The Best of Disinfectants




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9 Minutes

The Brazilian Stock Exchange – BM&F Bovespa – has just proposed, as part of the reform of Novo Mercado, that companies listed in the special segments disclose their management compensation as established by the Brazilian Securities and Exchange Commission – CVM.

The mere inclusion of a rule establishing that “premium” governance companies must obey the law may sound strange. But those who have been following the debate know that the proposal makes sense, as 33 publicly-held companies – 27 of which listed in the Level 2 or in Novo Mercado – make use of the IBEF-RJ injunction, which exempts them from such obligation under the arguments of “privacy” and “safety.” The proposal made by BM&F Bovespa therefore reopens a discussion started almost 10 years ago under the leadership of the then-chair of CVM, Maria Helena Santana. Since then, Brazilian publicly-held companies must (or, rather, should) disclose the minimum, average and maximum compensation of their management bodies – their boards of directors and management boards. The regulation, therefore, allows interested parties to understand the compensation and the incentives it represents for board members and directors. At the same time, the regulation is sufficiently balanced not to require the disclosure of individual compensation values – a common practice abroad that still hurts the pride of some people in Brazil.

Foreign observers – primarily investors – get surprised with the embryonic stage of the debate around the management compensation issue in Brazil. It’s one of the most important topics worldwide, not only in the agenda of the so-called activists, but also in the regulators’. The debate is based on three major fronts: transparency, structure and scrutiny.

The transparence battle was won a long time ago. Publicly-held companies in the United States and Europe regularly disclose detailed information about their directors’ and officers’ INDIVIDUAL compensation. CEOs themselves agree with this reality, as it was clear in the Commonsense Principles of Corporate Governance document, signed by 13 CEOs, among whom Jamie Dimon (JP Morgan), Warren Buffett (Berkshire Hathaway), Jeff Immelt (GE), and Mary Barra (GMC). They say that:

Companies should clearly articulate their compensation plans to shareholders. While companies should not, in the design of their compensation plans, feel constrained by the preferences of their competitors or the models of proxy advisors, they should be prepared to articulate how their approach links compensation to performance and aligns the interests of management and shareholders over the long term. If a company has well designed compensation plans and clearly explains its rationale for those plans, shareholders should consider giving the company latitude in connection with individual annual compensation decisions.

The debate rages when it comes to compensation plan structures. As we noticed during the 2008 financial crisis, many executives are paid according to formulas that are completely disconnected from the company’s actual performance. After all, banks went bankrupt and had to pay millionaire bonuses to many executives. In addition to the lack of a connection between compensation and results for shareholders, we saw that such plans did not take the assumed risks into account, leading executives to bet everything as, if their plans were successful, they would get rich, if they were not, their loss is limited (or nonexistent). These asymmetric structures have not only clumsily enriched many executives but also damaged the real economy in view of the bad decisions taken.

An excellent guide for the implementation of good practices is the ICGN Guidance on Executive Remuneration, originally launched in 2012, updated in 2015 and approved by the organization’s board in 2016. The paragraph below shows the document’s basic principles:

An effective remuneration structure is only part, albeit an important part, of the employment relationship that will be entered into with an executive. That relationship should encourage the right behavior, while also helping to recruit and retain successful employees and to provide the right level of reward for good performance. It will also ensure that only the necessary level of remuneration is paid and that poor performance is not rewarded.

ICGN’s document is an excellent starting point to understand today’s concerns about the creation and management of management compensation, taking incentives, retention, risks and alignment into consideration. It’s interesting to see how the debate has been evolving in terms of claw back clauses, that is, the re-capturing of values paid in excess based on subsequent information about the long-term impact of some management’s decisions. Guaranteed remuneration packages when executives join or leave a company (Golden parachutes, Golden handshakes, etc.) have been also increasingly criticized and recognized by the ICGN.

Certainly, to discuss the compensation structure – and the structure of incentives granted to executives – is only possible when compensation approaches are transparent. We will be addressing this topic later on.

The third front is the scrutiny by investors. In a number of countries, management compensation plans have to be approved by shareholders. This may have been the hottest topic of the debate, and many companies have been introducing regulations in their bylaws establishing that proposals on compensation plans are to be submitted to the shareholders’ binding votes. It’s the “say on pay” campaign that has been growing year after year. In 2011, the US Dodd Frank Act established that compensation plans were to be submitted to the shareholders’ approval, even if on an advisory basis. Few companies had their packages rejected, but when it happens, the consequences are significant, sometimes leading to the replacement of the management board or at least of their boards of directors.

Meanwhile, in Brazil…

The debate around compensation packages continues to be secondary in the Brazilian capital market. It’s curious that it happens as Brazilian shareholders have much more power to voice their opinion in this respect than US shareholders, for example. Our legislation of 1976 already sets forth the shareholders’ annual binding vote on the compensation ceiling paid to directors and board members.

The fact is that, in a typical Brazilian gambit, in which the form prevails over the essence, only the authorized “global value” of expenses has been subject to approval, without the disclosure of additional details. More recently, mainly after the CVM Instruction #481 of 2009, companies have started to disclose details about their compensation plans as part of their board’s proposals. Therefore, it’s a new reality for both investors and companies.

As expected, Amec has been noticing a growing interest among investors in discussing executives’ compensation. In 2015, a representative from Calpers delivered a presentation during the Amec Investor Forum, followed by debates with Brazilian investors about the topic. Recently, in the 2016 Season of Shareholders’ Meetings Workshop, the interest was reiterated, leading us to consider the possibility of organizing a specific event about the topic in the next months.

The investors’ perception is that the debate does not evolve because of two main reasons: the controlling structure of Brazilian companies – which allows controlling shareholders to approve the proposed packages – and the deficient disclosure policy, which hinders shareholders to come to relevant conclusions about the compensation programs.

The omnipotence of controlling shareholders as to establishing the management compensation has been undermined by the recent – and bold – decisions taken by the Brazilian Securities and Exchange Commission. In a recent decision[5], CVM concluded that an exorbitant remuneration paid to a company’s board member who is part of the controlling family but has no business experience was irregular. It is, of course, a limit situation, but also an indication that, when it comes to a publicly-held company, in which directors have fiduciary duties with all shareholders, there are limits to be respected.

Yet the disclosure aspect faces the lack of experience and the prejudice of some companies. Examples:

§  Company A – listed in one of BM&F Bovespa’s special segments. Its Reference Form (equivalent to Form 20-F) brings considerations about the principles behind the compensation paid to its “key directors.” However, the table that lists the management’s compensation includes only four officers appointed pursuant to the company’s bylaws. The only information available is that these officers receive a YEARLY compensation of less than BRL 50,000 on the total (that is, each director receives approximately BRL 1,000 per month on average). In the previous year, the maximum individual compensation was some BRL 75,000, and the minimum, approximately BRL 40,000. According to the table, in addition to these values, directors also receive salaries from the subsidiaries.  We are talking about the holding’s directors, which is a publicly-held company. However, the management’s key directors comprehend approximately 35 executives, as described in the “other material facts” item on the Form. These 35 directors received almost BRL 100 million on a consolidated basis. There is no information about average, minimum and maximum values. Has each director received, on average, BRL 3 million? Or one or two of them received 80% and the remaining percentage was divided among the other directors? Does this company actually want the market to understand how it pays its “key directors”? Doesn’t it sound like a “trick” to disclose the maximum compensation of BRL 75,000 per year when the effective compensation can be a thousand times higher?


§  Company B – company not listed in Novo Mercado or Level 2. It does not disclose its minimum, average or maximum compensation. The compensation paid to its management board totals some hundreds of million of reais. It has almost 100 officers appointed pursuant to its bylaws. What can be inferred about this company’s compensation? What is the risk taken by the main decision makers? What is the alignment between the officers’ compensation and their performance? What about the company’s ability to retain talents in its top management?


§  Company C – company not listed in Novo Mercado or Level 2. Yearly income close to BRL 500 billion (billion, with “b”). Total compensation of BRL 1.7 million, what means  BRL 300,000 on average for each director. Curiously, the total compensation paid to board members is higher than the amount paid to the executive officers – BRL 3 million. Not surprisingly, most board members are also members of the controlling family. It does not disclose maximum, minimum and average values. In the “others” item, it’s informed that its management board’s members receive more than BRL 2 million per year from the controlling shareholders, and BRL 45 million from the controlled companies. But the transparency level of these numbers is far below the values directly paid by the publicly-held company.


When BM&F Bovespa suggested the inclusion of the rule on the disclosure of compensation as set forth by CVM, it did the obvious (the least premium companies have to do is to follow the rules!), but also touched a very sensitive issue that can give rise to irrational reactions.

Among the arguments are the directors’ safety, their right to privacy and the “uselessness” of information.

Considering real facts, the safety argument is groundless. As far as we know, no director of a publicly-held company has ever been a victim of violence because of information made available to the market. And kidnappers are not used to reading CVM’s reference forms. And even if they do that, it’s unlikely that the disclosure of compensation values would encourage criminals to take specific actions. Likewise, there are no statistics showing that executives working for companies that comply with the regulation suffer more violence than those who work for companies that do not disclose such information.

The right to privacy is a legitimate argument. But not for companies that have access to the public capital. Once they access it, they also need to inform how they incentivize their decision makers. This is essential to understand the company’s risk profile, its ability to retain talents and even the company’s ethical standards. Executives who are not willing to have their compensation disclosed are exercising their right – but, accordingly, they must work for closed corporations. Therefore, companies that respect their shareholders must not hire executives when such confidentiality – through the use of IBEF injunction – is a requirement.

The “uselessness” of information is maybe the most erroneous argument. To affirm that understanding how management boards are compensated only satisfies the “curiosity” of some investors is the same as disdaining the intelligence of those who invest in publicly-held companies. It’s to ignore the reality of the entire international market of institutional investors. It’s to assume that companies can do whatever they want with the shareholders’ capital, as if they were not to be held accountable for providing information about their incentive structures.

We have also already heard that “shareholders can opt not to buy the shares of companies that do not disclose their compensation values.” Taken to the limit, this argument should also allow publicly-held companies not to disclose their balance sheets. After all, investors could opt not to buy their shares. However, it’s doubtful whether such practice encourages the building of a healthy capital market. By the way, it’s particularly difficult to apply the argument to companies listed in the premium segments that, at least in theory, commit themselves to adopting the best practices, also in line with the international scenario.

There is also the “cultural” argument. This sounds even more worrisome. To say that Brazil is different because our “culture” values privacy to the detriment of transparency is the same as condemning our country to the underdevelopment. It’s the same as accepting the reality described by Sergio Buarque de Holanda in Raízes do Brasil, which says that one of the characteristics of Brazilians is that we are “cordial,” what means we are different from people from other cultures. Similarly, patrimonialism, interlocked capitalism, nepotism, male chauvinism… and even slavery and hereditary captaincies could be justified.

As previously mentioned, CVM was wise in the way it addressed the rule. It did not establish that companies are to disclose their management boards’ individual compensation, but the minimum information necessary for investors.

Companies that make use of IBEF injunction and that are contrary to the proposal put forward by BM&F Bovespa are saying to their shareholders that they are not worried about them. What’s even worse is that they are damaging the image of the differentiated corporate governance segments, ignoring an extremely important topic for the global investor community.

They should not prosper. As the judge Louis Brandeis from the Supreme Court of the United States stated, “Sunlight is said to be the best of disinfectants.” It’s time to apply it to the Brazilian companies’ compensation practices.

This post comes to us from AMEC – Associação de Investidores no Mercado de Capitais. It was originally published on the AMEC website.

[5] PAS RJ-2011-5211



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