What if Brasil Played India – in Corporate Governance?

by Kevin McDonald

Published in Portuguese by Investimentos e Notícias (February 10, 2011) and in Spanish by América Economía (February 11, 2011).

Imagine it's a sunny afternoon on July of 2016 in Rio de Janeiro, and you have a perfect view of the playing field from your seat at Maracana. The Brasilian team is warming up for the final match toward the gold medal of the XXXI Olympiad. But the opponent coming onto the field is not Spain, Germany, the Netherlands, or Argentina. Due to an error by the International Olympic Committee, the team is from . India!

"Are you kidding me?" a Brasilian fan laughs. "The score will be 270-0. And if the Brasilians play without blind-folds, the score will be even higher."

To avoid embarrassment, the countries change the rules. India, by then the world's fourth largest economy, proposes a match of corporate governance. Brasil, by then the world's third largest economy, agrees to pull Ronaldinho and Robinho off the field and in their place put the nation's best companies, institutions, and corporate governance practices. These "players" will line up against the best from India, to see which country has better corporate governance. The officials too are replaced - by a few very large foreign investment funds, who take off jackets and ties and put on black shirts.

Does this sound strange? In reality, it is not. Already in many industries, the best companies from these two nations compete directly, not only for customers but also for the same foreign investors. And increasingly, what distinguishes the winning company is more than profit: the decisive factors include the way the company is governed - from the board of directors, to compensation policies, to accounting methods, and the way shareholder meetings are conducted. Investors feel confident about a company's future if they see openness, fairness, independent oversight, and a true partnership between the company and all of its owners, not just controlling shareholders.

Furthermore, investors are directly comparing Brasil and India. In Toronto last October, at the International Corporate Governance Network conference, participants were asked "Which country practices better corporate governance?" The response: 71% said Brasil, and 9% said India.

Is that a sufficient ranking of the two countries? In a word, no. Brasil and India have very different strengths and weaknesses. A numerical score does not shed any light on how business is done in either country. The comparison has to be more detailed. Let's imagine again Maracana in 2016 and see how the match turns out..

In the opening possession, Brasil takes control and passes the ball to Gafisa, the developer of residential real estate. Gafisa may be the best run company in Brasil, with widely dispersed ownership, a board of directors that is 83% independent, an independent audit committee and a fiscal council, fair compensation, superbly run shareholder meetings, no poison pills, and equal rights for all shareholders in case the company is sold. Gafisa evades all defenders and scores easily. Brasil leads, 1-0.

India storms back with its own real estate company, the very well run DLF, which is large ($75 billion revenue), venerable (60 years old), and highly valued (P/E of 25 and market cap of $10 billion). Foreign investors have embraced the New Delhi company. They include it in numerous indices, for example the Dow Jones BRIC 50 Index. DLF fires a long shot and scores, tying the game at 1-1.

Brasil has the ball again and passes to BRF, the superbly managed producer of chicken, pork, and other animal protein. BRF is run much the way Gafisa is, but with less independence on the board of directors. The powerful BRF runs right past India's vegetarian defense and blasts the ball into the net, making the score 2-1.

India does not have a big food company like BRF. The best India can offer in response is NestlÚ of India, which quickly melts in the carioca sunshine. But the ball is picked up by India's information technology industry - uh-oh, trouble for Brasil. These are truly global companies, adhering to very high standards of corporate governance. They tower over their Brasilian defenders, the well managed but younger Totvs, Cielo, and Redecard. India's Infosys passes to Wipro. then to Tata Consulancy . over to HCL for an easy goal, tying the score, 2-2.

India is now playing aggressively and sends in the pharmaceutical industry -- Ranbaxy, Dr. Reddy's, Piramal, Sun Pharmaceutical, to name a few. The Brasilians try to stop them with Hypermarcas and Natura, both of which are listed on the Novo Mercado. But the Indian companies operate in numerous countries, including Brasil, and they meet governance standards higher than those of Brasil. They play with the force of a cyclone and sweep the ball into the net with against no resistance, putting India ahead 3-2.

The first half continues like this. Down by one goal in the final minute of the half, Brasil's oil and gas industry, with fairly good governance by Petrobras and OGX, manages a goal: Petrobras bangs a shot off the right post and OGX tips it in (whereupon Petrobras shares fall 5% and those of OGX rise 20%). But India's Reliance Industry, with all the good governance of Petrobras and OGX, instantly comes back to put India on top again.

At half time, the game is tied, 5-5. Fans realize this will be a close fight, and they stay in their seats during intermission.

During the break, the teams think of new ways to prevail. India's coach makes a conceptual break-through: "We have some stronger firms and some weaker ones. The way to beat Brasil is not by sending our best mining company against Vale or our best bank against Ita˙ Unibanco. We will win only if we put our whole system against theirs."

India comes out like a well-oiled machine in the second half. On the first possession, the Indians send out a special unit, called "Disclosure - Annual Report." Wearing uniforms that are 95% transparent, this special unit takes control of the game. One jersey reads, "Director Profiles," referring to India's detailed description of each board member. The best Brasilian firms describe each board member in terms of age, education, experience, committees, and some of outside business activities. By contrast, all Indian firms report what the best Brasilians do, and more: (i) each director's attendance at meetings of the board, committees, and shareholders; (ii) the number of other boards and committees on which he serves, and the number for which he is the chairman. India's quantitative summary makes it easy for a shareholder to see which directors are active or not, and which may be over-extended. India confuses the defense and scores easily, taking a 6-5 lead.

The Maracana fans moan as they spot another Indian jersey, "Committee Profiles." Whereas the best few firms in Brasil indicate the membership, chairmanship, and purpose of each committee, every Indian firm presents the same and more: the number of meetings, attendance of each member, and in some cases, a year-end report of accomplishments. India's additional information shows investors the effort and performance of crucial committees of the board. India again baffles the defenders and drives the ball into the net. The lead is now 7-5.

One more Indian Disclosure Unit takes the ball. This one wears a shirt called "Executive Compensation." Whereas most Brasilian companies report compensation for executives and board members as groups, Indian firms report this information for top executives and all board members as individuals. The difference is enormous: it exposes possible excesses that the company's owners want to know about. This is a mismatch that is Brasil's fault - for not telling company owners how much the pay the CEO. The result is an "own goal," as Brasil tips the ball into its own net. The Indians are now up 8-5.

Halfway through the second period, the action is briefly stalled, when officials give India a yellow card for having two stock exchanges -- the Bombay Stock Exchange and the National Stock Exchange - in the same game. "This is too confusing," they say.

The Maracana fans are newly animated. They cheer for the home team and yell at the coach, "Put in our system! Put in our system!"

Brasil's coach hears this and gives the fans what they want. He sends in the Novo Mercado for the first time in the game. The result is immediate, as if Ronaldinho and Robinho were on the team after all, playing against Lakshmi and Pradeep. Brasil's voluntary system of differentiated corporate governance proves unstoppable. With help from the Instituto Brasileiro de Governanša Corporativa, the Novo Mercado quickly scores three goals, tying the game at 8.

After that, nobody scores. Each team has a way to stop the other, and both sides grow tired.

With seconds on the clock, Brasil has one last chance. India's goalie has tipped the ball out of bounds. Brasil sets up for a corner kick. The Brasilian coach looks down the bench. He waves in a new player. The fans see who that player is and they begin to roar, as an 800-pound gorilla, wearing green and yellow, jogs into position in front of India's goal. The new player is the CVM, Brasil's version of the US SEC, with the power to establish higher standards of corporate governance, equal or superior to those of India.

"Finally!" yell the fans. "We'll win for sure now that the CVM is serious!" The ball is thrown in. The CVM leaps high above all the defenders and puts its head directly on the ball, which ricochets straight to ..

The rest will have to wait until 2016. In the meantime, let's remember that Brasil can learn a lot from India in order to win the confidence and support of global investors. Indeed, the best practices in India represent low-hanging fruit for Brasil -- an easy way to make Brasilian companies less risky to shareholders and thus more valuable. Why wait until 2016?


Kevin McDonald
25 years of experience in investment banking, consulting, private equity, and international business
Michael Lehner
In the high technology field for 30 years, as an operating manager, consultant, venture capitalist, and investment banker
Copyright © 2010 McDonald-Lehner. All Rights Reserved.