Brazil’s IBGC Reflects on Pioneering Work in SOE Corporate Governance

In late 2020, the Center for International Private Enterprise (CIPE) sat down with leaders of Instituto Brasileiro de Governança Corporativa (IBGC), Brazil’s premier corporate governance organization, to discuss its work and connection to CIPE’s anti-corruption efforts in Latin America.

In this interview, IBGC’s Advocacy Manager, Danilo Gregório, and Advocacy Analyst, Laís Piasentini Oliva, share the organization’s mission to contribute to a fairer society by promoting better corporate governance practices and by offering educational materials, trainings and certification programs. Since 2016, IBGC has offered programs to educate board members of state-owned enterprises (SOEs).

Gregorio and Piasentini also share how recent events like the Lava Jato corruption scandal have raised the public and legislative profile of corporate governance. This public attention has boosted demand for IBGC’s governance training from both the public and private sectors and allowed the organization to consult with the government on new SOE governance regulations.

This interview is part of a series with CIPE’s partners in Latin America working on improving transparency and governance in SOEs.

Note: This interview took place in November 2020 and has been edited for length and clarity.

Q: Can you describe IBGC’s work to improve governance and combat corruption?

IBGC was created in 1995 and, at the time, many people in the corporate environment did not know what corporate governance was.

We had some volunteers from corporate boards who knew Brazil needed to improve corporate governance because it was a young democracy and was opening its economy. We knew that we had to improve the management and corporate governance of Brazilian enterprises so we could attract more investors.

At the beginning, corporate governance was centered around board members and our institute was called the Brazilian Institute of Board Directors. In 1999, our members decided we should not only engage with directors, but with all relevant stakeholders, such as entrepreneurs, investors, executive officers, and anyone related to the management of and leadership of organizations, such as advisors and lawyers.

Nowadays, we have about 2,500 members. Most are individuals but we have hundreds of enterprises as well. Most IBGC members are professionals who believe good practices of corporate governance can contribute to the transformation of organizations and benefit society as a whole.

Q: Do you have any projects related to CIPE’s efforts to combat systemic corruption in the region that you would like to share?

Our relationship with CIPE started in the early 2000s when we developed a guide for family-owned businesses. From that time until the beginning of 2010s, the Brazilian economy was growing, and we had many achievements to celebrate including record-low rates of inflation and unemployment. But things started to change with the emergence of economic and political crises. Then suddenly, in 2014, we had the Lava Jato investigation that highlighted corruption issues within large Brazilian companies and SOEs, and at the center of this scandal was Petrobras, the largest Brazilian SOE.

During this time there was some confusion about corporate governance and compliance practices. What happened with those companies was mainly a problem of integrity, not necessarily corporate governance. That confusion led many organizations and policymakers to respond to the scandal by strengthening mechanisms of corporate governance. We attracted more attention as an increasing number of enterprises and professionals were looking for training programs so they could learn principles that could help them to improve management. Many thought that if they could strengthen corporate governance practices, they could prevent risks of corruption.

We believe that they are right. Ethical behavior is the basis of good governance even though they are different issues. We know that if you do not have integrity and ethical behavior, the system of corporate governance will not work.

Meanwhile, it was a coincidence when we learned that CIPE was looking for projects in Latin America in 2015 to prevent corruption. At that time, we needed to develop a training program to better educate SOE board members to work in the best interests of their organization and be independent from the government and political parties.

We could not have done this without CIPE’s support as we knew that initially the government and SOEs would not pay to develop this training program due to budget constraints, and SOE leaders would not participate in our regular programs unless they had something customized to their individual needs. With CIPE’s support, we were able to design this program.

This was the beginning of a very productive line of work for IBGC. At the same time, we were developing this SOE program, education and training programs for board members and executive officers of SOEs became mandatory. The legislature and the government decided that this kind of training should be required for SOE administrators.

And after the scandals of 2014, many regulations, policies and self-regulation initiatives came out. IBGC was seen as a reference to help regulators and policymakers design their programs. This led to many opportunities. Thanks to the partnership with CIPE, we had the resources to update our recommendations and do more research on the adoption of SOE corporate governance practices.

Q: Corruption, or the abuse of entrusted power for private gain, affects countries to varying degrees around the world. To what degree is it a problem in Brazil and what impact does it have on Brazil’s democratic institutions?

Our problem with corruption dates back to the very beginning when the Portuguese first came to exploit the land. The corrupt connections they held between economic and political powers have remained and elites have been reluctant to let go of their privilege.

Today, the level of corruption in Brazil is similar to that of any emerging market. There is pressure to grow the economy and to generate employment, and I think this pressure leads to increased risk of corruption because of the political system. If politicians are going to implement their agenda, they are always going to connect with private sector interests, and not all those private sector interests are clean.

Unfortunately, corruption is also part of the culture and everyday life here in Brazil. The negative impact on public services is worsened by the lack of resources for health and education. There is also a risk to democracy when certain candidates, and even some sectors of the media, blame the political institutions for corruption because of the way institutions are set up. This leads to demanding more authoritarian behavior from the government.

In the past, we were used to corrupt behavior in the government because although we may have assumed most politicians were corrupt, we did not know exactly what they were doing that was wrong. However, today we know the level of corruption that is taking place in Brazil and we know that there are consequences for those who are involved in corrupt acts. The process is not perfect in the investigations, enforcement, and the punishment processes. While there is a lot of controversy, at least we know that something can be done.

The public is also paying more attention to the issue. Teenagers and students are discussing the issue of corruption openly on social media. That is a drastic change from when I was in school. Hopefully this is a good thing as it will hopefully result in us being more responsible when choosing who to vote for.

Q: Can you speak a bit about the relationship that your organization has with SOEs and how you interact with their officials?

We do not provide any advisory services. We focus on training companies and individuals who work for companies or the government on corporate governance principles. We are also focused on disseminating content through our communication channels and events. We also have certification programs for board members, members of fiscal councils, and audit committees.

If a company has a corporate governance problem, we do not engage directly with them. Instead, we can sell them a corporate governance training program – either to the company as a whole or to individuals who work for the company.

For example, if an enterprise has an issue, we do not start working with it to improve or fix something. We also do not build projects for specific organizations, but we can build programs with partners, like with Banco do Brasil, a federal bank. If they want to create a program to improve their own corporate governance, we will not do that for them. However, if the Ministry of Economy wants to build a program for SOEs, we might engage with them. If we sell them a training program then we would have a commercial relationship as well, but it is separate from the function of advocacy. We do not mix our advocacy and commercial efforts.

Q: What advocacy issues do you work on?

In addition to the governance of SOEs, we are very supportive of the “comply or explain” approach. We make recommendations like requiring that a board be composed of independent members. Some organizations may not be able to fulfill that, such as a family-run small business. That is okay, but you need to explain why you did not comply. Of course, this approach does not work for all corporate governance practices because some are so obvious that they should be in place in all cases, leaving you with no excuse not to comply with them. But in many other cases they are just recommendations.

On some issues there is no right or wrong, or there can be multiple solutions. Companies have the right to justify their own choices but there must be transparency about why recommended rules are not being applied. If they start to report why they are doing certain things, then they may start to change and ultimately transform their governance as well. IBGC led the movement to create the “comply or explain” practice for listed companies and model regulations. There is a lot of room for improvement, so we are currently engaging in discussions related to these rules.

Another issue that we are always working on is the changes to the Brazilian Corporate Law, which is the legislation that describes the rights and duties of directors, shareholders, and corporate governance bodies. There is always discussion about changes to the rules and to the law that could improve governance and we work with partners to improve legal mechanisms of good governance.

Q: How have you benefited from working on these issues with local, regional, and global partners? How are these partners important to your organization?

I think knowledge sharing with regional and international partners, like the network of CIPE partners in Latin America, is important as it strengthens our research and the debate about recommendations as international experience helps us improve our recommendations and sharpen what we say in Brazil. The stories that we get from other countries also help us collect evidence to support the ideas we have here.

Additionally, the relationship we have with the Organisation for Economic Cooperation and Development (OECD) in Latin America helps us justify our work with SOE stakeholders. When they see that these issues are bringing IBGC connections together with organizations like the OECD, they are more supportive of our work. And if the OECD were to invite us to talk about our experience with SOEs, then I think IBGC’s board members and other stakeholders would see all the work we have done up until now as having been worth it.

Q: What have been some of the biggest obstacles and breakthroughs that you have experienced related to your SOE transparency and governance initiatives in Brazil?

One challenge we had was when we decided to engage in the privatization debate in Brazil. I think when we talk about privatization, we are always talking about two opposite views on the role of the state. What is the limit for state intervention? We try to be neutral in that discussion, because IGBC does not want to be known as a partisan organization. So I think it is very difficult for us to make any statement and be seen as a neutral organization because the audience will always interpret you as supporting one side or the other. The general audience prefers to simplify the discussion, to simply defend privatization or criticize it. It is very hard to keep a neutral position.

On the positive side, we can say that IBGC has positioned itself as an advocate for good practices in SOEs. We have been engaged with governance rules in legislation before anyone else was, and that is why IBGC is always a source sought out by the media for comment. We are seen as an independent think tank that has an important voice on issues regarding the adoption of the SOE legislation and governance best practices.

Without our partnership with CIPE, it would have been harder for us to have made this work a priority at IBGC. As a multi-stakeholder organization, we have many issues to cover. Unlike other think tanks our advocacy team is not only working with SOEs or on public policies. But since we have this partnership with CIPE and connections with international partners and with the OECD, we have been able to keep SOEs a priority over the last five years.

I also think it is worth mentioning that the corruption fighting agenda has been challenging lately. Although it was one of the main issues President Bolsonaro advocated for during his campaign, the anti-corruption agenda has not been a priority during his administration.

Q: How has the Brazilian government used IBGC’s publications and your other work?

The Ministry of Economy has worked closely with IBGC on many public policies, such as when they created indicators to evaluate the adoption of governance standards within SOEs. In addition, we were invited to join the independent commission tasked with evaluating the government rankings that assess the performance of companies, and we participated in the creation of the standard bylaws for SOEs, a framework that the Ministry of Economy recognizes as the standard. For us that is a great achievement. Now we will see how it will actually be adopted by the federal authorities.

Q: What’s next?

Regarding SOEs, we know it is a very long road ahead, but our main priority is to raise their level of compliance and best practices. That is why we are preparing a new research report on the evolution of governance in Brazilian SOEs.

We are also aiming to contribute to the creation of a new regulation or public policy for the role of the state as an owner of enterprises, the so-called ownership policy, by developing a study on this theme. That policy would address how the state should act and what its rights and obligations are, including how the board members are elected, among others. I think it will help a lot because today in Brazil, there is some controversy and confusion regarding the role of the state as an enterprise owner or controlling shareholder and whether it is being held accountable.

Regarding other advocacy issues, I would highlight our work to integrate environmental and social matters with governance, following the debate around environmental, social and governance (ESG) issues. For example, IBGC was invited by the World Economic Forum to lead Chapter Zero in Brazil, a global initiative which aims to help board members to include climate change in the corporate agenda.

Cover photo: InfoGlobo