The BRIC Project -- Brazil -- A Nation In Flux, An Economy On The Move, And The Slowly Rising Tide Of Corporate Governance (Part 4)

This blog recently began the “BRIC Project.” Through this project, we will introduce readers to Brazil, Russia, India, and China – the BRIC nations – and the prominent features of their corporate governance and regulatory landscapes.

Brazil is Latin America’s largest economy, and the eighth largest economy in the world according to the World Bank.  With an estimated 198,739,269 citizens, Brazil also comprises South America’s largest populace.  The Economist reported that the Brazilian middle class rapidly expanded from 42% of the population in 2004, to 52% in 2008, coinciding with a halving of extreme poverty in Brazil during roughly the same period. 

Generally, the BRIC economies have bounced back faster than many more developed economies from the recent global financial crisis (Goldman Sachs).  Brazil’s economy has experienced unprecedented growth since the early 2000s and is poised to continue its impressive expansion.  As the Economist reported in Latin America’s big success story, Brazil’s growth is bound to pick up even more speed as it continues to develop oil fields, Asian countries’ demand for Brazilian food products increase, and further exploitation of the nation’s vast natural resources.  The report further notes that projections show Brazil will grow to become the world’s fifth largest economy, overtaking such countries as Britain and France, in the next ten to fifteen years.  Brazil’s plans to host both the 2014 FIFA World Cup and the 2016 Summer Olympics in Rio de Janeiro represent token symbols of the nation’s rise as a global economic and cultural influence.

The Challenges to Effective Corporate Governance in Brazil: 

Traditionally, the primary challenge to effective corporate governance in Brazil has been concentrated ownership.  Anderson, Jr., John William, 9 Law & Bus. Rev. Am. 201, 205 (2003), Corporate Governance in Brazil: Recent Improvements and New Challenges. (available via Hein Online).  Most major corporations in Brazil are under state control or controlled by Brazil’s elite families.  Id.  A related problem, the balance of preferred and common shares, has also presented challenges.  Until recent reforms of Brazilian corporate law, enacted by Law No. 10,303/01 in October 2001, preferred shares, without voting rights, could represent up to 67% of the total equity capital of a given corporation.  Id. at 208-9.  This led to an investing environment in which the vast majority of shareholders of many companies had absolutely no ability to influence management.  However, newly forming corporations may issue no more than 50% of their total shares without voting rights.  Id. at 209. 

Brazil’s courts offer additional challenges to the effective regulation of corporations and their corporate governance practices.  According to a Standard and Poor’s report, Brazil’s courts are viewed as unpredictable and ineffective, particularly when dealing with shareholder rights cases.  Additionally, Brazilian courts and legal institutions are seen as lacking the sophistication and manpower to effectively confront issues pertaining to shareholders’ claims and controversies.  Gorga, Érica, 27 U. Pa. J. Int'l Econ. L. 803, 827 (2006), Culture and Corporate Law Reform: A Case Study of Brazil.  (available via Hein Online). Notably, there are no class-action mechanisms available to shareholders in Brazil.   Id.     

Brazilian laws regarding corporations and governance issues face similar challenges.  Gorga briefly summarized this challenge for Brazil:

"Scholars have recently argued that law enforcement is a better predictor of equity and credit markets development than the law on the books itself.  Nevertheless, in spite of the principal role played by enforcement, it is worthwhile to remark that, especially for civil law countries, the question of how to create good law on the books is pivotal.  In most cases, it is impossible for a civil law country to enforce something that is not a legal rule on the books.  Consequently, in civil law countries [such as Brazil], the proper enforcement of laws requires the passing of proper legislation."  Id. at 806.

Gorga further noted that passing proper legislation is extremely difficult in Brazil.  Id. at 809.  Despite the reforms of Brazilian Corporate Law enacted in 2001, Brazil’s elite class of controlling shareholders were able to “capture” the legislative process, pressuring legislators and the Brazilian President to drop amendments aimed at increasing minority shareholder's rights.  Id.  The exemption of the then “existing” publicly held companies from the reduction of the issuance limit of non-voting preferred shares from 67% to 50% – mentioned above – is one poignant example.  Id.        

Brazil’s Regulatory Infrastructure:

Brazil’s rise to the status of economic powerhouse, and the increasingly globalized nature of the world economy, demand a discussion of the regulatory landscapes of this and other emerging markets. 

In Brazil, the Brazilian Securities Market Commission (Commisão de Valores Mobiliários, or “CVM”), regulates publicly listed companies in Brazil.  The CVM lays out the rules for corporate governance in a series of best practice principals known as the "Cartilha."  The Cartilha principles outline standards for disclosure, transparency, and shareholders’ rights vaguely similar to some regulations required in the United States and Europe.  However, formal compliance with the Cartilha is not mandatory in Brazil.  Furthermore, the CVM has a very limited staff that some describe as “not yet sophisticated enough” and “lacking specialized prosecutors to bring complex securities cases.”  Gorga, at 827.   Understandably, when considering the ineffectiveness of the Brazilian courts and the voluntary nature of the Cartilha principles, the CVM has not emerged as a prominent component of Brazil’s regulatory landscape. 

The Novo Mercado:

The BM&F BOVESPA (Bolsa de Valores, Mercadorias & Futuros de São Paulo), is Brazil’s largest, and the world’s third largest, stock exchange.  Gorga, Érica, 29 Nw. J. Int'l L. & Bus. 439, 446 (2009), Changing the Paradigm of Stock Ownership From Concentrated Towards Dispersed Ownership?  Evidence From Brazil and Consequences for Emerging Countries.  In December of 2000, Bovespa initiated a three-tiered scheme of listing rules known as Level 1, Level 2, and Novo Mercado (New Market).  The scheme is broadly known as the Novo Mercado, the strictest of the three tiers.  Ironically, compliance with the scheme is also voluntary.  As cited on Bovespa’s corporate governance website, compliance with the scheme is premised on the idea that “stock valuation and liquidity are positively impacted and assured by shareholder’s rights and by the quality of companies´ information.” 

As of year-end 2003, only two companies listed with the Novo Mercado and three companies listed on Level 2.  Gorga, at 452.  While thirty-one companies listed on Level 1, Gorga did not consider this significant as Level 1’s listing rules were not significantly different from the lax Brazilian regulations and listing rules for the traditional Bovespa. Id.  Despite this slow start, the three-tiered listing scheme has experienced an unprecedented period of success over the last six years, having expanded to a total of 161 listed companies as of February 2010: 107 on Novo Mercado, 19 on Level 2, and 35 on Level 1.            

The next several posts will outline the standards of corporate governance required by Level 1, Level 2 and the Novo Mercado.