A combination of a severe slowdown in its economy, a deterioration in public sector accounts, persistent high inflation and political uncertainty due to the ongoing investigation into the corruption scandal at its state-controlled oil company have created the perfect storm in Brazil.
In this environment, companies, with few exceptions, are cutting jobs, delaying or downsizing capital projects and going into survival mode. It would therefore be easy to assume that corporate governance is taking a back seat for the moment.
Corporate governance journey
Brazilian companies are not raising capital in the equity markets under those current circumstances. Instead, some controlling shareholders are taking advantage of the low valuations to buy out the minority shareholders and de-list their shares. One may therefore argue that investors and regulators have less bargaining power to press for better corporate governance at the moment.
The journey towards better corporate governance in Brazil, which reached its milestone when the Novo Mercado was set up by the stock exchange in 2000, also seems to have stalled. The Novo Mercado is the special listing segment of the BM&F Bovespa stock exchange for companies with high corporate governance standards. It has been a benchmark for other emerging markets, but now shows signs of wear.
In our view and that of the long-term investment community, however, companies with high corporate governance standards and strong fundamentals may be better equipped to deal with political uncertainty and volatility. Initiatives such as the corporate governance programme for state-controlled companies, which will award a seal of quality for companies that comply with a number of best practices in corporate governance, are encouraging. Equally positive is the work underway on the introduction of a Brazilian Stewardship Code, a set of principles aimed primarily at institutional investors who hold shares and thus voting rights in companies, in which we are heavily involved. The review of the Novo Mercado listing rules and the new Brazilian Corporate Governance Code, which will be enforced by the market regulator, add to this positive wind of change.
Reflecting on the timing of these improvements, we believe there is growing momentum in corporate governance and an economic downturn may well be an opportunity for a step change in Brazil. As such, we are continuing to engage with companies on issues such as board composition and effectiveness, compliance and culture change, as well as the quality of their reporting, to introduce best practices in corporate governance to the Brazilian market.
Digging deep – Engagement on conflict minerals
Loosening the grip – Engaging with state-owned companies