Brazil’s Improving Corporate Governance

From the mid 1990’s until 2000 the Brazilianconcluded his brief historical summary by
equity market was characterized by poormentioning that the CVM and the Central Bank of
corporate governance, weak enforcement, littleBrazil oversee the Brazilian fund industry.
minority investor protection, shallow liquidity andMr. Osorio then highlighted some of the more
low valuations. This challenging situation provokedrecent developments aimed at providing greater
de-listings and forced a migration of companiesinvestor protection and transparency in Brazil.
seeking the greater protection that the NYSESome of the more significant actions have
could offer. Fast-forward to the period betweenincluded; better enforcement against Insider
2004 and 2007 and the scenario had changedTrading through a 2005 agreement with the
completely, with a record number of IPO’sBrazilian Public Prosecutors office; a convergence
coming to the market raising a total of US$45of Brazilian GAAP accounting to IFRS; the
billion from foreign and domestic investors. Sointroduction of the possibility of on-line voting and
how can such a turnaround be explained?a CVM guideline no.35 on mergers between
Alternative Latin Investor was fortunate tocompanies with the same controlling shareholder.
attend the recent alternative investment summitJose Luis Osorio then spoke of how the financial
in Sao Paulo, Brazil and Jose Luis Osorio fromcrisis was shaping debate for new rules and
Jardim Botanico Partners shed some light on howregulations currently being considered. In
investor protection legislation has evolved in theNovember of last year, BOVESPA created a
recent past.committee, headed by a former head of CVM, to
A significant reform took place in Brazil in 2001,conduct a review of the Novo Mercado rules
when two 1976 corporate laws no. 6404 andmentioned earlier. The consultation process with
6385 were updated leading to amongst othermarket participants involves the following aspects
things an improvement in shareholders rights andthat Mr. Osorio highlighted; 1. Poison Pills; 2. Board
their enforcement and importantly a granting ofmember participation and 3. Corporate
independence to the CVM (the Securities andrestructurings – Tag Along Rights.
Exchange Commission of Brazil). Jose Luis OsorioIn concluding his presentation Jose Luis Osorio
went on to explain that at the same time theposed the question “how has the
BOVESPA (the Sao Paulo Stock Exchange)BOVESPA’s Novo Mercado performed?”
created three new listing levels for issuingHe said that if measured in terms of the number
companies, each with increasing better corporateof new companies that accessed the equity
governance requirements. These three levelsmarket and the volume of money raised that the
were voluntary and contained the followingsuccess of the Novo Mercado is unquestionable.
elements; Level I, required and improvement inOsorio also thought that it is indisputable that
quarterly reports and the disclosure of an annualNovo Mercado companies can now boast better
calendar of corporate events; Level II, looked forgovernance standards than those in the traditional
the elements of Level I as well as Tag alongmarket. Finally and perhaps most importantly the
rights (80%) and voting rights granted toquestion was asked as to if better corporate
preferred shares in transactions between relatedgovernance had led to better performance?
parties; The highest and final level was calledOsorio compared the performance of the
“Novo Mercado”, which incorporated theIBOVESPA with the IGC (special governance
elements of levels I & II but in addition hadstock index) since 2001, and he illustrated that the
Tag along rights (100%) and one share one vote.IGC has consistently performed better than the
Mr. Osorio, a former President of the CVMIbovespa.