By:
Jaime Alejandres
&
Alberto Alejandres
Brief Background on Brazilian Firms
 Brazilian companies generally have a weak corporative
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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
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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 2000-2006, 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
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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
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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