Interview With Mauro Cunha: We Must Seriously Think About Enforcement in Capital Markets

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In a critical analysis about capital markets, Amec’s former CEO and professional board member, Mauro Rodrigues Cunha, says it is necessary to reflect about an enforcement structure in the Brazilian market. In an exclusive interview for Amec, he addresses the main challenges we must face in the next few years.

“To work effectively, the market needs simple, fair, and valid rules for all participants. If you allow rules to be bent, you slowly dismantle capital markets,” he remarks. Mr. Cunha, who also worked as a chairman of the Brazilian Institute of Corporate Governance (IBGC) from 2008 to 2010, evaluates the problems in the current IPO boom, as companies were not properly prepared before going public. See the interview below:

Mauro Rodrigues Cunha. Photo: Germano Lüders.

What are the main challenges for Brazilian capital markets in 2021?

I would highlight four main challenges. The first one is to encourage investors to act like company owners and fulfil their duty. The second is to make sure that the companies that recently went public pay more attention to their governance practices. The third is to guarantee that the ESG agenda becomes a real agenda, not just a marketing one. And the fourth is to ensure the effectiveness of shareholders’ rights in our market. 

The enforcement structure in the Brazilian market is frequently criticized. What do you think about it?

To work effectively, the market needs simple, fair, and valid rules for all participants. If you allow rules to be bent, you slowly dismantle capital markets. We have seen this before and for many times Amec was the only one to stand against it. Not only for our own benefit but also for those concerned with players fulfilling their duties. Gatekeepers must safeguard the market as a greater asset in which people will invest their savings with the assurance they will not be stolen. Unfortunately, this role is seriously damaged in Brazil.

How should this gatekeeping structure work?

When we think of this power, we think of CVM (Brazilian Securities and Exchange Commission) straight away. But that does not mean it should be the only gatekeeper. In the past months, the regulator has struggled to effectively apply the rules, and this has got worse with time. Stock exchanges have been attracting more companies. And B3’s support to super-voting shares is a symptom. We have the Public Prosecutor’s Office that, according to the law, should protect capital markets too. Justice has not been working to support it. So, we have numerous problems. 

What course of action should CVM adopt, giving its recent attitudes towards conflicts and issues in structured operations? 

CVM should set its long-lasting slogan – protecting those who invest in the future of Brazil – as a priority. What we have seen in recent decisions is the protection of market agents. There is no record of accountability of managers, even in scandals of international repercussions like Petrobras. Investors are the ones who suffer from it. So, I believe it is necessary to have a philosophical debate over the role of the regulator and its  excessively formal view that leads to impunity.

You have talked about the problem of supporting super-voting shares. Could you explain your view on the matter? 

Amec has always supported “one share, one vote” for publicly listed companies, and undoubtedly, this is the most adequate system. I believe the existence of super-voting shares can be justified in private companies where there are highly sophisticated players that can fight for themselves. But if we create perverse incentives, we will have to face the consequences in the future. The problem in such structures is explained by game theory. All the players are encouraged to follow the rules until the last round. At the end, the incentive is to cheat. In capital markets, the last round may be a delisting or a takeover bid, when massive values change hands and the game is over. The controlling shareholder will not be concerned about his reputation in capital markets.

Do you believe that old problems caused by the companies’ lack of preparation may repeat themselves in moments such as the 2020 IPOs boom?

I believe so. Just look at how investment banks that should stamp a quality seal in the products they bring to the market fail to do so. In the recent IPO boom, we have seen many mistakes from the past, with companies assembling last-minute governance practices to go public. Then, investors feel pressured to buy assets that will immediately gain value. Banks have incentives to do business. And companies see a paycheck like they had never seen before. We have seen this happening before. 

How do you compare the current situation to the IPO boom in 2007?

In 2006 and 2007, many companies went public, but they were not ready for it. Most of them have lost value. The building sector is an example. If we calculate the gains in that period and the following losses, the value was lost completely. To put it simply, those companies were not ready to receive such capital. They lacked internal controls, projects, measures, and governance.  

Do you see problems in the board’s formation?

Of course! Investment banks come with a set of documents. Companies assemble a board with two or three renowned specialists before the IPO. Last month, I received two invitations to be a board member in companies that wish to go public. I asked when would the IPO happen and one of them said it would happen in the following week. The other company gave me a similar answer. I said, “No, thank you”. If you receive an invitation to join the board one week before the IPO, the company does not want you to contribute with governance standards, it wants your name.

Does that happen in the entire market?

The quality of the board’s composition has evolved in some companies, but certainly not in most of the newcomers. This scares me because many companies are coming with poor practices. If negative news starts to abound, the capital market’s credibility will be harmed and it will impact the entire market.

How should companies prepare for an IPO?

A rushed IPO process started just to make use of the window of opportunity skips the first steps a company should take to change its corporate governance model. Going public is a radical change, like puberty. There are huge consequences for companies’ culture, but they do not realize it. Amec will have to deal with many problems in the future because of that.

A recurring issue in post-pandemic debates is the rise of ESG. What is your view on that?

It is important to notice that Amec has been talking about ESG since its foundation. We have always stood up for the idea that without the “G”, “E” and “S” are marketing. Governance is a basic premise for serious talks over sustainability and the environment. It is sad when we see the agenda going straight to the environment as propaganda. This is valid for both companies and investors. Investors’ first task is to identify companies that are talking about sustainability but have never talked about the “G”.

Why do you think governance is a basic premise of ESG?

This means giving your governance practices a proper structure and making them clear. Which Brazilian company publishes evaluations of their board? None. Investors vote without knowing if board members were good or not. Again, to seriously talk about the ESG agenda, you must practice the old “walk the talk” technique. Most companies and investors do not do that.

What steps should investors take to improve ESG?

Investors that talk about ESG but have not joined the Stewardship Code must be doing greenwashing. The membership is free of charge and the principles behind it are essential for investors to fulfil their fiduciary duty and show that to companies and customers. Joining the Code means they acknowledge such duty that allows ESG implementation.