1. CONCEPT AND PRINCIPLES
Corporate governance emerged to overcome the so-called "agency conflict," which consists of the conflict of interest between the manager/executive and the company owner, as these interests are not always aligned. Thus, the aim was to create control and incentive mechanisms to ensure the alignment of executives' behavior with the interests of shareholders (SILVA, 2005, p. 1).
An agency relationship is considered a contract by which one or more individuals encourage another person, the agent, to perform an activity for their benefit. When the parties to this relationship seek to maximize their own interests, a misalignment between objectives may occur (JENSEN, MECKLING 1976, p. 308, apud SILVEIRA, 2002, p. 31). Thus, these divergences can be resolved through agency costs, the expenditure of a given company's shareholders to align their interests with those of managers (JENSEN, MECKLING 1976, p. 308, apud SILVEIRA, 2002, p. 31).
Thus, the Brazilian Institute of Corporate Governance (2015, p. 20) establishes that corporate governance would be the system by which institutions are directed, monitored and stimulated, in all relationships involving the organization, whether with partners, board of directors, supervisory and control bodies, as well as all other interested parties.
Assi (2017) understands that Corporate Governance consists of a set of practices that aim to optimize corporate results, concatenating investment results with good management, facilitating access to capital for entrepreneurs and investors.
Witherell (1999) defines Corporate Governance as a prerequisite that ensures the integrity and reliability of institutions in the market. It consists of rules and practices that define the relationship between managers and all stakeholders, ensuring accountability, fairness, and transparency.
Corporate Governance can also be understood as a set of practices aimed at optimizing a company's performance in order to protect all parties involved, such as investors, employees and creditors, facilitating access to capital (CVM, 2002, p.1)
Andrade (2005 apud SANTOS, 2011, p. 27) observed the following agency costs to align the interests between managers and shareholders as:
✅the cost of structuring and creating contracts between shareholders and managers;
✅cost of monitoring managers' activities;
✅expenses incurred by the manager to prove that his actions will not be harmful to shareholders;
✅costs of awards and incentives;
✅finally, residual losses, which arise from the reduction in the wealth of the main shareholder in possible discrepancies between the managers' decisions and the decisions that could maximize the shareholder's wealth.
In this sense, the implementation of an appropriate corporate governance policy creates a framework of reliability that enables the capture of external resources, as well as confidence in the fulfillment of commitments to suppliers, creditors, and employees. It constitutes a preponderant pillar for the company's sustainable growth (WITHERELL, 1999, p. 8).
This Corporate Governance is governed by some principles, which should guide the conduct of managers:
✅Transparency;
✅Equity;
✅Accountability (accountability);
✅Corporate responsibility.
Transparency refers to the provision of relevant information to interested parties, not restricted to those related to economic and financial factors, covering all factors that influence management, efficiency and organizational value (IBGC, 2015, p. 20).
Equity consists of equal treatment between partners and other interested parties, taking into account their particularities. (IBGC, 2015, p. 20).
Accountability establishes the duty to render accounts in a responsible, clear, timely, concise manner, acting diligently and assuming responsibility for any problems (IBGC, 2015, p. 20).
Finally, the principle of Corporate Responsibility constitutes the duty of governance agents to act in favor of the economic and financial viability of the institution, taking into account the business model, improving efficiency and reducing business risks (IBGC, 2015, p. 20).
2. HISTORY
The importance of Corporate Governance transcends the institution's good relationship with all shareholders, since a broad application of the principles of transparency and accountability are crucial to the integrity of the financial system (WITHERELL, 1999, p. 8). Through reliable and well-managed companies, we have the creation of jobs, generation of taxes, as well as the supply of goods and services to the market (WITHERELL, 1999, p. 8).
The term corporate governance was coined in 1991, used for the first time as the title of a book released in the United States by activist Robert AG Monks, bringing suggestions for good corporate practices, becoming a watershed (IBGC, 2006, p. 33).
In his book, Monks states that companies with a democratic corporate culture could live for a long time and would become more resistant to the impacts of economic crises and recessions, as they are closer to investors (IBGC, 2006, p. 33).
Silveira (2002) teaches that debates on the topic grew after problems related to corporate governance in the North American capital market, one of the most sophisticated in the world and a model for countries like Brazil. Large companies such as Enron, Worldcom and Xerox were accused of accounting fraud, related to tax evasion, balance sheet falsification, and transactions based on privileged information (SILVEIRA, 2002, p. 47).
The Enron scandal resulted in the bankruptcy of Arthur Andersen, one of the five largest auditing firms in the world (SILVEIRA, 2002, p. 47). The frauds also resulted in the bankruptcy of Enron itself, causing strong national commotion, as it was the seventh-largest company in the United States and one of the most admired. Enron employees were also severely affected, as a large portion of their pension funds were invested in the company's shares (SILVEIRA, 2002, p. 47).
In 1984, after Texaco executives rejected a purchase offer to protect their own jobs, causing great losses to shareholders, the California Public Employees Retirement System (Calpers), a pension fund for public employees, began a pioneering movement for corporate governance in the United States (SILVA, 2014, p.).
CALPERS sent a letter to the American capital markets regulator, containing recommendations to improve companies' relationships with the market by implementing transparency, oversight, and communication measures. The fund also began publishing a list of companies in which it had stopped investing and the reasons why. Based on this, the American Association of Directors developed a code of best practices for investors, encouraging the adoption of such practices by American companies (SILVA, 2014, p. 15).
Among the companies that adopted the code and greater control over executive activity, we have Time Warner, General Motors, American Express, IBM, Kodak, Sears, Compaq, among others (SILVA, 2014, p. 16).
As a reflection of the movement of directors and shareholders to remove the company's main executive and the chairman of the board, General Motors, in 1993, published its corporate governance code, which was a landmark in history, so much so that the history of boards is usually divided into two eras: pre-General Motors and post-General Motors (IBGC, 2006, p. 75).
In 2002, the Sarbanes-Oxley Act (SOX) was passed by the U.S. Congress in response to a series of corporate scandals involving major companies. It implemented a series of rules on corporate governance, imposing practices of responsible accountability, legal compliance, transparency, and a sense of fairness (IBGC, 2006, p. 75).
Regarding the history of Corporate Governance in Brazil, Castro (2009) states that with the international opening of the Brazilian market in the 1990s, the discussion about Corporate Governance was brought to the country, since there was a restructuring of the general corporate panorama caused by intense privatizations and the entry of new partners in companies, mainly foreigners, causing a drastic change in the relations between shareholders and managers.
In Brazil, progress over time has been diverse, and it is essential to highlight that it has not come solely through legal obligations, but through the advantages that such practices can bring, as well as attractiveness to investors (IBGC, 2006).
Within this global movement for good management practices, there was a reform of Law No. 6,404/1976 (Law of Public Limited Companies), through Law No. 10,303/2001 (known as the New Law of Public Limited Companies), bringing essential attributes to the Brazilian stock market such as equity and transparency (IBGC, 2006, p. 83).
Arruda, Madruga and Junior (2008, p. 76) highlight that among the reforms made in Brazil, the most notable are the reformulation of the Corporations Law, which, despite having a series of qualities, ended up failing due to the numerous subsequent amendments reducing the rights of minority shareholders, and the creation of the Novo Mercado segment on the São Paulo Stock Exchange.
Despite this, José Paschoal Rossetti and Adriana Andrade (2011, p. 431) state that the Corporations Law (Law No. 6,404/1976) established the bases for Corporate Governance processes in the country, as well as building the foundations of corporations and consequently the stock market.
In 1995, the Brazilian Institute of Board Members (IBCA) was created, later renamed the Brazilian Institute of Corporate Governance (IBGC), with the aim of expanding the possibilities for the governance system to operate by creating value for companies. (IBGC, 2006, p. 19)
In 1999, the IBGC launched the Code of Good Governance Practices, adhering to and assimilating several similar movements in the rest of the world, mainly in the United States and Europe (IBGC, 2006, p. 61).
In June 2002, the Brazilian Securities and Exchange Commission (CVM) released the CVM Recommendations on Corporate Governance, aimed at publicly traded companies overseen by the agency. At the time, the question arose whether it was legal for the CVM to recommend practices without legal authority to require their compliance. The prevailing understanding was that it was merely the agency's view on Corporate Governance, which could guide and influence the relationship between board members, auditors, shareholders in general, and management (IBGC, 2006, p. 63).
It is worth noting that in December 2000, a new segment of the São Paulo Stock Exchange (currently B3) was implemented, the so-called Novo Mercado, committed to trading shares of companies that voluntarily adopt good corporate governance practices (SILVA, 2014, p. 804).
However, the basic premise uniting them is that good corporate governance practices are valuable to investors (IBGC, 2006, p. 65). Shareholder rights and the quality of information provided by companies reduce uncertainty in the valuation process and, consequently, risks, in addition to strengthening the capital market as a whole (IBGC, 2006, p. 65). Based on this evidence, Bovespa has been working to promote the migration of companies already listed on its traditional market to Levels 1 and 2 of governance, or the Novo Mercado (IBGC, 2006, p. 65).
The Novo Mercado's standards and regulations and differentiated levels of Corporate Governance provide better investor recognition of companies' governance quality, also encouraging the listing of new companies, improving transparency between companies, and expanding shareholder rights (IBGC, 2006, p. 65; SILVA, 2014, p. 804). Companies will undergo a gradation of Corporate Governance requirements, starting at Level 1, going through Level 2, and ending at the Novo Mercado.
Along these lines, Rossetti and Andrade (2011, p. 441) teach that these differentiated levels were created with the objective of providing a trading environment that stimulates, at the same time, investor interest and company valuation. The key point required for listing companies in this differentiated market segment is greater protection and, consequently, a greater presence of the minority partner in the market (ROSSETTI, ANDRADE, 2011, p. 444-445).
3. FINAL CONSIDERATIONS
Corporate governance is a fascinating topic, not limited to the fundamentals presented here. The intention is to provide a general overview of the topic and encourage you to read more about it.
Thus, as discussed previously, throughout history we have countless examples of the catastrophic effects that can occur when we have management that goes against good governance practices, especially when the interests of managers clash with those of owners.
Corporate Governance seeks to align a culture of results and value generation, anchored in ethical principles such as equity and transparency. This culture also facilitates investor decision-making, as investors, armed with company information, can make better judgments.
Within the context of a transitional Brazilian business landscape, the adoption and implementation of good governance practices, as well as legislative changes, can catalyze change, encouraging new investors and granting them greater protection, especially for minority shareholders.
BIBLIOGRAPHICAL REFERENCES
ARRUDA, Giovani Silva de; MADRUGA, Sergio Rossi; JUNIOR, Ney Izaguirry de Freitas. Corporate Governance and Agency Theory in Consonance with Comptrollership. Rev. Adm. UFSM, Santa Maria, v. 1, 2008.
ASSI, Marcos. Governance, Risks and Compliance. São Paulo: Saint Paul Editora, 2017. 168 p. ISBN 978-8580041279.
CVM. CVM Recommendations on Corporate Governance. Securities and Exchange Commission, Rio de Janeiro, 2002. Available at: http://conteudo.cvm.gov.br/export/sites/cvm/decisoes/anexos/0001/3935.pdf. Accessed on: June 1, 2021.
IBGC – Brazilian Institute of Corporate Governance. Code of Best Corporate Governance Practices. São Paulo: IBGC, 2015
IBGC – Brazilian Institute of Corporate Governance. Compliance in the Light of Corporate Governance, São Paulo: IBGC, 2017.
IBGC – Brazilian Institute of Corporate Governance. Corporate Governance in Brazil. São Paulo: IBGC, 2004.
IBGC. A decade of governance: history of the IBGC, governance milestones, and lessons from experience. São Paulo: Saint Paul Editora, 2006. ISBN 85-98838-14-4.
ROSSETTI, José Paschoal; ANDRADE, Adriana. Corporate Governance: Foundations, Development and Trends. 5th ed. current and increased. São Paulo: Editora Atlas S/A, 2011. ISBN 978-85-224-6271-1.
SANTOS, Ana Paula Azevedo de Holanda. Factors that Influence the Implementation of Good Corporate Governance Practices in Family Businesses. FGV, Rio de Janeiro, p. 1–157, December 30, 2011.
SILVA, André Luiz Carvalhal da. Corporate Governance and Financial Decisions in Brazil. Rio de Janeiro: Mauad, 2005.
SILVA, André Luiz Carvalhal da. Corporate Governance and Business Success: Best Practices for Increasing Firm Value. 2nd ed. [S. l.]: Saraiva, 2014. ISBN 978-85-02-22048-5.
SILVEIRA, Alexandre Di Miceli da. Corporate Governance, Performance and Company Value. Dissertation presented to the Faculty of Economics and Administration – FEA, University of São Paulo. São Paulo, 2002. 19 p.
WITHERELL, W. The OECD and corporate governance. Financial Reporting, Paris, 1999. Available at: http://www.oecd.org. Accessed on June 27, 2020.
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