LatinFinance - July/August 2014 - 12

©REUTERS
©REUTERS

OPENING UP: Cartica Capital argues it has
succeeded in forcing more disclosure on
CorpBanca's merger with Itaú Chile

account, perhaps through board representation or even simply
better disclosure on executive compensation. But more aggressive
tactics are also gaining ground, says Cristiano Guerra, head of Latin
America research at proxy advisory firm ISS.
Compared to other emerging markets including in Latin America,
Brazil has tended to prove the most fertile ground for activist
investors, says Mike Lubrano, Cartica's managing director for
corporate governance. This is partly because the Novo Mercado
- a share trading platform set up a decade ago specifically for
companies that issue voting shares - succeeded in "highlighting the
importance of governance", according to Lubrano.
The platform, now Brazil's main listings segment, allows only
one class of shares, meaning fewer control groups can get their way
via previously commonplace preferential shares. The architects of
the Novo Mercado viewed that principle as vital for improvements
to corporate governance - in other words, effective relationships
between management, directors and shareholders.
Unlike in the US, most big companies in Brazil still have
controlling shareholders, so the worry was that preferential shares
made it harder for minority shareholders to ensure the right to an
equitable share in a firm's profits and growth. It is a right the OECD,
for one, views as key to good corporate governance, alongside
independent oversight by the board of directors and proper, timely
disclosure of financials and other information.
André Covre, chief financial officer at Brazilian conglomerate
Ultrapar - winner of LatinFinance's 2014 award for shareholder
transparency - says international investors see Brazil as having
better standards of governance and disclosure than other emerging
markets, thanks to the advances brought about by Novo Mercado.
Brazil's improved corporate governance has helped Brazilian
companies attract funds, he says.
"There's been a very significant change compared to 15 years ago.
Brazilian companies on average have evolved quite significantly
in corporate governance," says Covre, who is also a former chair
of Companies Circle, a group of Latin American companies set up
in 2002 to share their experiences of improving governance and
transparency.

12 L ATINFINA NCE.COM - July/August 2014

New markets
Investors nevertheless argue that across Latin America, further
advances in governance are now necessary in order for them to gain
more comfort when putting capital to work in the region's corporate
securities. This is especially so when it comes to equities, not least
given the three-year malaise in Brazil's stock market, Latin America's
biggest.
Can capital market investors' increased awareness of their rights
bring more transparency and a new shift in how corporate managers
interact with shareholders?
Many equity investors think so. Indeed, the varieties of
shareholder activism emerging in Latin America - from vocal
protests and lobbying regulators to negotiating board representation
or privately advocating strategy change - could be considered
"mutually encouraging", says Eduardo Figueiredo at the Brazilian
office of UK fund manager Aberdeen.
An increasingly activist approach by shareholders is already
beginning to change the way companies do business, he says.
"In a couple of our holdings the firms have come to us, in advance
of a change or a restructuring of the board. In the past they might
have made a proposal, and waited for a reaction. Now, they're more
likely to get feedback from investors first," Figueiredo says.

DOMENICA NORONHA, TEMPO CAPITAL

"PEOPLE ARE AFRAID OF BUYING
SHARES. IT'S UP TO ALL SHAREHOLDERS TO PUSH AND RAISE
ISSUES LIKE THIS, INSTEAD OF
REMAINING SILENT"
In contrast, Brazil's securities regulator, the CVM, is more
guarded in its take on the rise of shareholder activism - perhaps
reflecting lingering reservations in the market over the extent of its
benefits: "The existence of shareholder activism is a natural process
and may bring very positive results," it says in response to questions
from LatinFinance. "When the different players involved are duly
conscious of their roles, dialogues are extremely productive,
technical, and contribute effectively to the capital markets'
evolution."
Yet funds that have employed activist tactics say their actions
are necessary to bring wider improvements to the market. Such
advances include greater investor confidence, which, in turn, can
lower the cost of funding for corporates accessing debt and equity
capital markets. The Bovespa's corporate governance index, which
gives greater weight to Novo Mercado stocks, has consistently
outperformed the broader Ibovespa index, since 2001.
Domenica Noronha at Rio-based Tempo Capital says it was
unusual - but necessary - for her fund to be so outspoken in its
opposition to a merger between Portugal Telecom and Brazil's Oi
this year (see box, page 14). She says the low proportion of Brazilians
investing in the stock market is partly due to the perception
that management often ascribes a lesser priority to minority
shareholders' views.
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