The Evolution of Corporate Governance in Brazil

The following post comes to us from Bernard Black, the Nicholas D. Chabraja Professor at Northwestern University School of Law and Kellogg School of Management, and Antonio Gledson de Carvalho, Associate Professor at Fundacao Getulio Vargas School of Business at Sao Paulo, and Joelson Oliveira Sampaio at Fundacao Getulio Vargas School of Business at Sao Paulo.

In the past decades the Brazilian economy has undergone major changes such as macroeconomic stability; achievement of investment grade status for the debt of the government and many individual firms; strong economic growth; and development of pension funds, which became major investors in public company shares. Significant changes were also observed in the stock market. Through the early 2000s, Brazil was seen as having relatively weak corporate governance. Examples of expropriation of minority shareholders by controlling shareholders were common.

In 2000, in response to concern about weak protection for minority shareholders (including extensive use of non-voting shares, few outside directors, and low levels of disclosure), the São Paulo Stock Exchange (BM&FBovespa) created three high-governance markets (Novo Mercado, Level I and Level II). This contributed to a surge in initial public offerings, which had been nearly nonexistent until 2004; a leveling off in the number of listed companies, which had been shrinking; and sharply rising trading volume and liquidity. Most new listings were at one of the premium listing levels; some older companies also migrated their listings to a higher level. In spite of these major changes in the economy and the stock market, little is known about how corporate governance standards have been changing. This article, The Evolution of Corporate Governance in Brazil, aims at filling this gap by providing a picture of the evolution of corporate governance practices in Brazil.

Our data comes from three extensive hand collected surveys reporting governance practices in 2004, 2006, and 2009. Thus, the first survey comes at the beginning of the surge in IPOs in 2004; the third comes during the financial-crisis-related lull in new listings during 2008-2009. We aggregate our governance information into six indices covering the main aspects of corporate governance: board structure, ownership, board procedures, related party transactions, shareholders rights and disclosure. The board structure index is subdivided into two subindices: one for board independence, the other for audit committee and fiscal board. Finally, we compute a broad index, Brazilian Corporate Governance Index (BCGI), as the average of these 6 indices.

Our analysis shows that corporate governance practices improved significantly in the 2004-2009 period. This evolution is due to two main factors: 1) growth in Novo Mercado and Level II listings, mainly through the entry of new firms with high corporate governance practices (IPOs) and 2) improvement in the governance practices of the firms that were already listed, sometimes including change in listing level. Governance practices for firms already listed on Novo Mercado and Level II were stable during that period.

The improvements in corporate governance for already listed firms were mostly in the fields of board independence, board procedures, shareholder rights and disclosure. We also find that many firms in Novo Mercado exceed the minimum Novo Mercado requirements. Finally, we find that IPO firms with PEVC sponsors look broadly similar to IPO firms without these sponsors; they score better on several board procedures, but not on the substantive aspects of governance.

The full article is available for download here.

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