Governance and the Role of Government

Harsh discussions about corporate governance and the role of government have been increasing steadily from the last decade.  Regulations represent multidimensional trade-offs and sometimes even end up on opposite results, since risk aversion may cause reduction on informational efficiency and market liquidity, within a disclosure regulated market, for instance.  Therefore, the balance of public benefits from regulation versus its private burden demands a continued assessment over time.

We listened today to Mr. Mats Isaksson pointing the two main goals for government regulation: (i) to improve market efficiency, mainly by facilitating innovation driven corporations to raise capital, consequently creating an investor friendly environment, and (ii) to enhance stock markets proper credibility, transparency and enforceability, while they represent the epicenter for some of the most important footprint on companies.  Also, Mr. Isaksson raised questions under the light of stock market inefficiencies, in particular transaction concentration resulted by index portfolio investment.  Its side-effect is that it reduces liquidity for non-listed companies.

In addition, Prof. Sridar Arcot addressed widely adopted UK’s “Comply or Explain” disclosure approach, created under the assumption that compliance goes beyond one size fits all.  The main goal of this approach is conferring discretion and flexibility to companies, while considering the general scenario.  While being voluntary for companies, Prof. Arcot presented a selection of findings over this disclosure modality adoption landscape by companies, argued about the quality of some companies explanations and stated that there are still about 20% of companies ruled by this methodology that neither comply nor explain.

Finally, Prof. Rodrigo Bandeira de Mello presented the intricate pyramidal ownership structure some corporate groups have in Brazil to demonstrate the role played by government background board members.  One of the reasons for this is that Brazilian government had historically relied on these groups as a mechanism for policy implementation, since, within the country’s scenario, he said, it is less costly.  Nevertheless, Prof. de Mello affirmed that advantages created by government background board member are typically a firm “specific asset”, and contingent to the country’s institutions, not representing a monolithic formula.

To sum up, disclosure, its relevance and impacts differ accordingly to specific situations.  “Comply and Explain” may fit better for the British-like business environment, that demands greater flexibility and shows high protection for minority shareholders whereas closer relationship to government may change the way Brazilian firms talk to market.

November 17, 2012 by Cristiano Cittadino Oliveira/ Fundação Getulio Vargas #CouncilBusinessandSociety

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