LCV

NEWS ABOUT CORPORATE GOVERNANCE - May-June/2005

Year IV – No. 40

Corporate Governance News

Editor: Luciano Carvalho Ventura

Editorial

GovernanceMetrics International – GMI continues expanding its Corporate Governance services.

GovernanceMetrics International – GMI (www.gmiratings.com), the world’s leading unsolicited Corporate Governance research and rating services organization, has expanded its services even further.

GMI was started in New York in 2002 by Gavin Anderson, Gary Kraut, Jon Lukomnik, Howard Sherman, and Stephen Davis, all of whom had in-depth experience in the capital and Corporate Governance market. The CEO is Gary Anderson and Howard Sherman serves as its Director of Operations. The company’s chief activity is to classify companies through a unique Corporate Governance evaluation system, a method based on an average of 600 points that has been tested worldwide for over two years at that time.

In 2003, GMI made available to its clients, the majority of them investors, the ratings of 1,600 companies worldwide, comprised of 1,000 US companies and 600 non-US companies from the following 13 countries: Germany, Australia, Canada, Spain, Finland, France, the Netherlands, Italy, Japan, Portugal, the United Kingdom, Sweden, and Switzerland. The Canadian companies attained the highest average rating (7.2), closely followed by the UK (7.1) and the US (7.0). The lowest average ratings were received by Swiss companies (4.2), French companies (4.1), and Japanese companies (3.5). Based on the GMI method, of the 1,600 companies analyzed, only 17 obtained the highest rating grade of ten. Fifteen of these were American and two Canadian. These were (in alphabetical order): Alcan Inc (Canada), The Allstate Corporation (US), 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) and SLM Corporation (US).

In its most recent Press Release of March 6, 2005, GMI announced that, for their investment purposes, its clients already had the ratings of 3,220 international companies, which consider the level of these companies’ Corporate Governance policy.

Here a greater number of companies attained a grade 10 rating, i.e., 34 companies as compared with the mere sixteen for 2003. This increase in the number of companies with a state-of-the-art Corporate Governance policy in place could be due to an increased number of classified companies or to improved Corporate Governance levels in general. Among the 34 companies, 27 were American, 3 Canadian, 3 British, and 1 Australian. They are (in alphabetical order: Air Products & Chemicals Inc. (US), BCE Inc. (Canada), BP Plc (UK), CIT Group Inc. (US), Colgate-Palmolive Company (US), Cooper Industries Ltd. (US), The Dow Chemical Company (US), Eastman Kodak Company (US), Entergy Corp. (US), General Electric Co. (US), General Motors Corp. (US), Gillette Company (US), Great Lakes Chemical Corporation (US), Johnson Controls Inc. (US), Lockheed Martin Corporation (US), Mattel Inc. (US), Nexen Inc. (Canada), Occidental Petroleum Corp. (US), People’s Energy Corporation (US), PepsiCo, Inc. (US), PG&E Corporation (US), Praxair Inc. (US), The Procter & Gamble Company (US), Public Service Enterprise Group Inc. (US), Regency Centers Corp. (US), Rohm & Haas Company (US), SLM Corporation (US), Smith & Nephew Plc (UK), 3M Company (US), TransCanada Corporation (Canada), United Technologies Corporation (US), Vodafone Group Plc (UK), Westpac Banking Corp. (Australia), and Wisconsin Energy Corporation (US).

In the context of countries, the UK achieved the highest average rating (7.39) closely followed by Canada (7.14) and the US (7.03). The lowest average ratings went to Belgium (3.93), Japan (3.49), and Greece (2.37).

In conclusion, we point out an interesting article in The New York Sun of March 29, by Elizabeth Peek, entitled “Corporate Governance Moves to Center Stage”. Its subject matter is the growing importance of Corporate Governance level information given by GMI to its clients, as one more decisive factor in the selection of corporate investments. In her article, Peek mentions a number of companies to which GMI has given very low Corporate Governance ratings that subsequently led to huge shareholder losses. Among these are Parmalat, Freddie, Mac, Marsh & McLennan, Krispy Kreme, and Interstate Bakeries.

In addition to this Corporate Governance classification service, GMI has provided the market with outstanding newsletters on events in the US and the world in relation to this topic whose worth increases daily the business world.

The IBGC (Brazilian Institute of Corporate Governance).

The IBGC continues to grow. As part of its geographic expansion through the creation of chapters, after consolidating its presence in the Southern region capital cities and Rio de Janeiro, on June 5, 2005, the Paraná chapter was formed at an Extraordinary General Meeting, where the members of its Coordinating Committee were elected.

They are Fernando Mitri, Juarez Seleme, Marcio Kaiser, and Marcelo Bertoldi, the last named appointed as Coordinator-General. In turn, in its Extraordinary General Meeting held on June 28, 2005, the Southern Chapter elected the following Coordinating Committee, comprised of Paulo Renato Soares Terra, Roberto Lamb, Telmo Schoeler, and João Verner Juenemann. Immediately thereafter, the committee elected Juenemann as its Coordinator-General. In its Extraordinary General Meeting of June 30, 2005, the Rio de Janeiro Chapter elected Antônio Alberto Gouveia Vieira, Fernando Marotta, Paulo Gonçalves Simões, and João Laudo Camargo, the last-named who was elected as Coordinator-General of this Chapter.

National Association of Corporate Directors - NACD

Founded in 1977, the NACD, the IBGC’s US sister association, is entirely dedicated to meeting the Corporate Governance needs of boards of directors and their members. It boasts 15,500 members all of them involved in a wide spectrum of companies, from the Fortune 100 to small private organizations, and it also holds annual conferences. This year’s conference will be held on October 24 and 25, 2005 in Washington DC, and its main topic will be “Fortifying Shareholder Relations and the Public Trust”. The pre-conference matters to be discussed on October 23^rd are very apposite in the context of Corporate Governance today, particularly for companies subject to the very demanding Sarbanes Oxley Act. These topics are: a) Audit Committees: upgrading quality and improving performance and b) Executive Fees and the role of the Fee Committees. Interested parties can obtain all information on the conference and on the NACD itself on its website (www.nacdonline.org).

The NACD is the only association of boards of directors, board members, board member candidates, and board of director consultants in the US. Presently, it has thirteen chapters spread throughout the country and its website is worth visiting for anyone active or interested in Corporate Governance.

ABRAPP (Brazilian Association of Private Complementary Pension Funds).

In conjunction with two related institutions, ICSS and SINDAPP, ABRAPP, an association comprised of close to 400 Brazilian pension funds that, for the first quarter of 2005, recorded a total net worth in the region of R$320 billion (approximately, US$120 billion), held its eighth international seminar, “The Structure of Pension Funds in Europe” from May 21 through 28, 2005. During this period, 28 directors and Officers of Brazilian pension funds, including the writer, visited Portugal and Spain, where they met with government bodies, trade union leaders, directors and Officers of the leading local pension funds, asset managers, and distinguished professors. ABN Amro, Banif Investment Banking, Espírito Santo-Besaf, and Icatu-Hartford sponsored this seminar. Although the main topics covered related to pension fund systems, it is worth commenting on some aspects of the governance practices implemented by Portuguese and Spanish pension funds and their involvement in the Corporate Governance of companies where they are shareholders. Together with Italian pension funds, these funds are known as “Mediterranean funds” and, strange as it may seem, they have no corporate identity, unlike the majority of pension funds worldwide. In fact, they are actually formally contracted agreements entered into by the members and an asset manager. These agreements establish the commitment to savings, on the one hand and the commitment to managing these resources, on the other hand. Under the auspices of a Control Commission, usually comprised of individuals with no background in the task of guiding and monitoring the asset manager’s activities, the members have minimal influence in guiding and monitoring such managers’ activities.

Brazil’s pension fund governance legislation, unlike that of these two countries, ensures a more active member presence in its management and monitoring bodies. This was recently reinforced by Resolution No. 13 of October 1, 2004 issued by the Complementary Pension Fund Management Council, which introduced standards, governance rules and practices, and internal controls to be followed by Brazilian pension funds (See the May/April 2005 LCV News Editorial).

Portuguese and Spanish pension funds perform practically none of these actions, since the manager tends to use the voting powers of the shares representing the reserves of the funds it administers, to vote in line with the interests of the financial group of which the asset manager is part.

Some progress has been observed, where the manager is now required to provide a more detail disclosure of accounts, either in the manner in which it managers the resources, or how it uses its voting power on the pension fund investment, in these companies’ general assemblies. But this will all be conditional on the growth of these pension fund reserves in relation to the net equity of the leading financial institutions and on the improved qualifications of the Control Commission member companies, representing all other parties included in the savings and fund management agreement.

Once again, the José Alves Group takes a pioneering step in Corporate and Family Governance.

Many family businesses have utilized Family Governance as part of their attempt to manager real or potential conflict between their shareholders/partners. Experience has shown more failures than successes arising from this approach focusing only on the family, where the company plays a secondary role. Recently, more up-to-date family groups have begun to combine the use of Family Business Governance with good Corporate Governance in their companies.

An excellent example of this approach to the family business, via action in both the family and the company, is that of the José Alves Group that, in October 2002 celebrated 40 successful years under its motto of “Consolidating the Present – Guaranteeing the Future”. The Group was formed in 1962 by natural born entrepreneur, José Alves, and his wife, Maria Dilda, and began as a Wet and Dry Goods Wholesaler through Casas Alô Brasil, in Uberlândia, State of Minas Gerais. The Group is presently run by José Alves Junior, who, this year was named as one of the National Tobacco and Beverage Industry Business Leaders by the Gazeta Mercantil Newspaper. His company manufactures Coca-Cola and Sopro de Garrafa soft drinks and mineral water. During the latter half of 2000, he opened a new business in the field of higher learning, for which the first entrance examination for the Alves Faria Faculty was held. The college now offers eleven courses, nine of them holding MEC (Ministry of Education and Culture) approval, one at level A, two at level B, and one pending approval.

In 1999, the Group introduced its Corporate Governance project in conjunction with a Family Business Governance Project. As part of its innovative approach to the family business sector, it developed and implemented a “Junior Board of Directors”, comprised of the third generation successors of the Group’s family member shareholders. The objective here is to prepare these successors for their relationship with the business, regardless of the specific roles they will play in the future, such as shareholder, member of the board of directors, executive, or even family council member. Among the prerequisites for these family members to become involved in this successor development project is that they must be aged twenty or over and be studying for a college degree. Through their monthly meetings and as it performs within a controlled level of transparency of the business of the companies, under a confidentiality agreement, individually signed by each member, the Junior Board of Directors, presently composed of ten members, utilizes the companies’ economic and financial data, discusses their current problems, and can question policies and propose solutions. These queries and proposals must be presented via the Chairman of the Group’s Board of Directors, which is aided by an independent board member and another executive in directing this project. In the opinion of Alves Junior, to date, the development and involvement of each member of the Junior Board of Directors over its two-year existence has fully justified the decision to implement this pioneer project.

Speaking of Corporate Governance and Family Governance…

René Werner, widely regarded as one of the most competent and progressive family business consultants in Brazil, recently launched his new newsletter, Família & Negócios (“Family and Business”) (www.wernerassociados.com.br), where he published his interesting article entitled “Family Governance and Corporate Governance”. In this article, despite being more of a specialist in Family Governance, Werner acknowledges that, in a family business, Family Governance cannot function without Corporate Governance and vice-versa, when he states “Good governance supporters must recognize that family businesses should not and cannot discard the family nature of the business, but family businesses seeking to be more professional, must implement good Corporate Governance practices, incorporate their principles, and manage their assets accordingly”. Werner’s article is transcribed in full in the Technical Material section of the LCV website (www.lcvco.com.br)

Werner has been invited to speak at The First Annual Latin American Family Office Conference to be held from November 17 and 18, 2005 in Coral Gables, Florida. More information on this event can be obtained from the website (www.mgi-direct.ch)

Recent survey on the compensation and structure of Brazilian Boards of Directors

Through its board member, Paulo Conte Vasconcellos and the consultancy firm Watson Wyatt do Brasil represented by its Officer, Marcos Morales, the IBGC recently concluded a study of the practices and fee policies and of the structure of Brazilian boards of directors. The study sample included seventeen companies with a total of 200,000 employees, twelve of which are listed in Bovespa’s (São Paulo Stock Exchange) premium Corporate Governance segment. Annual net revenues recorded by these seventeen companies totaled US$23 billion, an average individual annual net income of US$1.4 billion. The survey included 178 board members and the data was obtained through questionnaires and personal interviews. The results of this survey can be found in the IBGC website (www.ibgc.org.br).

The chief monthly fee results, based on part-time service, obtained in this survey, at an exchange rate of (US$/R$2,36) were as follows: Chairman of the Board - R$6.000 for the first Quartile, R$11.387 for the Simple Average, R$11.387 for the Weighted Average, R$9.000 for the Median, and R$11.000, for the third Quartile. Board Member - R$5.000 for the first Quartile, R$8.196 for the Simple Average, R$7.772 for the Weighted Average, R$8.881 for the Median, and R$11.000 for the third Quartile. Structural size results were as follows: six members for the first Quartile; nine members for the Average; eight members for the Median; and eleven members for the third Quartile. Number of meetings: 24% of boards held up to four meetings per annum, 29% five to eight meetings, and 47% nine to twelve meetings, almost half of them lasting for four hours. Lastly, the results for the crucial item of composition were: 36% of these individuals are majority stockholders, 33% are independent non-company members, 18% are non-independent non-company members, 18% are former executives of the company, 5% are active company executives.

The new dynamics of the board of directors’ relationship with the CEO

Everyone in the world of Corporate Governance is aware of the complexity of the board of directors/CEO relationship and its crucial role in a company’s success or failure. On June 8, 2005, Exame Magazine published an interesting summary by Walter Janssen Neto, the economist and Corporate Governance specialist with degrees from the Stanford Law School, Chicago Business School, and Wharton School, of Ram Charan’s most recent book, “Boards that Deliver (published by Josey-Bass), specifically covering this complicated topic. In his summary, Janssen Neto, explains that it is Charan’s belief that board members are currently undergoing a process of transition and change. The first stage, prior to the great corporate scandals era, was the ceremonial period. With the advent of the Sarbox Act, which transferred a substantial degree of trustee responsibility to the board of directors, came the liberation period. Janssen Neto is of the opinion that “With this increased responsibility and their pockets at risk, boards became more actively involved in their companies’ business activities, but in an unstructured manner. This leads to unproductive clashes with the CEO and other hands-on executives”. Charan’s recommended solution for these conflicts is that, in their relationship with the CEO, boards should enter what he calls the progressive period, where the interface between these two sides becomes constructive and cooperative. His book is a diagnostic chart of this many faceted relationship and, in Janssen Neto’s view, is a practical guide for boards of directors and their chief executives, one that explains how to ensure this relationship evolves and how to approach this new Corporate Governance environment.

Corporate Governance achievements in Turkey

In late 2004, the Turkish Capital Market Board required all companies listed on the Istanbul Stock Exchange to disclose in their annual reports for fiscal year 2004, their level of compliance with its Corporate Governance Principles, issued in 2003. In February 2005, it paved the way for yet another advance for listed corporations by launching a new and completely separate performance index known as the Corporate Governance Index. To qualify for inclusion in this index, a listed company must attain a level of transparency compliance, not in relation to the earlier principles approved in 2003, but with new and stricter principles of transparency pursuant to the 2004 OECD Corporate Governance Principles. Among many others, we highlight here the full transparency required on executive compensation, clear regulations preventing conflict of interests, expansion of stakeholder rights, and particularly, simplified exercising of shareholder voting rights, particularly overseas investors.

In the opinion of many, this movement is yet another qualification to ensure Turkey’s entry into the European Union.

Best Corporate Governance Practices

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

2. The Board of Directors

2.11. Term of office

The Board Member’s term of office should be clearly established. It should be short, preferably just one year long. Reelection should be possible after a formal evaluation of performance. Reelection should not be automatic. All the Board Members should be elected at the same time.

2.12. Age limit

Some people are unproductive even before 60 years of age. Others are very productive at 75. If the term is short and the evaluation method is efficient, no age limit is necessary.

2.13. Change in the Director's main occupation

A Director’s main occupation is an important factor in choosing him/her. When his/her main occupation changes, the Board Member should tender his/her resignation. The nominating committee should analyze the convenience of proposing his/her reelection.

2.14. Remuneration

The fees of the independent and external Directors should reflect the time each is expected to devote to the company. The level of fees, on an hourly basis, should be compatible with the remuneration of the CEO including his bonus and fringe benefits.

2.15. External consulting

Directors should be entitled to consult with external professionals (lawyers, auditors, tax specialists, etc.) paid by the company to get a second opinion. The Board should include this matter in its internal instruction.

2.16. Independent Director

The majority of the Board Members should be independent from the company. The definition of independence is:

not having any other ties with the company, except possible shareholdings
not having been an employee of the company or any of its subsidiaries
not providing any service or product to the company
not being an employee of any company providing any service or product to the company
not being married or related down to the second degree to any company officer or manager
not being paid anything by the company except normal director fees and possibly dividends (if also an owner).

A Director should work for the good of the company, and consequently for all the owners.

A Director should seek maximum independence from the Owner or Stakeholder that may have nominated him/her, knowing that, once elected his/her responsibility should be to all the Owners.

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