UK stewardship code provides inspiration for Brazilian governance push

Brazilian stewardship practices 'lag developed markets', says code executive committee member.

The executive committee overseeing Brazil’s revamped stewardship code is looking to the UK for guidance as it bids to improve stewardship standards in the jurisdiction.

Committee member Geraldo Affonso Ferreira, an independent director and corporate governance specialist, said he was “very impressed” with the reforms made to the UK code in 2020. The UK’s corporate governance and stewardship is “no doubt” the reference for Brazil, he added.

A previous version of the Brazilian code had been created by AMEC, the country’s association of capital markets investors. The group joined forces with the local CFA Society to put together the current version, which was launched last year.

Signatories include large international managers such as BNP Paribas Asset Management, abrdn and Federated Hermes, as well as Brazil-based investors including Itaú Asset Management and BB Asset Management.

While Brazil is following in the steps of the UK, it is not yet at the level of the 2020 code, Ferreira said. The Brazilian code has seven principles, compared with 12 held by the UK, and the document is a quarter of the length. It also does not cover service providers.

A spokesperson for the FRC, the UK reporting regulator, said it would encourage other markets to “consider the focus on the activities and outcomes of stewardship reporting, market-wide and systemic risk, and the integration of stewardship and ESG into investment decision-making”. They also noted that the FRC is part of the global stewardship codes network, meeting regularly with other jurisdictions to share experiences and learning.

Ferreira was highly critical of the state of stewardship among local investors in Brazil. Managers do carry out some engagement, he said, but “they don’t do engagement which is deeper and constructive and engage the company on a regular basis”.

Managers claim to have carried out stewardship just by attending a company AGM, he said, but engaging once a year does not make change possible. Ferreira also said that local investors “go as free riders” when international managers carry out engagements, and “have those big assets as a shield for them”.

However, he added that the reporting of international managers is not without its faults. “If you look today at a stewardship code report, they talk a lot about Latin America but almost don’t have a single word about Brazil,” he said. Looking forward to 2023, the code will ask reports to specifically address engagements that have been carried out in Brazil.

Ferreira’s comments were echoed by Michiel van Esch, an engagement specialist at Robeco, which is a signatory to the new code.

“In the Brazilian market, stewardship practices are generally at a lower level than we see in most developed markets,” he said. “Local investors have been scaling up their efforts in voting activities but there is limited local knowledge on the benefits of shareholder engagement. Many Brazilian listed companies are controlled by a majority shareholder, boards lack diversity and independence, and dual class shares are still a common practice, limiting protections in place for minority shareholders. There is room for improvement both on governance and sustainability.”

If more investors aligned their stewardship practices with the Brazilian code, van Esch added, they would be in a better position to contribute to positive change.