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Home , Corruption, Corruption in Brazil

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n a surprising showing, the value of m&a activity in rose to $61.77 billion in 2017. While still fairly low by global standards, that number marks a 33 percent increase over 2016. I The catalyst behind that jump was the nation’s famous “Lava Jato,” or “Car Wash,” investigations into . Large Brazilian groups under pressure from the probes were forced to sell major assets as their financing options became scarce. Some of these deals naturally represented great opportunity for buyers in terms of valuation. But some also came with a fair share of risk, as they may still hold undocumented liabilities, or carry legacies from historically poor governance structures. These deals and the probes themselves have heated up the discussion about corporate ethics in Brazil, highlighting the importance of the supervisory role of boards and the identification of risk not only in M&A transactions but in any capital allocation decision. At the center of that discussion are Emilio Carazzai and Heloisa Bedicks, respectively the former Chairman and General Superintendent of the Instituto Brasileiro de Governança Corporativa, a leading authority on corporate governance standards in the country.

“It is not fair to say that the evolution of corporate governance in Brazil was accelerated due GOVERNANCE Emerges to Lava Jato,” he says. “The revised fifth edition of IBGC’s Corporate Governance Best Practices Code was published in November 2015, but the first one from the “CAR WASH” was published in 1999. Many other developments have assured the dynamism of governance-related In 1995, when IBGC was created, one of the first Brazilian themes in Brazilian capital markets, which would issues the founding group had to deal with was the Institute of have happened with or without Lava Jato.” proper Portuguese translation for “governance.” At Corporate Among these were three significant initiatives: the that time, Mr. Carazzai and Ms. Bedicks say, board Governance Capital Markets Investors Association Stewardship meetings at most companies were mere periodic officials emilio Code for Responsibility of Institutional Investors; lunch meetings, a leisure activity for a group of the Brazilian Association of Private Pension carazzai gentlemen to discuss everything but corporate Funds Investment Code; and the reform of “Novo issues. Meeting minutes were written in advance to and heloisa Mercado” guidelines starting in 2010 (Novo be signed afterward, just as a formality. bedicks talk Mercado is the listing segment in the Brazilian Fast forward more than 20 years to the present to Brunswick’s Stock Market that includes companies with the day: The Lava Jato probes have made “governança tereza kaneta highest standards of corporate governance, created corporativa” the phrase of the moment. The about reforms in 2000). According to Mr. Carazzai, these follow a investigations started in 2014 and are the biggest in the culture larger trend in Brazil. ever into . However, according of business “It’s not a coincidence that Brazil has the most to Mr. Carazzai, the growing talk about governance leadership advanced capital markets in the BRIC countries has as much to do with the groundwork that had (Brazil, Russia, India, China) or other Latin already been laid regarding a shift of culture toward American countries,” he says. international best practices. Lava Jato only threw Still, those improvements on their own weren’t

ILLUSTRATION: HANNA BARCZYK HANNA ILLUSTRATION: additional light on its importance. enough. Some companies listed among the Novo

brunswick review · issue 15 · 2018 71 BRAZIL

Mercado were later found to be targets of the Lava tereza kaneta is a Arguably, the most significant outcome of Lava Partner in Brunswick’s Jato investigations. office. Former Jato is the realization that even “big shots” may be “Many companies have complied only in head of MZ Consult Latin held accountable for the wrongdoing. The great appearance,” Ms. Bedicks says. “On the surface, America, she participated surprise for was not the exposure of the in 95 percent of the they had adopted all the best practices in terms IPOs in Brazil between systemic unethical private-public relationships, of processes and structures. But the true essence, 2004 and 2012. but the fact that for the first time in history which pertains to companies’ culture, was not several high-profile businessmen, politicians and there. Lava Jato was a reality check for everyone influential intermediaries involved in the schemes – it highlighted the importance of strong board actually ended up in prison. supervision and the importance of cultural change This change in the perception of risk and higher in Brazilian companies.” culpability for non-transparent decisions has made Mr. Carazzai agrees, saying an emphasis companies more vigilant. Pressure not only from on audits, governance rules and compliance boards and investors, but also from other relevant requirements can only go so far – the culture itself influencers have shaken companies to the core, has to change. and they are adapting – learning to engage and “The problem is only corrected by ethical establish constructive conversations with all their behavior,” he says. “When you impose a stakeholders about ethical, environmental and regulation, you only create one more specialist in social responsibility issues. circumventing that regulation. What you have to Both Mr. Carazzai and Ms. Bedicks agree this do is to educate, pre-empt and mitigate. Fostering has resulted in permanent changes, at least in better practices, implementing strong supervision the private sector. As companies put their heads and severe punishment for wrongdoers will all over the parapet, they are also learning to defend result in better outcomes.” themselves from detractors, and this process leads to increased . “When a company decides on an investment The probe resulted in CLEAN-UP TIME some impressive or divestment, it should present itself in the most NUMBERS: transparent way possible. Clever companies should maintain a dialogue with markets and society in A sprawling AFTERSHOCKS general. So, in that regard, I do not see them falling brazil probe CONTINUE TO ROCK Former back into old habits,” says Mr. Carazzai. reeled in everyone BRAZIL: President Luiz Inácio Ms. Bedicks expresses a cautious optimism. from car wash Lula da Silva, still one “Private companies have woken up to the employees to an of the country’s most importance of good governance to create popular politicians, 188 ex-President was sentenced in April CONVICTIONS sustainable value. The era of ‘leisure lunch to 12 years in prison board meetings’ are definitely over; companies BEGUN IN MARCH for corruption, even understand the need for strong boards. What we 2014 as a - as he was ahead in the see is that the pressure comes from its own board polls for the upcoming laundering inquiry, members; peer pressure has been elevating the Brazil’s Operation election. He is so far standards of their own work.” Lava Jato (“Car the highest profile Wash”) grew into figure imprisoned in Overall, Ms. Bedicks believes there is still a long the probe. 305 the biggest PEOPLE way to go for a broader cultural change, and she corruption probe in INDICTED ON CRIMINAL expects to see state-controlled companies also Latin America. The LULA DA SILVA reforming governance and increasing transparency. name came from CHARGES disputes the charges Mr. Carazzai adds that more work needs to be done a car wash facility in and turned himself to build on the progress that’s been made. Brasília that was an over to police only early focus of after a dramatic “Our work at IBGC focuses on making sure all the probe. standoff involving the advances in corporate governance are successful Ultimately, key thousands of in the long term,” he says. “Significant advances figures from several supporters. His cell is inevitably produce reactive opposing forces – it major , in the southern city of happened in the implementation of Brazilian including , 11.8 , in the same BILLION DOLLARS and nearly every police headquarters Corporate Law in 1976, and in the creation of Novo political party were where the Lava Jato IN FUNDS, INCLUDING Mercado in 2000. The journey of governance is not a implicated. probe is based. FINES, RECLAIMED straight line. Resilience is the key.”

72 brunswick review · issue 15 · 2018