|The bad example of state-controlled companies|
Recent episodes offer important lessons about the practices of these companies
Despite the privatizations of the 1990s, state-owned company governance remains a key issue for the competitiveness and efficiency of Brazil's economy, for a number of reasons. First, because state-controlled companies (SCCs) currently represent 22.8% of the Ibovespa index. Therefore, the good management of such companies is fundamental for investors, as unpleasant surprises will have an immediate impact on their assets. Second, because the performance of SCCs – which typically operate in strategic and infrastructure-related industries – has a direct "cascade effect" on society, as their inefficiencies will be passed down to the price of products and services, affecting the entire production chain. Third, it is important for the government to "lead by example" by showing good corporate behavior, as a way to obtain the legitimacy to demand governance from the private sector. As better practices are adopted, society gains greater control over the use of such companies by the State.
The episodes illustrated below offer important lessons for the discussion on SCC governance:
• Copel – increase of rates in public utility concessions: Copel is controlled by the state of Paraná and 44% of its capital is held by private investors. It was the first Brazilian power company to be listed on the NYSE. However, the company underwent substantial changes to its rate increase policy as of 2003, with the election of a new state governor. Since then, on many occasions, it has refused to fully pass on the increases authorized by the National Electric Power Agency (Aneel) to its consumers. In 2003, for instance, Aneel authorized an increase of approximately 25%. Nonetheless, the new government made Copel suspend the price hike for consumers who were not behind on their payments. In addition to producing a negative impact on the company's results, the decision contributed to Moody’s lowering its credit rating at the time.
• Banco do Brasil – replacing leaders without the board's participation: In April 2009, the market was taken by surprise by the change of command at Banco do Brasil, which is listed on the Novo Mercado. According to the specialized media, the switch was motivated by political disagreements between the institution's CEO and the federal government, which wanted to reduce the bank's interest rates to mitigate the effects of the world financial crisis at the end of 2008. The impact was immediate, with a 8.1% drop in share price on the date of the announcement. The Ibovespa rose 0.8% that day. Irrespective of the substitution's merit, it became clear that the issue was resolved through a direct relationship between the government and the bank's executives, with no participation whatsoever by the board of directors. As one of the main recommendations in the OECD's governance guidelines for state-controlled companies is to give CEO selection and replacement power to the board, this makes for a negative mark on the institution's governance.
• Celesc – importance of minority shareholder participation: Despite having control of the company, the state of Santa Catarina holds only about 20% of the shareholding capital of Celesc, the Bovespa Nível 2 pioneer. In 2009, a group of relevant minority shareholders headed by a large pension fund proposed to move the company into the Novo Mercado, as a way to elevate its corporate governance standards and add value. However, the proposal found strong opposition in Celesc's employees, fearful that the conversion of preferred into ordinary shares required for the listing change would lead to the company's privatization. As a result, the proposal was never voted on. After strong pressure from minority shareholders displeased with the company's low profitability, Celesc announced a performance enhancement plan at the end of 2009. Implementing the project has been proving difficult, however. Not only would it have to increase strictness when supplying power to large clients in default (often industries with major political heft), Celesc would also have to implement payroll cuts in an election year for the state’s governor. This case shows the importance of relevant minority shareholders to pressure SCCs for greater economic efficiency and higher governance standards.
In addition to the episodes above, we should highlight the uncertainties surrounding the completion of Petrobras's capitalization process, disclosed in 2009. The government initially announced an addition of 5 billion barrels in reserves, to be paid for through government bonds. However, many market agents have shown concern about the value to be attributed to those barrels, as an excessive figure could lead to a dilution of minority shareholder stakes. However, an internal document changed the discussion’s direction. Seven years earlier, Petrobras's board had approved a code of good practices ensuring preferred shareholders the right to be consulted on relevant issues, including the "valuation of assets for paying for a capital increase". Accordingly, Petrobras decided to install a committee of minority shareholders to monitor the asset valuation process involved in the capitalization. The case illustrates the importance of formalizing governance rules in order to increase political protection at SCCs.
Altogether, the cases presented above show the complexity of the governance issue in state-controlled companies. Themes such as clear definition of each company's primary goal (maximization of results vs. promoting public policies), related party transactions, meritocracy and performance evaluations for senior management, and clear separation of the state's roles as regulator and controller, among others, are fundamental in the enactment of good corporate governance solutions at these companies.
Finally, we should underline that the way to good governance is not straightforward and protection against political interference is never perfect. Well-regarded, exemplary companies with a long history of governance victories, such as Sabesp, are also subject to blunders. This past January 28, the company was forced to republish its 2008 balance sheet due to retirement and pension debts not assumed by the state government and transferred to Sabesp.
Note: State-owned companies can be either entirely owned by the state or mixed-economy companies. The latter are entities with mixed ownership by the government and private sector (investors), with control mandatorily held by the state. As the subject of corporate governance is more often broached at mixed-economy companies, these entities are the focus of this text and designated as "State-Controlled Companies" (SCCs).