The ball is in our court

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Brazil will start to change in 2016. No, we are not saying that, as if by magic, we have a solution for the dramatic political situation we find ourselves in today. The change we are talking about has already been agreed. It’s related to the new regulation – the Instruction 561 – on distance voting approved this year by the Brazilian Securities and Exchange Commission (CVM) to take effect in the 2016 season of shareholders’ meetings.
We are not overstating. The regulation – to be detailed herein – that facilitates the participation in shareholders’ meetings can eventually revolutionize the ability of investors to exercise their role in the corporate governance of Brazilian companies and, accordingly, improve and make them more competitive and profitable. But for that, some conditions should be observed.
First of all, let’s analyze the historical context. The exercise of voting rights by minority shareholders has been always seen as an exercise in futility in a market dominated by companies with defined controlling groups. Given that this has been the dominant model in our country for the past 80 years[1], it’s undeniable that there is considerable skepticism about the ability of members recommended by minority shareholders to influence on decision processes. Three movements, however, show this can be an anachronistic vision. In increasing order of priority, we can list (1) the rebirth of widely held corporations in Brazil, (2) the Law 10,303/01 and (3) new expectations about governance structures.
The existence of companies without a controlling shareholder is usually seen as a watershed. After all, it puts the usual understanding about the balance of power in the companies upside down, increasing the power and relevance of their Boards of Directors. However, the use of this model, expected to grow significantly in the past decade but that has eventually stagnated, resulted in a limited number of companies, insufficient to produce a change in investors’ attitudes. Additionally, the few examples of this model have very distinctive characteristics that do not allow a mass-market approach about the impacts of their governance structures.
The second movement was the approval of the Law 10,303, in 2001. The reformulation of the corporate legislation has reinforced the possibilities of minority shareholders to influence on the companies’ governance bodies, primarily on their Boards of Directors and Conselhos Fiscais. In addition to facilitating the election of independent directors, , the law provides members of the Conselho Fiscal with individual supervising powers. The vision that minority shareholders could not do anything relevant started to go out the window.
But maybe the most important movement was the change in the society’s expectations about the role of governance bodies regarding the management of companies – not only from the strategic and operating points of view, but also in the field of ethics and respect for the laws and shareholders’ rights. On one hand, the more incisive posture of regulatory agency as to the responsibilities of managers has led some market participants to become aware of the consequences of their acts. On the other hand, the society – investors in particular – started to get much more interested in the way managers react to the constant challenges faced by the companies, primarily when significant problems take place. In this context, the presence of effectively independent voices in governance bodies is essential to ensure their effectiveness.
In this new reality, the exercise of voting rights by institutional investors gains relevance as never before. It has been more and more present, as it can be noticed in recent shareholders’ meetings. However, factors such as costs, bureaucratic red tape and cultural aspects continue to prevent managers from fully exercising their responsibilities as “owners” of their respective investees.
The revolutionary aspect refers to the change enabled by the CVM related to the first two factors. For some time, the regulatory agency has been working to remove the obstacles on the participation of investors in shareholders’ meetings. Examples include the attorney proxy solicitation, the manuals on the participation in shareholders’ meetings, the waiver of the requirement of having an attorney to represent directors, CVM SEP’s Official Letter 01/2014 and now, the Instruction 561.
The new regulation arrives to discipline the so-called “distance voting,” established by the Law 12.431 of 2011. By playing its role, the CVM was an outstanding teacher and showed how a good regulatory agency must act. For the past years, it has exhaustively discussed with market participants the best way to make the distance voting concrete. As part of this process, the CVM focused on a specific vision and was mature enough to make significant changes to it based on the feedback given by the regulated parties. The result is a modern, smart and useful regulation with potential to revolutionize Brazilian listed companies.
In its essence, the Instruction 561 creates the proxy card for Brazilian investors. It’s a measure that brings us closer to the international regulations. Globally, institutional investors can vote in their investees without leaving their desks – originally through mailing and currently more and more via electronic means. By now, it was necessary to be physically present in the shareholders’ meeting to represent an investor in Brazil.
This is only one aspect of the regulation, however. By consulting with market participants, the CVM was able to understand and use, in the best way possible, the existing platforms in the capital market. Service providers that already have an infrastructure to integrate companies and investors (bookkeeping agents, custodians, depositaries, etc.) will be responsible for the flow of information in this new process. Accordingly, implementation costs will be very low – no doubt much lower than the costs related to the compulsory physical presence of shareholders. Deadlines have been adjusted to fit some legal requirements and investors’ and service providers’ needs.
The concept used by the CVM is consistent with the investors’ needs. The distance voting depends less on complex technological solutions and more on the assurance of a fair flow of information for all the parties capable of making shareholders’ rights concrete and, at the same time, feasible to be implemented. For those who vote remotely – most institutional investors around the globe – the major challenge is to be able to express their opinions about the proposals brought forward both by the Boards of Directors and dissenting shareholders. The Instruction makes significant progress towards that, facilitating the election of independent members, the establishing of Conselhos Fiscais and also the creation of shareholder resolutions, something that has been possible since that the Law was enacted in 1976 but that, in practical terms, has been rarely done. Now, any relevant shareholder can recommend the inclusion of items in the voting agenda of a shareholders’ meeting.
Several bureaucratic obstacles have been eliminated in the process. The dreadful obligation of having the power of attorney updated every year – a hurdle that used to lead to a loss of up to 30 percent of the votes effectively casted by foreigners – falls through the floor. Therefore, the regulation improves both local and foreign investors’ lives.
But the major impact of the Instruction 561 is likely to be experienced in the next years. To reach its objective, such impact will take place as a result of the changes in the behavior of companies and investors.
From the investor’s perspective, it’s essential to understand that the new regulations demand a growing level or professionalism when it comes to the engagement with their investees. Efforts to vote matters in the day prior to the shareholders’ meeting will continue to be possible, but they will have the considerable disadvantage of not counting on the support of those who vote on a remote basis. Accordingly, activist efforts will take place in advance – and possibly as part of a constructive dialogue with the companies.
Additionally, the elimination of costs related to the physical participation in shareholders’ meetings will put an end to the main excuse for the absenteeism among institutional investors. In most cases, there is no excuse to reframe from voting. And the broader understanding of the fiduciary duties of institutional investors is likely to result in greater participation.
As a result, it will be important that investors develop their own mechanisms to meet their duties. Having a “voting policy” is no longer enough. It’s crucial that institutional investors develop a plan to actively participate in the governance of their investees (rules of engagement) aimed to protect and maximize the assets they received from their clients. There’s still a lot of work to be done.
From the companies’ perspective, the situation is the same. In addition to fully understanding their roles according to the new regulation, they must analyze the consequences to the investors. Virtuous listed companies will take advantage of this opportunity to give a real boot in their relationship with investors. The establishing of a pre-shareholders’ meeting period is particularly important to encourage the exchange of information and expectations among the company and investors. There is room now for the creation of more effective and prepared governance bodies to deal with the challenges facing listed companies, not only through a higher number of independent members, but also through members who complement the corporate structure on a constructive manner.
Given all these factors, the impacts of the Instruction 561 cannot be minimized. The CVM has done its bit. Now it’s up to the regulated parties – investors, companies and service providers – to do theirs. The likely result is a much healthier capitalism.
[1] watch the presentation by the historian Ney Carvalho in YouTube