04/05/2010

The attached report is a literature review of the corporate governance regime in Brazil from an international trade union perspective. It is the latest in a series of HBS-TUAC discussion papers in the same policy area: Workers’ Voice in Corporate Governance – A Trade Union Perspective (2005); World Bank Approach to Corporate Governance (2006); Corporate Governance in Sweden (2008); and Pension Fund Investment in Private Equity (2008).

The review has consisted of screening the Brazilian corporate governance system using the policy framework set out in TUAC 2005 report “Workers’ Voice in Corporate Governance – A Trade Union Perspective” . The framework proposes two complementary approaches to addressing workers’ rights in corporate governance:

• worker participation and representation within the company (including rights to representation in the governing bodies), and
• the stewardship of workers’ capital invested in equity via their savings in pension funds.

Structure of the report

Section one discusses the concept of corporate governance in an emerging economy, before comparing the World Bank-inspired “shareholder value” model for reform with the stakeholder approach, which has been set out in the TUAC framework of 2005 among others.

Section two reviews the characteristics of the ownership structure of Brazilian companies, which is heavily concentrated and under tight family control and looks at how the debt crisis of the 1980-1990s and the following IMF-supported privatisation reforms reinforced those patterns.

The third section  analyses the reforms and self-regulatory initiatives that took place in 2001 – reform of the corporate law, creation of voluntary stock exchange listing requirements or ‘segments’, which proved to be a defining moment in the history of Brazilian corporate governance.

Section four outlines the main elements of the current corporate governance regime based on the corporate law of 2001. Chapter five describes labour rights and worker participation mechanisms. Finally, chapter six reviews pension funds and the prospects for development of shareholder activism in Brazil. Issues for further discussion are set out in the conclusions.

Conclusion and issues for discussion

Corporate governance in Brazil remains dominated by controlling shareholders and wealthy families in particular, who through a dual class system and pyramid group structures have been able to maintain control over the private sector in spite of two decades of deregulation and market opening. This is not surprising in the context of an emerging economy although the level of concentration of ownership in Brazil is particularly high even by emerging economy and Latin American standards. The wave of privatisation in the late 1990s was supposed to have led to improved market discipline among corporate managers and  installed shareholder value governance and AGM democracy. In fact it had exactly the opposite effect. The IMF-supported reforms allowed the grip of very wealthy families over the economy to continue, while allowing large parts of the most profitable and competitive sectors to be transferred to foreign ownership.

The election of Lula to the Presidency at the end of 2002 and the parliamentary majority won by the Workers’ Party the PT can be seen as a catalyst for helping to shake up the well established and powerful interests of Brazilian controlling families. In anticipation of the widely expected electoral win of the PT, the incumbent government of Cardoso succeeded in 2001 where it had failed in 1997 at the time of the privatisations, to partly redress the bias of the regulatory framework in favour of controlling shareholders. It did so with a very measured reform of the corporate law, and with the introduction of voluntary Novo Mercado listing segments. From the point of view of the “political economy of reform” the policy of Cardoso was a belated attempt to rehabilitate, in the eyes of the public, the most unequal and authoritarian aspects of Brazilian private sector governance, while at the same time locking into self-regulation the more demanding measures of corporate governance. This two-tier level reform that took place in 2001 – (i) measured reform of corporate law supplemented by (ii) self-regulatory initiatives – and the political independence granted to the stock exchange authority the CVM was aimed at preventing more radical change of policy direction after the election of the PT in 2003.

Since 2003 Lula’s government has implemented important reforms to increase social inclusion which mark a clear shift from the policies of the past in a progressive direction. Examples include the democratisation of the governance of pension funds as a stand-alone policy objective, which had been initiated by the PT under the last Cardoso government, but which was moved further up the reform agenda. By contrast government activism has been less visible on corporate law issues – confirming the successful initiatives of the pre-Lula election. An exception is that concerning creditors’ rights and the reform of the Bankruptcy law in 2005.

The reform of the corporate law 6404/76 of 2001 achieved some progress in enabling minority shareholders to serve as counterweights to the controlling shareholder group. But progress was limited – not least for shareholders’ right to access the agenda of the AGM which still is something for the future in Brazil. And reform came at the cost of greater complexity of the law itself. The end result is that the corporate governance map of the Brazilian corporation has not increased in clarity. In addition to the visible part of the iceberg – the Board of Directors around which gravitate the Fiscal Board and the AGM – there exists the invisible, or less visible part – the shareholder agreement that binds the shareholders in forming a controlling block. The fact that controlling shareholders have duties by law that are equivalent to those applying to directors, or that the shareholder agreement – which is a private contract – are binding?  on the board and on top management are clear indications of where the centre of gravity of corporate power lies in Brazil. Being ruled by civil law doctrine, the duties of directors include a requirement for directors to serve  the social purpose of the company. This is something that might be considered undesirable by World Bank and OECD experts for whom directors’ duties can only conceivably be toward the shareholders and the shareholders only. It would be important to test the Brazilian corporate law notion of director’s duties, which also applies to the controlling shareholder, and in particular to explore what is covered by the social purpose of the company.

The reforms initiated by the Lula government, and by PT parliamentarians under the previous Cardoso government, to open up the boards of pension funds to trade unions have paved the way for a workers’ capital stewardship framework in Brazil. Today, trade union representatives sit on the boards of the country’s largest pension funds. Obstacles to proxy voting have been eliminated and a modest rise in shareholder activism can be observed. Yet, the corporate law still favours the controlling family groups. Also the portfolio composition of pension funds is overwhelmingly in favour of government bonds, whereas the equity exposure – where workers’ capital strategies come into effect – is below 20%. As such the investment policy of Brazilian pension funds is aimed at financing government debt. Considering the tax subsidies that benefit the pension industry and their members, one can consider Brazilian pension funds close to quasi-public financial institutions.

The development of worker participation mechanisms in the continental European sense of the term – has not been government policy, although in practice there are many board level employee representatives (elected democratically by the prevailing union) and various forms of company-specific worker committee do exist. This could change in the period ahead given the proposed legislation on board level employee representation in state-controlled companies. However, even so, much could be done to improve information and analysis on worker participation and representation on the governing boards of private companies and of pension funds. There is little literature and no comprehensive and systematic surveys available on these issues. Quantitative and qualitative surveys of worker representation in private companies and in pension funds in Brazil would be useful research.