To regulate goes beyond issuing standards, supervising and punishing. To regulate is also to guide. And maybe this is the most efficient way a regulatory body can operate. Everybody is already used to the attitudes of Central Banks from all over the world that, by means of cryptic announcements or strategically given interviews, actually manage to make the audience understand their objectives and act in the expected way. Many times, the use of traditional regulating tools or, in this specific case, of monetary policies, becomes even unnecessary.
It is curious that this practice has been disseminated much faster among banking and monetary regulatory bodies than among the capital market ones. But little by little, the gap has been closing. The market’s “sheriffs” have been realizing that their words have weight – and usually their words are the most effective way of influencing the way agents operate.
This reality has become clearer in the measures adopted by the Brazilian Securities and Exchange Commission (CVM). Despite all efforts to streamline administrative processes by selecting the most relevant cases and making use of a ‘supervision by risk’ approach, the body is not likely to complete sanctioning processes at the same pace as that of the capital market’s decisions. Often, although the decision is great, it comes too late and then, “Ines is dead.”
Therefore, the guidance provided by the regulatory entity has the ability to eliminate this problem – not to mention enforcement costs, allowing CVM to use its resources on a more efficient basis.
Among the guidance tools used by CVM, the Official Letter is maybe the most important and powerful one. It is a document issued by one or more of its superintendencies through which the body shares its understanding about specific topics or procedures. Some of them are recurrent and issued every year with updates that reflect both the market’s innovations and the regulatory body’s focuses of concern.
In February, CVM published the 2014 version of the Official Letter SEP 01. Because of its scope, it has become a compulsory reference for companies in the beginning of each year, period during which they prepare their accounting statements and hold their General Shareholders’ Meetings. Therefore, a critical period in the corporate life of any publicly-held company.
The document has 158 pages – and is far from being a recreational reading experience. But it is there that CVM calls the attention to important points that may be going unnoticed by the market’s agents. It is a compulsory reading for anyone who is interested in corporate governance practices – including investors.
As in COPOM’s minutes, the companies’ attention (or more precisely, their attorneys’) is focused on the changes made from one year to another once these minutes address “new items” that have not been mentioned in the previous years.
CVM’s technical precision in preparing its Official Letters has been bringing significant effects. The agents have been learning to consider the Official Letters’ terms as the regulatory body’s interpretation of potentially obscure points in the regulations. Therefore, to adopt a contrary procedure is the same as asking to be sued.
In fact, CVM often says nothing but the obvious in its Official Letters. It spells standards and regulations that must be self-explanatory but are not for regulated entities that are not very interested in good practices and deliberately do not “understand” them. Many times, it merely repeats previously judged and precedent cases already published, what should not be necessary. But, even in these situations, as much redundant the repetition may seem, CVM has been able to correct injurious practices by means of this tool.
An important example took place in 2013, when CVM clearly stated that companies directly or indirectly influenced by their controlling shareholders could not participate in separate voting processes designed to the minority shareholders. It seems obvious and it is obvious. But it had to be said. And once it was said, many detrimental practices were corrected.
One of the highlights in the 2014 Official Letter is related to the practices that apply to the Annual General Meetings of publicly-held companies.
Any shareholder who has already “ventured” to participate in a Shareholders’ Meeting knows that it is a problematic process. Stuck to a law dating back to 1976 and to an extremely formal and detailed Civil Code, Brazilian Shareholders’ Meetings stopped in time. The entire legislation is based on the hypothesis that investors are physically present, what has been more and more unusual given the growing institutionalization of no risk investment options. It is not a problem that happens only in Brazil, however. All over the world, voting exercising processes in Shareholders’ Meetings have been criticized because of their complex and bureaucratic dynamics. Many times, it seems that the process has been conceived to fail.
In this year’s Circular Letter, CVM managed to deal with the problem. And it has done that without creating any new standard, but only by clarifying how ongoing regulations must be applied.
The guidance provided by the regulatory body eliminates one of the major problems in our Shareholders’ Meetings: the difficulty in communicating independent candidacies of non-controlling shareholders. Because the matter is not directly regulated and (most of the) companies have never been interested in encouraging the election of truly independent Board members, their law departments easily reject communication requests made by minority shareholders. The only alternative was the public power of attorney, an expensive and very complex process depending on the characteristics of the company’s shareholding structure.
This biased interpretation used to give rise to a clear asymmetry: the candidates proposed by the controlling shareholder were announced to the four winds through the company’s communication channels (site, public notices, IPE system, Shareholders’ Meeting manuals, etc.). Yet independent candidates used to have their names launched only in the Shareholders’ Meeting and had to seek the support of those with discretionary voting power present in the meeting.
That is the core of the problem. With the growing institutionalization of the market and broader participation of foreign investors in Brazilian companies’ capital, a growing number of shareholders do not vote in the meeting itself, but through distance voting, making use of mechanisms like the proxy card, produced by their trustees and depositories. These agents, with the objective of minimizing the process subjectivity (and the possibility of being questioned), used to include in their votes only the information officially disclosed by the company. That is to say: the candidacies included as minority shareholders were NEVER listed in the respective election ballots.
CVM has put an end to this farce in a forceful and polite way. Once again, by clearly explaining a point already established by the regulation. The Instruction 481/09 says that the company must publish “any additional and relevant information and documents for the exercising of the voting right in Shareholders’ Meetings.” Well, how can companies claim that independent candidacies, to be subject to a separate voting process, are not relevant information? Of course, they cannot. But now everything is fully clarified. Checkmate.
Over time, CVM’s guidance can bring relevant changes to the governance processes of publicly-held companies. Independent Board members can eventually receive more and more relevant support, increasing their representativeness in Boards of Directors. And more important than that, we are likely to see a “depersonalization” of the nomination processes once independent candidates are likely to be elected by a large group of investors, and no longer by a small group of activists. Accordingly, the voting power exercise becomes more and more crucial when it comes to have managers meet their trust obligations.