Best practices are a key to investor interest
RAISING STANDARDS BRAZILIAN COMPANIES HAVE BECOME MORE AWARE OF THE NEED FOR GOOD INVESTOR RELATIONS, HIGH STANDARDS OF CORPORATE GOVERNANCE AND TRANSPARENCY. AGENCIES SUCH AS THE BRAZILIAN INSTITUTE FOR INVESTOR RELATIONS ARE SETTING STANDARDS FOR OTHER COUNTRIES TO FOLLOW

BECAUSE of the crisis in Argentina, some North American investors have been wary about committing themselves south of the Rio Grande. But the picture in Brazil is quite different. Indeed, legislative changes and other reforms have improved the general climate for investment there, despite the downturn affecting most of the Western hemisphere.

ROBERTO CASTELLO BRANCO President of the Brazilian Institute for Investor Relations

“One very important thing we have is the fiscal responsibility law,” says Roberto Castello Branco, President of the Brazilian Institute for Investor Relations (IBRI). “This makes politicians accountable for the management of public finance. Moreover, we have a regime of inflation targets that has been working since 1999, keeping inflation under control.”
Over the past ten years, Brazil has been deregulating its economy. “Of course, there is still much to do in the future,” says Mr. Castello Branco. “Some necessary reforms have not been implemented yet. The incoming government has a full agenda to boost economic activity in the long term. However, Brazil has improved a lot in comparison with the early 1990s.”

Most important of all, he believes, is the preservation of Brazil’s macro-economic stability. “Without that, there can’t be a healthy capital market,” he argues. “I have never heard of a country that had a high degree of volatility in terms of economic policy, yet had a strong capital market.”

Maintaining macro-economic stability should lead to a much more favorable environment for investors who have an interest in the stock market. “Brazil has a mutual fund industry that invests only eight percent of its assets in equities,” he points out. “That is very low. In that sense, there is a very high potential for investment growth.”
The IBRI is dedicated to encouraging Brazilian companies to recognize the importance of good investor relations and demonstrating how to achieve them.

PRODUCTION LINE Billions of dollars have been invested in Brazil by U.S. car manufacturers like Ford, which has opened a new factory in Bahia

“We are teaching people about best practices and have been bringing in experts in the field, mainly Americans, who are much more advanced in this kind of thing, to tell us about their experience and knowledge,” says Mr. Castello Branco. “IBRI’s main role is to educate people and try to implement best practices, in order to improve the competitiveness of Brazilian companies in capital markets.”

Regulatory changes have been introduced by the Comissão de Valores Mobiliarios (CVM), Brazil’s equivalent of the Securities Exchange Commission, to raise standards of corporate governance in minority shareholder protection, accounting standards, the role of auditors and board directors’ responsibilities.
“Over the last couple of years moves have been made to reform the capital markets,” says Mr. Castello Branco. “Both the government and the private sector have taken initiatives aimed at protecting minority holders’ rights and company transparency.”

He cites the public offers relating to the Companhia Vale do Rio Doce (CVRD), the world’s third largest diversified mining company, as a success in attracting investor interest. “That company acquired almost 800,000 new shareholders,” he says. “There is a big opportunity to invest in good companies in Brazil. A company must have a very dynamic capital market, so there is a transition process.”

The nature of company ownership in Brazil is evolving significantly. In the past, the Brazilian corporate sector was basically controlled by a few families and government enterprises. After privatization and in-flows of foreign direct investment, the corporate scene was dominated by shared-control companies. Now it is moving towards a much more American or British model, with a less concentrated structure of ownership.

A number of larger Brazilian corporations have chosen to be listed on the New York Stock Exchange, as well as on the São Paulo bourse. Companies that are listed in New York are subject to stricter rules regarding transparency, which IBRI thinks is a good thing for the Brazilian market as a whole. “If a company stays listed only in the local market, the growth in its liquidity is very limited,” says Mr. Castello Branco.
He also believes that the fact that Brazilian stocks are traded at a discount on the international market offers special opportunities for U.S. investors.

“There is no economic reason for world-class Brazilian companies, like CVRD or Embraer, to be traded at a lower value,” he asserts. “So this is a source of opportunities for U.S. investors. These companies are good players and are very competitive, by any standards. They are as good as any other company in the world.”
Mr. Castello Branco remains very optimistic about the future. “The Brazilian economy almost stagnated for the past 20 years, so now we are in a very good position to start a sustained process of economic growth,” he says.