Novo Mercado: paving the way

The role of the Brazilian stock exchange in shaping Latin America’s corporate governance

Stock exchanges throughout Latin America have begun to realise the importance of good corporate governance in attracting investors after the success of Brazil’s Novo Mercado, a listing segment of B3 reserved for companies meeting high standards of corporate governance.1

Although Novo Mercado initially struggled after its launch in December 2000, it has since become the driving force behind the B3 exchange and an inspiration for improved corporate governance in the region. In its first two years, no companies listed on the segment but, by 2007, 57 per cent of companies traded on B3 were listed on the differing levels of Novo Mercado as opposed to the traditional segment.2 Other exchanges in the region have taken note and hope to emulate this success. However, what is successful in one industry or market will not necessarily be guaranteed the same success in another. Rather than seeking to replicate Novo Mercado, other exchanges should aim to learn from Novo Mercado’s example and determine their own approaches for improving listed companies’ governance. If countries remain creative and build on what Novo Mercado has done, Latin America should have not just one, but several models of good corporate governance from which to establish coherent regulations for the region.

Argentina

Argentina is one of the many countries that has taken note of Novo Mercado’s success and currently has the opportunity not only to emulate it, but to improve upon it. Argentina’s newly formed capital market, Bolsas y Mercados Argentinos (ByMA), plans to create its own version of Novo Mercado by establishing a segment available only to companies with high standards of corporate

Santiago Chaher

Managing Director at Cefeidas Group & Co–Director at Universidad de San Andrés Corporate Governance Program

governance. By emphasising reliability and transparency, ByMA will set the bar high for what is required to list on the new segment and create protections for international investors who might otherwise be wary of investing. As Novo Mercado has already been through four sets of updated listing rules, ByMA will have the benefit of taking the best practices by following Brazil’s example.

However, it will still need to take into account factors specific to the business environment in Argentina and adapt the rules. First, unlike Brazil in 2000, Argentina has relatively good corporate governance regulations that are on par with international standards. This presents the welcome challenge of raising the standards even higher to fit the needs of a more corporate governance–savvy, new market. Secondly, there still are many companies in the process of committing to good corporate governance practices, so the bar set by the new market must be realistic in setting their standard. Third, Argentina’s economy appears to be on a positive trajectory, but the country is still vulnerable to political and economic shifts. A struggling economy was one of the main reasons that Novo Mercado took so many years to catch on and an economic downturn would certainly have a similar impact on Argentina’s new market. Currently, there is also a political push in Argentina for the development of capital markets and Argentina has recently expressed interest in joining the Organization for Economic Cooperation and Development (OECD,) which has prioritised good corporate governance.

If ByMA can capitalise on the window of opportunity it currently has and on the existing regulatory framework in the country, we expect that the new market could see positive results much more quickly than did Novo Mercado and could begin to drive ByMA’s success in the same way Novo Mercado has driven B3’s.

Colombia

While Argentina is very closely modeling Brazil’s corporate governance segment, other countries have taken a different approach – emulating the spirit of Novo Mercado, without replicating the system. In Colombia, for example, rather than creating a separate segment with completely different listing rules, the Colombian Securities Exchange (BVC) has invested in perhaps, a slightly lower–maintenance approach by creating a specific designation for companies with high standards of

attracting more investors. Novo Mercado can learn from B3’s experience and plan has been a positive influence in the ahead for this shift. region without demonstrating the Like Novo Mercado, ByMA will have to need for imposing a one–size– continually update its listing rules in order INSPIRING fits–all system. B3 and Novo to take into account the current business CHANGE Mercado appear to be pushing context. Novo Mercado was designed with Latin American countries can for more regional integration, controlling owners in mind and ByMA’s learn from the as they’ve already bought, new market will likely have a similar initial success of Brazil’s and are in the process of framework. However, knowing that this Novo Mercado buying, significant stakes in very framework may contribute to a shift the predominant demutualised in company composition, ByMA’s new exchanges in the region. As market should be ready to continually more exchanges in the region have reassess its listing rules in order to ensure demutualised, B3 has capitalised on they address the issues most relevant in that and bought enough shares to place the current business environment. a director on the board of the Santiago, Lima, Mexican and Colombian exchanges. The right frameworks If B3 decides to invest in ByMA, putting As more good governance–focussed a director on ByMA’s board would be the markets pop up in Latin American, next logical move for B3. implementing frameworks to encourage B3 hopes that this integration will help it better governance will only get easier. If to maintain its status as the most influential ByMA can have more success by building Latin American market, as well as increase upon BVC and B3’s experiences and liquidity and help the region compete with integrating its own ideas, then the next global markets. Furthermore, through exchange to go through the same process this representation, B3 is in a position to will have even more examples to follow and directly influence the corporate governance options to consider. While the ultimate goal standards of the exchanges, as well as to for Latin America may be more coherent push for coherent regulatory standards for corporate standards throughout the If countries governance, we should be region. While it is not clear exactly how B3 will use this strategy to exert its influence, remain creative and build on what reluctant to hold one model up as the gold standard at these early stages. we should expect to see more consistency in the listing rules across Latin America as Novo Mercado has done, Latin Novo Mercado set the ball in motion, but now other markets have the more markets demutualise America should opportunity to test ideas of and B3 continues to buy large stakes of the predominant have not just one, their own and add to what has been done. Together, governance called the Investor exchanges in the region. but several models B3 and the other key Latin Relations Quality Issuer. Companies receiving the designation voluntarily comply with international As ByMA designs its listing rules and establishes a procedure for reevaluating of good corporate governance American markets have the opportunity to collaborate and find dynamic ways best practices for investor relations (IR). However, the initiative has faced its own challenges, which will be useful for those rules to reflect changes in the market, it should be aware of the main challenges from which to establish coherent to keep apace with foreign investors’ needs and expectations for good ByMA to take into account as it develops its that Novo Mercado has faced regulations for corporate governance. own segment devoted to better corporate governance. One downside is the IR so that it can address them proactively should they the region By choosing to set the bar high for good governance recognition granted by the BVC does arise. For example, given the and responding nimbly to not provide feedback on the quality and historic predominance of controlling changes in the market, we can expect Latin accuracy of the content used for recognition owners in Latin America, Novo Mercado American stock markets to gain the trust of standards but rather only denotes a took steps to encourage more dispersed foreign investors, inspire the participation of verification that the information requested ownerships by creating strong protections local companies and investors and increase exists on the issuer’s website. As different for minority shareholders. To further liquidity in the region, helping it to become markets experiment and refine various encourage dispersed ownership, when Novo a truly lucrative emerging market. methods for addressing corporate Mercado launched, they mandated that governance, the region will only become companies reserve 10 per cent of shares for 1Novo Mercado was launched by BOVESPA in 2000 a better example for good corporate individual (non–institutional) investors. and became a part of BM&FBOVESPA in 2008 when BOVESPA and BM&F merged. As of March governance practices over time. These rules led to more outside investors 2017, BM&FBOVESPA became B3 after buying out buying shares, more owners selling shares competitor Cetip. Novo Mercado is now a listing Regional interaction These initiatives in Argentina and Colombia of their companies and, eventually, a shift in company composition. segment on B3. For consistency, B3 will be used throughout the article to refer to all previous forms of B3. 2Novo Mercado and Its Followers: Case Studies in are just two examples of how Novo Mercado As ByMA finalises the listing rules for its Corporate Governance Reform, IFC Global Corporate has inspired other markets to experiment with their own methods for encouraging own new market, it is likely that corporate governance improvements could produce Goverance Forum http://www.ifc.org/wps/wcm/connect/ e1162a8048a7e69ea787e76060ad5911/Novo per cent2BMercado per cent2Btext per cent2Bscreen per good corporate governance and are thus the same type of shift in ownership. ByMA cent2B4–21–08.pdf?MOD=AJPERES

Ethical Boardroom

North & Latin America award winners 2017

In the US, the dialogue around corporate governance is growing. At the start of 2017, the Investor Stewardship Group, a collective of some of the largest US-based institutional investors and global asset managers, launched with a mission to establish basic standards of investment stewardship and corporate governance for the US.

Roll on seven months and its membership has more than doubled, with 38 organisations now signed on to the mission, including HSBC Global Asset Management, J.P. Morgan Asset Management, Standard Life Investments and Walden Asset Management.

The framework of basic standards for US institutional investors and boardroom conduct goes into effect on 1 January 2018, with the aim of giving organisations the time to adjust before the start of the 2018 proxy season.

The initial focus will be on corporate governance principles, investment stewardship principles and the promotion of long-term value creation for US companies and the broader US economy. The framework is likely to have a major impact on how US companies govern themselves, and also improve how asset managers and owners conduct their fiduciary activities on behalf of clients.

Over in Latin America, directors believe that corporate governance has been addressed with greater depth by boards over the last couple of years and there is now an increasing focus on sustainability management. It is the consensus among 99 per cent of directors on the boards of more than 500 Latin American companies that sustainability creates financial value, according to a recent study released by GRI and global management consulting firm A.T. Kearney.

Four out of five directors in Latin America link sustainability to the corporate strategy and the identification of risks and opportunities, or understand it as an integral part of the economic, social and environmental management of the company.

The Ethical Boardroom Corporate Governance Awards recognise and reward outstanding companies who have exhibited exceptional leadership in the area of governance. The awards highlight the important role that corporate governance plays in dictating a company’s success and a board’s contribution to the creation of long-term value.

Ethical Boardroom is proud to announce its Corporate Governance Awards winners in North and Latin America.

It’s the consensus among 99 per cent of directors on the boards of more than 500 Latin American companies that sustainability creates financial value

AWARDS WINNERS 2017 MIDDLE EAST AWARDS WINNERS 2017 THE AMERICAS

NORTH AMERICA 2017

FINANCIAL SERVICES ROYAL BANK OF CANADA TRANSPORTATION & LOGISTICS THE CANADIAN NATIONAL RAILWAY CO. (CN RAIL) CONGLOMERATE HONEYWELL INTERNATIONAL INC. MANUFACTURING MAGNA INTERNATIONAL PHARMACEUTICALS PFIZER INC. TECHNOLOGY INTEL CORPORATION INSURANCE MANULIFE FINANCIAL FOOD & BEVERAGE PEPSICO INC. TELECOMMUNICATIONS TELUS MINING GOLDCORP INC. UTILITIES AVANGRID

LATIN AMERICA 2017

FINANCIAL SERVICES GRUPO FINANCIERO BANORTE (GFNORTE) TRANSPORT & LOGISTICS GRUPO AEROPORTUARIO DEL CENTRO NORTE (OMA) FOOD & BEVERAGE UNION DE CERVECERIAS PERUANAS BACKUS Y JOHNSTON S.A.A. MINING CORPORACIÓN NACIONAL DEL COBRE (CODELCO) CONSTRUCTION GRUPO GRAÑA Y MONTERO MANUFACTURING NATURA BRASIL CONGLOMERATE GRUPO ARGOS HOLDING COMPANY GRUPO SURA OIL & GAS ECOPETROL UTILITIES EDP BRASIL AIRLINES LATAM AIRLINES