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Code of best practices of corporate governance in Brazil

Letter to the International Finance Corporation, Washington

17 July 2015

Dear Ms Germanova,

Norges Bank Investment Management (NBIM) appreciates the opportunity to provide feedback in the peer review of the draft revised code of best practices of corporate governance in Brazil, issued by the Brazilian Institute of Corporate Governance (IBGC).

Our perspective is that of a globally diversified institutional investor. NBIM manages the Norwegian Government Pension Fund Global (GPFG), which holds total assets of USD 880 billion. We have invested USD 570 billion in equity in more than 70 markets. As of end-June we held equity worth BRL 11.6 billion in 310 Brazilian companies.

In answering to the peer review, we would like to focus our comments on the procedures by which board directors are elected, as well as how minority and preferred shareholders may propose candidates and elect, and the related disclosure. As a diversified investor, we vote our shares by way of proxy voting. We would therefore highlight some current challenges related to proxy voting in board elections. This is of relevance to themes 1 and 2 in the IBGC consultation document because the effective ability to exercise voting rights in board elections may be affected, and hence the accountability of the board towards the shareholders.

The need for early and complete information on voting items and procedure

For proxy voting to work satisfactorily, complete information on all agenda items should be disclosed at least at the deadline stipulated by Brazilian regulation of 15 days ahead of the general meeting of shareholders. Alongside this information, there should also be certainty on the voting procedure at the shareholder meeting. The early distribution of this information to shareholders – as said ideally by three weeks ahead of the meeting – is necessary for a fully satisfactory proxy voting process. Such a time span would provide us, and our agents, sufficient time to organise, analyse and consider all relevant facts, interact with the company as warranted, and subsequently make considered voting decisions and implement our voting instructions throughout the proxy voting chain.

In light of these requirements, there are still challenges in the Brazilian framework. We would encourage the IBGC to include new language into the code to the effect of helping this situation. The implementation of the CVM instruction 561 with effect from 2016 might be an opportunity to address some of these issues.

Below, we elaborate on these challenges in more detail. There is currently no section in the draft revised code that gives a particular account of recommended board election practices. NBIM would be willing to forward to the IBGC suggested text for a new section on board elections.

Information on minority and preferred shareholder candidates

Brazil has a distinctive system in which minority shareholders and holders of preferred shares may propose and elect board candidates. We regard this system as a useful addition to the corporate governance framework, in particular given the controlled nature of many Brazilian companies.

However, the common practice of disclosing such candidates at the shareholder meeting or shortly before the meeting effectively precludes voting by shareholders voting by proxy. We understand that the late deadline for minority and preferred shareholders was intended to ease the proposal process for those shareholders. However, the effect of the late filings is that the bulk of such shareholders are not able to vote, due to their natural dependence on proxy voting. In practice, this amounts to disenfranchisement for those foreign investors who are not able to be present at the meeting. This is a concern in any case and even more so in the instances when there is a competitive vote between candidates.

We would encourage the IBGC to consider how minority and preferred shareholders can be motivated to file their proposals early enough for inclusion in the ordinary meeting material sent out by the company currently at least 15 days prior to the meeting, or in earlier distribution depending on the implementation of CVM instruction 561. Once the company receives such a proposal, it is important that complete information be distributed to shareholders for their consideration.

Individual vote and count for each board candidate

In Brazil, the board candidates are generally presented as one bundled voting item at the shareholder meetings, and consequently in the proxy voting material prepared prior to the meeting. This bundling precludes investors voting by proxy from differentiating their votes between individual board candidates. The possibility of withholding votes from individual incumbent board members and new candidates is important for shareholders to be able to reflect potential concerns with the composition of the board, even if there are no candidates in excess of the number of board seats up for election. The ability to differentiate votes at the individual level is common practice in most advanced markets today – and is supported by the OECD Principles of Corporate Governance.

For these reasons, we would encourage a recommended practice in Brazil whereby each board candidate, incumbent as well as new candidates, is always voted on separately at the shareholder meeting. The vote count for each individual should be published at the meeting or shortly after the meeting. For this procedure to be effective, each board member or candidate should be presented as a separate voting item also at the agenda for the shareholder meeting, as well as in the proxy voting form made available to investors.

Ensuring complete and timely information on all board candidates and an individual vote count for each candidate in all board elections will markedly improve the framework for board elections in Brazil by facilitating proxy voting. There is a further procedural challenge in the uncertainty as to whether cumulative voting will be applied. We would commend the IBGC if the future code were to address all these issues with the aim of ensuring complete information on board election voting items and voting procedure in time for proxy-voting shareholders to consider. We remain as the IBGC’s disposal should further information or discussion be requested.


Yours sincerely

Petter Johnsen 
Chief Investment Officer Equity Strategies                                                        

Ola Peter Krohn Gjessing
Senior Analyst