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					                    Improving Corporate
                    Governance Through
                    a Voluntary and
                    Enforceable Regime:

The Case of Brazil’s Novo Mercado

 Patrícia Pellini                                Mike Lubrano
BM&FBOVESPA                                      Cartica Capital
                         November 10, 2009
                        Rio de Janeiro, Brazil
                       DFI – CG Working Group



                                                   www.CarticaCapital.com
• Introduction

• History and implementation

• Main Results

• 2008 and beyond

• Replicating Novo Mercado



                               www.CarticaCapital.com
OECD Principles / Latin America CG Roundtable

 Shareholder Rights and Treatment
    • For Whose Benefit is the Company Run?
 Boards of Directors
    • Role, Composition, Organization and Quality
    • Accountability and Incentives
 Control Environment
    • Identifying, Quantifying and Addressing Risk
    • Internal and External Checks and Balances
 Transparency and Disclosure
    • Accounting and Audit Standards
 Supervision and Enforcement
    • Public and Private Mechanisms


                                         www.CarticaCapital.com
              Listed Cos.    Equity            Mkt. Cap.       MC/GDP
                             Offerings         US$ mm          %
Brazil                412                  4         121,640                 25
Russia                196                 10          67,467                 36
Bombay
  Mkt. Cap.          5650                 15         130,390                 26
Shanghai              715                160         306,444                 32
Mexico                169                  3         103,941                 16
Turkey                289                 57          34,217                 15

                 2002 data




                                                           www.CarticaCapital.com
Patterns of ownership and control
• Almost universally controlled by
   founders/family
• Prevalence of non-voting (PN) shares
Inequitable treatment of shareholders
• Changes of control
• Delistings
Accounting and Audit Standards; Transparency
Boards and Statutory Auditors
Poor enforcement (Regulator / Courts)



                                        www.CarticaCapital.com
1. Legal Reform (Mandatory for All)
   • Corporate Law
   • Securities Law and Regulation

2. Voluntary Code – “Comply or Explain”
   (Transparency Regime)

3. Combinations / Hybrids




                                 www.CarticaCapital.com
• Introduction

• History and implementation

• Main Results

• 2008 and beyond

• Replicating Novo Mercado



                               www.CarticaCapital.com
Limited Legal Reform
• Limits on PN shares, but “Grandfathering” for
   existing firms
• Partial tag along rights
• Delisting rules
• Regulator’s (CVM) powers increased

Voluntary Codes
• CVM –“ Comply or Explain”
• IBGC – Aspirational

Opt-in System (Novo Mercado)




                                          www.CarticaCapital.com
   Traditional or basic (minimum legal requirements)
   4 Corporate Governance listing segments
    › Nível 1 (Level 1)
    › Nível 2 (Level 2)
    › Novo Mercado (New Market)
                                                                             organized OTC
    › Bovespa Mais (Bovespa Plus)                        + only voting      gradual access to
                                                            shares             the market
                                         + shareholder
                                           rights and
                                          arbitration
                   + better disclosure
                     and free float
      Regulation




     Traditional




                                                                         www.CarticaCapital.com
•   Exchange
•   Investors
•   Companies
•   Class association
•   Academics
•   Regulator (CVM)
•   Government (BNDES; Central Bank)
•   Advisors (IFC; OECD)




                                   www.CarticaCapital.com
Private consultations
• Listed companies
• Prospective listed companies
• IFC/CVM company/investor session

Public dialogue
• Brazilian Institute of Corporate Governance
  (IBGC)
• Latin America CG Roundtable
• News Media



                                     www.CarticaCapital.com
•   Marketing to domestic constituencies (existing
    companies; new companies; investors)
•   IGC – Special Corporate Governance Stock Index
•   International constituencies (NY road show)
•   IFC Campaign




                                           www.CarticaCapital.com
Amendment Process
  • Closed hearing with the NM’s companies
  • Not rejected by more than 1/3 listed companies
  • Approval of securities regulator

Revision (main topics)
  • Independent director requirement (20%)
  • Directors’ unified term at most 2 years
  • Arbitration applied for all shareholders
  • Definition of diffuse control




                                         www.CarticaCapital.com
• Introduction

• History and implementation

• Main Results

• 2008 and beyond

• Replicating Novo Mercado



                               www.CarticaCapital.com
           Listed Cos.    Equity Offerings Mkt. Cap.        MC/GDP
                                           US$ mm           %
Brazil              388          5+2+0=7         330,347                  50
Russia              215               20         142,887                  45
Bombay            4730                53         386,321                  55
Shanghai            837              222         314,316                  33
Mexico              326                5         171,940                  23
Turkey              297               51          98,299                  25

                                                   2004 Data




                                                       www.CarticaCapital.com
           Listed Cos.         Equity            Mkt. Cap.        MC/GDP
                               Offerings         US$ mm           %
Brazil               404          43+7+8=58          1,369,711                104
Russia               328                   28        1,104,974                117
Bombay              4887                   86        1,819,101                155
Shanghai                 833               223       3,694,348                194
Mexico                   367                6          397,725                  39
Turkey                   319               34          286,572                  44

                                                         2007 data




                                                             www.CarticaCapital.com
Macroeconomic environment
• 1994 Plano Real / 1999 Currency Crisis
• Inflation falls from 13% to 4.26% (2002-2008)
• Longest period of macro stability in decades
• Strong Growth

Political Developments
• Elections of 2002 and 2006 (Lula)
• Moderate Consensus




                                       www.CarticaCapital.com
• Introduction

• History and implementation

• Main Results

• 2008 and beyond

• Replicating Novo Mercado



                               www.CarticaCapital.com
        Number of Companies                                                                          77%

        Traded Value
                                                                            66%         64%              65%
        Market Value                                                58%                        59%
                                                                                  57%
                                                             56%

                                                     48%
                                               46%
                                        39%
                            35%                                                     36%          37%
                                    34%                                   35%


             23% 23% 25%                                   24%
     19%
                                              17%
 14%
                                  12%
                       9%
           7%
4%


 2001        2002       2003        2004        2005         2006          2007         2008         oct/09
   IPOs by Listing Segment                 Participation of Listing Segments
      (2004 - Oct/2009)                        at the Exchange (Oct/09)
            BDR                            •   37% of total listed companies
            7%
  Nível 1                                  •   65% of market capitalization
   7%           8                          •   79% of traded value
            8
Nível 2
 14% 16

                    81
                              Novo
                             Mercado
                              72%
                                                                          64
                                        Novo
                                       Mercado

                                                                     26
                                                                               4   4
            2            1         1   1         1        7    9

        1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
•   Initial Public Offerings (IPOs)                      •   Follow On Offerings
     •     Filings at CVM: 6                                  •     Filings at ANBID: 2
                                                              •     Filings at CVM: 2
                                     55,6                                                 26,8
         Primary         Secundary


                                     32.0
                                                                                                 19,0
                                                                            15,1
                                                                                   14,5
                                                                                          25.0
                                                  22,0                             4.2           13.0
                                                                     8,5    7.1
                            15,4
         4,5   5,4                                12.3               1.3
                             9.1     23.6                    4,4
                                                                                   10.3
         1.7                                                  2.7     7.2   8.0
                                                   9.7                                            6.0
         2.8       3.0       6.3            7.5
                   2.4                       -                1.7                          1.8

     2004 2005 2006 2007 2008 oct/09                         2004 2005 2006 2007 2008 oct/09
    •     World Markets                                                •     Emerging Markets¹


                                                                                                              Ranking WFE
                                                                                                               2nd place



                                          Ranking WFE
                                             3rd IPOs
                                             6th place




         Inicial Public Of f erings                                              Inicial Public Of f erings

           Other Of f erings                                                       Other Of f erings

Source: World Federation of Exchange (WFE). ¹ Mem bers of Em erging Markets Comitee - IOSCO.
                          IGC x Ibovespa




                                                            25/06/2001
                                                                a
                                                            31/08/2009

                                                             IGC +451%
                                                          Ibovespa +288%
                       Base 1.000 – since June 25, 2006




Source: BM&FBOVESPA.
• IPOs and Migrations to Novo Mercado
  Accompanied by
        • Anti-takeover Measures

• Derivatives losses among very well-known
  companies




                                        www.CarticaCapital.com
Main Drivers
•   Development and sophistication of the market
•   International Financial Crisis
•   Challenge of the existing corporate governance structures

Objectives
•   Maintain the value of the Corporate Governance segments =
    the differential and attractiveness to investors and
    companies
•   Sustain Novo Mercado as a national and international
    benchmark




                                                 www.CarticaCapital.com
Birth of first Brazilian “corporations”: diffuse control and
   dispersed capital
     How to protect shareholders?
     How to avoid conflict of interest?
Lessons of the Financial Crisis
     What mechanisms can guarantee effective Boards?
Evolution of the Brazilian rules and regulation
     IFRS Convergence
     More transparency required by CVM
Complexity to reach consensus
   Higher number of listed companies at Novo Mercado
       Fev/2006 = 21 companies
       Ago/2009 = 101 companies




                                                               www.CarticaCapital.com
• Broad range of point of views:
    Not restricted to the Exchange’s own perceptions


• Any solution must involve all stakeholders:
    Creation of the Novo Mercado Consultative Committee (CCNM)
    Discussion forums with listed companies
    Two seminars open to the public to discuss more complex issues




                                                           www.CarticaCapital.com
• Introduction

• History and implementation

• Main Results

• 2008 and beyond

• Replicating Novo Mercado



                               www.CarticaCapital.com
 Replicating the NM – Philippines Maharlika Board

Current Conditions
• Reasonable Legal Standards – Poor Compliance
• Active Governance Advocates (Philippines IoD)
• Concentration of Controlling Interests in Small Number of
   Families
• Poor Enforcement – Regulator / Exchange / Courts

Main Elements
• Benchmarking Against PSE Guidelines / IoD Scorecard
   (Subjective Elements)
• Independent Evaluation – Sanctions for Non-Compliance
• Alternative Dispute Resolution




                                                     www.CarticaCapital.com
 Replicating the NM – Philippines Maharlika Board

Issues
•   Subjectivity of Measuring Extent of Compliance
•   Market Conditions / Number, Character and Capacity of Investors
•   Credibility of the Exchange / Independence of ADR
•   Governance of the Exchange – Effectiveness of Self-Regulation

Current Status
•   Initiative Announced – Expected 1st Quarter 2010
•   Draft PSE Guidelines Published and Vetted
•   Five Charter Members of the New Listing Segment Have Identified
    Themselves – plus the Exchange Itself
•   Controversy Involving Future Leadership of the Exchange
•   Incomplete De-Mutualization of the Exchange




                                                          www.CarticaCapital.com
                   Thanks!

     Patrícia Pellini          aMike Lubrano
  Issuer Development         Managing Director,
  and Listing Manager       Corporate Governance
www.bmfbovespa.com.br          Cartica Capital
                            www.carticacapital.com
 ppellini@bvmf.com.br
                               +1-202-367-3011

                        a



                                         www.CarticaCapital.com