5 Focus Novo Mercado and Its Followers: Case Studies in Corporate Governance Reform Maria Helena Santana Melsa Ararat Petra Alexandru B. Burcin Yurtoglu Mauro Rodrigues da Cunha Copyright 2008. For permission to photocopy or reprint, International Finance Corporation please send a request with complete 2121 Pennsylvania Avenue, NW information to: Washington, DC 20433 The International Finance Corporation All rights reserved. c/o the World Bank Permissions Desk Offi ce of the Publisher The fi ndings, interpretations, and 1818 H Street NW conclusions expressed in this publication Washington, DC 20433 should not be attributed in any manner to the International Finance Corporation, to All queries on rights and licenses its affi liated organizations, or to members including subsidiary rights should be of its board of Executive Directors addressed to: or the countries they represent. 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Burcin Yurtoglu Foreword by Mauro Rodrigues da Cunha Global Corporate Governance Forum Focus 5 ACKNOWLEDGMENTS The Global Corporate Governance Forum would like to extend its sincerest thanks to Maria Helena Santana and the BOVESPA for their contributions to, and support for, this publication. The Forum is fortunate to have had the opportunity to document in this publication the “great experiment” of BOVESPA and its members and to recount the initial impact of this pro-active corporate governance leadership experience, both regionally and globally. We are grateful, too, for the efforts of the other contributors to this edition of Focus, Melsa Ararat, Petra Alexandru, B. Burcin Yurtoglu, and Mauro Rodrigues da Cunha. Their analyses helped us to discern the lessons of Novo Mercado and its followers, specifically the stock exchanges in Bucharest and Istanbul. The Forum also thanks Mike Lubrano, formerly IFC Manager of the Investor and Corporate Practice Unit, and now Managing Director, Corporate Governance at Cartica Capital, LLC. Mr. Lubrano dedicated time and effort in reviewing and commenting on the earliest versions of this manuscript. His first-hand experience with the Novo Mercado, and his longstanding corporate governance investment career have both benefited this document, and in turn, the Forum and its readership. Nancy Metzger, senior projects officer at the Forum, worked with the authors, translators, and editor to develop this publication so that its insights were practical, relevant, and compelling. Finally, this publication would not have been possible without the professional diligence and skill of an outstanding editor—James Spellman. We thank him for his meticulous attention to detail, his insightful suggestions and edits, and his general good spirit throughout this year- long project involving so many. ii Novo Mercado and Its Followers: Case Studies in Corporate Governance Reform CONTENTS Acknowledgments .................................................................................................ii About the Authors .................................................................................................v Praise for Novo Mercado ..................................................................................... vii Foreword by Mauro Rodrigues da Cunha, CFA ................................................ix The Novo Mercado by Maria Helena Santana 1. Context...................................................................................................... 2 2. The Novo Mercado and Corporate Governance Levels 1 and 2 ............... 12 3. Implementation ........................................................................................ 16 4. Initial Results ............................................................................................ 22 5. The Dramatic Change, The Consolidation ................................................ 22 6. Highlights................................................................................................. 24 7. The Impact of Governance Rules on Prices ............................................. 31 8. Challenges ............................................................................................... 32 Corporate Governance Reform Activities in Brazil and IFC support. Timeline of Events through 2006 .......................................................................................... 37 Novo Mercado Versus Romania’s Transparency Plus Tier—A Mirror Image? by Petra Alexandru 1. Introduction ............................................................................................. 41 2. Environment ............................................................................................ 42 3. The Main Problems .................................................................................. 42 4. The Transparency Plus Tier and the BVB Corporate Governance Code ... 45 5. Romania’s Successes and Failures with Transparencey Plus Tier ............. 51 6. Where We Are—Some Perspectives ........................................................ 53 Learn More Online ....................................................................................... 54 Novo Mercado and Its Followers: Case Studies in Corporate Governance Reform iii CONTENTS (CONTINUED) Rating-Based Indexing of the Istanbul Stock Exchange: Lessons from Novo Mercado’s Success to Advance Corporate Governance Reforms by Melsa Ararat Ph.D. and B. Burcin Yurtoglu Ph.D. 1. Introduction ............................................................................................. 57 2. Brazil and Turkey: Their Economies, Financial Markets ............................ 58 3. Ownership Patterns: Differences, Similarities in Two Periods— The 1990s and 2000-2006 ...................................................................... 63 4. Changes after 2000: Novo Mercado—Why or Why Not? ......................... 67 5. Reflections on The Drivers Of Reform: The Corporate Governance Index Experience and Its Outlook ............................................................. 72 Learn More Online ....................................................................................... 75 References ......................................................................................................... 77 iv Novo Mercado and Its Followers: Case Studies in Corporate Governance Reform ABOUT THE AUTHORS Mauro Rodrigues da Cunha, CFA joined the Mauá Investimentos team in July 2007 as Partner and Head of Equities. Previously, he was the Chief Investment Officer at Franklin Templeton Investimentos Brasil, and its predecessor Bradesco Templeton (2001–2007). Prior to that, he held a variety of positions in the financial services sector in Brazil. A Chartered Financial Analyst, Cunha earned an MBA from the University of Chicago Graduate School of Business and a BA in Economics from Pontíficia Universidade Católica do Rio de Janeiro. He has participated in the boards of several publicly traded companies in Brazil and has been an active participant in the debate to reform Brazilian corporate law and capital markets regulations. These efforts include the Latin American Corporate Governance Roundtable, co-sponsored by the IFC, with support from its Global Corporate Governance Forum, and the OECD. He is currently vice-chairman of the board at the Instituto Brasileiro de Governança Corporativa (IBGC) and a lecturer in the institute’s corporate governance courses. Cunha has participated in the Forum’s Corporate Governance Leadership Program, held at the World Bank’s headquarters, and other international events. Maria Helena Santana became chairperson of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) in July 2007, after serving as a commissioner for one year. Before then, she worked for the São Paulo Stock Exchange (BOVESPA), starting there in 1994. Between 2000 and June 2006, she was the Listings and Issuer Relations Executive Officer. In this role, she was responsible for both the supervision of listed companies and new listings. She was in charge of the creation and implementation of the Novo Mercado and the Corporate Governance Levels. Petra Alexandru is an executive manager with the Bucharest Stock Exchange (BVB) in Romania. She worked with the National Securities Commission of Romania until 1998, when she joined the BVB as a Deputy General Manager. She has been a member of two OECD Working Groups, one on “Capital Markets Development” and the other on “Corporate Governance in SEE Countries.” She has made contributions to adopting the “OECD Best Practices for the Development of Stock Exchanges in Transition Economies” and the “OECD White Paper