Corporate Governance and Firm Performance in Brazil - Term Paper Example

Corporate Governance and Firm Performance: the case of Brazil listed firms Table of Contents Corporate Governance in Brazil 3 The Importance of Corporate Governance 4 Board of Directors 5 Board Independence and Firm’s Performance 6 Governance and Return 6 Structure and Ownership of corporate governance 7 Determinants of Strong and Good Corporate Governance 7 Shareholders Rights and Privilege 8 The role of the Audit Committee 9 Corporate Governance Mechanisms 9 References 11 Bibliography 13 Corporate Governance in Brazil Brazil was never much enthusiastic towards adopting the global corporate governance policies as most of the companies and big business houses are family-owned business. The Brazilian companies preferred concentrated ownership and informal approach to the corporate governance. In a recent survey conducted among the Brazilian companies, in which 127 board members and 74 companies were included, showed their satisfaction towards the prevailing governance policies. (Alexandre, Laouchez, and Lindenboim, 2002). The governance in Brazil was mainly depended on the excessive influence of the major shareholders of the company. According to the Brazilian law board, only one-third of the member of board can be non-executive, so most of the directors in the Brazilian board were executives. The Brazilian Institute of Corporate Governance (BICG) issued a code of ethics stating the best corporate governance practices in 2001. It was established as a non-profit organisation, to monitor the governance practices in Brazilian firms and business organisations. The codes states that there should be transparency, fairness and accountability in all the organisations in order to maintain perfect governance. In the Brazilian corporate governance, the structure is duel as the Brazilian companies have board of directors as well as fiscal council. The fiscal council is mainly elected by the owners of the company. This council is created to safe guard the interest of the minorities and the people holding the non-voting stocks in the company. The fiscal council has the right to take part in the decision-making process and attend the annual general meetings of the company. They actually represent the less powerful group of the organisation. The council can access all the information of the company including the independent auditors. The other members in the structure of the organisation are the board of directors, the management, which includes the CEO of the organisation and the corporate officer, and the independent auditors. According to the Brazilian corporate governance codes, the shareholders of the company are the real owners, according to their amount of shareholdings in the company. The annual general meeting is conducted and the shareholders should be reported in advance for the same (Mallin, 2007, p. 256-257). In Brazil the corporate governance system indicates that the investors are not much willing to provide equity finance. So, the Brazilian Pension funds were introduced to encourage the minor shareholders to take part in the decision making process of the company. The introduction of duel-leadership structure in the company also motivated them to play important roles in development of the organisation. The shareholders in the Brazilian companies were given voting right on the principle of one share, one vote. The preferred share owners did not have the voting rights. The companies issued two-third of the preferred shares. This means 16.67 percent of the shareholders did not had any voting rights in the company. But the issuances of preferred shares were reduced to half after the reforms of 2002. The Importance of Corporate Governance Good Corporate Governance helps in maintaining balance between managers, board of directors and the stakeholders of the organisation. It drives the firm towards achieving transparency of operations, fairness and discourages fraudulent practices within the organisation. Corporate Governance is important for: Careful Management: It helps in taking decisions and managing the various functions of the organisation together with the shareholders and directors. Low corruption level also helps in reduction of risk within the organisation. It measures, encourages and projects integrity. Stability: The stability of the company depend the stock prices of the company. The investors will always get attracted towards a well governed and profit earning company and this will also help to generate good amount of revenue. Training the board of directors: It is very important to find the right person to control and manage the company. The director brings in their knowledge, expertise and experience, but it is very important to properly train them, so that they adhere to good governance policies. Stakeholders: The stakeholders of the company are the directors, shareholders, employees, suppliers, etc. These people are important for efficient management of the organisation and the day to day operational activities. Board of Directors The code of governance includes that every company would have a board of directors. The number of directors in the board would range from five to nine and the selection should be done by the owners of the company. The owners are also responsible for taking into account the opinion of the stakeholders, and the corporate objectives of the company while taking the decisions. Along with this an advisory board is also recommended. It is the mission and vision of the board to add value to the company, look after its smooth functioning and maximise the profit of the organisation (OECD, 2006, p. 60-61). The role and functions of the directors, the CEO and other committee member are described in details. An annual performance evaluation meeting should be conducted to evaluate the performance of all the directors, and other lop-level members of the organisation. Risk management policies are also formulated during such meetings on social, safety, financial and environmental issues (OECD, 2011, p. 51). Board Independence and Firm’s Performance The board of directors act as control mechanisms to take care of the interest of the shareholders and safeguard the capital invested by hiring, firing, compensating and advising the management. Many researches have been done on the independence of the board and performance in relation to that. The independent directors should take the responsibility of improving the performance of the firm and reduce the conflicts prevailing within the company (Hirschey, John, and Makhija, 2009, p. 86-88). They must balance the interest of the major and minor shareholders. It is the responsibility of the directors to enforce constraints on the family members of shareholders and prevent them from exploiting the wealth of the company. Some of the non-US companies have also suggested that the board of directors do not have much impact on the family run companies. The board size is also an important aspect for evaluating the performance. The big size of the board would create confusion and mismanagement in the company (Zheng, 2007, p. 14) Governance and Return Corporate governance has a direct relation with the return. Corporate governance mainly states the norms and policies that the board of directors would apply to protect the integrity of the major shareholders and protect the rights of the minor shareholders of the company. When the company follows the guidelines of general governance such as transparency, accountability, responsiveness, etc and conduct business, the company is bound to earn profits and acquire market share. This also attracts investors, as investors also want to invest in those companies which have a good financial record. So this would bring in addition capital for the company (Farrell, 2012). Structure and Ownership of corporate governance The ownership structure has largely become depended on the Law of ownership transformation. The increase in the process of privatisation has lead to a highly dispersed ownership structure. The managers received only the minor stakes in the company. The emergence of the non-financial institutions has also affected the ownership structures. The shareholders from different other countries are also taking interest in investing for companies in other countries. So investments by foreign investors are also changing the ownership patterns in the new corporate governance era. The basic structure of ownership included shareholders, board of directors and the management board. The shareholders are the owners of the company and decision-making rights are always given to the major shareholders of the company (OECD, 2011, p. 2). Determinants of Strong and Good Corporate Governance It is often said that strong corporate governance always generates strong social progress. Strong and good corporate governance framework must have: Accountability Responsiveness Transparency Participatory Efficient and Effective Abiding by the rules and regulations Equitable and inclusive A good governance system must have all-pervading attributes for the companies. It is the key to make defensive decision-making and help in continuous improvement of the firms’ performance in relation to its accountability, strategy, compliance and performance. It is important to set strategies and plan business functions. It is very important to set goals, plan, monitor, and adapt to the changing business environment. The board should be responsible for setting goals for the organisation along with the management and plan out a framework (Commonwealth of Australia, 2009). Shareholders Rights and Privilege In a company the shareholder has the following rights: He/ She have the right to obtain the memorandum of association and article of association of the company and view the resolutions of the company. He/she has the right to hold the certificate of shareholding, 3 months after the allotment (Fernando, 2011, p. 121). He/ She have the right to transfer the shares according to the norms stated by the company. The shareholders have the right to see the financial statements and other books of accounts. The Shareholders also have the right to receive dividends (Fernando, 2011, p. 316). The role of the Audit Committee The audit committee is formed as a sub-committee under the board of directors. They monitor the matters relating to the financial reports and audits of the company. The board of directors are accountable to the shareholders for reporting all the financial matter, so the board appoints an audit committee under them. The audit committee includes the auditors and the directors from the board. It is their responsibility to follow the policies of the governance practices to maintain transparency in the financial reports of the company. The body also regulates the auditors and formulate policies for the same. The committee generally include 3 independent, non-executive members and one director who have ample financial knowledge. The audit committee must also have a representative from the minor shareholding group (OECD, 2004, p. 100-101). Corporate Governance Mechanisms The mechanisms are mainly designed to minimise the inefficiencies and malpractices within the organisation. This includes: Monitoring the Board: The board of directors have the power to recruit, control and fire the workforce for skilfully maintaining the capital of the firm. The board identify the problem areas and take actions to eliminate them. The executive directors are given superior authority for such activity. The internal auditors and control process: The board, management, auditors and other employees working within the organisation is responsible for internal control, operational efficiency and reporting. Balancing the power: The different divisions or departments balance the functions of the organisation. Similarly the board of director and the management divide themselves into group to exercise their power for different departments. Compensation: A minimum wage rate is set by the government. But organisations have their own slab for a fixed salary or wage and performance based remuneration. It may also be cash or non-cash or shares. External mechanisms for control are the government policies, laws, labour market rules, media, and demand for assessment of financial statements (Braga-Alves, 2008, p. 7-10). References Alexandre G., Laouchez, J. M. and Lindenboim, P., 2002. Brazilian boardrooms. [Online] Available at: < http://www.mckinseyquarterly.com/Brazilian_boardrooms_1177 > [Accessed 13 June 2012]. Asian Development Bank Institute, 2012. Political Determinants of Corporate Governance. [Online] Available at: < http://www.adbi.org/working-paper/2011/03/18/4490.financial.regulatory.harmonization.east.asia/political.determinants.of.corporate.governance/> [Accessed 13 June 2012]. Braga-Alves, M. V., 2008. Three Essays on Corporate Finance: Evidence from Brazil. Michigan: ProQuest. Commonwealth of Australia, 2009. Corporate Governance: Handbook for the board. [Online] Available at: < http://www.fahcsia.gov.au/sa/disability/pubs/general/CorporateGovernanceHandbook/Pages/Features.aspx> [Accessed 13 June 2012]. Farrell, C., 2012. Brazilian boardrooms. [Online] Available at: < http://www.nber.org/digest/dec01/w8449.html > [Accessed 18 June 2012]. Fernando, A. C., 2011. Business Environment. New Delhi: Pearson Education India. Fernando, A. C., 2011. Corporate Governance: Principles, Policies and Practices. New Delhi: Pearson Education India. Hirschey, M., John, K., and Makhija, A. K., 2009. Corporate Governance and Firm Performance. West Yorkshire: Emerald Group Publishing. Mallin, C. A., 2007. Corporate Governance. Oxford: Oxford University Press. OECD, 2004. Corporate Governance: A Survey of OECD Countries. Paris: OECD Publishing. OECD, 2006. Corporate Governance of Non-Listed Companies in Emerging Markets. Paris: OECD Publishing. OECD, 2011. Corporate Governance Corporate Governance in Slovenia. Paris: OECD Publishing. OECD., 2011. Corporate Governance Board Practices: Incentives and Governing Risks. Paris: OECD Publishing. Zheng, Y., 2007. Corporate Governance and Firm Performance. Michigan: ProQuest. Bibliography Alexander, B., 2011. Corporate Governance and Business Ethics. Berlin: Springer. Bernard S. Black, B. S., Carvalho, A. G., and Gorga, E., 2009. An Overview of Brazilian Corporate Governance. 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