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Raising Its Profile by Raising Its Standards

Brazil’s most highly regarded companies impress investors with world-class corporate governance.

Quarterly earnings reports are such a staple of corporate governance in the U.S. and other established economies — and have such a strong impact on stock prices in those markets — that it is easy to forget that in some countries the practice of producing them is rare, even nonexistent. Last year Brazil’s biggest pay-TV operator, Net Serviços de Comunicação, became the first telecommunications company (and one of the first public companies in any sector) to publish quarterly numbers in Brazil.

“If you try to bring a country into global market status, you must follow what’s going on around the world,” explains Marcio Minoru Miyakava, director of investor relations for Net Serviços. “Brazil is becoming more and more important, and there’s no way to attract capital if you don’t have good practices.”

Vinicius Silva, a strategist with Morgan Stanley’s emerging-markets team in New York, says more Brazilian companies are getting the message. “Brazil is moving to a new level, and it scores very favorably with respect to governance in other emerging markets,” he says. “One of the reasons the country is moving in this direction is the increasing foreign investment coming from institutional investors — particularly pension funds, which have more stringent requirements.”

Since 2004, Silva says, nearly three quarters of primary equity issuance — whether it be local or some kind of American depositary shares program — has gone to foreign investors that “would not invest in Brazil if they didn’t think the companies presented them with good corporate governance.”

To find out which Brazilian companies are most responsive to shareholders’ needs, Institutional Investor surveyed portfolio managers and research directors at 115 institutions, foreign and domestic, managing a total of $154 billion in Brazilian equities. Based on their responses, we have identified the most shareholder-friendly company in each of the eight industry sectors polled for the 2007 All-Brazil Research Team survey.

Some of the companies, such as department store chain Lojas Renner, have been trading publicly for decades. Others have been listed for only a short time, such as Localiza Rent a Car, which held its initial public offering in May 2005, and Tam Linhas Aéreas. But all share a commitment to keeping investors informed.

“I believe the market demands this and also that investors perceive the difference between the companies that have a very good level of disclosure and those that don’t,” says Paula Picinini, investor relations manager at Lojas Renner. “If you look at the premium the investor accepts to pay for [a company with good disclosure practices], you see that companies in Brazil are realizing this as well.”

An additional reason for the growing commitment to improved corporate governance can be traced to the Bolsa de Valores de São Paulo, or Bovespa, Novo Mercado. The market, launched in December 2000 to encourage Brazilian companies to conform to global standards of transparency, disclosure and related issues, established reporting and governance guidelines that mirror those in the U.S. and Europe and supplement requirements already established by Brazil’s Comissão de Valores Mobiliários. Some 95 percent of newly listed companies in Brazil follow the Novo Mercado guidelines, which are voluntary, Morgan Stanley’s Silva says, and the number of listed companies continues to grow. In the first ten months of this year, more than 60 companies listed shares on the Bovespa, compared with just 29 in 2006. Moreover, the benchmark index continues to soar and was up 41.7 percent in the first 11 months of the year.

Silva predicts that standards will develop further as Brazil becomes more prominent on the global stage. “Brazilian companies are increasingly taking a regional or multinational role, and in that regard they have to improve their corporate governance — particularly for the bigger companies to attract an investor base from other countries,” he says. “Brazilian companies also are making acquisitions abroad, gaining shareholders of other companies, and that’s a point to bear in mind. This should increase as Brazilian companies use shares instead of cash as an acquisition currency.”

Net Serviços’ Miyakava acknowledges that the landscape of publicly traded companies in Brazil is “still a bit of a mix,” with some practicing corporate governance and transparency at the level of his company and others not as far along the learning curve, but “overall, it’s improving,” he says. “If you compare our situation now to five or six years ago, we’re in a much better position.”