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back to index backLATINtalk March,  2006


Brazil: Problematic ownership structures

In recent years, companies in Brazil have increasingly come to recognize the importance of corporate governance in boosting capital markets and economic performance. But while many companies have adopted good, or in some cases excellent, governance practices,” to quote the Institute of International Finance, there has been little progress” in reforming a number of key aspects of corporate governance, leaving Brazil overall in the lower tier of leading emerging markets.”

This low rating is generally attributed to Brazil’s highly concentrated ownership structure and the lack of protection of minority shareholders’ rights. Future legislation is expected to continue to focus on improving these issues,” predicts rating agency Standard & Poor’s. One big step forward was Brazil’s introduction of the Novo Mercado (New Market), where listed companies must observe higher governance standards than those required by law. This was one of the reasons why we decided to go straight to the New Market,” says Wilson Pinto Ferreira jr., President and CEO of power company CPFL Energia. Having CPFL shares in the New Market helps us to differentiate the company from the competition, allowing us to trade with a significant premium.”

For Ferreira, transparency means much more than compliance with certain financial disclosure rules. Transparency involves rituals that influence all areas of the company,” he says. In CPFL’s case, this involved setting up dedicated committees that assess the way the company relates and communicates to society as a whole. We have identified every stakeholder and the way we relate and communicate to them,” boasts the CEO. The whole contribution of the company’s activities to our community is made public to the financial markets and stakeholders through our Annual Report, written using the Global Reporting Initiative (GRI) methodology, which means that the economic, social and environmental contributions are made explicit to all through 167 ratios and questions answered, including total environmental expenses, and the company’s programs to protect the environment. We came to the conclusion that only by making public our internal policies would we create the conditions within which we could sustain those policies, rather than falling into the trap of simply launching a one-off initiative,” Ferreira says.

Ferreira is convinced that the cost and effort involved in transparency initiatives or higher standards of corporate governance create value for any company in terms of being perceived as a distinctive player in a given sector. Also, shareholders appreciate the ability to capture premiums in the market following the company’s consistent adherence to these principles. From our experience, I reached the conclusion that the CEO has to be in the driver’s seat if a company strives for greater transparency,” says Ferreira. The establishment and follow-up of specific initiatives, the changing of processes, and leading by example, can only be done by the CEO in person.”

According to Pedro Luiz Barreiros Passos, Chairman of the Board of Natura Cosméticos, the country’s largest cosmetics company, Brazil has experienced a visible evolution in transparency in governance” benefiting all of the company’s stakeholders, including investors, clients, employees, and the community. But while more and more Brazilian organizations are evolving in that direction, Passos perceives that some major multinational players are not following the same example: They may present highly transparent reports at home, but they have very limited communication at their Brazilian subsidiaries.”

As Passos explains, Natura has defended transparency ever since its inception back in 1969, believing in the importance of making relevant contributions to the societies in which the company operates. Passos is convinced that, with information available to everyone, transparency is already everywhere. Only organizations that are totally connected with their environment will be innovative enough to perpetuate their presence in the market,” he argues. This philosophy has helped us improve our processes, practices, and the quality of our decisions, and has ultimately had a significant positive impact on our financial results.”

In 1998, Natura established a Corporate Governance Board with independent non-executive directors. That was well before the company went public in 2004. Creating a truly transparent organization is a complex evolutionary process that requires constant revision and improvement,” says Passos, speaking from experience.

For another Brazilian company, the leading road concessionary CCR, the need for transparency is almost self-evident, says its CEO Renato Valle. CCR’s shareholders are all large construction companies which, in emerging markets, are very aware of the stigma that comes with a lack of transparency. So it is crucial for CCR to be as transparent as it can be. Across the company we work hard to standardize transparent processes,” says Valle. But we also try to leave space for people to be able to take risks and become ‘intrapreneurs’.” Valle does not fear that greater transparency will limit CCR’s competitiveness. On the contrary, I am sure it makes management easier because it establishes a natural balance of interests between stakeholders.” To stay ahead of the game, CCR sponsors a corporate governance study group at Fundação Dom Cabral business school. Last year, CCR won the top three investor relations awards for a Brazilian company,” Valle rejoices.

Source: Egon Zehnder International - GAI


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