Henrique Meirelles: Good governance in the Brazilian financial system
Speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil, at a seminar
organized by the International institute of Studies of State Law (IIEDE - Instituto
Internacional de Estudos de Direito do Estado), Sao Paulo, 5 September 2008.
* * *
1. It is my pleasure to take part of this event dealing with an important and often
overlooked topic: corporate governance in the Brazilian financial system. This is an
especially dear issue for the Central Bank and particularly for me.
2. To start, I would like to mention that monetary stability is a precondition for good
corporate governance. In the inflationary environment Brazil experienced for
decades, the requisites for good governance vanished under the prevailing
unpredictability and monetary confusion. There is no room for a transparent,
disciplined and fair relationship among parties involved in a firm when predictability
and stability are absent. In this sense, the main contribution of the Central Bank to
corporate governance is to reaffirm its permanent commitment to inflation targeting
in the conduction of monetary policy.
3. The Brazilian Institute of Corporate Governance defines governance as "the system
by which corporations are managed and monitored, involving relationships between
shareholders, board, management, independent auditors and statutory audit
committee". Good practices of corporate governance focus on increasing the
company's value, facilitating its access to capital and contributing towards its
stability and soundness. Indeed, this general definition is very similar to the one
offered by OECD, to whom corporate governance is summarized as "a set of
relationships between the administration of a legal entity, its board of directors, its
stockholders and other stakeholders".
4. A question arising from these definitions is that of how to establish the ethical
standards needed in the construction of governance to secure that relationship
between the different corporate agents develop in a fair and efficient fashion.
Contrasting with more mature economies, which have more thinly distributed
stockholding and relatively more liquid exchanges and in which there is more
pressure on management to minimize the asymmetry of information, ownership and
control in Brazil are not comparably segregated, in spite of the significant increase in
initial public offerings over recent years.
5. Therefore, our ownership structure is still characterized by high concentration of
stocks with the right to vote, typical of family companies or companies controlled by
a restricted group of investors, by superimposition of ownership and management
and by scarcely active minority stockholders. Besides, our boards frequently exhibit
a diffuse segregation between their own responsibilities and that of the
administration, in addition to informal structures, low number of professionally
trained board members or members with a small degree of independence.
6. As a result, the main challenge to be faced in Brazil in governance issues involves
the relation between controlling stockholders and minority stockholders or creditors.
How to face this challenge?
7. As far as the Brazilian financial system is concerned, the Central Bank follows some
well established principles of corporate governance, including:
•
Transparency, facilitating the analysis of the activities of the company, its
economic and accounting reports and non-financial aspects inherent to its
businesses, offering to those interested a comprehensive vision of the
corporation's performance. The administration shall go beyond the
obligation to inform, and reach the desire to inform, in addition to fostering
good internal and external communication, which shall not be restricted to
financial aspects, but shall be wide and comprehensive.
•
Discipline, that is to say, commitment by the management in adhering to
behavioral standards widely recognized as correct and appropriate.
•
Independence, in what it relates to arrangements to safeguard or minimize
possible conflicts of interest, such as the control by an executive or a
majority stockholder. Such arrangements include, for instance, a balanced
composition of the executive board and administration and the use of
external audit.
•
Accountability, according to which agents of corporate governance shall be
accountable for their actions before those who elected them and shall fully
answer for acts practiced in the performance of their duties.
• Responsibility, by which executives shall care for the continuity of the
organization and, therefore, shall incorporate considerations of social and
environmental content in defining their businesses and operations,
including a system for corrective actions and punishment, as needs be.
•
Equality, which is translated into a fair and equalitarian treatment to all
minority groups, either of capital or of other stakeholders, where
discriminating policies or attitudes shall be deemed unacceptable.
8. Based on the foregoing principles, the Central Bank, in its supervising role, follows
the best international practices, materialized in the standards defined by the Basle
Committee of the Bank for International Settlements, according to which corporate
governance represents a critical issue in the banking environment. Management
shall monitor the establishment of corporate objectives, performance of the
day-byday operations, defense of stakeholder interests, conformity to applicable laws and
regulations, and care for the interests of depositors.
9. Therefore, the directive applied by the Central Bank reaches beyond the mere
relationship of the institution with external stakeholders or the concern with the
truthfulness of its financial statements, since it considers all aspects related to the
institution's management and to its internal control systems.
10. In fact, the key to secure efficacy in governing financial institutions necessarily
implies an effort to build an effective system of internal controls, able to support
stability and continuity of individual activities and, consequently, the systemic
stability of the financial system itself.
11. Ladies and gentlemen, I referred above to the fact that Brazil faces more challenges
to consolidate good governance in corporate practices compared to more mature
economies. As a final message, I would like to underline that monetary and
institutional stability and the effort, not only of the Central Bank, but also of other
regulatory agencies, including the Comissão de Valores Mobiliários (the Brazilian
Securities and Exchange Commission), the Superintendence of Private Insurance
(Susep) and the Complementary Pension Secretariat, and initiatives from market
institutions, such as the Novo Mercado implemented by the São Paulo Stock
Exchange, in addition to our growing corporate maturity in an increasingly globalized
world, enabled us to make significant advances in recent years towards best
governance practices, gradually converging to the standards of more advanced
economies. There is no doubt that we shall continue to make more and permanent
advances, and this is our goal.