A Importância da Governança Corporativa para os Mercados Emergentes

Renato de L. GrandmontHead, Global Corporate Governance Research

2

Contents

1 Background

2 Corporate Governance and its Implications for GEMs

3 Global Trends in Corporate Governance

4 Conclusion

3

What Is Corporate Governance?

Corporation– Weak board of directors

– lack of independence

– lack of accountability

– Unfair shareholder treatment

– One share one vote

– Tag along rights

– Lack of information disclosure

– Off balance sheet operations

– Accounting standards

– Business practices

– Cross group subsidies through transfer pricing

– Old habits are hard to change (mindset of controlling families)

Country– Legal system does not work (can’t sue)

– Weak enforcement of laws and regulations

– Outdated laws and regulations

– Lack of transparency in fiscal matters

– Structural problems:

– Different share classes

– Deficient capital structure (voting - non-voting)

– Ownership structures

Corporate Governance is a measurement of risk

Examples of Corporate Governance Problems

4

Why Corporate Governance Is Key For GEMs

• One of the causes of the GEMs’ Valuation Discount

• Investors’ perception about GEMs must change for valuations to increase

• Corporate Governance is a key ingredient to change that perception– Laws– Regulations– Corporate Action - Be a Global Player!

• Viability of asset class is at risk – Companies and entire countries are being black listed!

5

Exemplary Emerging Companies Can Access A New Investor Base

Fund Flows Into Emerging Markets: From 26% to 6% of an International PortfolioFund Flows Into Latin America: From 23% to 7% of an Emerging Market Portfolio

0%

5%

10%

15%

20%

25%

30%

1/8

/1992

5/8

/1992

9/8

/1992

1/8

/1993

5/8

/1993

9/8

/1993

1/8

/1994

5/8

/1994

9/8

/1994

1/8

/1995

5/8

/1995

9/8

/1995

1/8

/1996

5/8

/1996

9/8

/1996

1/8

/1997

5/8

/1997

9/8

/1997

1/8

/1998

5/8

/1998

9/8

/1998

1/8

/1999

5/8

/1999

9/8

/1999

1/8

/2000

5/8

/2000

9/8

/2000

1/8

/2001

5/8

/2001

9/8

/2001

1/8

/2002

5/8

/2002

9/8

/2002 0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

Emrg/Intl Assets (1,000s)

Source: DB Corporate Governance Research, AMGDS

6

For How Long Will The Asset Class Remain “Undervalued”?GEMs - Valuations and Estimates

15-Nov-02 PER EPS Growth PBV ROE PCF EV/EBITDA Mkt Cap Mkt Cap

2002E 2003E 2002E 2003E 2002E 2002E 2002E 2003E 2002E 2003E GDP 02E MSCI

Country (x) (x) $(%) $(%) (x) $(%) (x) (x) (x) (x) $(%) (%)

Asia

Taiwan 23.6 18.2 46.7 29.7 2.1 12.4 12.1 10.3 13.5 11.6 81.6 72,754

China 15.5 14.5 23.3 7.4 1.2 12.7 10.1 9.2 9.4 9.2 42.7 34,493

Korea 8.6 7.0 56.4 21.6 1.2 18.1 4.4 3.7 5.4 4.8 160.3 120,135

Malaysia 14.6 13.1 9.3 11.2 1.6 15.5 7.9 7.1 10.4 9.1 31.8 29,639

Indonesia 5.0 4.6 12.2 11.1 1.2 28.0 3.5 3.3 4.0 3.5 7.7 4,908

Philippines 19.9 15.1 1.7 31.7 1.0 9.3 5.2 5.0 8.2 7.6 3.7 2,759

Thailand 11.1 9.3 44.4 21.1 1.6 17.0 5.1 4.7 7.5 6.6 8.8 8,741

India 12.5 11.4 20.3 9.7 2.4 33.5 9.7 9.1 9.2 8.6 21.1 22,562

Total Asia 14.1 11.7 41.1 19.9 1.6 17.0 7.7 6.8 8.7 7.7 41.6 297,193

Latin America

Argentina 8.1 9.5 26.8 5.7 1.2 45.7 4.7 5.4 5.3 5.1 20.2 1,734

Brazil 6.3 4.7 5.2 35.3 0.7 21.0 2.5 2.1 5.1 4.6 31.8 30,785

Chile 14.2 11.6 -14.2 22.7 1.1 7.9 3.7 4.3 8.6 7.9 97.2 8,364

Colombia 6.5 5.5 47.1 18.1 0.3 6.1 na na na na 17.9 571

Mexico 9.9 8.5 11.9 17.1 1.4 18.7 3.6 3.4 5.4 5.1 43.5 40,362

Peru 10.3 9.4 23.7 10.3 2.2 40.7 0.9 0.8 3.5 3.8 27.5 2,404

Venezuela 8.6 6.3 70.7 36.9 na na na na na na 16.5 768Total Lat Am 9.0 7.4 8.3 24.0 1.1 19.6 3.2 3.0 5.6 5.2 46.2 84,988

EMEA

Turkey 19.5 13.1 nm 58.7 2.2 9.8 5.0 4.4 10.5 6.3 32.0 8,890

Israel 16.6 9.0 40.0 39.6 2.0 20.0 4.7 8.2 11.6 10.8 45.9 18,024

Russia 8.8 8.1 12.7 9.1 1.0 13.8 4.8 4.5 5.8 5.5 29.4 25,001

Poland 19.9 17.5 48.1 33.0 1.5 9.5 3.5 3.7 6.2 6.0 8.5 6,552

Hungary 11.3 9.9 36.6 16.9 1.6 15.5 3.9 3.4 5.5 5.0 32.8 6,260

South Africa 9.8 8.7 27.0 13.3 1.9 25.3 6.5 5.8 7.2 6.6 157.2 68,719

Egypt 5.8 5.7 29.4 -0.9 1.0 17.3 3.3 3.7 4.4 5.7 na 1,121

Czech 10.9 10.4 19.8 4.8 0.7 8.3 2.2 2.1 4.2 3.7 na 2,629

Total EMEA 11.7 9.4 27.4 19.8 1.7 19.9 5.5 5.5 7.5 6.8 80.1 139,605

GEM Total 12.6 10.4 32.1 20.5 1.5 18.2 6.4 5.8 7.9 7.1 52.6 521,786

EU Total 15.5 13.1 20.8 16.4 1.8 9.6 8.0 7.0 6.5 5.8

EAFE Total 16.6 14.1 30.0 16.3 1.6 8.3 7.9 7.1 6.5 5.9US Total 17.2 14.3 17.5 20.5 2.7 16.2 10.6 9.2 8.4 7.2

[1] DNE (Decrease on Negative Earnings); [2] INE (Increase on Negative Earnings)

Source: Deutsche Bank GEMs Strategy, IBES, Bloomberg, MSCI

7

Is Texas Another Emerging Market?

Enron - Corporate Governance Wake Up Call for the US

Some of the Issues: – Lack of transparency– Complicated accounting system - insufficient disclosure - off-balance sheet financing– Lack of board independence (consultants, charitable donations)

Enron is leading to:– Legal and regulatory changes– An overhaul of US accounting standards

– Review of the role of auditors and of US GAAP– Stock exchange listing requirements could change– Institutional investors also reacting

Corporate governance is a global issue, present in all developed markets as well

8

Valuation Analysis: It Pays To Be Good

Premium of Top Performers versus Bottom Performers: Quintile

Source: Deutsche Bank Securities Inc. estimates and company information

25%

65%

84%

193%

158%

70%

131%

240%

85%

30%

96%

241%

47%

61%

89%

244%

0%

50%

100%

150%

200%

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300%

Latin America South Africa EEMEA Emerging Europe

Average of PE Average of PB Average of PCF Average of EV/EBITDA

Note: Based on 2002 estimates, priced as of November 2002

9

Performance Analysis: It Pays to Hold the Good

Source: Deutsche Bank Securities Inc. estimates, Factset, Bloomberg, MSCI

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180

MSCI EMF Latin America Top Quintile Bottom Quintile Top Decile Bottom Decile

Bottom Quint

Top Quintile

MSCI LA

Bottom Decile

Top Decile

Latin America: Corporate governance appears to be a contributing factor to price performance (5 Years, U$ indexed, rebased)

10

Performance Analysis: It Pays to Hold the Good

EEMEA South Africa

Corporate governance appears to be a contributing factor to price performance(5 Years, U$ indexed, rebased)

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20

40

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08/0

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Tier 1 Tier 5 Tiers 1 & 2 Tiers 4 & 5 MSCI SA

Tier 1

Tiers 1&2

Tier 5

Tiers 4&5

MSCI SA

Source: Deutsche Bank Securities Inc. estimates, Factset, MSCI

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50

70

90

110

130

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170

190

210

230

Msci EMEA Tiers 1+2 Tiers 4+5

MSCI EMEA

Tiers 1+2

Tiers 4+5

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Implications of Better Corporate Governance

Corporation– Attract global investors – Increase in value– Reduction of cost of capital– Enhances capital efficiency– Protection of all shareholders attracts more shareholders

Economy– Reduces the “country risk” - micro efforts– Accelerates the development of capital market– Induces stable long term foreign capital inflows– Increases national competitiveness– Helps achieve sustainable growth– Helps increase transparency in both private and public sectors, which helps reduce corruption

12

Global Trends in Corporate Governance

Increased Fiduciary Responsibilities

Corporate Failures will help the US work to improve corporate governance– Legal and regulatory implications for all that trade in US markets

Awareness is being raised about corporate governance issues

Institutional Investors and Analysts

Corporates and Lenders

Regulators and Stock Exchanges– are trying to improve corporate governance in order to boost their equity markets

Governments concerned about reducing:– want to reduce the “country risk” and the cost of capital for their companies

Codes of Corporate Governance being adopted

13

Increased Fiduciary Responsibilities - The Role of Corporate Governance

New Law in the US (Sarbanes-Oxley Act) regulations to follow, key issues:

CEO/CFO certification (criminal offense)

Audit Committee (independent directors)

Accounting standards (disclosure & move towards principles based accounting?)

New Environment has Implications for:

Securities Exchange Regulators

Board Members, specially Independent Directors

Institutional Investors

Investment Banks (research independence)

Stock Exchanges (adopt new measures to protect investors)

Governments (reduce investment risk to attract more capital)

14

Conclusion - CG Has Direct Implications for Investment Decisions

GEMs are undervalued and the viability of the asset class depends on investors returning to the region to stay

– requires both macro and micro reforms

Companies want to attract global investors and so need to improve their standards

Corporate governance impacts equity valuation and stock price performance – Countries/Companies want to attract global investors and so need to improve their standards – Valuation re-rating is possible through better Corporate Governance– But the opposite is also true

Increased fiduciary responsibilities for board members and investors– Legislative/regulatory changes taking place in many countries– Corporate governance is a measurement of risk