Governance impacts stock prices in Brazil

According to Urban Larson, manager of the top performing F&C Latin American Equity Fund, the market is increasingly rewarding companies for strong governance practices as standards in the region steadily improve, and likewise punishing those that fall short.

Larson points to the example of Cosan, a Brazilian sugar and ethanol producer, which has seen its stock price tumble by 14% since Monday after it announced a shareholder-unfriendly corporate restructuring.

“The company, which we do not hold, is switching from its shareholder-friendly listing on the Novo Mercado of Sao Paolo’s BOVESPA to a Bermuda-based holding company structure with two share classes and voting rights that are very heavily skewed in favour of the controlling shareholders. This clearly disadvantaged minority shareholders. The market has demonstrated that investors take a very dim view of it,” said Larson.

Overall he argues that the corporate governance bar in Latin America has been raised significantly in recent years and cites Lojas Renner, a Brazilian clothing retailer, as a business on a mission to set new standards.

“Lojas Renner is a stock we are pleased to hold. The company was sold into the market by JC Penney of the US in 2004 and has a free float of 100% with no controlling shareholder. This was the first-ever Brazilian company not to have a controlling shareholder,” explained Larson, “so it is breaking new ground.” Renner is listed on the Novo Mercado which, among other shareholder protections, requires a single share class with equal voting rights and full tag-along rights for all shareholders.

“The company sees itself as a role model for other Novo Mercado companies,” commented Larson, “it wants to show the Brazilian market that a successful company does not need a controlling shareholder. It also sends out a detailed guide to AGM resolutions and actively reminds shareholders to vote by calling and e-mailing.”

Most of the Brazilian IPOs have been Novo Mercado listings, or have had to have a very good reason not to be. “This is a very positive development for the region that helps make it an even more attractive place to invest,” he concluded.