The price of governance is the endless surveillance – stewardship practices land in Brazil

By Isabella Saboya
The attractiveness of a capital market is coupled with the quality of its regulation and supervision and the governance of companies and investors. Good governance practices have to be part of the companies’ corporate culture.
The Brazilian capital market has been worsening in institutional terms since 2010, when there was an unsuccessful attempt to improve the Novo Mercado listing rules. It’s possible to notice a worrisome increase in the number of questionable corporate restructurings, as it happened in the 90’s. But unlike that period, the perception today points to a low mobilization among institutional investors in voicing their concerns about operations that are potentially harmful to the market. Maybe this is the result of an adverse effect, in which the institutional improvement of the market in the 2000’s led to an increase in the number of investments, leading agents to take a kind of “voting with their feet” attitude, that is, to sell their shares when they perceive corporate practices considered harmful. Maybe it is also the outcome of the larger availability of beyond-border options and the easier process of investing abroad. It’s important to note that such freedom of choice is very positive for the market as the global competition for capital helps improve the quality of local assets.  But the fact is that the participation of domestic management companies willing to protect and improve the stock market in institutional terms has decreased. The increased passivity in the local market clash with the new wave of governance in the developed markets: stewardship.
Not translated into Portuguese yet, stewardship is the governance of institutional investors who, by taking responsibility for managing third parties’ funds, need to comply with the fiduciary duties agreed with their clients. Institutional investors are stewards of third parties’ funds, that is, they “take care” of someone else’s investments. Two decades ago, the expression “corporate governance” was not translated in Brazil. There was a huge estrangement about its literal translation as the term governance was associated with household management. Today, the first occurrence in the internet is “act of governing, government,” and Wikipedia directly shows “corporate governance.’ Therefore, finding a definite translation for stewardship in Brazil is just a question of time.
As with the corporate governance codes that have proliferated all over the world after the 2001 crisis (more than 100), today 11 countries have stewardship codes. The UK Stewardship Code, FRC – Financial Reporting Council, launched in July 2010, is the most advanced one in dissemination and adherence terms. It has more than 300 signatories and an increasingly active follow-up by the FRC as to guide them about how to effectively engage with the invested companies and report their activities. Brazil has joined this team with the launch of Amec Stewardship Code in October 2016, which already has 12 signatories among the largest management companies in the Brazilian capital market.
Good governance creates value: what used to be an uncertain promise has become a reality in the past 16 years. Amec code is another critical step towards strengthening the Brazilian capital market as part of the virtuous cycle that started in 2000 with the launch of the Novo Mercado, followed by the Reform of the Corporate Law in 2001, the IPOs boom in 2007 and the launch of the Code of Best Practices of Corporate Governance in the end of 2016, based on the IBGC code.
The code’s proposal – to promote a sense of ownership and create a responsible engagement posture among institutional investors – is ambitious, but essential for the stock market to be regarded as a source of financing respected by committed domestic companies as it happens with commercial and development banks. Today, most Brazilian listed companies continue to regard stock investors as the capital that easily flees, that do not take on commitments and fly like meteors across their corporate lives.
The Brazilian Stock Exchange – BM&F Bovespa – has been promoting an intense debate about the review of the Novo Mercado rules since the beginning of the year.  Most of the feedback received from companies listed in this segment regarding the changes proposed has been: “My investors have never mentioned that such rules would be important.” During the first stage of the public hearing on the Novo Mercado reform, held from June to September, 2016, BM&F Bovespa received 30 opinions, 16 from listed companies, 10 from associations and entities and only 6 from institutional investors. We all know that there is no such a thing as the power vacuum. The feedback the Stock Exchange has been receiving from the companies comes from controlling shareholders, officers, lawyers and other providers of corporate service. Receiving no feedback from long-term funders cannot be healthy.
Among Amec code’s 7 principles, highlights are the principles 3 and 4:  “Take ESG (environmental, social and governance) factors into account in their investment processes and stewardship activities” and “Monitor the issuers of securities”. Aberdeen, UK’s largest fund manager with BRL 19 billion in assets under management in Brazil, is a signatory of the code and has already started to demand a clear posture from the invested companies regarding the key issues of the Novo Mercado reform. Investors must go beyond and request the companies listed in this segment to provide a formal appreciation and deliberation about the topic. Some matters could be even discussed in the shareholders’ meetings as they directly affect shareholders. If the listing in the Novo Mercado segment was a matter discussed by the board, why does the voting on the changes proposed to the segment’s rules would not be?
If by now many institutional investors were not sure about how they could comply with the principles of the stewardship code, now it is clear: the reform of the Novo Mercado is the first major acid test of good stewardship practices in Brazil. Large investors must demand that the boards of directors of companies listed in the Novo Mercado segment analyze how they will vote in the reform of the segment in June and that they include their decision in public minutes. That’s the transparency the market expects from the companies listed in the Stock Exchange’s highest corporate governance level. And that’s the line of action expected from those that follow good stewardship practices.
Isabella Saboya has 24 years of experience in the financial market and serves on the boards of listed companies.