 Corporate Governance & Shareholder Value CReCER 09 São Paulo, Brazil Fernando Alves

Corporate Governance & Shareholder Value Historical context “ The 19 th century saw the foundations being laid for modern corporations: this was the century of the entrepreneur. The 20th century became the century of management: the phenomenal growth of management theories… As the focus swings to the legitimacy and the effectiveness of the wielding of power over corporate entities worldwide, the 21st century promises to be the century of governance.” (King II Report) PricewaterhouseCoopers

“ The 19 th century saw the foundations being laid for modern corporations: this was the century of the entrepreneur. The 20th century became the century of management: the phenomenal growth of management theories… As the focus swings to the legitimacy and the effectiveness of the wielding of power over corporate entities worldwide, the 21st century promises to be the century of governance.”

(King II Report)

“ Successful governance in the world of the 21st century requires companies to adopt an inclusive and not an exclusive approach. The company must be open to institutional activism and there must be greater emphasis on the sustainable or non-financial aspects of its performance.... The correct balance between conformance with governance principles and performance in an entrepreneurial market economy must be found, but this will be specific to each company.” (King II Report) Corporate Governance & Shareholder Value Historical context PricewaterhouseCoopers

“ Successful governance in the world of the 21st century requires companies to adopt an inclusive and not an exclusive approach. The company must be open to institutional activism and there must be greater emphasis on the sustainable or non-financial aspects of its performance.... The correct balance between conformance with governance principles and performance in an entrepreneurial market economy must be found, but this will be specific to each company.”

(King II Report)

Corporate Governance & Shareholder Value Conceptual basis “ There is no single model of good corporate governance.” OECD “ Corporate governance is “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations”. It encompasses the mechanisms by which companies, and those in control, are held to account.” ASX Corporate Governance Council.

“ Corporate governance is the system by which business enterprises are directed and monitored, involving the relationships among Stockholders, the Board of Directors, the Executive Directors, the Independent Auditor and the Audit Committee. Good corporate governance practices have the objectives of increasing the value of the enterprise, facilitating its access to sources of capital and contributing to its perpetuity.” IBGC - Brazilian Institute for Corporate Governance Corporate Governance & Shareholder Value Conceptual basis

“ Corporate Governance refers to the process and structure used to direct and manage the business and affairs of an organisation with the goals of ensuring its financial viability and enhancing shareholder value. Equally important, it encompasses the impact of key strategic decisions on all stakeholders, from investors and employees to customers, suppliers and the public.” PricewaterhouseCoopers working definition Corporate Governance & Shareholder Value Conceptual basis “ One could say that Corporate Governance is a system of “taking care” in the context of an effective management process” The word “Governance” derive from the Greek verb “Kubernáo” which means to Steer .

“ Corporate Governance refers to the process and structure used to direct and manage the business and affairs of an organisation with the goals of ensuring its financial viability and enhancing shareholder value. Equally important, it encompasses the impact of key strategic decisions on all stakeholders, from investors and employees to customers, suppliers and the public.”

PricewaterhouseCoopers working definition

Stockholders Board of Directors Alignment of Interests Other stakeholders Management Corporate Governance & Shareholder Value Agents

Transparency Corporate Responsibility Accountability Equity Corporate Governance Corporate Governance & Shareholder Value Principles

Transparency – Equity – Accountability - Corporate Responsibility Sustainability in a stakeholder society Business in society as opposed To Business and society Board of Directors Board Committee Executive Directors Auditors Pillars of Governance Basic Principles Best Practices Ethics Essence Corporate Governance & Shareholder Value Schematic view Stakeholders & Stockholders

Corporate Citizenship (Social, Ethics, Environment) Board Structure & Composition Composition an d o rganisation Induction and training Board remuneration Succession planning / identification and nomination Strategy, Planning and Monitoring Vision and mission Strategic steering Corporate and management performance monitoring Board Operation and Effectiveness Boardroom conduct and relationship Audit committee Nomination committee Remuneration committee Tax committee IT committee Risk committee Disclosure committees Reputation committee Governance committee Robust Risk Management and Compliance Processes Transparency and Disclosure Risk management framework Internal control Financial reporting Enhanced reporting (financial & non financial data) Code of conduct Employee relations / Health and safety Social responsibilities Environmental responsibilities Corporate Governance & Shareholder Value Framework & Key components Ethics

Composition an d o rganisation

Induction and training

Board remuneration

Succession planning / identification and nomination

Vision and mission

Strategic steering

Corporate and management performance monitoring

Boardroom conduct and relationship

Audit committee

Nomination committee

Remuneration committee

Tax committee

IT committee

Risk committee

Disclosure committees

Reputation committee

Governance committee

Risk management framework

Internal control

Financial reporting

Enhanced reporting (financial & non financial data)

Code of conduct

Employee relations / Health and safety

Social responsibilities

Environmental responsibilities

Corporate Governance Increasing regulations Increased complexity due to globalisation Transparency and accountability demands Increased demands from stakeholders New technologies Ethical and financial scandals Integrity-driven performance expectations Increased competitive pressures Corporate Governance & Shareholder Value Drivers

Source: PwC 9 th Annual Global CEO Survey Globalisation and Complexity Corporate Governance & Shareholder Value Call for improved governance and international harmonisation

Clear correlation Strong institutional environment for governance at a country level does not eliminate governance as a potential area of risk or value destruction at the individual company level [or vice versa]. Standard & Poor’s “ The Role of Country Risk In Assessing Corporate Governance” 2007 Corporate Governance & Shareholder Value Sovereign credit ratings

Clear correlation

Strong institutional environment for governance at a country level does not eliminate governance as a potential area of risk or value destruction at the individual company level [or vice versa].

Standard & Poor’s “ The Role of Country Risk In Assessing Corporate Governance” 2007

Mastering Business – Corporate Governance Control model Corporate Governance & Shareholder Value Two broad corporate governance models are prevalent… but these are a world apart Market model Dispersed ownership Non- executive- majority Boards Broadly aligned incentives High disclosure High degree of shareholder equality Active takeover market Active private equity market (including IPOs) Sophisticated institutional investment Institutional context Corporate context Shareholder environment Independence and performance Capital market liquidity Transparency and accountability Concentrated ownership “ Insider” Boards Incentives aligned with core shareholders Reliance on family, bank and public finance Institutional context Corporate context Shareholder environment Independence and performance Capital market liquidity Transparency and accountability Limited disclosure Inadequate minority protection Limited takeover market Underdeveloped new-issue market

Understanding the demands of the organisation’s stakeholders in terms of performance and conformance, and aligning the organisation to deliver against these objectives, in consideration of the risk appetite and risk tolerance of the organisation. The people, processes and technology should be designed and deployed such that the achievement of objectives are measured, risks assessed and continuous improvement realised in support of effective governance, risk management and compliance. Corporate Governance & Shareholder Value Governance, Risk and Compliance

Corporate Governance & Shareholder Value Governance, Risk and Compliance Integrity – Driven Performance

Corporate Governance & Shareholder Value Trends and Challenges Regulatory harmonization. Shift in economic centre of gravity and capital flows driving change in corporate governance practices . Worldwide convergence in relation to a common corporate governance doctrine / stakeholder – oriented model. Voluntary self adoption of best practices of corporate governance. Increasing pressure from non traditional stakeholders (communities, environmentalists, politicians, etc.). Increasing institutional and retail activism.

Regulatory harmonization.

Shift in economic centre of gravity and capital flows driving change in corporate governance practices .

Worldwide convergence in relation to a common corporate governance doctrine / stakeholder – oriented model.

Voluntary self adoption of best practices of corporate governance.

Increasing pressure from non traditional stakeholders (communities, environmentalists, politicians, etc.). Increasing institutional and retail activism.

Corporate Governance & Shareholder Value Trends and Challenges Positive correlation between good corporate governance and market capitalization / stock performance. Greater focus on the essence of corporate governance rather than on formal governance procedures (corporate governance as a driver to sustainability rather than just a compliance function) / value added approach. New corporate reporting model (financial and non financial data / XBRL / IFRS / Triple bottom line approach). Adoption of best practices of corporate governance as a source of competitive advantage both to companies and to countries.

Positive correlation between good corporate governance and market capitalization / stock performance.

Greater focus on the essence of corporate governance rather than on formal governance procedures (corporate governance as a driver to sustainability rather than just a compliance function) / value added approach.

New corporate reporting model (financial and non financial data / XBRL / IFRS / Triple bottom line approach).

Adoption of best practices of corporate governance as a source of competitive advantage both to companies and to countries.

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