In 2003, the Organization for Economic Co-operation and Development (OECD) published a White Paper on Corporate Governance in Latin America. According to this paper, Brazil has seen "comprehensive and far-reaching" reforms in local corporate governance practices. The 2001 reform of the Corporation Law strengthened minority shareholders rights and improved standards for disclosure, with improved laws on tag-along rights, de-listing, non-voting shares, election of board members by minority shareholders and private arbitration. The same year, the Sao Paulo Stock Exchange (BOVESPA) launched three new market segments: "the Special Corporate Governance Levels 1 and 2" and the "Novo Mercado" with each market segment requiring progressively stricter standards of corporate governance. So far, the BOVESPA has been successful in attracting listings on the level 2 and Novo Mercado segments, implying improved standards in corporate governance practices. In July 2002, the Securities Exchange Commission published its Recommendations on Corporate Governance that apply to all listed companies on a comply-or-explain basis. Despite these comprehensive reforms, weaknesses still persist. The concentration of control in the hands of a few shareholders and issuance of preferred or non-voting shares is prevalent, which to a large extent is due to the family controlled ownership structure. Other problems range from the poor functioning of boards, the disregard of minority shareholders' rights to the lack of adequate legal protection to investors. Overall, observers concur that considering the generally improved quality of the current legal environment, priority must be on the enforcement of existing legislation and speeding up judgment of current administrative procedures.

General Overview

In 2003, the Organization for Economic Co-operation and Development (OECD) published a White Paper on Corporate Governance in Latin America. The report stated that Brazil has seen a "comprehensive and far-reaching" (p. 36) set of corporate governance reforms and other initiatives. For instance, the Brazilian Institute of Corporate Governance (IBGC) was established in 1995 as a not-for-profit institution to promote good corporate governance practices. The IBGC issued the first Brazilian Corporate Governance Code in 1999 which was last revised in 2004. The IBGC code contains recommendations on the relationship between controlling and minority shareholders along with guidelines on improved functioning of the Board of Directors. In addition, the Brazilian Securities and Exchange Commission (CMV) also issued a voluntary code of corporate governance in 2002 to provide guidance on corporate governance applicable on a comply-or-explain basis. A Self-regulation Code for the Public Offerings of Securities Distribution and Acquisition was also issued in 2005 by the National Association of Investment Banks (ANBID) specifically for investment banks.

As part of its ongoing efforts to improve corporate governance practices, in 2000, the São Paulo Stock Exchange (Bovespa) created three special listing segments designed for firms that voluntarily decide to commit themselves to higher corporate governance standards - where level 1 has the least stringent requirements as opposed to level 3 or the New Market (Novo Mercado). The 2003 OECD paper noted that "it is anticipated that all future IPOs will likely take place on the Novo Mercado and many private companies are contemplating listing on this market segment" (pp. 36-37). A 2008 Country Partnership Strategy for Brazil published on the World Bank website states that an initiative to create a more equitable, competitive and sustainable Brazil with the help of the World Bank, the International Bank for Reconstruction and Development, and the International Financial Corporation during the period 2008-2011 is underway. Under this program, the focus in the financial sector will be to improve the competitiveness, efficiency, and risk management of the sector, as well as to maintain the system's stability. The development of the capital markets is expected to be addressed in fiscal year 2009, with a technical assistance loan supervised by the CVM to foster "improved regulation and supervision, increased transparency and enhanced minority shareholder protection" (p. 55), the OECD report noted. These endeavors, per the report, will also help institutionalize the progress made through the New Market launched by the Bovespa. The Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A.) was created in 2008 with the integration between the Brazilian Mercantile & Futures Exchange (BM&F) and the São Paulo Stock Exchange (Bovespa).

The legal framework for corporate governance is governed by the Brazilian Corporations Law, the Securities Market Law, and Brazilian Civil Code. In addition, the CMV issues various regulations in connection with the securities market that impact corporate governance practices. The 2008 paper by Silveira and Saito notes that the enactment of a new Corporations Law (or also referred to as the Corporate Law) in 2001 brought about changes in some important rules designed to improve minority shareholders protection. The 2003 OECD paper further explains that the 2001 Corporations Law, in addition to strengthening minority shareholders rights, also improved standards for disclosure, with improved laws on tag-along rights, de-listing, non-voting shares, election of board members by minority shareholders and private arbitration. At the same time, the Securities Market Law was also amended, thereby giving the CVM greater functional and financial independence. The CVM regulates the stock exchanges, securities brokers, distributors, pension funds, mutual funds, and leasing companies and has jurisdiction to issue and enforce regulations contained in the Corporations Law and the Securities Law. A 2005 progress report by Aline Santos et al. prepared for the Sixth Meeting of the Latin American Corporate Governance Roundtable stated that the priority must be on enforcement of existing legislation and speeding up administrative procedures. However, the 2008 paper by Silveira and Saito points out two main constraints faced by the CVM in the enforcement of legal protection to investors: (1) lack of direct access to information protected by the bank secrecy law and (2) limited financial and human resources.

The paper by Silveira and Saito on corporate governance in Brazil also identifies a few major problems in the Brazilian corporate governance framework. To begin with, the authors' note that the ownership structure, which in a majority of cases is family controlled, poses one of the main problems. In general, concentration of control is in the hands of a few shareholders and issuance of preferred or non-voting shares is prevalent. Other problems range from the poor functioning of boards, the disregard of minority shareholders' rights to the lack of adequate legal protection to investors. As explained by the authors, there is a low level of tag along rights beyond legal requirements for minority shareholders. With regard to the board of directors, the paper points out that there is no clear division of roles between boards, managers, and controlling shareholders, particularly in family-owned companies. Further, there appears to be a general lack of board committees and internal regulations and guidelines. Also, the directors were not found to be independent and there is a lack of information on related party transactions.

According to the 2005 World Bank report on Accounting and Auditing in Brazil, the local securities market ranks among the most dynamic in Latin America and around 400 companies were listed on the São Paulo Stock Exchange, at the time of the assessment. However, the report notes that the domestic securities market is dominated by government bonds and its liquidity is relatively low compared to other large global markets. The World Bank's 2009 Doing Business report, published in 2008, notes that investor protection in Brazil is slightly below the average achieved by member states of the OECD. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Brazil scores 6.0 in the disclosure index against an OECD average of 5.9. It scores 7.0 in the Director Liability Index against an OECD average of 5.0 and 3.0 in the Shareholder Suits Index against an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

II

The legal framework for corporate governance is governed by the Brazilian Corporations Law, the Securities Market Law, and Brazilian Civil Code. In addition, the CMV issues various regulations in connection with the securities market that impact corporate governance practice. The 2008 Silveira and Saito paper notes that the enactment of a new Corporations Law (or also referred to as the Corporate Law) in 2001 brought about changes in some important rules designed to improve minority shareholders protection. The 2003 OECD paper further explains that the 2001 Corporations Law, in addition to strengthening minority shareholders rights, also improved standards of disclosure, with improved laws on tag-along rights, de-listing, non-voting shares, election of board members by minority shareholders and private arbitration. At the same time, the Securities Market Law was also amended, thereby giving the CVM greater functional and financial independence. The CVM regulates the stock exchanges, securities brokers, distributors, pension funds, mutual funds, and leasing companies and has jurisdiction to issue and enforce regulations contained in the Corporations Law and Securities Market Law. The 2005 progress report by Santos et al. prepared for the Sixth Meeting of the Latin American Corporate Governance Roundtable stated that the priority must be on enforcement of existing legislation and speeding up administrative procedures. However, the 2008 paper by Silveira and Saito points out two main constraints faced by the CVM in the enforcement of legal protection to investors: (1) lack of direct access to information protected by the bank secrecy law, and (2) limited financial and human resources. The above information, however, does not directly address Brazil's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

II

The 2003 OECD White Paper recommended that steps should be taken to facilitate shareholder participation in General Meetings and voting of shares. It also recommended that institutional investors should be encouraged to exercise their ownership rights in a more active and informed manner. Per the 2006 paper prepared by Aline Santos for the Seventh Latin American Corporate Governance Roundtable, although one-share-one-vote structure is not mandatory in Brazil, it has been voluntarily accepted by most companies. The 2007 Padovan and Assuncao paper explains that shareholders are entitled to appoint directors and remove them from office by means of shareholders' meeting. Also, votes at board meetings that violate a shareholders' agreement are not counted. According to a 2004 Institute of International Finance assessment, proxy voting is permitted under Brazilian law and is a common practice; however, a proxy agent must attend meetings in order to exercise votes and voting cannot normally be done by mail or electronic means. Furthermore, the Corporations Law empowers the shareholders meetings to perform the following functions: (1) to change the by-laws; (2) to appoint and remove directors and members of the auditing committee; (3) to review on an annual basis the managers' accounts and approve financial statements and; (4) to exercise shareholders' rights in case of non-compliance with obligations required by laws or by-laws, among other issues. The above information, however, does not directly address Brazil's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

II

The 2003 OECD White Paper recommended that the legal and regulatory framework must provide for clear and ex-ante rules regarding how minority shareholders are to be treated when there is a change in corporate control. In cases of de-listings or withdrawal rights, authorities must ensure a fair, practical and predictable system for valuing the shares of minority investors, the report adds. Furthermore, the report notes that if the legal framework allows shares with different voting rights, "this needs to be fully justified and accompanied by commensurately stronger and more effective protection of minority shareholders" (p. 2). More recently, the Silveira and Saito paper points out that there seems to be a disregard for the rights of minority shareholders. However, the 2008 Country Partnership Strategy for Brazil notes that under the new initiative to create a more equitable, competitive and sustainable Brazil, the development of the capital markets is expected to be addressed in fiscal year 2009, with a technical assistance loan supervised by the CVM to foster "improved regulation and supervision, increased transparency and enhanced minority shareholder protection" (p. 55). The above information, however, does not directly address Brazil's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

II

There is insufficient information publicly available directly addressing Brazil's compliance with this principle.

Principle V: Disclosure and Transparency

II

According to the 2006 paper prepared by Aline de Menezes Santos for the Seventh Latin American Corporate Governance Roundtable, the 2003 OECD White Paper recommended that national accounting standards should be brought into compliance with International Financial Reporting Standards (IFRS) and the quality of the financial reporting process should be assessed with a view to eliminate conflicts of interest. The disclosure of related party transactions and potential conflicts of interest in such transactions should also be improved and supported by better information about corporate ownership and control structures. A July 2007 update on Deloitte IAS Plus website notes that with the enactment of Law No. 11,638 in 2007 (effective January 1, 2008), all Brazilian listed companies will be required to apply IFRSs in their consolidated financial statements starting in 2010 (optional from 2007).

Per the 2007 Padovan and Assuncao paper, public corporations listed in the New Market and Bovespa are subject to more stringent corporate governance requirements. With regard to CVM regulations, the paper notes that public companies are required to disclose information on financial statements accompanied by an annual report and opinion from an independent auditor and minutes of the shareholders' meeting. In addition, public corporations must disclose facts involving strategic information. The 2003 OECD White Paper recommended improved disclosure of related party transactions and potential conflicts of interest, however, the 2008 Silveira and Saito paper points out that the available information on related party transactions is inadequate. The above information, however, does not directly address Brazil's compliance with this principle.

Principle VI: The Responsibilities of the Board

II

With regard to the responsibilities of the board, the 2003 OECD White Paper recommended that laws and practices must ensure that all directors act independently and that boards improve their ability to manage conflicts of interest and ensure compliance with laws and ethical standards. However, the 2008 Silveira and Saito paper points out that there is no clear division of roles between boards, managers, and controlling shareholders, particularly in family-owned companies. Further, there appears to be a general lack of board committees and internal regulations and guidelines. Also, the directors were not found to be independent.

According to the 2005 progress report by Aline Santos et al. prepared for the Sixth Meeting of the Latin American Corporate Governance Roundtable, Brazilian corporate law states that directors and officers owe their duties to the company, without regard to the group of shareholders who elected them. Such duties include care, diligence, loyalty and confidentiality and the CVM has the power to penalize companies and directors for breach of duty of care, duty of loyalty, failure to disclose information and conflicts of interests. Further, the CVM Instruction No. 367 of 2002 requires directors and officers to confirm in writing that they do not hold a seat on the board of a competitor, nor have any conflicts of interest. The 2005 CVM progress report notes that the third revision of IBGC Code introduced new guidelines in order to: (1) improve board's ability to manage conflicts of interest; (2) encourage boards to clearly define their work procedures through the approval of an internal regulation of the Board of Directors; and (3) give directions to boards in the aspects of directors' independence and compliance with ethical standards. The above information, however, does not directly address Brazil's compliance with this principle.