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Improving Corporate Governance Through a Voluntary and Enforceable Regime:

Improving Corporate Governance Through a Voluntary and Enforceable Regime: The Case of Brazil’s Novo Mercado November 10, 2009 Rio de Janeiro, Brazil DFI – CG Working Group. Patrícia Pellini BM&FBOVESPA. Mike Lubrano Cartica Capital. Agenda. Introduction

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Improving Corporate Governance Through a Voluntary and Enforceable Regime:

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  1. www.CarticaCapital.com Improving Corporate Governance Through a Voluntary and Enforceable Regime: The Case of Brazil’s Novo Mercado November 10, 2009 Rio de Janeiro, Brazil DFI – CG Working Group Patrícia Pellini BM&FBOVESPA Mike Lubrano Cartica Capital

  2. Agenda www.CarticaCapital.com • Introduction • History and implementation • Main Results • 2008 and beyond • Replicating Novo Mercado

  3. www.CarticaCapital.com OECD Principles / Latin America CG Roundtable • Shareholder Rights and Treatment • For Whose Benefit is the Company Run? • Boards of Directors • Role, Composition, Organization and Quality • Accountability and Incentives • Control Environment • Identifying, Quantifying and Addressing Risk • Internal and External Checks and Balances • Transparency and Disclosure • Accounting and Audit Standards • Supervision and Enforcement • Public and Private Mechanisms

  4. Brazilian Stock Market in early 2000s www.CarticaCapital.com Mkt. Cap. 2002 data

  5. Brazil’s Corporate Governance in early 2000s www.CarticaCapital.com • Patterns of ownership and control • Almost universally controlled by founders/family • Prevalence of non-voting (PN) shares • Inequitable treatment of shareholders • Changes of control • Delistings • Accounting and Audit Standards; Transparency • Boards and Statutory Auditors • Poor enforcement (Regulator / Courts)

  6. Menu of Possible Options www.CarticaCapital.com • Legal Reform (Mandatory for All) • Corporate Law • Securities Law and Regulation • Voluntary Code – “Comply or Explain” (Transparency Regime) • Combinations / Hybrids

  7. Agenda www.CarticaCapital.com • Introduction • History and implementation • Main Results • 2008 and beyond • Replicating Novo Mercado

  8. Brazilian Response 2000-2002 www.CarticaCapital.com • Limited Legal Reform • Limits on PN shares, but “Grandfathering” for existing firms • Partial tag along rights • Delisting rules • Regulator’s (CVM) powers increased • Voluntary Codes • CVM –“ Comply or Explain” • IBGC – Aspirational • Opt-in System (Novo Mercado)

  9. Result: A Five-Tiered Regime www.CarticaCapital.com • Traditional or basic (minimum legal requirements) • 4 Corporate Governance listing segments • Nível 1 (Level 1) • Nível 2 (Level 2) • Novo Mercado (New Market) • Bovespa Mais (Bovespa Plus) organized OTC gradual access to the market + only voting shares + shareholder rights and arbitration + better disclosure and free float Regulation Traditional

  10. Players in Development of Novo Mercado www.CarticaCapital.com • Exchange • Investors • Companies • Class association • Academics • Regulator (CVM) • Government (BNDES; Central Bank) • Advisors (IFC; OECD)

  11. Process for Developing and Vetting the Rules www.CarticaCapital.com • Private consultations • Listed companies • Prospective listed companies • IFC/CVM company/investor session • Public dialogue • Brazilian Institute of Corporate Governance (IBGC) • Latin America CG Roundtable • News Media

  12. Launching of the Novo Mercado www.CarticaCapital.com • Marketing to domestic constituencies (existing companies; new companies; investors) • IGC – Special Corporate Governance Stock Index • International constituencies (NY road show) • IFC Campaign

  13. 2006 Revisions www.CarticaCapital.com • Amendment Process • Closed hearing with the NM’s companies • Not rejected by more than 1/3 listed companies • Approval of securities regulator • Revision (main topics) • Independent director requirement (20%) • Directors’ unified term at most 2 years • Arbitration applied for all shareholders • Definition of diffuse control

  14. Agenda www.CarticaCapital.com • Introduction • History and implementation • Main Results • 2008 and beyond • Replicating Novo Mercado

  15. Early Results (2002-2005) www.CarticaCapital.com 2004 Data

  16. Novo Mercado Takes Off (2006-2008) www.CarticaCapital.com 2007 data

  17. Novo Mercado Takes Off (2006-2008)

  18. Other Factors www.CarticaCapital.com • Macroeconomic environment • 1994 Plano Real / 1999 Currency Crisis • Inflation falls from 13% to 4.26% (2002-2008) • Longest period of macro stability in decades • Strong Growth • Political Developments • Elections of 2002 and 2006 (Lula) • Moderate Consensus

  19. Agenda www.CarticaCapital.com • Introduction • History and implementation • Main Results • 2008 and beyond • Replicating Novo Mercado

  20. Corporate Governance Segments Participation

  21. Evolution of IPOs • Corporate Governance as the norm for companies IPOsbyListingSegment (2004 - Oct/2009) Participation of Listing Segments at the Exchange (Oct/09) • 37% of total listed companies • 65% of market capitalization • 79% of traded value 8 8 16 81 Novo Mercado

  22. PublicOfferings – Capital Raised(BRL billion) • Follow On Offerings • Filings at ANBID: 2 • Filings at CVM: 2 • Initial Public Offerings (IPOs) • Filings at CVM: 6

  23. World Markets Inicial Public Offerings Inicial Public Offerings Other Offerings Other Offerings Capital raising activities in 2009 Equity(US$ Million – up to September) • Emerging Markets¹ Ranking WFE 2nd place Ranking WFE 3rd IPOs 6th place Source: World Federation of Exchange (WFE). ¹ Members of Emerging Markets Comitee - IOSCO.

  24. Impactof Financial Crisis in NOVO MERCADO IGC x Ibovespa 25/06/2001 a 31/08/2009 IGC +451% Ibovespa +288% Base 1.000 – sinceJune 25, 2006 Source: BM&FBOVESPA.

  25. Some Concerns Post-Boom (2008-pres.) www.CarticaCapital.com • IPOs and Migrations to Novo Mercado Accompanied by • Anti-takeover Measures • Derivatives losses among very well-known companies

  26. NOVO MERCADO 2009/2010 – RevisionProcess • Main Drivers • Development and sophistication of the market • International Financial Crisis • Challenge of the existing corporate governance structures • Objectives • Maintain the value of the Corporate Governance segments = • the differential and attractiveness to investors and companies • Sustain Novo Mercado as a national and international benchmark www.CarticaCapital.com

  27. ChallengesoftheRevisionProcess 2009/2010 • Birth of first Brazilian “corporations”: diffuse control and • dispersed capital • How to protect shareholders? • How to avoid conflict of interest? • Lessons of the Financial Crisis • What mechanisms can guarantee effective Boards? • Evolution of the Brazilian rules and regulation • IFRS Convergence • More transparency required by CVM • Complexity to reach consensus • Higher number of listed companies at Novo Mercado • Fev/2006 = 21 companies • Ago/2009 = 101 companies www.CarticaCapital.com

  28. RevisionProcess • Broad range of point of views: • Not restricted to the Exchange’s own perceptions • Any solution must involve all stakeholders: • Creation of the Novo Mercado Consultative Committee (CCNM) • Discussion forums with listed companies • Two seminars open to the public to discuss more complex issues www.CarticaCapital.com

  29. Agenda www.CarticaCapital.com • Introduction • History and implementation • Main Results • 2008 and beyond • Replicating Novo Mercado

  30. Replicating the NM – Philippines Maharlika Board • Current Conditions • Reasonable Legal Standards – Poor Compliance • Active Governance Advocates (Philippines IoD) • Concentration of Controlling Interests in Small Number of Families • Poor Enforcement – Regulator / Exchange / Courts • Main Elements • Benchmarking Against PSE Guidelines / IoD Scorecard (Subjective Elements) • Independent Evaluation – Sanctions for Non-Compliance • Alternative Dispute Resolution www.CarticaCapital.com

  31. Replicating the NM – Philippines Maharlika Board • Issues • Subjectivity of Measuring Extent of Compliance • Market Conditions / Number, Character and Capacity of Investors • Credibility of the Exchange / Independence of ADR • Governance of the Exchange – Effectiveness of Self-Regulation • Current Status • Initiative Announced – Expected 1st Quarter 2010 • Draft PSE Guidelines Published and Vetted • Five Charter Members of the New Listing Segment Have Identified Themselves – plus the Exchange Itself • Controversy Involving Future Leadership of the Exchange • Incomplete De-Mutualization of the Exchange www.CarticaCapital.com

  32. www.CarticaCapital.com Thanks! aMike Lubrano Managing Director, Corporate Governance Cartica Capital www.carticacapital.com +1-202-367-3011 a Patrícia Pellini Issuer Development and Listing Manager www.bmfbovespa.com.br ppellini@bvmf.com.br

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