The corporate governance of privately controlled Brazilian firms.
| Autor | Black, Bernard S. |
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Introduction
This paper provides an overview of Brazilian corporate governance in early 2005. It is based primarily on an extensive survey distributed to all firms listed on Bovespa, Brazil's principal stock exchange (2005 Brazil CG Survey). We received 116 replies to the survey, including 88 from privately controlled firms, 17 from government-controlled firms and 11 from subsidiaries of foreign companies. This paper focuses on privately controlled firms.
Our data provide a uniquely detailed snapshot of Brazilian corporate governance. Even basic data, such as the number of independent and non-independent directors, was previously not available. We identify areas where Brazilian corporate governance is relatively strong and weak. Board independence is an area of weakness: The boards of most Brazilian private firms are comprised entirely or almost entirely of insiders or representatives of the controlling family or group. Many firms have zero independent directors. At the same time, minority shareholders have legal rights to representation on the boards of many firms, and this representation is reasonably common. Financial disclosure lags behind world standards. Only a minority of firms provide a statement of cash flows or consolidated financial statements. However, many provide English language financial statements and an English language version of their website. Audit committees are uncommon, but many Brazilian firms use an alternate approach to ensuring financial statement accuracy--establishing a fiscal board. A minority of firms provide takeout rights to minority shareholders on a sale of control beyond the minimum required by Brazilian law. Controlling shareholders often use shareholders agreements to ensure control.
This paper proceeds as follows. In Section 2, we briefly review the general literature on corporate governance in emerging markets, and provide a more detailed review of Brazilian corporate governance. In Section 3 we describe our survey, other data sources and sample. Section 4 discusses the overall size of the Brazilian public market, and the cross-listing and Bovespa listing choices made by Brazilian firms. The remainder of this article concentrates on Brazilian private firms and covers boards of directors (Section 5); board and committee procedures (Section 6); audit committee, fiscal board and independent auditor (Section 7); shareholder meetings and shareholder rights (Section 8); conflict of interest transactions (Section 9); financial disclosure (Section 10); control and shareholder agreements (Section 11); and compensation (Section 12). Section 13 concludes.
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Literature Review
We review here the limited literature on corporate governance patterns in emerging markets. We cover studies of Brazil with care, and other studies in less depth. We do not cover studies of developed countries or nonpublic firms.
2.1 Firm-level governance in emerging markets
This paper provides a detailed descriptive analysis of firm-level governance in an important emerging market. We know remarkably little about those details. Cross-country studies of governance often provide high level comparisons between countries--for example, mean scores on disclosure (Patel et alii, 2002) or overall governance (Bruno e Claessens, 2006). Moreover, these studies rely on a limited set of cross-country governance measures. The available multi-country measures which cover emerging markets are:
* Standard & Poor's transparency and disclosure survey (conducted in 2002, repeated in selected countries but not generally)--covers 30 Brazilian companies.
* Credit Lyonnais Securities Asia governance survey (conducted in 2001, not repeated)--covers 24 Brazilian companies. (1)
Individual country studies typically report summary statistics for overall governance and particular governance measures (e.g., Zheka (2006), Ukraine; Drobetz et alii (2004), Germany; Black et alii (2006), Russia). Choi et alii (2007) provide some details on the composition of Korean boards of directors during 1999-2002. But there is very little that provides a fine grained picture of a particular country. The only comparable study we know of is a contemporaneous study of India (Balasubramanian et alii, 2009).
2.2 Research on brazilian corporate governance
Overall governance
We survey here what we consider to be the more significant research on Brazilian corporate governance. Leal (2007) provides a more extensive survey. Valadares e Leal (2000) and Leal et alii (2000) find a high degree of concentration of voting power in Brazilian firms. This concentration is due in large part to firms using dual-class structures, with insiders retaining voting common shares and outsiders holding primarily nonvoting preferred shares.
Da Silveira et alii (2009) study the evolution of firm-level corporate governance practices in Brazil from 1998 to 2004 using a broad corporate governance index based on publicly available data. They find that overall governance quality improved over this period, but remains low. There are large differences between firms, with greater heterogeneity over time. They found no significant explanatory factors for firms' governance choices.
Dutra e Saito (2002) study the effect of cumulative voting on board composition as of 2000 for the 142 most actively traded Brazilian firms. They rely on family names to identify which directors may be independent. They find little use of cumulative voting, and estimate that about 20% of directors are independent.
Da Silveira et alii (2004) study the association between firm value and board size, composition, and separation of Chairman and CEO. They find a positive association between separation of Chairman and CEO and Tobin's q.
Novo mercado
De Carvalho (2000) reviews Brazil's experience during the 1990s and concludes that the absence of IPOs, and the decline in trading on Bovespa during the late 1990s, is plausibly related to low investor protection. This study formed part of the basis for Bovespa's creation of Novo Mercado in 2000.
De Carvalho (2002) discusses the potential value of higher governance listing segments of an overall stock market, such as those introduced by Bovespa. De Carvalho e Pennacchi (2009) analyze firms' decisions to go public on, or migrate to, the higher Bovespa listing levels, and find evidence of lower IPO underpricing, positive investor share price reaction to migration, and higher post-migration liquidity.
Bovespa's success with higher listing levels has led to efforts to copy its approach in, to our knowledge, Turkey and Romania, though thus far with little success (Alexandra, 2008, Ararat e Burcin Yurtoglu, 2007).
Takeout rights
Several papers study takeout rights (also called tag along rights) in Brazil. Many Brazilian firms issue both voting common shares and nonvoting preferred shares, which have economic rights similar to common shares. Prior to 1997, Brazilian corporate law required a new controlling shareholder, who acquired 50% of the common shares, to offer to buy all remaining common shares, at the same per-share price paid for when acquiring control. In 1997, Brazil removed this rule to facilitate the government's sale of controlling stakes in majority state-owned enterprises. In 2000, the law was changed again, to reinstate takeout rights for common shares at 80% of the per-share price paid for the controlling shares. Nenova (2005) and Carvalhal-da-Silva and Subramanyam (2007) report conflicting results on how these law changes affected the premium accorded to common shares, relative to preferred shares. Bennedsen et alii (2008), report that during 2000-2006, a number of Brazilian firms voluntarily agreed to provide additional takeout rights to common shareholders, provide takeout rights to preferred shareholders, or both, in connection with equity offerings.
Value of control
Dyck e Zingales (2004) study the premium paid for control blocks in 39 countries; of these, Brazil had the highest average premium, at 65% of the trading value of the shares. Nenova (2003) estimates that Brazil had a relative high value of control, at 23% of firm value; values for other countries range up to 48% in South Korea. See also Valadares (2002).
2.3 Overview of brazilian corporate governance
Historically, Brazilian financial markets were heavily regulated. (2) Brazil adopted its first Corporations Law only in 1940. The government ran the stock exchanges. Brokers were civil servants, who had the exclusive right to trade shares on the exchanges, and could pass this right on to their children. Government rules specified the number of brokers in each area, as well as brokerage fees.
Some financial liberalization began after a 1964 military coup. In 1965, the new government adopted the first law to regulate capital markets and securities offerings (Law 4728/65). The Brazilian securities commission, Comissao de Valores Mobiharios (CVM), was created in 1976 (Law 6385/76). A new Corporations Law, also enacted in 1976, established separate rules for closely held and public corporations (Law 6.404/76). These reforms eliminated the old civil servant brokers and permitted private stock exchanges and broker-dealers to emerge.
During the 1970s and 1980s, the government took several steps to encourage stock market development. It granted tax incentives to firms that went public and to investors who purchased shares in public companies, and required pension funds and insurance companies to invest a minimum percentage of their assets in the shares of public companies. By the end of the 1980s, there were almost 600 publicly traded companies, but a significant number had gone public only to capture the tax incentives, and had no interest in having public shareholders or active trading of their shares.
In the late 1980s, the financial incentives for going public were eliminated; since then, many of the firms which went public during the period of tax incentives have returned to private...
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