In early 2023, the disclosure of a major accounting scandal brought Brazil’s capital markets to its knees. A BRL20 billion (then $3.9 billion) hole found in the books of Americanas, a traditional retailer, caused banks to close their credit spigots, slammed the Ibovespa stock index and, for a couple of months, turned investors away from Brazilian securities.
More than anything, however, the scandal exposed how corporate governance remains disappointing in Brazil even after decades of progress.
Americanas was hardly an isolated case. Frauds and scandals have sapped the value from once-vaunted stocks such as reinsurer IRB Brasil (now IRB(Re)) and telecommunications group Oi. Environmental disasters driven by poor risk management hurt investors in the mining giant Vale and petrochemical group Braskem. And then there was Operation Car Wash, a multinational corruption scandal that originated in Brazil that involved some of the largest issuers in the country, including oil giant Petrobras.
“Brazilians like to say that politics are dirty here. Well, our capital markets are as dirty as our politics,” says Adilson Bolico, a securities lawyer at Mortari Bolico Advogados in Porto Alegre.
But Brazil is also one of the most attractive and liquid plays in emerging markets. This raises the question of what investors should do to take advantage of an expected rebound in local securities while steering clear of any bad apples.
That is a question that even the savviest local investors struggle to answer.
“There is a culture in Brazil that values profits at any cost, and this culture can dodge any governance system,” says Fabio Alperowitch, a partner at Fama Investimentos, an asset manager in São Paulo focused on environmental, social and governance issues. “There is a view among certain companies that to maximize one’s profit it is necessary to take it from someone else, be it the supplier, the bank or the minority shareholder.”
NOTHING NEW
Of course, greed is not exclusive to Brazilian capitalism, and some may argue that the thirst for profit makes the heart of capital markets beat. Its combination with other characteristics of the Brazilian business environment, however, creates optimal conditions for poor governance practices to thrive.
Take capital markets rules as an example. There is no dearth of well-intentioned regulations, both from the government and market intermediaries. It’s that they have not had the expected impact on improving corporate behavior.
Alperowitch cites the case of Novo Mercado. This high governance listing level was created at the turn of the century by the São Paulo Stock Exchange (now the B3) to gather the stocks of companies committed to best governance practices, but it ended up incentivizing what he calls governance-washing.
“Novo Mercado achieved the opposite effect by creating a checklist of requirements that companies are eager to tick off, but not necessarily to follow,” he says. “At the same time, investors started to think that if a company was listed on Novo Mercado, their governance is good. That is a mistake.”
Americanas, Oi, IRB Brasil, Vale and Braskem are or were at some point listed on Novo Mercado, and this fact has highlighted the insufficiency of the mechanism to provide safety to investors. A similar point can be made about strengthening the role of independent board members that has happened in recent years.
There is a culture in Brazil that values profits at any cost, and this culture can dodge any governance system
Fabio Alperowitch , Fama Investimentos
“Despite the problems, the introduction of independent board members was one of the biggest leaps taken for corporate governance in Brazil this century,” says Fabio Coelho, the chairman of AMEC, an association of investors.
But critics say that independent board members in many companies are anything but that. Herbert Steiner, the chairman of Mesa Corporate Governance, a consultancy, says that many of them are too close to the controlling shareholders or too eager to make a career as board members, which precludes being as nosy as it would befit the interest of investors.
“Being a board member in Brazil today is like being a coach 15 years ago,” Coelho says. “It has become a fad. Everybody says that they know all about corporate governance.”
Steiner says that investors must put their feet to work and try to influence corporate decisions as much as they can. That’s no small task.
Experts note that some progress has been made since the pandemic to make it easier for minority shareholders to participate in general assemblies, for instance, by allowing investors to attend them virtually. With time, such measures may help to create a stronger stream of activism in an investor base now known for its passivity.
“Investors must stop lionizing leaders and business models that are clearly unsustainable and anti-ethical,” says Alexandre Di Miceli, an academic and consultant in São Paulo who is focused on corporate governance and business ethics. “Sometimes investors are victims, but in others they are also accomplices of the very companies that will give them losses.”
But another characteristic of the Brazilian capital markets is that listed companies tend to have strong controlling shareholders, rather than pulverized capital, which makes it hard for minority investors to be heard. In some cases, like Petrobras and Vale, the most important shareholder is the federal government, adding a layer of political uncertainty to the whole process.
CROWDED COURTS
It is even harder for investors to look for compensation in the courts if they feel that their portfolios have been negatively affected by the mismanagement of illegal practices.
The local courts are notoriously slow and overburdened, and there is a lack of judges with expertise in the capital markets. Another problem, according to Bolico, the securities lawyer, is that investors that put their money in stocks listed at Novo Mercado automatically agree to try and settle disputes via arbitrage before moving to the courts. This measure is intended to increase the efficiency of dispute settlements, but it has ended up creating an extra barrier to the participation of minority investors, as an arbitration process costs at least BRL1 million, he says.
“The Brazilian market is not for small investors,” Bolico says. “If they lose money because of a corporate fraud, the only thing they can do is cry.”
SAFEGUARDING MINORITY INVESTORS
The government is trying to improve the plight of minority investors and has presented a bill that makes it easier for them to join forces in securities class actions. AMEC’s Coelho says he has welcomed the initiative, although it is still not clear in what shape the bill will emerge from the legislative process, where issuers will have plenty of opportunities to influence its final form.
“The bill creates a mechanism that will enable investors to look for reparation in a more simplified way. Mechanisms that are available today are not working because the bar is set too high,” he says. “But it must be finely tuned to avoid punishments that are so high that they will prevent competent managers from working at listed companies.”
It has been a long and uneven road towards better governance in Brazilian capital markets, and the journey is far from over. Investors must in fact steel their nerves for the potential of new cases coming to light, as scrutiny by stakeholders and the media is on the rise and the incentives for foul play have been rife.
“It has been a difficult period for some business sectors, and directors have had to take bolder decisions that sometimes border on being illegal,” says André Camargo, a counsel at the Tauil & Chequer law office in São Paulo. “Companies need to find creative ways to get out of tough situations, decision-makers come under pressure, and the difference between what is right and what is wrong becomes blurrier.” LF
