Meanwhile, in London…

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When crossing a dense forest, it’s easy to get lost if we pay attention only to the trees. To know the exact location, it is important to stand from a good viewpoint that allows us to see the entire forest and not only the trees. No doubt that today, with the GPS enabled smartphones, the popular saying has become a bit outdated. Even so, there’s truth in it: we need to understand the whole picture and not only the immediate problems.
The debate about the capital market reform does not escape this logic. The years come and go and the topics are the same, putting in different camps those who are really interested in a broader, more inclusive and dynamic capital market and those who believe that it’s possible to have a market based on the maintenance of the privileges and lack of transparence of the past. With that, we end up discussing specific points, the result of our immediate experience – and eventually get lost about the objective we want to reach.
If we analyze the main recent facts driving the development of the Brazilian capital market, we will probably converge into five initiatives: the Instruction 561, which addresses the distance voting; the implementation of the Brazilian Code of Best Practices of Corporate Governance; the challenges and efficiency of enforcement measures; the equal treatment to shareholders; and the reform of the Novo Mercado.
In turn, each of these initiatives leads to the same questions: do minority shareholders’ shares value the same as controlling shareholders’? Are appraisal reports fair? Should management compensation be closely scrutinized? Are the management liabilities being observed?
Amid this debate, which many times goes downhill to manichaeist ideas, it is worth remembering the popular saying and try to see the forest. And a good way of doing so is to observe what is going on in the rest of the world and ask whether (1) we are going in the same direction and (2) are at least debating the same things.
In terms of corporate governance and capital market regulations, the UK market is maybe the most fruitful one to be analyzed. Given its traditional ‘bottom up’ and voluntary approaches and the actual implementation of the principles of the consuetudinary law (contrary to the USA, where such principles have been lost for a long time in the codification of the practices, leading to a number of non-intentional consequences), the London market is a source of inspiration as to what has to be done in many other jurisdictions. The list of initiatives with global impact is long, such as the Cadbury Report and the Kay Review[1], among others.
When we examine the banks of the River Thames to learn about the debates around the capital market and governance practices, we continue to see a very intense activity in 2016, intellectually rich and inspiring for the rest of the world. And we can expect additional innovations in 2017.
A good document to guide us in this process is the “Developments in Corporate Governance and Stewardship 2016” report, published in January 2017 by the Financial Reporting Council – FRC – an independent body responsible for issuing self-regulatory measures in the governance, accounting, audit and investment areas. Focusing on governance and stewardship, it brings the body’s recent experiences in relation to the enforcement of the UK Code and the UK Stewardship Code, in addition to listing initiatives of other entities about these topics.
The UK Code is structured to allow the adherence through the comply or explain system. It’s the same approach used by the Brazilian Code of Best Practices of Corporate Governance, prepared by 11 capital market’s entities and submitted to the Brazilian Securities and Exchange Commission – CVM. The regulator is now preparing the inclusion of the Code in the regulatory system, which is likely to start to impact our companies in 2018.
The analysis of the implementation of the UK Code shows both the horizon we should seek and some of the limitations imposed by our system.

Source: FRC
The chart shows the number of companies of the two main indexes of the UK Stock Exchange that do not comply with some items of the UK Code. It can be noticed that the items which implementation has been more difficult among midsize companies seem to be (1) 50% of independent members on the board; (2) Audit Committee membership; and (3) independence of the Chair. When it comes to larger companies, the main problem is the auditors retendering[2], followed by items similar to those facing midsize companies.
The chart provides us with many reflections. First, we can see that the number of companies that do not comply with each item is low – 10% of the total at the most. This shows that the UK Code has been well assimilated by the corporate world over the years. On the other hand, the FRC’s report states that some companies in compliance with the Code still provide very poor explanations about some of its items – what can mean a “just for show” compliance.
An example of this deficiency is related to the item E.2.2. of the Code. It establishes that companies must explain how they intend to engage with shareholders, mainly when it comes to issues with dissenting votes in the meetings. It is a version of the idea that Amec has brought to Brazil during the debates about the reform of the Novo Mercado. In our contributions in April and November, 2016, we suggested that companies should establish an Engagement Policy as a way of showing the posture they will adopt in the discussion of long-term governance problems. Unfortunately, we have not received any feedback yet, although it is a trend in the main markets all over the world.
The analysis of the compliance with the Governance Code brings important reflections about the debate in Brazil. First, there are several analyses presented in the report that would be unfeasible in Brazil – simply because there is no information available. Another important example is the issue related to the management compensation. 91% of the companies have already established ways to recover bonuses paid in the event of future poor performances, through clawback or malus provisions. It’s an analysis we cannot make in Brazil because of the lack of information. Additionally, we meet resistance in certain protections against the disclosure of information that is much more basic than that.
The report also shows an increase of 24% in the resolutions about the disclosure of the management compensation with a significant number of contrary votes. Less than one third of the 30 largest companies had a support above 95% of participating shareholders as to their compensation proposals. Once again, we are talking about analyses that are not possible to be conducted in Brazil since the disclosure of the voting processes in the meetings is very poor. Amec called attention to this point in the Public Hearing that resulted in the CVM Instruction No. 561, but has not managed to convince the regulator about the importance of creating and publishing an analytical voting map. Our statement is available in our website.
Another curious fact is the item with the most difficult level of compliance – the independence level of Board members –, which shows the gap between our market and the best practices. Whereas the Brazilian Stock Exchange – BM&F Bovespa – gears efforts towards convincing companies to accept at least two independent members, in the United Kingdom, the number of independent members is 50% of the Board – in line with the recommendations of the Brazilian Institute of Corporate Governance – IBGC, but far away from the practices adopted by Brazilian companies.
Finally, it’s important to observe the numbers in the following table, which brings information about the growth of activism in the United Kingdom. We see a significant increase in the quantity of proposals that receive contrary votes by shareholders – mainly when it comes to the compensation issue. Once again, it’s not possible to make a comparison with the Brazilian reality since the minutes do not provide sufficient information for this analysis.

Source: FRC
In fact, before addressing the issue related to the minutes, we need to discuss the shareholder list. Amec considers it an essential right of shareholders, according to the Article 100, Paragraph 1 and 126 of the Law 6,404/76. However, the interpretation given by the regulator, with which we do not agree, has made the concretization of such right virtually impossible. We live in an environment where controlling shareholders have access to the list of shareholders and, accordingly, can create campaigns and strategies for the proposals to be voted. Minority shareholders have no tools to do the same, not to mention they cannot even audit the final result. A shareholder reports an unusual situation in which the equity positions were marked in pencil, and the shareholder, when signing the attendance book, was not even allowed to see the remaining lines and pages of the book. A pure information monopoly.
As to the Stewardship Code, the FRC’s report highlights the publishing of the ranking in the reports sent in 3 categories. Additionally, the committee announced that the management companies classified in the last category (the worst reports) would be excluded from the list of signatories. After that, the FRC started a fruitful debate with them that is already positively impacting the reports. For example, 68 management companies have already migrated from the Category 2 to the Category 1, and many others from the Category 3 to the Category 2. It’s a smart way of helping improve the reports and the compliance levels, an experience Amec intends to replicate. The issue has already been discussed in the second meeting of the Stewardship Code Implementation Working Group.
Another point the FRC focused on was the publishing of the engagement practices adopted by institutional investors. In other words, the self-regulator believes it’s important that signatories are clearer in relation to their policies about whether, when and how they will participate in shareholders’ collective efforts to positively impact on the invested companies.
It’s also important to mention the regulatory initiatives that establish the reporting of stewardship principles by pension funds through the ‘comply or explain’ approach, what certainly helps encourage the adoption of good practices both because it forces management companies to think about the subject and helps ensure transparent market practices.
The implementation of the Stewardship Code is a priority for Amec. In fact, our work is primarily focused on spreading the stewardship culture, reflected in the Code’s principles, as a way of ensuring that institutional investors play their role in our companies’ governance structures. The Code was launched in 2016 and already has 12 signatories, including some of the country’s largest financial institutions and main global investors that participate in the Brazilian market.
By the way, the FRC’s report highlights statements of compliance with the Stewardship Code that can be an inspiration for the signatories that are implementing Amec’s Code.
It’s not possible to summarize, in this article, all the initiatives mentioned by the FRC. Highlights are the innovations in the corporate culture, the composition and compensation of board members, and the companies’ risks and performance in the long term. It is worth reading.
In addition to FRC’s initiatives, it’s important to mention two important fronts of the debate. The Investment Association (IA), similar to what would be a combination between Amec and Anbima (the Brazilian Financial and Capital Market Association), has been implementing a series of initiatives to foster the development of the capital market. In 2016, the association was very active in important debates.
An example is the issue related to the management compensation. The IA established a working group to address the topic, and its conclusions were published in July, 2016. The recommendations can be summarized in the following areas:

  • Strengthening of Compensation Committees and their accountability;
  • Stronger engagement with shareholders;
  • More transparency in the establishing of goals and in the use of the discretionary power;
  • Definition of the executives’ compensation levels;
  • Establishing of parameters about alternatives to increase the confidence of the markets in relation to this topic;
  • Simpler, more transparent and more flexible compensation plans.

When we read the report and confront it with the Brazilian reality, the impression is that the debate here is only in its initial stage, far behind other countries. While in the central markets, the productive engagement among shareholders and companies to align the structures to encourage decision makers are stronger and stronger, in Brazil we are discussing whether the disclosure of aggregate compensation data infringes the constitutional privacy principle. Even BM&FBOVESPA gives way to the pressure of some companies, allowing the existence of companies in the highest governance levels that, through the use of legal remedies, do not disclose even the information required by the CVM. Meanwhile, Brazil distances itself more and more from the best international practices.
Finally, it is noteworthy to mention IA’s work focused on the preparing of useful independent auditors’ reports. As to the new format of the report – that will be implemented in Brazil this year but has been used in the United Kingdom for some years – the IA has been identifying the reports that add value for investors and those that bring, in the “Key Audit Matters” session, a useless document that brings standardized information with the mere objective of complying with the regulation. By selecting the best reports, the association encourages the production of useful documents, observing the essence of the rule and not only its form. This is a good example to be replicated in Brazil.
Overall, we can conclude that the debate about corporate governance, stewardship and shareholders’ rights is more active than ever. The UK intellectual production in this area shows a willingness to evolve and reinforce its position as one of the world’s most important markets.
Amec has been directly participating in this process. As shown in this article, many of the topics under discussion in the United Kingdom are part of Amec’s agenda: Stewardship, management compensation, activism, proxy voting, transparence and engagement were included in all of Amec’s manifestations in 2016 and will continue to be part of our agenda in 2017.
We are sure that the current status of the debate in the main economies must be an example for the Brazilian market, and we are ready to bring our vision on how it’s possible to build a fairer, more transparent and dynamic market to support our economy.
[1] The Cadbury Report was prepared in 1992 by a committee led by Sir Adrian Cadbury and resulted in the UK Governance Code. The Kay Review was prepared by the Professor John Kay to review the British market practices after the 2008 financial crisis.
[2] The new UK legislation, in line with the European directive, establishes that auditors must be rotated every 20 years and that a tender process must be held at least every 10 years. With the inclusion of the item in the legislation, the FRC deleted it from its code for periods starting in June 2016, but it applies to the periods before that.