attendance can already be planned by interested parties. It will be held in London from July 6 through 8, 2005. Among a number of reasons for the choice of this city, is its substantial activism in Corporate Governance, practiced by local institutional investors, particularly pension funds, in the capital market. Further details may be obtained on the ICGN website (www.icgn2005.com).

The IBGC (Brazilian Institute of Corporate Governance)

The IBGC is already disclosing details on its Fifth National Corporate Governance Congress to take place in São Paulo at the Grand Hyatt São Paulo Hotel. It will open with an inaugural dinner on November 7 and continue throughout the day of November 8, 2004. As in previous years, this year’s occasion, unquestionably Latin America’s most important Corporate Governance event, will include distinguished speakers, and will concentrate on Corporate Governance in a Brazilian context. The International Speaker at the Inaugural Dinner will be the CEO of Goldman Sachs International and Chairman of the Board of Directors of the European Corporate Governance Institute, Antonio Borges. The program is available on the IBGC (www.ibgc.org.br), which may also be used for registration.

NACD (National Association of Corporate Directors)

The US version of the IBGC, the NACD, founded in 1977 and dedicated exclusively to meeting the Corporate Governance needs of boards of directors and their members, has 15,500 members all part of a vast spectrum of companies, ranging from Fortune 100 corporations to small private companies. It also holds annual conferences and, this year’s will be held from October 17 through 19, 2004, in Washington, DC. The central topic will be, “Board Leadership – Evolution or Revolution”. Interested parties may obtain further information on the conference and on the NACD itself on its website (www.nacdonline.org).

Are Brazilian pension funds working hand in hand with US pension funds in the field of Corporate Governance activism?

During the two days preceding the 10th Annual ICGN Conference, Brazilian pension funds held their II International Pension Fund Seminar in Rio de Janeiro. This was attended by hundreds of Brazilian and other bodies. Topics of mutual interest, among them, pension-related matters, such as taxes and administrative costs, were discussed. With their American colleagues, Brazilian pension funds, which have made a name for themselves thanks to their activism exchanged experiences and discussed the potential for association in this type of movement. These will most certainly be followed by future encounters to the benefit of Corporate Governance in Brazilian companies, not least because of the capacity for investment and interest in globalization of the giant US pension funds.

Increasing APIMEC activity in Corporate Governance related topics.

As part of its keen awareness of the importance of good Corporate Governance in developing and strengthening any capital market, particularly the Brazilin market at its present stage, APIMEC (Association of Capital Market Investment Analysts and Professionals) has held a number of events focusing on Corporate Governance related topics. On August 20, 2004, it held a seminar attended by distinguished speakers, among them, IASB (International Accounting Standard Board) Trustee, Roberto Teixeira da Costa, on the topic of standardized accounting standards between Brazil and the rest of the world. As we all know, ever since the invention in the 15th century, of double-entry bookkeeping by the Italian friar, Luca Pacioli, a contemporary of Leonardo da Vinci, members of the Corporate Governance environment and company executives cannot replace accounting as the evaluation basis of corporate performance. Within this context, and considering its growing globalization, a common accounting language, if this were possible, would be an outstanding support tool for all involved in Corporate Governance. It is for this reason that the APIMEC initiative is backed by all who support improved Corporate Governance. On September 15, from 1330h to 1910h, APIMEC will hold a seminar, coordinated by its Vice-President, Haroldo Reginaldo Levy Neto, on the ever more current and important topic of “The Independent Professional Board Member, the Democratization of Capital, and Practical Results”. Further details on the event are available on the website (www.apimecsp.com.br).

The increased standing of Brazilian executives in the global market.

Among the more important duties of any board of directors, are the selection, evaluation, remuneration, motivation, and training of their executives. The importance of this role is explained by the fact that, despite being the front line of accountability before a company’s shareholders, the board of directors is not an executive body but one that guides and monitors executive action, which should always be the role of executive management. In other words, the board of directors exercises it role of company guidance through the members of executive management. On the topic of monitoring without involvement in the operation, it is always opportune to remember what the Americans say regarding the conduct of a good board member - “nose in fingers out”. Thus, it is the dream of all boards to be able to count on competent, trained, and motivated executives. In a recent report based on the example given by Sweden’s Volvo, journalist Tânia Nogueira Álvares comments that, as they develop within the complex scenario of uncertainties and sudden changes, Brazilian executives gain flexibility, creativity, and speed in resolving problems. Furthermore, they demonstrate enormous energy for work in addition to a facility for interpersonal relationships and negotiating skills. This economic reporter’s comments are borne out by a survey carried out by the distinguished international human resources consulting organization, Roland Berger. In the worlds of its director for Brazil and Latin America, Kelen Reis, “he (the Brazilian executive) is more flexible, open to innovation, interactive, bold, and tends to exceed the expectations of company controllers. They move easily between different departments, and adapt more rapidly to the most complex multifunctional, racial, and cultural environments”. This study was carried out over the last ten years and evaluated the competence of five thousand Brazilian professionals in senior management, director, and CEO positions in fourteen different segments of the economy.

The world’s current most influential corporate “guru” brings the importance of good Corporate Governance to the attention of all.

For the majority of the specialized press, Canadian consultant, Don Tapscott is the most influential individual in current media, since Marshall McLuhan, who, in the sixties, first formulated the concept of the “global village”. Tapscott maintains that in this new century, companies must be “the products of quality and ethical values, in other words, reliable and coherent”. His main pillar of ethical values is the relationship of the company with its customers, personnel, and shareholders. And, as we all know, a transparent and equitable relationship with shareholders that includes permanent accountability, is the basis for all good Corporate Governance.

Best Corporate Governance Practices

- Quoted from the Best Corporate Governance Practices Code - Brazilian Institute of Corporate Governance – IBGC - Third Edition, March 2004 – Brazil.

1 OWNERSHIP

1.1 Owners

Every shareholder is a company owner, commensurate with his/her respective share in the company’s capital. This principle should be extended to all kinds of companies and

organizations, as applicable.

1.2 The "One Share = One Vote" Concept

Voting rights should be extended to all owners in proportion to the number of shares they may hold and regardless of class of shares. This principle should prevail in all types of companies and organizations, to the extent applicable.

The proportionate voting rights of individual holdings are essential to align the interests of all the owners. As a matter of fact, voting is the best and most efficient oversight instrument.

Companies planning to go public should contemplate common shares (3) only. Companies that have both common and preferred shares should evolve to the one share = one vote concept. In case this is not possible, we suggest extending voting rights to preferred (4) shares under certain circumstances, which should be entered in the bylaw of the company. These may include: Transformation, split-up, incorporation, merger, and sale of relevant assets, with the concept of relevance clearly defined in the bylaw of the company;

Approval of relevant contracts between companies in the same group and approval of subjects relating to a compensation plan based on stocks and stock options;

Conflict of interest situation, which should be set forth in the bylaw of the company, or existing code of ethics;

Approval of appraisal report on assets, which shall be added to the capital stock, change of corporate object and reduction of mandatory dividends.

3. Common shares: Class of shares entitling their holders to vote at General Meetings, in addition to holding interest in the company’s revenues. Each common share corresponds to a vote at General Meeting decisions.

4. Preferred shares: Class of shares entitling their holders to certain benefits of a financial or political nature in exchange for partial or total restrictions to their voting rights. Benefits may include priorities in dividend payouts and/or capital refunds, tag along, dividends 10% higher than those paid out to common shareholders, and even voting rights, when established in the bylaw of the company.

Best Corporate Governance Practices (cont.)

- Quoted from the Best Corporate Governance Practices Code - Brazilian Institute of Corporate Governance – IBGC - Third Edition, March 2004 – Brazil.

1.3 Owners’ Agreements

Owners agreements on sales or purchases of their shares or units, share acquisition preference, and the exercise of voting rights or controlling power should be available to all other owners and filed at the headquarters of the company, as well as their amendments and termination.

Owners agreements should not in any way bind or restrict any voting rights of the Director, as they all should loyally and diligently perform their duties to the company, above the personal interests of those who elected them.

There should be no Officer nominations in owners agreements.

1.4 Owners’ Records

The company should make available to any of its owners all owners records, with their respective holdings in the company and class of shares or units and any other securities issued by the company.

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