Brazil: The Insertion Of Corporate Governance In Brazilian Companies

Last Updated: 13 March 2013
Article by Cristina De A. Salvador

It is usually common sense to think that family businesses conflicts arisen throughout time can be solved by the understanding among founders, shareholders and successors. This procedure, however, more often than not proves insufficient, and this is where the so-called "Corporate Governance" comes into play, whereby the principles and practices apply to any type of organization, regardless of its form of business organization, type of control and size.

The role of Corporate Governance is critical to the company performance management, since it is a set of practices eventually aimed to optimize its performance by protecting all stakeholders (such as employees, investors, creditors, etc.), making access to capital easier. The lack of Corporate Governance can scale up conflict and even put the life of a company into jeopardy due to several factors, such as, among others, lack of transparency (something essential in Corporate Governance delivery), distorted handling by the management personnel in charge, weak understanding of the business among family members. These are factors commonly not found within the company's management yet should be there.

It is important to highlight that the corporate governance allows owners (shareholders or members) to manage their company strategically and effectively supervise their executive board. To succeed in their succession process, it is critical that managing officers be aware that one of the major problems faced by family businesses arises when the family increases and dilution of power and property inevitably occurs, by way of distribution among various members of the family, who do not always share the same ideology and business plans. Accordingly, having awareness and jointly adopting Corporate Governance practices is indispensable to obtain qualified advice on keeping the shareholders' willingness in consolidating into a business Group while sustaining the ability to compete in the market.

For the major good practices (transparency, accountability and equity) to be included in these companies' governance guidelines , the Board of Directors is required to show their position in the company, especially with regard to electing the Executive Board, supervising and evaluating management's performance, establishing strategies for the company and choosing the independent auditors.

According to the Code of Best Practices from the Brazilian Institute of Corporate Governance (IBGC), there are six chapters that address practices and recommendations for each body under the organizations' governance system:

  • Property (shareholders/members);
  • Board of Directors;
  • Management;
  • Independent Audit;
  • Supervisory Board;
  • Conduct and Interest Conflicts – deals with standards of conduct and behavior applicable to one or more agents, in addition to proposing policies and practices to avoid conflict of interest and misuse of assets and information related to the organization.

Corporate Governance has become an interesting and important tool for a number of companies. Indeed, differentiated levels of corporate governance were created, to which listed companies can voluntarily adhere (the Stock Exchange launched special listing segments of companies, developed to provide a trading environment which would encourage both the investors' interest and the valuation of companies - December, 2000). Adherence to the governance levels has provided evidence of a positive impact on liquidity and returns, in addition to reducing the volatility of the shares. Furthermore, good corporate governance practices have already proven to be important drivers for development of capital markets.

In all countries across the Globe, institutions are currently engaged in debating Corporate Governance practices. Particularly as regards Brazil, this is still a quite recent feature as it started in 1999, through creation of the Brazilian Institute of Corporate Governance (IBGC) and the first Brazilian code of best Corporate Governance practices.

Brazil has a governance system based on concentrated family ownership, which leads to higher risk to minority interests, as it imposes certain reasonable limits on external financing and on challenging management, which turns out to be the least effective (but not inefficient) one from the economic viewpoint. The control over assets in the company should be directed to those who can make best use of them towards higher wealth creation.

Last but not least, below are some examples of companies who embraced Corporate Governance fundamentals and guidelines:

VALE, Petrobras, Itaú Bank, HSBC, Sabesp, HSBC, TAM, Telefônica, Brazil Telecom, Ultrapar (Ultragaz), among others.

In view of all the above, we can realize that the adoption of Corporate Governance practices is increasingly expanding in developed and also developing markets. Such practices are spreading more and more, bringing benefits and better organization to companies, attracting a great deal of investments to businesses and to the countries (worth emphasizing that the governance system prevailing in each country depends on other factors that complement it, such as the country's culture, its existing regulatory system, legislation, how the companies' activities are organized internally and the market institutions), strengthening and expanding the capital markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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