Corporate Governance in Developing and Emerging Markets

Franklin Ngwu, Onyeka Osuji, Frank Stephen, Franklin N. Ngwu, Onyeka K Osuji, Frank H. Stephen

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317353867
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Throughout the world, the Anglo-American model of corporate governance tends to prevail – but no two countries are identical. Governance outcomes in developing and emerging economies often deviate from what theory predicts, due to a wide range of factors. Using insights from New Institutional Economics, Corporate Governance in Developing and Emerging Markets aims to explain the different issues and cultural and legal factors at play, and put forward an alternative governance framework for these economies.

Structured in three parts, this text investigates different models of corporate governance; it explores the realities of corporate governance in ten nations, including the 'BRICS' (Brazil, Russia, India, China and South Africa) and 'MINT' (Mexico, Indonesia, Nigeria and Turkey) countries; and then considers corporate governance reform.

This interdisciplinary text will be a valuable tool for students of corporate governance across Business, Economics and Law; and an equally useful resource for anyone working in or carrying out research in this area.

Part C

Corporate governance in the BRICS and MINT countries

5

Brazil

Recent corporate governance advances and retreats

Ricardo P. C. Leal and Flávia S. Maranho

Introduction

This chapter discusses developments in Brazilian corporate governance practices, with an emphasis on recent transformations and the institutions that took part in them. The focus is on the narrative about recent selected developments and the actual difficulties that promoters of better corporate governance have faced. This chapter is not a literature review and there is no intention of offering a broad set of references, particularly on more general aspects. Thus, the number of references was kept to a minimum, prioritizing those dealing directly with Brazil. The selection of topics is naturally arbitrary and they may not be interrelated, but they offer views on important corporate governance topics such as ownership structure, listing requirements, compensation disclosure, and institutional investor engagement, with mention to state-owned companies and institutional investors wherever appropriate.

This introduction is followed by a discussion of the partial reshaping of the concentrated ownership model towards a mix of systems. The introduction of premium trading lists at the stock exchange and the attempts to reform them comes next. These premium trading lists demand that the companies that voluntarily join them abide by a list of corporate governance and disclosure requirements. Attempts to strengthen the requirements created in 2000 were only partially successful. The chapter then addresses compensation levels, focusing on the new rules designed to improve and expand compensation disclosure and the legal resistance by companies to comply. Finally, a brief analysis of institutional investor engagement in Brazil and its muddled effects closes the chapter. The text highlights the most important institutions taking part in the events and their stance in most instances.

Leal, Carvalhal and Iervolino (2015) present a general picture of the recent evolution of corporate governance practices in Brazil. They analyse a Corporate Governance Index (CGI) of Brazilian publicly traded companies between 2004 and 2013. The CGI series starts in 1998 and has been calculated annually since then for each company traded on the exchange. Leal and Carvalhal-da-Silva (2007) proposed the original CGI questionnaire version with objective questions that could be responded to with a simple “yes” or “no” using publicly available information.

Leal et al. (2015) state that overall corporate governance quality improved, especially after the stock exchange created the premium corporate governance trading lists in 2000. However, the average score of the index levelled out in the last few years of their sample. They say that the average CGI of 5.8 (out of 10) in 2013 is low and suggest that there is room for improvement. The set of questions related to ethics and conflicts of interest register much lower scores than the other sets of questions regarding transparency, composition, and functioning of the board and shareholder rights. The authors underline their concerns about the very small number of firms that ban loans to related parties or facilitate participation in shareholder meetings. They claim that the lesser use of mechanisms to increase control, such as non-voting shares and indirect control structures, was a notable advance. However, there was a more frequent use of agreements among shareholders and they may interfere with the independence of directors and enhance the power of the controlling block.

This chapter proceeds with sections discussing the emergence of a hybrid ownership model, a partially successful attempt to reform premium listing rules and recent developments and legal battles over compensation disclosure, closing with the inconclusive effects of the entanglements of institutional investors with their investees in Brazil. A brief last section concludes the chapter.

The rise of a hybrid model of corporate governance

Brazil has been perceived as a low investor protection country (Nenova, 2012). Leal and Carvalhal-da-Silva (2007) and Leal, Carvalhal and Valadares (2002) pointed out that, in the late 1990s, the country displayed underdeveloped corporate governance practices, typical of a highly concentrated ownership emerging economy, with many large firms controlled by families and the state, passive boards submitted to the will of controlling shareholders, widespread use of indirect control structures, and a very high percentage of non-voting shares in the equity capital of listed companies. These authors highlight that the largest shareholder would hold a significant share of the voting rights even in cases where there was no controlling shareholder. They also reveal that, in those cases, the three largest shareholders controlled companies – often bound by an agreement – in addition to frequently using pyramid schemes as a mechanism to ensure control at a lower cost.

The privatization of state-owned companies in the second half of the 1990s begins to change the ownership structure of Brazilian companies (Leal et al., 2002; Carvalhal, 2012). Many state-owned enterprises made the transition from control by the Brazilian state, often with minority shareholders, to a hybrid system of control in which the members of the acquiring consortia became the new controlling group under a shared control arrangement formalized by an agreement. A market characterized by companies controlled by a single entity, commonly the state or a family, gained a new ownership form: the shared control companies resulting from the many privatizations, with minority shareholders (Leal et al., 2002). It is from this time that giants such as Vale (mining) and the several telecommunications companies resulting from the break-up of Telebras became hybrid control public enterprises. Yet, the crown jewel, Petrobras, was never considered for privatization, possibly due to the tremendous political resistance this would ensue. To the best our knowledge, there is no Brazilian academic evidence that minority shareholders are more often or severely expropriated when the state is the controlling shareholder instead of a family. The recent cases of Petrobras, discussed in another chapter in this book, and Eletrobras (energy) may suggest so, but several cases of family controlled companies, the most notorious of them being the business group owned by entrepreneur Eike Batista, cast some doubt that the problem is more severe with state-owned companies. So far, it seems that it is hard to say which type of company can be more deleterious to minorities.

The privatization of state-owned companies in the second half of the 1990s begins to change the ownership structure of Brazilian companies (Leal et al., 2002; Carvalhal, 2012). Many state-owned enterprises made the transition from control by the Brazilian state, often with minority shareholders, to a hybrid system of control in which the members of the acquiring consortia became the new controlling group under a shared control arrangement formalized by an agreement. A market characterized by companies controlled by a single entity, commonly the state or a family, gained a new ownership form: the shared control companies resulting from the many privatizations, with minority shareholders (Leal et al., 2002). It is from this time that giants such as Vale (mining) and the several telecommunications companies resulting from the break-up of Telebras became hybrid control public enterprises. Yet, the crown jewel, Petrobras, was never considered for privatization, possibly due to the tremendous political resistance this would ensue. To the best our knowledge, there is no Brazilian academic evidence that minority shareholders are more often or severely expropriated when the state is the controlling shareholder instead of a family. The recent cases of Petrobras, discussed in another chapter in this book, and Eletrobras (energy) may suggest so, but several cases of family controlled companies, the most notorious of them being the business group owned by entrepreneur Eike Batista, cast some doubt that the problem is more severe with state-owned companies. So far, it seems that it is hard to say which type of company can be more deleterious to minorities.

Moreover, Silveira (2009) indicated that several domestic developments began to change the ownership context again in 2004, such as the surge in Initial Public Offerings (IPO) listing on the Novo Mercado, one of the newly created premium listing segments of the stock exchange. Novo Mercado requires that all shares are voting shares and that companies must comply with an assortment of corporate governance practices that go beyond legal requirements. The author asserted that Brazil underwent a substantial shift in ownership structure in the ensuing years. A sizable minority of companies transitioned to lower control concentration levels and a few could even be characterized by dispersed ownership and management control. This reconfiguration brought about important changes in the structure and practices of boards of directors, improved the disclosure and quality of company information, and potentially enhanced investor protection. A new hybrid model of ownership emerged, in which a large minority of companies typically had a shared control group formalized under a shareholders’ agreement, instead of a clear single controlling shareholder (Leal et al., 2002; Silveira, 2009).

Still, Sternberg, Leal and Bortolon (2011) state that the overall concentration of control rights remained very high, even though it was significantly lower among the companies listed in the aforementioned premium listing segments. Furthermore, the authors evinced that agreements among shareholders became more frequent with the reduction in control concentration, regardless of the existence of a controlling shareholder. Carvalhal (2012) affirmed that shareholder agreements might mitigate conflicts of interest among controlling and minority shareholders because the large shareholders signatories to the agreement may inhibit the predatory actions of the largest shareholder. Thus, the author claims that the existence of agreements is positively related to firm value and could produce a better degree of investor protection.

The signatories to shareholders’ agreements meet prior to board meetings. In those meetings, they may determine how their representatives on the board will vote. Agreements may bind any director vote at board meetings to the will of the signatories, bind votes only for specific issues, or not bind votes at all. Gelman, Castro and Seidler (2015) claimed that the impact of shareholder agreements on firm value in Brazil is negative if they bind the vote of the directors regarding any topic. This effect becomes positive when vote binding is limited to specific issues. They maintain that Carvalhal (2012) optimistically evaluated the role of shareholders’ agreements because most minority shareholders do not take part in them and the controlling group of shareholders may still expropriate them.

The serious economic crisis of 2014–2016 in Brazil seems to have interrupted the decreasing trend in control concentration. The number of companies with major shareholders owning more than 50 per cent of the voting shares rose from 41 per cent in 2014 to 47 per cent in 2015. Accordingly, the percentage of companies with minority or shared control dropped from 54 to 49 per cent in the same period (Capital Aberto, 2015). The lower stock prices following the domestic economic slowdown incentivized acquisitions, which in turn led to a reduction in market free float, possibly increasing control concentration. Many public companies were acquired and then went private. Others simply delisted because they no longer saw advantages in incurring the costs of remaining public. Some companies abandoned the premium lists for the first time. In tandem with these events, a policy of greater state intervention in the economy – both as financier and provider of selective economic incentives – reduced the role of capital markets. These new events led to the reappearance of old challenges to continuous corporate governance practices improvement and gave way to a reenergized control concentration trend (Chiba, 2012; Capital Aberto, 2015).

The creation of the premium listing requirements in 2000 was at the heart of the changes in ownership concentration that occurred in the first decade of the twenty first century. In particular, the Novo Mercado requirement that listed companies issue voting shares only was well accepted by market participants who saw stock issuance as a good opportunity at the time (Leal et al., 2015). The next section narrates the challenges faced by the promoters of the new listing segments.

Premium listing requirements reform

Back in 2000, The Securities, Commodities, and Futures Exchange of Brazil (BM&FBOVESPA) – the unified stock exchange of the country – was facing a very serious threat, with Brazilian companies listing their American Depository Receipts (ADRs) in the United States and thus facing a loss of trading revenue. The exchange responded by launching differentiated corporate governance listing segments in December 2000. The three new premium levels – Levels 1 and 2 and Novo Mercado – demanded corporate governance and transparency practices over and above the requirements in the Brazilian Corporate Law and complementary regulations issued by the Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM). The reader may find more details about the information provided on the premium listing segments in Braga-Alves and Shastri (2011); Carvalhal (2012); and Carvalho and Pennacchi (2012) as well as at the BM&FBOVESPA website.

These premium segments are a private initiative to improve the credibility of Brazilian public companies and capital market. Companies voluntarily join one of them and agree to comply with corporate governance and disclosure standards that go beyond legal requirements. These premium lists are an intermediate alternative between more detailed and less flexible laws and regulations, which are obviously mandatory, and corporate governance codes, which in Brazil consist of recommendations that are not subject to comply-or-explain rules. Migration of previously listed companies to the three new listing segments was partial because many companies remained in the old trading listing segment, called “traditional”. Newly listed companies, however, embraced the premium lists, especially between 2004 and 2007.

Level 1 demands that companies improve their disclosure practices and increase the dispersion of their shares by means of several specific requirements. A company must agree to all the obligations of Level 1 and adopt an additional broad range of corporate governance practices involving the board of directors and rights for non-voting shares to join Level 2. Moreover, companies must agree to quicker dispute r...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures and tables
• About the contributors
• Part A Introduction
• Part B Models of corporate governance
• Part C Corporate governance in the BRICS and MINT countries
• Part D Critical issues for corporate governance in developing and emerging markets
• Part E Conclusion
• Index