Corporate Governance in Brazil Constraints and Challenges

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					             Corporate Governance in International Business and Finance
                         EIB B239m/ILO L239m: Professor S. Donald Gonson
                              Erika Tabacniks – ID 991146383 - April 2009

Corporate Governance in Brazil: Constraints and Challenges

        The Brazilian stock market has developed strongly in the last four years. Almost US$ 40

billion has been raised through the issuance of equities, and further US$ 78 billion through

debentures issuances from 2006 to 2008. The BM&FBOVESPA S.A. - Securities, Commodities

and Futures Exchange was created in 2008 as a result of a merger between the Brazilian

Mercantile & Futures Exchange (BM&F) and the São Paulo Stock Exchange (Bovespa) and is the

largest exchange in Latin America and the third largest worldwide in terms of market value1.

        In comparison to other developing countries, Brazil has one of the best corporate

governance structures in the world, especially as a result of initiatives taken by the Brazilian

Institute of Corporate Governance (IBGC), BM&FBovespa; and the Securities and Exchange

Commission (CVM)2. One of these initiatives was the adoption of Novo Mercado and its Special

Corporate Governance Levels 1 and 2, a diversified listing segment created by the Brazilian

Stock Exchange in 2000, an important step for its equity market. It provided concrete,

standardized certification of corporate commitments to higher governance standards that

could be readily observed and adopted by market participants3. At the same time, however,

investor concerns about corporate governance have increased internationally and locally. The

  BM&Fbovespa website.
  Stuber, Walter Douglas and Neto, Vera Lucia Pereira. Enron, Parmalat? New Challenges To Corporate Governance
And Regulatory Supervision – The Impact In Brazil. Sao Paulo, September 10, 2004.
  Gonzalo A. Chavez, Ana Cristina Silva. Brazil's Experiment with Corporate Governance, Journal of Applied
Corporate Finance. Pg: 34-44. Morgan Stanley, 2009.

implementation of governance practices is not an easy task and becomes more difficult in Brazil

mainly due to the following characteristics:

        •   Prevalence of family owned companies;

        •   Limited capital pulverization; and

        •   Low percentage of shareholders with voting rights.

        This article provides an overview of the challenges faced by corporate governance

practices of Brazilian firms, identifying areas where Brazilian corporate governance is relatively

weak, and where regulation might be strengthened. Most of the items discussed below are

interconnected to the three main factors mentioned above, contributing to the existence of

more conflicts between minority and majority shareholders.

Shareholders’ rights: companies listed in Brazil may issue common or preferred shares. The

first are governed by the principle of one share, one vote. The latter do not generally carry

voting rights. The original Corporate Law, enacted in 1976, authorized listed companies to issue

1/3 of ordinary shares and 2/3 of preferred shares (non-voting). The issuance of preferred

shares is a way for controllers to raise equity capital without diluting their voting control4, this

means that control could be exercised with a holding of only 16.67% of the voting shares. In

2001, with the acceleration of the opening up of the Brazilian economy, the number of issuance

of preferred shares was limited to 50% of the company`s total shares. Existing listed companies

may observe the former cap, even in future share issues. Despite this change, until recently it

 Black, Bernard S., De Carvalho, Antonio Gledson and Gorga, Erica,An Overview of Brazilian Corporate
Governance(July 2008). U of Texas Law, Law and Econ Research Paper No. 109; Cornell Legal Studies Research
Paper No. 08-014; ECGI - Finance Working Paper No. 206/2008. Available at SSRN:

was very common to have the founder and major shareholder of the company as the owner of

100% of the ordinary shares and the free float composed exclusively by preferred shares.

Controlling shareholders often use shareholders agreements to ensure control.

Ownership Structure: the concentration of control in the hands of a few shareholders in Brazil

has been associated with many of the country’s governance weaknesses. These weaknesses

include not only the poor functioning of boards but also the disregard for minority

shareholders’ rights and the low liquidity of stock markets. In fact, more than 60% of publicly

held companies have one single shareholder controlling over 50% of the voting shares. With

corporate control concentrated in the hands of few shareholders, if not a single shareholder,

there is very limited scope for hostile takeovers. Thus, the managerial discipline imposed by

such mechanisms is not a relevant feature of the market for corporate control in Brazil.

Independence of the Board: most private firms have boards that are comprised entirely or

almost entirely of insiders or representatives of the controlling family or group. In addition to

that, many boards do not have an independent director. Despite this fact, however, minority

shareholders have legal rights to representation on the boards of many firms, and this

representation is reasonably common.

Financial Disclosure: Brazilian accounting standards are weaker than international standards.

Statement of cash flows or quarterly consolidated financial statements are not officially

required, and only a minority of firms provide these as a result of good practice, generally in

connection with a listing on Bovespa Level 1 or higher, or cross-listing on a foreign exchange.

On the other hand, however, due to the increasing number of international investors in the

country, more than half of the listed companies in Brazil provide financial statements in English

and also have a version of their website in English.

One of the major difficulties to Brazilian companies is in regards to the standardization of

accounting standards. International bodies, such as IASC, IOSCO, UE and SEC, have supported

the process of converging accounting practices, mainly towards IFRS, to better standardize the

format and disclosure of financial statements in conformance with global rules. Even though in

Brazil changing a law is lengthy and procedure-intensive the convergence of Brazilian GAAP

with international accounting practices has been accelerated in the last years5. In December

2007, Brazil enacted Law 11.368 which modified several items of the original Corporate Law in

order to accelerate the convergence towards IFRS scheduled for 2010. In despite of its

initiatives in this area, Brazil still has a couple of problems to address such as the lack of experts

in IFRS to advise companies and the lack of familiarity with the English language by most


Audit Committees: are not very common in Brazil. However, many companies use an alternate

approach to guaranteeing financial statement accuracy of a fiscal board. Most of the firms have

either an audit committee or a permanent or effectively permanent fiscal board.

Legal Investors’ Protection: according to Silveira and Saito6, judges in Brazil are not required to

have any additional training on Financial and Capital Markets issues other than those regularly

provided by the standard university mandatory disciplines. The lack of education in securities
  Chehab, Eduardo. Corporate Governance: A Guiding Light For Investors In Brazil. Standard & Poor`s Corporate
Governance Services. March 2009.
  Da Silveira, Alexandre Di Miceli and Saito, Richard,Corporate Governance in Brazil: Landmarks, Local Codes of
Best Practices, Current Level of Compliance and Main Challenges(September 15, 2008). Available at SSRN:

matters and finance has held up the effectiveness of the CVM in enforcing both administrative

and criminal actions. In general the judicial system is not specialized to deal with corporate and

financial cases. However, things have started to change lately7. A couple of years ago, the state

of Rio de Janeiro has introduced a new specialized court empowered to settle cases involving

corporate disputes.

        Since 2005, there has been an emergence of a couple of widely held corporations in

Brazil, such as Lojas Renner (retail) and Invest Tur (tourism). Despite the fact that these firms

still constitute rather the exception, than the norm in Brazilian Stock Market, some specific

corporate governance recommendations could be developed to them, given their peculiarities

and different potential agency conflicts.

        The Brazilian stock market has been increasing mainly due to its outstanding

performance in the last years. As a result, corporate governance practices in Brazil are changing

rapidly, fueled mainly by new IPOs on the Level 2 and Novo Mercado segments, and also to a

smaller extent by former public firms upgrading their governance level. Despite the fact that

IBGC and CVM Codes have been helpful in educating corporate players on the governance

practices internationally recommended by market agents, the Brazilian market hasn’t really

been tested yet. The quality of corporate governance practices adopted by Brazilian companies

still needs to be validated. As markets worldwide respond to a continuous slowdown in the

financial and capital markets, investors and companies watch carefully as their stocks play see-

saw ad infinitum.

 OECD – Organization for Economic Co-Operation and Development (2004). “The Fifth Meeting of the Latin
American Corporate Governance Roundtable – Questionnaire on Enforcement Issues: Draft Results”. 8-9 October,
2004. Rio de Janeiro, Brazil.


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