LCV

NEWS ABOUT CORPORATE GOVERNANCE - September-October/2004

Year IV – No. 36

Corporate Governance News

Editor: Luciano Carvalho Ventura

Editorial

Brazil’s multinational, WEG, a synonym for success.

- Few people, other than its founders, Werner Ricardo Voigt, Eggon João da Silva, and Geraldo Werninghaus, believed that, 43 years after its inauguration, a little electric engine factory started up on September 16, 1961, in Jaraguá do Sul, Santa Catarina, Brazil, would be on the verge of becoming the world’s largest electric engine producer. Today, with its annual billing of R$2 billion (US$740 million) close to forty percent (40%) of which is comprised of exports, WEG is ranked by Veja Magazine as Brazil’s ninth largest multinational company. The company is present in over fifty countries on all five continents. It industrial park consists of five (5) factories in Brazil, two (2) in Argentina, one in Mexico, and one in Portugal. It is about to take over another electric engine factory, in China this time, with its acquisition of the total shareholding of a local group. And Corporate Governance? The founders’ families, the Voigts, Silvas, and Werninghaus’, have always been involved in the company’s management, after passing through the usual rites of passage into professional initiation, with the result that WEG has become a reference for successful family businesses. The same opportunities for improvement available to company personnel were also offered to family members who joined the company and made their careers based exclusively on their professional and personal qualifications. In other words, the family members who today hold executive positions in the company or who are members of its board of directors were trained and evaluated to carry out these roles. There is no question that this is one of the main reasons that WEG has always been such a successful family business. And what of the company’s succession policy, the Achilles heel of so many family businesses? The first step in this process occurred in 1989, when Werner Ricardo Voigt, Eggon João da Silva, and Geraldo Werninghaus, and Vice-President Gerd Edgard Baumer stepped down from their executive positions and dedicated themselves exclusively to the company’s Board of Directors, which then began to closely monitor the process of the transition of the company’s chain of command to one of the heirs, Décio da Silva. Now, after the passage of fifteen years, it is clear that the process of CEO transition was extremely successful. In October of this year yet another transition process began, one considered by many to be infinitely more complicated, since it involved the election of the Chairman of the Board, a position held by one of the company founders. The WEG Board consists of six (6) members, five (5) of them external members who, with the exception of the deputy chairman, Gerd Edgar Baumer, are members of the controlling families, all fully trained and qualified for their positions, and one (1) independent board member. After 43 years of inspired leadership of the company, having reached the company’s statutory age limit of 75, founder Eggon João da Silva, resigned from the WEG Board. He continues with his other activities, among them, as CEO of the WEG holding company and as a member of other boards of directors. It was on this occasion that WEG displayed the current level of its ongoing professionalism. The other board members unanimously elected the board’s only independent member, Nildemar Secches as Chairman of the Board. Over the years of his professional career, Secches, a former BNDES (Banco Nacional de Desenvolvimento Econômico e Social) director, who ranks among Brazil’s most gifted executives, has accumulated in-depth corporate governance experience, acquired when he was CEO of the Perdigão Group, and as an independent board member of Ultrapar and of WEG itself where he has been a member of the board of directors since 1997. He was recently elected to the board of Iochpe-Maxion S.A. As a publicly quoted corporation, WEG is at the mercy of the severest of judges, the capital market. And everything points to the market’s full approval, with the company’s increasing corporate governance practices, and the manner in which the controllers run the organization. In July this year, WEG’s share base consisted of 1,200 shareholders. After a Secondary Public Offer of its Preference Shares by the institutional investors in order to increase company liquidity and to more widely distribute its stock, this base was expanded to 7,575 shareholders. All these events have increased the valuation of WEG preference shares by fifty percent (50%) over the beginning of the year. There is no question that WEG is synonymous with success.

IBGC - Brazilian Institute of Corporate Governance.

- As part of the IBGC’s principal mission of contributing to Corporate Governance in Brazilian business, its recent weekly Information Bulletin included a selection of lead articles on Corporate Governance published in the Brazilian press. It also expanded its structure by creating a further three (3) technical committees headed by prestigious professionals with in-depth board of director experience and Corporate Governance background. These are the Judicial Committee, coordinated by Paulo Fernando Campos Salles, the Capital Market Committee in the hands of Mauro Rodrigues da Cunha, and the Risk Management Committee linked to the Rio de Janeiro Chapter of the IBGC and coordinated by Eduarda La Rocque. The work of all members of IBGC technical committees is voluntary and any member interested in taking part should contact Tatiana Rocha (tatiana@ibgc.org.br).

- Further to IBGC activities, everything is in place for the Fifth National Corporate Governance Congress to be held in São Paulo on November 7 and 8, 2004. This is unquestionably the leading Corporate Governance event held in Latin America. Details will be given in the next newsletter – November/December 2004.

National Association of Corporate Directors - NACD

- Through its members, the IBGC’s US counterpart, the NACD, founded in 1977, is engaged in an interesting survey carried out by CFO Magazine. This survey seeks to analyze the relationship between members of boards of directors and the financial directors of publicly quoted companies, during the period directly prior to and after the Sarbox Act was enacted. It is a well-known fact that the chief financial officers and the CEO’s of companies quoted in US stock exchanges were the most hard hit by the severity of this new corporate legislation, as from when it came into force in July 2002. The results of the survey will be published in the December 2004 issue of CFO Magazine.

The Brazilian Judiciary increasingly favorable towards the use of arbitration.

- Our July/August 2004 Newsletter No. 23 remarked on the third and definitive mark in the history of the introduction of arbitration in Brazil: the enactment on September 24, 2002 of Decree No. 4311, that brought Brazil into the New York Convention. This is the world’s chief agreement on arbitration, and governs the recognition and execution of foreign arbitration sentences issued after the 1996 promulgation of the law recognizing the legitimacy of the arbitration report abolishing any requirement for legal ratification, and of the Federal Supreme Court’s recognition of the constitutional nature of the arbitration system in 2001. From then on a doubt persisted as to the position to be taken by Brazilian justice regarding what became known as the Arbitration Law. In a recent debate during the IV Brazilian Arbitration Committee Congress, the conclusion reached was that, after the Law had been in force for eight years, the Brazilian Courts would now regard this method favorably, unlike the position imagined or described during the first few years of its legislation. In his address, High Court Justice Sidnei Beneti of the São Paulo Courts commented that recent judicial decisions underline the Judiciary’s endorsement and acceptance of Arbitration. As an example, he cited the STF (Brazilian Federal Supreme Court) where not a single case has been recorded against the Arbitration Law. The High Court Justice continued by stating, “there are now six precedents in the STJ (Superior Court of Justice) and in the STF favorable to arbitration”.

- It is an accepted fact that good Corporate Governance is the best prevention against corporate conflict. However, even in a good Corporate Governance environment, conflict is sometimes nevitable. In the business world, delays in settling conflict among shareholders almost always impact a company’s operational continuity. On the other hand, a rapid solution to this type of conflict always gives the shareholders an opportunity to return to the previous status of common interests or, even to rapidly extinguish the company and invest the funds in another company, or even alternative investmentsoHo. A speedy solution to conflict situations is particularly important for giant institutional investors or companies constantly seeking new investment or partnership opportunities, without having to endure the lethargic pace of standard court proceedings at their first corporate conflict. The arbitration system is also vital and useful in settling corporate conflict in family businesses. Moreover, the use of arbitration proceedings in corporate relationships providing a fast solution to conflicts, introduces a positive environment in attracting new investments and new partners. This conclusion reached by the IV Brazilian Arbitration Committee Congress is excellent news for Brazilian Corporate Governance. It is always timely to recall that the implementation of good Corporate Governance practices worldwide and its enforcement and precedents created in Brazil represent yet another favorable condition for improving the levels of Corporate Governance in Brazil.

Recording a curiosity.

- Anyone familiar with the Brazilian board of director and senior management market is aware that rarely are these professionals recruited through classified announcements in wide circulation newspapers, even business newspapers. In September 2004, one of the world’s leading human resource consultancies present in over twenty (20) countries, published a classified advertisement in a Brazilian business newspaper seeking a Chairman of the Board for a multinational engineering organization in Rio de Janeiro. It is possible that this was the first classified advertisement printed in a Brazilian newspaper calling for candidates for as high a position as Chairman of the Board. Since consulting projects such as this are normally conducted under the strictest possible standards of confidentiality, the result of this pioneer search in the Brazilian business market is unknown.

IBRACON (Institute of Brazilian Independent Accountants) announces its Corporate Governance Chamber

- The IBRACON CGC (Corporate Governance Chamber) was formed in November 2003 and, headed by Elso Raimondi, commenced operating in January of this year. Meetings are held on the first Monday of each month at 1500h, and their purpose is to act as a debate forum for Corporate Governance related matters. During the meeting, IBRACON gives its valuable contribution in its capacity as a body composed of audit and accounting professionals, all of them substantially representative of the Corporate Governance world. Anyone interested in the CGC’s activities should visit the IBRACON website (www.ibracon.com.br) or phone for information at (11) 3258 0210.

ABRASCA (Brazilian Association of Publicly Quoted Corporations) presents awards for the best annual reports of 2003

- A major pillar of good Corporate Governance is Transparency, and the annual report is an important tool for reflecting the company’s alignment in this area. In September, ABRASCA held the sixth edition of its Best Annual Report Award, whose Judging Committee was presided over by a leading Brazilian specialist in this field, Lélio Lauretti. The entire judging procedure was organized by SB Eventos and culminated in the award ceremony, where Companhia Brasileira de Distribuição (Pão de Açúcar Supermarket Chain Group) was the winner in the publicly quoted corporation category and Natura the winner in the private company category. In his speech, Lauretti pointed out that the quality of the information contained in the competing companies’ annual reports, improves with each passing year.

The high price of omitting material information in organized markets.

- Recently AT&T, the leading US long distance telephone company, reached an agreement with a group of shareholders that sued the company alleging that it had failed to disclose material information on its operations during a certain period of activities. Two points arouse interest in this settlement, a common practice in the US capital market and in the country’s judicial system. Firstly, the brief period of time on which the shareholders based their case, arising from alleged losses (December 1999 to May 2000), and, secondly, the significant difference between the amount of the case and the amount of the settlement: US$2.4 billion and US$100 million. Nevertheless, this agreement made by a company of the size of AT&T, is a lesson to the capital market that the omission of material information that, by causing a shareholder to take a wrong decision, could dearly cost any company negotiating its shares in organized stock exchanges.

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

1.5 The General Assembly

The top governing body of a company is its General Assembly (of Owners). All references to "General Assembly" made herein also extend to the general meetings of the owners.

1.5.1 Main Powers

The following powers are exclusive to the General Assembly: increasing or decreasing capital stock and other amendments to the bylaw/articles of association; electing or removing Directors or members of the Fiscal Council at any time; examining Management accounts on an annual basis and making decisions about the financial statements; and making decisions on company transformation, consolidation, merger, incorporation, split-up, termination or liquidation.

1.5.2 Advance Notice

A minimum 30 days’ notice of the Annual General Meeting should be given to all owners.

It is desirable that information of the date of the Annual Meeting be available to all owners by the end of the fiscal year.

Any owner is free to request the governing body of the company to stop counting notice time prior to a General Meeting expected to address more complex issues, such request should be duly justified.

1.5.3 Venue, Date, and Time

The venue, date, and time of the General Meetings must be selected so as to allow most owners to be present.

1.5.4 Agenda and Documentation

The agenda of the General Meeting, as well as its respective documentation – which should be as detailed as possible – should be made available to all owners on the date of its first notice, so that all owners can take a stand as to the matters to be voted on.

The agenda should not include "other subjects", to make sure important matters are mentioned with enough notice.

Any dissenting votes on the approved decision should be minuted, if so required. Listed companies should forward all their minutes in full to CVM (Brazilian Securities and Exchange Comission) and/or to the Stock Exchange where they are listed, even if they have published just a summary of the minutes.

The bylaws should establish that any subjects not expressly included in the agenda may only be voted on upon full owner attendance and unanimous agreement, including preferred shareholders with voting rights on the issue.

1.5.5 Owner Proposals

Mechanisms should be encouraged for the timely receipt of proposals from owners wishing to include them in the agenda of the upcoming General Meeting.

1.5.6 Questions in Advance from the Owners

The owners should always have a chance to request and receive information from company management in a timely fashion. Questions should be asked in writing and addressed to the company’s Chief Executive Officer or the Investors’ Relations Officer.

1.5.7 Voting Rules

Voting rules should be well-established and available to all owners as of the publication of the first notice of the General Meeting. These rules should be made to facilitate voting, including proxy voting, or other voting methods.Votes by proxy should be given according to the specific instructions of the owners. The proxies should be analyzed in good faith, reducing red-tape requirements to a minimum.

1.5.8 Conflicts of Interest during General Meetings

Should an owner for any reason have a personal or conflicting interest with that of the company during the debate of a particular issue at the General Meeting, he/she should abstain from taking part in the discussion and voting, both in his/her own name or on behalf of a third party.

The bylaws should contain rules for deciding cases of conflicts of interest.

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