Issue 6 - December 2011
Brazil’s Fortunes - continued
Roger Agnelli, the highly regarded former CEO of CVRD, ran afoul of President Lula. Agnelli had led the company’s impressive growth during his 10-year tenure. Toward the end, however, he decided not to buy local and awarded major shipbuilding contracts to a Korean firm that bid 40% less than its Brazilian competitors. Lula publicly denounced Agnelli, and Lula’s successor, President Rousseff, ousted him. Investor concerns about the company’s future soared.
A Revival of Fortune
Although the Brazilian government intends to bolster the economy, its agenda will confront the implacable force of the middle class it has helped create — and that class’s expectation that business decisions be made in the interests of shareholders.
There is a growing investment mentality in Brazil’s middle class that wasn’t there 10 years ago. Where once discussions of investments were rare, it now is a common topic at social gatherings. From 1999 to 2009, 31 million people entered the Brazilian middle class, bringing the total to 95 million (52% of the population). These individuals have disposable income and are investing in the stock market.
The BM&FBOVESPA is making efforts to improve corporate governance practices. In 1995, the Brazilian Institute of Corporate Governance was established. Its mission is to raise awareness of corporate governance standards and disseminate best practices. In 2000 the BM&FBOVESPA launched its New Market. This listing segment includes companies that voluntarily implement corporate governance standards beyond those the law requires. One of the goals is to broaden the market of individual investors by requiring that public share offerings use mechanisms that favor capital dispersion and broader retail access.
Brazil still has a long way to go with its stock market. But as Brazil moves toward better governance standards, companies will create greater value for their shareholders. Harvard Business School professor Paul A. Gompers proved the point in landmark research published in 2003. He created a governance index as a proxy for shareholder rights at 1,500 large U.S.-based companies. He found that companies with stronger shareholder rights had higher firm value and sales growth. These companies also had lower capital expenditures and made fewer acquisitions.
In the 1970s and ’80s, it was common to describe Brazil as a sleeping giant. The giant is now awake. With improved corporate governance, its companies will see even greater growth. Stay tuned.