Interview with Marta Viegas: Governance Evolves In Brazil, But There Are Still Numerous Challenges To Create More Certainty

Corporate governance in Brazilian companies has evolved in the past few years. However, the Brazilian capital market is yet to overcome many difficulties and challenges to provide investors with a safe and reliable environment. That is Marta Viegas’s opinion, Chief of the Corporate Governance Department at the Inter-American Development Bank (IDB), and responsible for impact investment.

As a seasoned lawyer with an extensive career in Brazil and the world, including a position in the Brazilian Institute of Corporate Governance (IBGC), Ms. Viegas believes Brazilian companies must improve their practices and create more diverse boards. “Despite the pressure from international investors, the extensive debate over the matter, and even a bill for quotas introduced in Congress, there has not been any substantial progress,” says Ms. Viegas.

Moreover, she evaluates learning opportunities and changes during the pandemic, as well as issues like diversity and ESG growth. See the full interview below:

How do you see the evolution of corporate governance in Brazilian companies?

Marta Viegas, Chief of the Corporate Governance Department at IDB.

There have been significant improvements in the past few years, such as the Brazilian Corporate Governance Code for Listed Companies and the updated rules for the listing segments at B3 (Brazilian stock exchange). Beyond regulations and norms, I believe greater access to knowledge was the most significant improvement. And it happened thanks to the good work done by associations such as Amec and IBGC. Our criticism, however, should be drawn towards situations that occur quite often in the Brazilian market, such as conflicts of interest in related-party transactions. The insecurity is aggravated by the legal system, which fails to provide fast and efficient solutions in a process we call enforcement.

Could you tell us more about these issues?

A recent survey by IBGC regarding the adoption of practices supported by the Brazilian Corporate Governance Code shows that only 28.6% of companies have adopted formal policies for related-party transactions. This must change to reduce frustration and boost the market’s confidence. Also, only 16.1% of companies follow the recommendation of nominating outside directors for at least half of the Board’s seats and having one-third of independent members on the Board. Only 23.1% adopt the recommended practices to Audit Committees, including having their budget and being ruled by a majority of independent directors with experience in accounting, finance, and auditing.

What are the main risks investors face with Brazilian companies?

The Brazilian market has complex structural characteristics that tend to make investors insecure due to the lack of checks and balances in companies to manage conflicts between controlling shareholders and minor shareholders. Among the practices that could provide more legal safety, we can name a good Board with a majority of outside directors and an appropriate number of really independent directors, and an Audit Committee that receives direct reports. A good controlling environment with risk management, compliance, and internal auditing is also essential. However, these practices are precisely the ones that face the strongest opposition. Lastly, controversial cases in the market fail to build the proper trust.

Could you talk about the evolution of boards of directors amid the pandemic? What progress did they make and what challenges did they face in the past year?

The pandemic demanded a lot from Boards. They had to rethink their strategies, expand the amount of cash in hand, reposition the company, and preserve its culture and reputation – all of that in an ever-changing virtual environment. In many cases, there was more interaction between the Board and management teams, which also fostered the need for defining responsibility and the course of action to act swiftly amid an uncertain environment. I believe Boards have evolved. I think virtual tools have helped a lot, making meetings more efficient and materials more accessible. I do not see why some Board meetings could not be held virtually in the future. This will reduce costs and increase their diversity. 

How do you evaluate the evolution of diversity in Boards’ composition?

I think Brazil still has a lot to do in terms of diversity in Boards. When we speak of gender diversity, women’s share in the Boards of Brazilian public companies has been halted at around 8% for a few years. Despite the pressure applied by international investors, the extensive debate over the matter, and even a bill for quotas introduced in Congress, there has been no substantial progress. The picture is not different when it comes to diversity beyond gender issues. Having a diverse Board is not about being politically correct. It is about improving the company’s decision-making process for better results in the long term.

How can we change this situation?

Institutional investors are increasingly aware of the Board’s composition. At IDB Invest, we do our part and question the usual lack of diversity. In today’s world, it makes no sense for a company to have a Board that does not represent at the least the market it serves.

How is BID Invest acting towards ESG issues in capital markets?

IDB Invest is an impact investor and makes an individual ESG analysis for each approved transaction. Not all investors can make a separate analysis, and the market is short of options. As an alternative, investors usually rely on sustainability reports or ESG Ratings. Despite the fact they have become more sophisticated in the past few years, sustainability reports are unreliable since there is no common standard and companies only publish what they want. ESG Ratings also have to evolve a lot. As it is now, they have no standard procedure, and their tools are often just a collage of isolated “E,” “S,” and “G” criteria. It’s the opposite of a holistic approach that identifies the company’s culture, with the “G” criteria serving as a foundation to guide the “E” and “S” long-term policies. 

In a broad sense, how do you evaluate executives and fund managers’ attitude in this context?

It is interesting to mention the McKinsey Global Survey on ESG programs, which shows  C-Level executives and investment professionals’ understanding of ESG issues increased significantly from 2009 to 2019. And there is the expectation that ESG topics will generate even more value to shareholders in the next five years than they do now. The study shows that the social aspect was the one that gained more relevance even before the pandemic. Paying attention to ESG issues, putting people first, and valuing transparency in the decision-making process will help companies recover and keep their reputation.