What Will Stop the Bovespa?

by Kevin McDonald

This article was published in América Economía, on December 2, 2010 in Spanish and on December 6 in Portuguese.

Will the Bovespa keep rising at the current pace? It's up 20% in the past five months. What's going to stop it?

Most people reply: it will depend on the economy. Or corporate profits. Or interest rates. Or global liquidity. Or demand from China.

Here's a better answer: it will depend on the directors, officers, and shareholders of the companies listed on the Bovespa. As an example, the economic meltdown in the US stemmed from a financial bubble that could be traced to a few people. But millions who benefitted from the prosperity had become willing accomplices allowing the bubble to grow and finally burst. In the same way, the people participating in the Bovespa's rapid ascent are choosing not to look at important details or to solve simple problems before they escalate into crises.

Take this test to see if think you understand what has been going on in the past year. In each case, the correct answer is a leading company (or companies) on the Bovespa.

1. At which company did executives receive 14 times the compensation paid by the closest competitor?
2. Which company paid its directors 20 times more than its largest competitor paid?
3. Which company paid its officers and directors 10 times more than the amount approved by shareholders?
4. At which company did the Chairman vote in favor of having the company acquire a firm in which he beneficially held shares?
5. Which company delivered to the CVM a proposal for an annual general shareholders' meeting two days after the meeting?
6. At which company have the independent directors not attended a single board meeting in eight years, according to the company's documents?
7. Which company has a board whose attendance rate has declined for the past four years, to 54% in 2010 (excluding alternate board members)?
8. Which company paid an independent audit firm 32% for auditing and 68% for "other services"?
9. Which companies have no audit committee composed of board members and also have no fiscal council overseeing the company's accounting?
10. Which company has bylaws stating that a purchase of 10% of the company's shares requires an offer for 100% of the shares at a price 20% above the market price?

If you know the answers, and you have not acted to correct the problems or to inform others, then you are responsible for a potential blow-up. If you do not know the answers but you are a director, officer, or shareholder of a large Bovespa company, then you have your head in the sand - and you share in the responsibility for what may happen.

For sure, the Bovespa will be hurt by any downturn in the economic and political environment. But the extent of the pain will depend on the stability of individual companies. This means that everyone involved - from directors to officers to shareholders - has a lot of work to do.

They say that success has many parents, whereas failures are orphans. This is a sad commentary on our failure to take responsibility for things that go wrong. We have learned enough from recent experience to anticipate failure - and to take steps to mitigate its impact. Now we need to apply that lesson.

Let's hope that the Bovespa keeps rising steadily. But let's do more than hope: let's ask, analyze, and act. Let's not assume some one else will prevent a meltdown. Yes, I'm talking to you.