By: Jaime Alejandres & Alberto Alejandres

Brief Background on Brazilian Firms Brazilian companies generally have a weak corporative governance, a small board of directors or no independent directors at all. Audit committees are replaced with Fiscal Board’s. Financial disclosure is mixed.  Ex: Some firms provide English disclosure and some do not. Cash flow statements are many times not provided or consolidated quarterly financial statements. Almost all firms have controlling shareholder. Brazilian corporate law provides limited protection to minority shareholders. Bovespa (Brazil’s Stock Exchange) helps fill this gap.

Literature Review Brazilian firms use dual class structures.  Ex: Insiders hold voting common shares; Outsiders hold primarily non-voting preferred shares. This practice results in a high concentration of voting power within firms. Study done by Dutra & Saito (2002) on cumulative voting on board composition for Brazilian firms. Results:  Found little use of cumulative voting.  Use family names as a measure of director independence.

Literature Review Cont’d.… Prior to 1997 Brazil corporate law required new controller, who acquired 50% of common shares, to offer to buy all remaining C.S. at per-share price paid when acquiring control. In 1997 Brazil removed this rule. In 2000 Brazil reinstated takeout rights, now at 80% of the per-share price paid for controlling shares. During , some Brazilian firms provided additional take out rights to common shareholders & preferred shareholders with the company's equity offerings.

Literature Review Cont’d.… Historically Brazil’s financial markets were largely regulated. In 1976, Brazil’s security commission, Comissao de Valores Mobiliarios (CVM) was created.  This helped with the adoption of new corporation law, that included rules governing companies & stock exchanges.

Literature Review Cont’d.… In the 1970’s & 1980’s Brazilian govt. granted tax incentives to firms that went public & investors who bough stock of public companies. Required pension funds & insurance companies to invest in common stock of public firms. There was close to 600 publicly traded firms at the end of the 1980’s. Article states the firms only went public to get these tax incentives from the government, and that there was no desire to have public shareholders or active trading of shares.

Literature Review Cont’d.… Late 1980’s incentives for going public diminished. Many firms went back to private ownership. The end of the 1990’s majority of share trading involved private owned companies. Many Brazilian firms cross listed on the NYSE, which cause a large portion of the trading to move to the exchange.

Literature Review Cont’d.… In 2000 Bovespa (Brazil’s Stock Exchange) launched three new listings,  Level 1, Level 2 and Novo Mercado. Bovespa wanted stronger corporate governance, while still allowed firms to retain Bovespa listing with weaker governance requirements.

Listing Levels: Bovespa & Cross Listing Higher levels provide investors their corporate governance posture. Level 1 Listing: Step up from ordinary listing  More on disclosure. Level 2 Listing: Similar to Novo Mercado  Allows for the issue of preferred shares. Novo Mercado Listing : Requires the firm to issue only voting common shares.  25% of shares not controlled.  Provide financial statements that comply with GAAP or IAS.  Provide takeout rights to minority shareholders & arbitration for any disagreements.

Composition of the Board of Directors Brazilian law requires public companies to have a board of directors with at least 3 members; the majority of firms have 3-7 board members. A common corporate governance concern is that boards can be too large to be effective However, in Brazil it seems as if the boards are too small to be effective The overall work done by the board may exceed the capacity of a small group of people It is also important to note that Brazil has no legal requirements for board independence. Information on director independence is not publicly available

Composition of the Board of Directors Cont’d Minority shareholder representation Minority shareholders have the legal right to elect one representative by majority vote CEO and chairman split A common governance recommendation is that the CEO and Chairman positions should be split, to prevent the CEO from having too much power over the firm. Most Brazilian firms have different individuals as CEO and Chairman; in a study the author found that 71% of firms separate these roles. The common Brazilian pattern is to have the chairman represent the controller but it is unknown whether separating these roles is valuable Director's terms Under Brazilian law, directors can serve for terms of up to 3years Level 2 and Novo Mercado firms are limited to 2-year terms And directors are subject to removal by shareholders at any time

Board Procedures Board meetings Brazilian law does not require a minimum number of board meetings However, most Brazilian firms hold at least 4 meetings per year Minutes and other board procedures A standard corporate governance recommendation is that companies prepare written minutes of board meetings, which indicate who attended the meeting, the issues voted on, and the voting outcomes. Brazilian law requires firms to keep minutes of board meetings There are some differences in board processes between firms with and without independent directors. Firms with an independent director are more likely to prepare board minutes, record the votes of individual directors, and more likely to have a succession plan for the CEO

The End of Part 1 That concludes our presentation What's next Part 2: Oversight of financial reporting