The advances regarding Investors’ Responsibilities

Complaining is easy.

We often see investors publicly complaining about their rights before the CVM (Brazilian Securities and Exchange Commission) or in relation to the companies. But so that these complaints are credible, a question must be made. In addition to claiming for their rights, have investors been complying with their obligations?

This question was the major topic of a debate during the 13th Latin America Corporate Governance Roundtable, held in Quito, in June. Representatives from all over the continent shared their experiences around a document entitled “Reinforcing the Governance: the institutional investors’ roles” (available atwww.amecbrasil.org.br\doc2\Strengthening_Latin_American_Corporate_Governance.pdf ). The document brings 11 recommendations of utmost importance to both diagnose whether institutional investors have been playing their role and identify the aspects that are feasible to be improved.

The general tone is the need of a continuous engagement by institutional investors in the governance processes of the companies in which they invest. In Brazil, these processes have usually evolved as a result of initiatives led by proactive and independent fund managers. Pension funds have also become more present in Brazilian companies’ shareholders meetings, mainly since that the old SPC (current Previc, the industry regulator) has established that the exercising of these institutions’ voting rights is mandatory.
Regarding regulations, unlike other countries, Brazil lacks a public policy to encourage institutional investors to get more involved in the capital market. In Chile, for example, the Ministry of Finance has a high position called ‘Chief of the Capital Market.’ No doubt Brazil is far away from this reality, what demonstrates that there is a lot of room for a better understanding of the capital market as a strategic asset for the country.
The self-regulatory environment has been evolving in the country; we can even say that it is one of the world’s most advanced self-regulatory environments. However, no doubt that many self-regulatory initiatives have given risen to duplicities and even conflicts among the rules. But fortunately there are many entities that have been focused on conciliating them.
Associations have also been helping institutional investors get more involved in governance processes. Obviously, we have an urge to talk about Amec’s actions, but it’s important to highlight that other organizations, such as IBGC (Brazilian Institute of Corporate Governance) and Apimec (Brazilian Association of Capital Market Analysts), have also been contributing to increase investors’ awareness of their responsibilities.
It seems that we are missing two important things to have investors get even more involved in the exercising of their responsibilities: the perception of the fiduciary obligation related to the responsibilities mentioned by OECD (Organization for Economic Cooperation and Development) and a pressure by investors’ customers so that those that actually comply with their obligations are awarded – by having their rights and investments preserved, and those that do not comply with them are punished.
The OECD also recommends the adoption of formal practices to distinguish good companies from bad companies. In Brazil, there have been some regulatory incentives recently, among which the incentive that institutional investors invest in companies with better governance processes. But things have not evolved a lot. However, on the other hand, we notice an increasingly selective market when it comes to the companies’ governance practices. From December 2011 – the year the report was issued – to June 2013, Ibovespa index had a drop of 16%, whereas IGC (Corporate Governance Index, which includes companies in BMF Bovespa’s special levels of governance) increased 8%. And we do not need to mention more extreme cases – both of good and poor governances, which make this conclusion even clearer: investors have been voluntarily more selective and no longer accept to be partners of companies with deficient governance practices. No doubt, a promising advancement.
Maybe Brazil’s largest gap is related to the implementation of formal voting policies and the reduction of absenteeism in shareholders meetings. Except from pension funds’ regulations, nothing else has been made as to the regulatory environment. And despite the increasingly higher activism of some fund managers, the industry, as a whole, does not participate in most shareholders meetings. There are several challenges – the first one, the participation and voting difficulties (and costs). In this sense, Amec bets on the recommendations submitted to CVM in the beginning of the year for the implementation of distance voting processes and the reduction of regulatory “tricks” that prevent the healthy activism from taking place. In institutional terms, it’s clear that the potential conflicts that affect investors’ participation in corporate voting processes need to be managed.
Another recommendation made in the report is related to the need of increasing the communication in several levels: (1) among mutual funds; (2) among pension funds; (3) between these two categories of institutional investors; and (4) among institutional investors and the companies in which they invest.
The communication among fund managers has in Amec a major driver. In fact, the Association works exactly according to the lines recommended by the “Kay Review” (http://www.amecbrasil.org.br/doc2/KAY_REVIEW_FINAL_REPORT.pdf) published in the United Kingdom in 2012 regarding the need of a forum through which managers can interact and discuss governance issues and minority shareholders’ rights. At the same time, it seems that major Brazilian pension funds have been interacting – what may evolve to include the rest of the industry. Maybe the interaction between pension funds and investment funds can also evolve. The opportunity is exemplified by the existence of only one pension fund among all Amec’s members. The dialogue exists and has been growing, but it can be further improved.
The communication between institutional investors and the companies in which they invest represents the most important field for future advancements. Over the last years, we have started from a ‘zero contact’ among the parties to a growing engagement. We are talking about the relationship among institutional investors and the companies’ boards of directors and controlling groups. The roundtable’s participants agree that this dialogue is of utmost importance for the development of good governance practices. Such issue, not for coincidence, was once again discussed some days after in New York, in ICGN Annual Conference: boards of directors and investors need to interact more. This interaction is a ‘work in progress,’ but the lack of general engagement rules cannot be used as an excuse for the lack of dialogue. Certainly, this will be the most interesting field when it comes to the improvement of corporate governance processes in the next years.
The report also recommends actions to increase the boards of directors’ effectiveness. In this respect, Brazil has been evolving – from the professionalization of the boards, increasingly higher participation of independent board members and even the progress of CVM’s jurisprudence as to the administrators’ responsibilities. However, many agents still see board members as the “representatives” of a specific group of shareholders. Such vision – apart from being unlawful – hinders the development of linear discussions in shareholders meetings that many times end up divided into “our board members” and “their board members.” An important progress is seen is Previ’s case – largest Brazilian institutional investor – which, in a recent review of its Code of Corporate Governance, excluded all mentions to “Previ’s representatives in Boards of Directors.”
Over the latest years, there has been little progress when it comes to the improvement of internal governance processes of institutional investors. In this case, it seems that pension funds advanced more than mutual funds, or at least they face problems of other nature. CVM’s recent initiative of including decisions in its Ruling establishing that pension funds are, except for specific cases, parts related to their sponsors, had an important curative effect in the market. But there are still controversies to be solved.
Finally, the recommendation on the use of divestitures as the ultimate tool for institutional investors advanced a lot in Brazil. Until recently, the resources invested in the Brazilian market were “stuck” to the assets available here. CVM has evolved drastically by authorizing equity funds to invest abroad. The same can be said regarding the pension funds that today have been actively seeking global investment opportunities. And even BMF Bovespa has been collaborating in this process, encouraging the development of BDR certificates of major international companies. If investors have the possibility of allocating their investments in other countries, systemic failures in governance processes will be more and more expensive for the companies that do not implement the best practices.
In conclusion, Brazil has been evolving, but there is still lot to be done. In December 2012, a Brazilian company took to its General Shareholders Meeting a proposal that “virtually bankrupted it”. Individuals and international investors were present to fight for their rights (and to exercise their responsibilities). Only two Brazilian institutional investors participated in this meeting.
We still have a long way to go.