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R.Adm., So Paulo, v.39, n.4, p.373-384, out./nov./dez. 2004 373

RESUMO Estrutura do controle acionrio e composio do

conselho de administrao: evidncia sobre empresasbrasileiras de capital aberto

O objetivo neste estudo fornecer evidncias preliminares sobre aestrutura do controle acionrio e a composio do Conselho de Ad-ministrao das empresas listadas na Bolsa de Valores de So Paulo(Bovespa). Os atributos do Conselho de Administrao investigados

junto com a estrutura do controle acionrio das empresas so o tama-nho do Conselho de Administrao, a proporo de outsiders e adualidade do diretor-presidente. Constatou-se que o capital votante e

o capital total das empresas listadas na Bovespa ainda so bastanteconcentrados, sugerindo que a separao do controle acionrio e docontrole de deciso no a questo de agncia mais relevante. Essaevidncia tambm sugere que, em geral, o Conselho de Administra-o das empresas listadas na Bovespa predominantemente compos-to por acionistas majoritrios e por executivos dessas empresas. Issosuporta o argumento de que conflitos de interesse entre acionistasminoritrios e majoritrios podem existir, assim como oportunidadespara a expropriao de acionistas minoritrios pelos controladores e/ou executivos. Ainda nesse sentido, documentou-se que a proporode outsiders no Conselho de Administrao menor entre empresaspossuindo um acionista controlador na estrutura de capital social.

Essa evidncia suporta o argumento de que a independncia do Con-selho de Administrao inversamente relacionada com a concen-trao do controle acionrio das empresas. Alm disso, constatou-senmero menor de membros do Conselho de Administrao na amos-tra brasileira, se comparado a outras amostras de companhias abertasdos Estados Unidos e do Canad. Por fim, documentou-se uma inci-dncia significativamente menor de dualidade do diretor-presidentenessa amostra, se comparada a outras amostras semelhantes de com-panhias negociadas nos Estados Unidos e no Canad.

Palavras-chave: governana corporativa, estrutura do controle acionrio,conselho de administrao.

Ownership structure and composition of boards

of directors: evidence on Brazilian publicly-

traded companies

Eduardo SchiehllIgor Oliveira dos Santos

Eduardo Schiehll,MSc e PhD, ProfessorAssistente de Contabilidade na HEC Montral,escola afiliada Universit de Montral, Montral,Qubec, Canada (Canada H3T 2A7).

E-mail: [email protected]:HEC Montral3000, chemin de la Cte-Sainte-CatherineMontral (Qubec)Canada H3T 2A7

Igor Oliveira dos Santos Mestrando em GestoInternacional naHEC Montral, escola afiliada Universit de Montral, Montral, Qubec, Canada(Canada H3T 2A7).E-mail: [email protected]

Os autores agradecem ao suporte financeiro daChair in Governance and Forensic Accounting, HEC

Montral, e do Social Sciences and HumanitiesResearch Council of Canada.

Recebido em 14/abril/2004Aprovado em 04/novembro/2004

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374 R.Adm., So Paulo, v.39, n.4, p.373-384, out./nov./dez. 2004

Eduardo Schiehll e Igor Oliveira dos Santos

1. INTRODUCTION

Considerable attention has been devoted in both the aca-demic literature and the business press to the impact of gover-nance structure on firm valuation. Investors associate specificgovernance conditions such as ownership structure, composi-

tion of the board of directors and executive compensation planswith the optimal use of the firms resources and lower agencycosts, which lead to better performance and higher stock prices.Investors also perceive effective governance as a means of re-ducing investment risk, since they believe it decreases the like-lihood of unfortunate events befalling the company (BUCH-HOLTZ, YOUNG and POWELL, 1998; CONYON and PECK,1998; COLES, McWILLIAMS and SEN, 2001).

Corporate governance differs significantly across countriesdue to variations in political and legal constraints on the owner-ship and control of public companies. Government regulationsaffect the ways companies are owned (stock exchange rules), the

manner in which they are controlled (legal structures), and theprocesses by which changes in ownership and control take place(takeover codes) (WEIMER and PAPE, 1999; GIBSON, 2003).These regulations have a direct influence on two important fac-tors affecting corporate governance and control: the structure ofcorporate ownership and the structure of corporate boards. InBrazil, for example, the 1976 Corporate Law enables groups orindividuals holding relatively small amounts of a firms capitalto exercise control, mainly through a system of dual shares. Or-dinary shares come with voting rights, while preferred shares donot. Only ordinary shareholders may vote on the appointment ofdirectors to the firms board. The method of electing the directors

therefore reinforces the dominance of ordinary shareholders, al-though the minority (of voting shares) is entitled to one seat onthe board through multiple voting.

Consistent with the governance literature, this study takesthe perspective that the board of directors is the primary mecha-nism for achieving top-level separation of the decision man-agement and control functions in public companies. The boarddelegates decision management functions and many decisioncontrol functions to internal agents (managers), while retain-ing ultimate control over these agents through the right to ratifyand monitor key decisions and the right to appoint, dismissand determine the compensation of managers. In short, the board

of directors holds the ultimate responsibility for ensuring thatthe firm is run in the best interest of all stockholders. Follow-ing this line of reasoning, this study uses agency theory to ex-amine ownership structure and the composition of the board ofdirectors of Brazilian publicly-traded companies. In particu-lar, this study examines whether the firms ownership struc-ture is associated with three dimensions of the board of direc-tors, namely board size, percentage of outside directors on theboard and CEO duality.

This study documents that voting privileges and the totalcapital of Brazilian publicly-traded companies remain strongly

concentrated, suggesting that the separation of ownership anddecision control is not the most important agency issue. On theother hand, the data suggests that controlling shareholders inBrazilian public companies are very likely to be executives ordirectors of the corporation. This implies a greater potentialfor conflict and the expropriation of minority shareholders by

these controlling shareholders. This findings also suggest thatthe proportion of outside directors on the board is lower amongfirms having a single controlling shareholder in the ownershipstructure. This is consistent with the argument that board inde-pendence is inversely related to the firms ownership concen-tration. In addition, the data documents that the number of di-rectors on the board in this sample is smaller than in compa-rable samples of publicly-traded companies from the UnitedStates and Canada. Surprisingly, the incidence of CEO dualityin this sample is significantly smaller than in similar samplesof public companies from the United States and Canada.

The organization of the remainder of this paper is as fol-

lows. Section two presents the theoretical governance frame-work used to examine the proposed associations between thefirms ownership structures and attributes of their boards ofdirectors. Section three describes the sample and the variablesused in the investigation. Sections four and five present thediscussion and the findings on the ownership structure andboard composition in this sample of Brazilian publicly-tradedcompanies. Finally, conclusions and suggested avenues forfurther research are presented in section six.

2. CORPORATE GOVERNANCE

Evidence for the association between governance structureand firm performance is found throughout the agency litera-ture in finance, accounting and management research. Theagency relationship has been described as a contract underwhich one or more persons (the principal(s)) engage anotherperson (the agent) to perform some service on their behalf thatinvolves delegating some decision-making authority to theagent (JENSEN and MECKLING, 1976). Essentially, agencytheorists predict that the separation of ownership and controlincreases the potential for opportunism on the part of a man-ager, and makes it critical that organizations design mecha-nisms to limit such possibilities. In short, the agency literature

advocates that when the interests of principals and agents arenot aligned, conflicts of interest arise, and control mechanismsbecome an important factor to explain firm performance. Theagency research has therefore focused on designing corporategovernance structures that motivate managers to make perfor-mance-enhancing choices that in turn maximize shareholdervalue (BARKEMA and GOMEZ-MEJIA, 1998; COLES,McWILLIAMS and SEN, 2001).

Differences in corporate governance across countries ap-pear to be the result of variations in corporate organizationalstructure, particularly the ownership structure and composi-

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OWNERSHIP STRUCTURE AND COMPOSITION OF BOARDS OF DIRECTORS: EVIDENCE ON BRAZILIAN PUBLICLY-TRADED COMPANIES

tion of the board of directors. Corporate governance in Brazil,for example, follows an insidermodel rather than the Anglo-Saxon approach, where capital markets act to discipline man-agement. Brazil is also distinct from other countries such asGermany, where the banking sector plays an important role inthe governance of companies (LEAL and DE OLIVEIRA,

2002; WEIMER and PAPE, 1999). Given the concentratedownership structure of Brazilian public companies, it followsthat the separation of management from ownership is not themost important agency issue in Brazil. The most crucial issuewould be how to offer protection to minority shareholders. Inthis respect, the study byInstituto Brasileiro de GovernanaCorporativa (IBGC, 1998) finds no evidence of any influenceof minority shareholders over board composition or the deci-sion-making process. According to the IBGC (1998), for ex-ample, 48.7% of companies have their directors appointed byshareholders, 17.9% by their CEO and only 2% by an inde-pendent minority group. In addition, the presence of large share-

holders as well as family owners is greater in Brazil than in theUnited States (CORE, HOLTHAUSEN and LARCKER, 1999;LEAL and DE OLIVEIRA, 2002). In contrast to United Statepublic firms, where all shares have similar voting privileges,Brazilian public firms are allowed to have dual class shares.Thus, the combination of dual class shares and pyramids al-lows the dominant shareholders of the business group, who arevery often the founding family, to control the firm with only asmall percentage of the total capital. This situation offers aninteresting opportunity to examine the issue of ownership struc-ture and its relation to board composition. There exists a highpotential for conflict and expropriation of minority sharehold-

ers by controlling shareholders, which may prevent boards ofdirectors from acting effectively in Brazilian public compa-nies. Following this line of reasoning, the purpose of this studyis to document descriptive and preliminary evidence on theassociation between ownership structure and the compositionof board of directors in Brazilian public firms. The next sec-tion describes the data used in this study.

3. DATA

The database for this study was developed from a singlemain source: the So Paulo Stock Exchange (Bovespa). As such,

the starting point was represented by a set of 405 Brazilianpublicly-traded companies listed at the Bovespa in December2002. Companies pertaining to the financial institutions andthe natural resources exploitation sectors were excluded in thefirst round, leaving a list of 284 companies. Three companieswere then eliminated since they were no longer listed on theSo Paulo Stock Exchange (Bovespa) on February 2004, pe-riod when the governance data was collected. A further 41companies were discarded because they had incomplete infor-mation on either the members of the board or their main share-holders. The final database therefore consists of 240 listed com-

panies from 71 different industrial segments(1). Table 1 belowpresents the distribution of the sample along the industrial seg-ments.

From the Bovespa database (www.bovespa.com.br) gover-nance data was collected for each company in the sample. Morespecifically, the data collection focused on companies boards

of diretors, capital structure and the identity of majority share-holders. The data collected from Grupo 2 Administrao Quadro 01-Composio Atual Conselho de Administrao,about a companys board of directors, were basically: the num-ber of directors on the board, their names and respective posi-tions in the company and its board. Based on this informationthe variables board size, proportion of outsiders on the boardand CEO duality were measured. The equity data gathered froma spreadsheet available at the Bovespas website were essen-tially related to the book value of each listed companys e-quity. The shareholder data collected from Grupo 3

Table 1

Distribution of Main Segments and Percentage ofTotal Sample

Industry CategoryNumber Percentage ofof Firms Total Sample

Diversified holding companies 42 17.500Telecommunications 21 8.75Metallurgy 18 7.50Textiles 18 7.50Steel 12 4.00Petrochemical, Plastics & Rubber 08 3.33

Auto parts 08 3.33Pulp and Paper 06 2.50Civil Construction 05 2.08Food 08 3.33Air Transportation 03 1.25Ceramics, Glass & Crystal 03 1.25Chemical Products Miscellaneous 03 1.25Construction & Engineering 06 2.50Department Stores 03 1.25Fertilizers, Manure & AgriculturalDefensives 0

3 1.25

Household Appliances 03 1.25Oil Prospecting and Refining 03 1.25Real Estate 03 1.25Other industries with less than threecompanies 64

Total Sample 2400

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Distribuio do Capital 02-Posio Acionria were per-centages of voting capital and total capital. All these data wereused as the main elements for the analyses presented in thispaper.

4. OWNERSHIP STRUCTURE

According to the traditional agency literature, the moreconcentrated the firms ownership structure, the more theagency costs and economic benefits of monitoring increase toshareholders (JENSEN and MECKLING, 1976; DEMSETZand LEHN, 1985). The premise is that large shareholders tendto engage in closer monitoring activities, which reduces infor-mational asymmetries between owners and managers as wellas between the firm and external investors. However, the abil-ity of large shareholders to impact firm governance and per-formance may depend on their identity. Inside control by share-holders, or owner management, may represent a higher degree

of control at any given level of shareholding than the controlprovided by outsiders (LEHMANN and WEIGAND, 2000;SCHULZE et al., 2001; GIBSON, 2003). From this perspec-tive, one may suggest that family relations tend to make agencyproblems associated with private ownership and owner man-agement more difficult to resolve, due to self-regulation andproblems engendered by altruism. In other words, controllingshareholders combined with owner management may collude

to keep minority shareholders at bay, starting with the compo-sition of the board of directors.

This study focuses on direct ownership and control, mea-sured by the proportion of voting shares held directly by a singleshareholder or a small group of shareholders. Following thisline of reasoning, firms in this sample were classified into two

groups. The firms with a majority shareholder have a singleshareholder, person or institution directly owning more than50% of the firms voting equity shares. The second group, firmswithout a majority shareholder, includes firms in which nosingle shareholder directly owns more than 50% percent of thefirms voting shares(2). Tables 2 and 3 present some descriptivestatistics (means and medians) on the ownership structures ofcompanies in the sample as of the end of fiscal year end 2002.Specifically, table 2 presents the percentage means and medi-ans of outstanding shares directly owned by a single large share-holder, the three largest shareholders and the five largest share-holders. For comparison purposes, table 2 is presented in the

same format as used in the study by Leal, Da Silva and Valadares(2002), which presents ownership data for a similar sample ofBrazilian public firms as at of the end of fiscal year 1998. Thiscomparison sheds light on whether changes have occurred inthe capital structures of Brazilian public companies since 1998.

Table 2 shows that 70% (167) of the firms in the samplehave a majority shareholder, while 30% (73) do not. Theseproportions are similar to those in the sample studied by Leal,

Table 2

Percentage of Directly Owned Shares

Companies With a Companies Without aTotal (240)

Majority Shareholder (167) Majority Shareholder (73)

Voting Capital Total Capital Voting Capital Total Capital Voting Capital Total Capital

(%) (%) (%) (%) (%) (%)

Largest Shareholder 72.12 55.85 31.85 25.65 59.87 46.67Median 72.71 53.00 30.87 22.85 59.14 44.30Three Largest Shareholders 85.38 68.43 62.15 49.19 78.32 62.58Median 93.66 70.05 63.31 48.04 87.42 61.51Five Largest Shareholders 86.10 69.65 70.35 56.16 81.31 65.55Median 94.01 74.22 73.13 55.86 88.93 66.71

Table 3

Number of Companies Without a Majority Shareholder (73)

by Level of Ownership (Voting Capital)

0 5% 5% 10% 10% 20% 20% 30% 30% 40% 40% 50%

Largest Shareholder 1 0 10 24 18 20Three Largest Shareholders 1 0 01 02 05 64Five Largest Shareholders 1 0 01 01 03 67

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Da Silva and Valadares (2002). In the group of firms with amajority shareholder, the average percentage of the voting (to-tal) capital owned by the largest shareholder is 72% (55%),while the voting (total) capital owned in the group of three andfive largest shareholders is 85% (68%) and 86% (70%), re-spectively. Overall, these statistics document that the owner-

ship structure of Brazilian public firms has not changed sig-nificantly since 1998 and remains highly concentrated.

In the group of firms without a single majority shareholder,the average ownership by the largest shareholder is 31% (25%)of the voting (total) capital. This is similar to the levels foundby Leal, Da Silva and Valadares (2002). However, some sig-nificant changes can be observed here with regard to owner-ship level in the groups of three and five largest shareholders.In this respect, table 2 documents that the group with the threelargest shareholders owns 62% (49%), on average, of the vot-ing (total) capital, while the group with the five largest share-holders owns 70% (56%), on average, of the firms voting (to-

tal) capital. Comparing ownership levels in the groups withthree and five largest shareholders between 1998(3) and 2002,a slight reduction is observed in voting capital ownership and,at the same time, an increase in the ownership of total capitalin both groups. These variations may provide evidence thatprivatization and the inflow of foreign investment have begunto change the equity structures of Brazilian publicly-tradedcompanies. Although not reported in this paper, there is alsoevidence that foreign investors took control of some large Bra-zilian companies in the 1997 privatization process. In order totake advantage of the capitalization opportunities offered byprivatization, private family-controlled companies appear to

have begun adjusting their capital structures to a more com-petitive environment.

The objective of table 3 is to analyze the ownership con-centration of the group of Brazilian publicly-traded compa-nies without a single majority shareholder (N = 73). As such,table 3 classifies companies in this group per different levelsof ownership of the voting capital. Such classification is doneaccording to the voting capital owned by companies largestshareholder, the group of three largest shareholders, and thegroup of five largest shareholders. The results in table 3 showthat voting capital in the group of firms without a single ma-

jority shareholder tends to be concentrated in the hands of a

few shareholders. For example, the first column of table 3 re-ports that only one company out of 73 does not have a singleshareholder holding more than 5% of the voting capital. Infact, 42(4) out of 73 companies (85%) without a majority share-holder have at least one shareholder holding more than 20% ofthe voting capital. Moreover, 64 out of 73 companies (87%)without a single majority shareholder have a group of threeshareholders holding more than 40% of the voting capital. Fi-nally, looking at the ownership level of companies five larg-est shareholders this number increases to 67 companies, whichmeans that 91% of companies without a single majority share-

holder have more than 40% of their voting capital held by agroup of five shareholders. Further analysis in the data alsoindicates that very often these five shareholders have familylinks(5). In sum, the data reported in tables 2 and 3 providessignificant evidence that the ownership structures of Brazilianpublicly-traded companies are strongly concentrated, and cor-

porate governance thereby follows the insider model, wherethe separation of ownership and decision control is not the mostimportant agency issue. Although controlling shareholders ul-timately appoint the management, this data also provide evi-dence that controlling shareholders in Brazilian public compa-nies are likely to be executives or directors of the corporation.This implies that a controlling shareholder who is an executiveor director (or both) may derive either pecuniary or non-pecu-niary benefits from occupying the position of executive/direc-tor, and may wish to retain control in order to maintain theflow of these benefits, which are not shared by minority share-holders. These findings provide evidence of potential agency

problems in closely-held firms, involving what financial econo-mists(6) term entrenchment of dominant shareholders. The en-trenchment perspective predicts that large shareholdings bymanagement or founders often enable them to dominate share-holder meetings and control director appointments, and thusdirectly or indirectly control the firms decision-making pro-cess. The result is a decrease in the firms value due to poten-tial conflicts of interest between minority outside shareholdersand large inside shareholders looking to extract private ben-efits from the firm. In such a context, the most crucial issue ishow to offer protection to minority shareholders. Assumingthat the board of directors is the primary mechanism for achiev-

ing the effective monitoring of management decision-making,next section analyzes the corporate board attributes in thesample of Brazilian publicly-traded companies.

5. THE BOARD OF DIRECTORS

As mentioned above, the distribution of power among cor-porate managers, shareholders and directors is established whenshareholders nominate a board of directors to represent andprotect their interests and to ensure that executives duly as-sume their responsibilities. As such, the proposed relationshipbetween the board of directors and the firms ownership struc-

ture emerges from the issue of the separation of ownership andcontrol. The literature suggests that the more concentrated thefirms ownership structure, the greater the degree to whichagency costs and the economic benefits of monitoring increaseto the same shareholder (JENSEN and MECKLING, 1976;FAMA, 1980). For example, when ownership is concentrated,the large shareholder can effectively monitor the management,sometimes by personally sitting on the board and/or influenc-ing the appointment of members of the board of directors. Thisleads one to expect that ownership concentration and the con-trol of voting privileges have an impact on the following board

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attributes: board size, percentage of outside directors and CEOduality (table 4). Focusing on such board attributes, the fol-lowing paragraphs analyze the governance data of this sampleof Brazilian publicly-traded companies.

5.1. Board size

The debate on board size and its influence on the effective-ness of board monitoring suggests that large boards bring adiversity of competences and experiences, increase opportuni-ties for broad geographic representation and provide extensivedirector resources to allow board committees to deal effectivelywith complex issues. Beyond a certain threshold of board size,however, information flow and decision-making could becomemore difficult and cumbersome, and the directors might loosetheir sense of responsibility and accountability. Prior researchis not conclusive as to whether board size has a positive ornegative effect on the effectiveness of governance in public

firms. A small board serves to control managers, whereas a largerboard may not function effectively as a controlling body, leavingmanagement freer to act. However, a larger board may be morevaluable for the breadth of its services (CORE, HOLTHAUSENand LARCKER, 1999; COLES, McWILLIAMS and SEN, 2001;ANDR and SCHIEHLL, 2004).

Table 4, Panel A, shows no difference between the averagenumber of directors of companies with a majority shareholder(6.06 directors) and companies without a majority shareholder(6.85 directors). The maximum number of directors in bothgroups is 16, and it applies to Net Servios de ComunicaoS.A. and Tele Norte Leste Participaes S.A. (see table 7 for

details). Surprisingly, table 5 documents that 106 (44%) com-panies in the sample have fewer than five directors on the board.Also, table 5 shows that board size tends to be positively asso-ciated with the firms equity size. At the same time, it alsosuggests that board size in this sample of Brazilian companiesis relatively small, compared to publicly-traded companies inthe United States and Canada, where the average number ofdirectors on the board is 9.25 and 9.87, respectively (KORN/FERRY INTERNATIONAL, 2004). These findings are con-sistent with the argument that ownership and voting concen-tration negatively impacts board size (COLES, McWILLIAMSand SEN, 2001). Nevertheless, the empirical issue remains

whether ownership concentration affects board size because itreduces the complexity of monitoring management decisionsor because ownership concentration is a sign of the potentialentrenchment of inside controlling shareholders.

Along the same line, table 6 shows the average number ofdirectors on the board for the ten largest industry groups in the

Table 4

Cross Classification of Companies by Ownership Structure and Board Composition (Board Size,

Proportion of Outsiders and CEO as Chairman)

Companies With a Companies Without a Total Sample (240)Controlling Shareholder (167) Controlling Shareholder (73)

Panel A

Mean 6.06 6.85 6.30Board Size Minimum 02 03 02

Maximum 16 16 16

Number of 00-05 directors 80 26 106Companies 06-10 directors 72 39 111With 11-16 directors 15 08 023

Panel B

Average percentage 77.07 79.32 77.75less than 10% 00 01 0110% 50% 16 04 20

Outsiders 50% 60% 08 01 0960% 70% 49 19 6870% 80% 32 15 4780% 90% 18 12 30greater than 90% 44 21 65

Panel C

CEO as Chairman 65 24 89

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sample. In this respect, table 6 documents that companies inthe steel, petrochemical and telecommunications industries havethe largest boards: 8.33, 8.00 and 7.43 directors on average,respectively. This may be explained by the fact that these sub-

groups are all capital-intensive industries and that board sizecontinues to be a function of asset size. The argument is thatthe larger the company, the greater its potential growth oppor-tunities and agency cost, and the more complex its governanceconditions. Moreover, these industry groups also have the low-est average proportion of voting capital owned by a single share-holder. Hence, these findings may suggest that the relativelylower levels of ownership concentration and the use of debtfinancing tend to positively impact board size by representinga more diversified group of stakeholders on the board.

5.2. Outside directors

An important attribute of board composition is the distri-bution of members according to their primary allegiance, which

Table 5

Cross Classification of Companies by Board Size and Total Value of Equity

Number of Social Capital (In Millions of Brazilian Reais)

Directors Less Than 50 50 100 100 250 250 500 More Than 500 Total

05 or Less 53 18 19 08 08 10606 09 20 17 22 14 26 09910 12 04 03 05 07 06 02513 15 00 02 01 00 05 00816 19 00 00 00 00 02 00220 or More 00 00 00 00 00 000

Table 6

Average Board Size for the Ten Largest Industrial

Sectors

Industry CategoryNumber Averageof Firms Board Size

Diversified holding companies 42 6.45Telecommunications 21 7.43Textiles 18 6.28Metallurgy 18 5.56Steel 09 8.33Petrochemical, Plastics & Rubber 08 8.00Auto parts 06 5.33

Pulp and Paper 06 7.33Food 05 4.60Civil Construction 05 5.60

Table 7

Largest Boards

NumberCompany Industry Category

of Directors

16 Net Servios de Comunicao S.A. Diversified holding companies Tele Norte Leste Participaes S.A. Telecommunications

15 Bunge Brasil S.A. Diversified holding companies

Inepar S.A. Indstria e Construes Heavy Construction Embraer-Empresa Bras. de Aeronutica S.A. Aircraft Material

14 Tekno S.A. Construes Ind. e Com. Metallurgy Politeno Indstria e Comrcio S.A. Petrochemical, Plastics & Rubber Ferrovia Centro-Atlntica S.A. Transportation

13 Cia. Vale do Rio Doce Minerals Miscellaneous Cia. Fiao Tecidos Cedro Cachoeira Textiles

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may be either to shareholders (outside) or managers (inside).In this respect, the governance literature suggests that an in-side director, either a top executive or important stakeholder,may not support the same value-creation strategy as an outsidedirector(7). Outside directors are considered professional refereeswho unbiasedly assess the performance of managers, determine

their remuneration and replace them if necessary (BARKEMAand GOMEZ-MEJIA, 1998). Thus, the boards effectiveness inmonitoring the actions of managers is assumed to be a positivefunction of its proportion of outside, unrelated directors(GAGNON and St-PIERRE, 1995; CORE, HOLTHAUSEN andLARCKER, 1999).

In view of the demand for decision-making expertise,coupled with the requirement for detailed firm-specific knowl-edge, it is natural for boards to contain senior managers fromwithin the organization. However, as discussed above, the in-clusion of inside board members leads to conflicts with thedecision control function of the board of directors. Along this

line, recent research also suggests that high levels of manage-rial stock ownership can be costly to other stockholders(ANDR and SCHIEHLL, 2004). For example, owner-man-agers may lack the managerial skills required to maximize thevalue of the firm. They may also have incentives to make value-reducing decisions at the expense of minority stockholders.Such incentives can arise from the undiversified nature of hu-man and financial capital that may lead to wealth-decreasingdiversification and the avoidance of opportunities that are per-ceived as risky. They can also arise from the power that owner-managers have to expropriate wealth from minority stockhold-ers by paying themselves excessive salaries, negotiating deals

with other companies that they control, withdrawing corporatefunds, consuming perquisites or borrowing from the firm atbelow market interest rates. These agency problems are likelyto be further compounded by the reduced discipline to whichowner-managers firms are subject in the market for manage-rial labor and corporate control. As such, firms with owner-ship concentration and/or owner-management should attemptto provide credible signals to outside investors concerning en-trenchment-related behavior. The proportion of outside direc-tors on the board is one such governance attributes.

As documented in table 4, Panel B, the average percentageof outside directors on the board is slightly greater in the group

of firms without a majority shareholder in their ownership struc-ture. The difference in the proportion of outside directors onthe board between the group of firms with and without a ma-

jority shareholder is greater when the data is analyzed by lev-els of outside directors. For example, table 4, Panel B, docu-ments that the proportion of firms having a percentage of out-side directors greater than 60%, or a majority, is significantlygreater in the subgroup of firms without majority sharehold-ers. As expected, the findings are consistent with the argumentthat board independence is inversely related to the firms own-ership concentration. In addition, as documented in table 3,

the group of companies without a majority shareholder alsohas ownership structure concentrated in the hands of few share-holders. Hence, the relatively lower percentage of outside di-rectors in this sample of Brazilian companies may be explainedby the fact that large controlling shareholders tend to partici-pate in and/or appoint family members to the firms board and

management, thereby negatively affecting board independence.A further analysis of the relative independence of the board ofdirectors would benefit from establishing whether the major-ity shareholder is a founding family, an industrial company ora financial institution. In this respect, previous research on thisissue has already provided evidence that the impact of largeshareholders on board composition and firm performancedepends on their fiduciary responsibilities (ANDR andSCHIEHLL, 2004)(8). Moreover, one may raise the questionof whether an outside director can be an effective monitor whenserving on boards dominated by large shareholders, such as inthis Brazilian sample. In a context of ownership concentra-

tion, one may argue that outside directors lack independencebecause, despite their impartial status and ability to offer ad-vice on some decisions, outside directors have little influenceover decisions involving family members and other large share-holder matters. Second, the tendency of large shareholders toappoint to their boards outside directors who are close friendsand/or happen to have a fiduciary relationship with the firmmay compromise the outside directors independence and moni-toring efforts.

5.3. CEO duality

CEO duality is characterized by firms that have combinedthe positions of CEO and Chairman of the Board of Directors.This dual function has been criticized as an inappropriate wayto define one of the most critical power relationships in pub-licly-traded firms (COLES, McWILLIAMS and SEN, 2001).This view asserts that CEOs who are also board chairs have aconcentrated power base that permits decision-making in theirown self-interest and at the expense of shareholders. Alongthis line, proponents of separating the positions of CEO andChairman of the Board argue that the ability of the board tomonitor independently and effectively tends to be compromisedwhen the CEO is also the Chairman of the Board. The gover-

nance literature suggests that separating the CEO and Chair-man positions tends to improve the decision-making processand the overall governance of the firm in several ways. First,the relationship between the board of directors (the overseer ofmanagement) and management is clarified. Second, havingindependent leadership improves the boards effectiveness andorganization. Third, the boards responsibility to look aftershareholders interests moves to the forefront. In contrast, com-bining the CEO/Chairman position (CEO duality) may havesome compensatory advantages. For example, a combinedCEO/Chairman role would enhance the information flow be-

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tween the board and management and improve co-operationand co-ordination between the two bodies.

As expected, table 4, Panel C, documents that in this sampleof Brazilian publicly-traded companies the proportion of com-panies combining the positions of CEO and Chairman of theBoard is significantly higher in the subgroup of firms with a

majority shareholder (65 out of 167 firms or 39%) than in thesubgroup of firms without a majority shareholder (24 out of 73firms or 32%). This result suggests that ownership concentra-tion also leads to power concentration in the hands of the sameexecutive, who is probably (or related to) the majority share-holder.

The results documented in table 4, Panel C, seem to indi-cate that the incidence of a combined leadership structure (CEOduality) in this Brazilian sample of publicly-traded companiesis smaller (37%)(9) than those of the United States or Canada.In similar samples of United States and Canadian public firms,the incidence of CEO duality is somewhere between 60% and

70% (see for example, GAGNON and St-PIERRE, 1995;CORE, HOLTHAUSEN and LARCKER, 1999; ANDR andSCHIEHLL, 2004). Three competing arguments may explainthe lower incidence of CEO duality in this sample, which mightconstitute a subject for further research. One possible explana-tion is that increasing concern with appropriate managerialmonitoring has led to the widespread adoption of a separateleadership structure in Brazilian publicly-traded companies.On the other hand, one may argue that the impact of CEO du-ality is closely related to the use of alternate governance mecha-nisms such as the proportion of outside directors, governanceand compensation board committees, and executive perfor-

mance-contingent compensation. The use of such alternativegovernance mechanisms appears to be greater in the UnitedStates and Canada, and may compensate for the negative im-pact of a combined leadership structure. Finally, a third pos-sible explanation is that in some companies of this sample whereduality was not identified, the positions of CEO and Chairmanof the Board are held by two people with family links. Thismight be possible given the ownership structure and high levelof family ownership in this sample(10) of Brazilian publicly-traded companies. Such situation leads to an equivalent powerconcentration than CEO duality. In fact, further data analysisbased on the names of the board members seems to partially

support this argument. For example, in 21(11) out of 102 com-panies among the group with a controlling shareholder andwithout CEO duality (table 4, Panel C / N = 167 65 = 102),the CEO and the Chairman of the Board belong to the samefamily. Similarly, in 9(12) out of 49 companies among the groupwithout a controlling shareholder and without CEO duality(table 4, Panel C / N = 73 24 = 49), the CEO and the Chair-man of the Board have family links. Considering these compa-nies the overall level of CEO duality in this sample increasesto about 50%. This finding has an implication for further re-search. The measurement of CEO duality or power concentra-

tion should also take into account situations where CEO andChairman of the Board are members of the same family links.

6. CONCLUSION

This study provides preliminary descriptive evidence on

the ownership structure and composition of boards of direc-tors in Brazilian publicly traded companies. The attributes ofthe boards of directors and ownership structures investigatedinclude board size, proportion of outside directors and CEOduality. The study focused on Brazilian public firms becauseof the greater presence of large shareholders as well as familymembers in the ownership structure, and because very littleevidence is found in the literature on the use of governancemechanisms in the Brazilian capital market.

This studys descriptive and preliminary evidence on own-ership structure and board composition provides several con-tributions to the governance literature on Brazilian companies.

The findings regarding the ownership structure of Brazilianpublicly-traded companies as of the end of 2002 suggest thatthe voting privileges and total capital of Brazilian publicly-traded companies remain strongly concentrated. Corporategovernance in Brazil appears to follow the insider model, wherethe separation of ownership and decision control is not the mostimportant agency issue. In contrast, the data suggest that con-trolling shareholders in Brazilian public companies are verylikely to be executives or directors of the corporation. Thisimplies that a controlling shareholder who is an executive ordirector (or both) may derive either pecuniary or non-pecuni-ary benefits from occupying the position of executive/director,

and may wish to retain control in order to maintain the flow ofthese benefits, which are not shared by minority shareholders.Hence, the potential for conflicts of interest and the expropria-tion of minority shareholders by controlling shareholders ishigh and may represent greater risk for outside investors. Thisprovides an interesting setting for further empirical investiga-tion of governance issues.

The findings also suggest that the firms proportion of out-side directors on the board is greater in the absence of a major-ity shareholder in the ownership structure. Similarly, this studydocuments that the proportion of firms having boards with amajority of outside directors is significantly greater among the

subgroup of firms without a single shareholder owning morethan 50% of the voting capital. This is consistent with the ar-gument that board independence is inversely related to the firmsownership concentration. Also, the evidence suggests that thenumber of directors on the board tends to be positively associ-ated with the firms equity size. However, the findings alsosuggest that the board size in this sample of Brazilian compa-nies is small compared to samples of publicly-traded compa-nies from the United States and Canada. This result may pro-vide preliminary evidence that a concentration of ownershipand voting privileges negatively impacts the number of direc-

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tors on the board of the Brazilian public firms. Surprisingly,the incidence of CEO duality in this Brazilian sample is sig-nificantly smaller than in similar samples of public companiesfrom the United States and Canada. This may suggest that CEOduality is closely related to the use of alternate governancemechanisms such as the proportion of outside directors, gov-

ernance and compensation of board committees and executiveperformance-contingent compensation. However, whether thesealternative governance mechanisms offset the negative impactof combining the positions of CEO and Chairman of the Boardin Brazilian public companies remains an empirical issue forfuture research.

While this study has provided a preliminary step in the ex-amination of the associations between the governance mecha-

(1) These segments have been officially adopted by theBrazilian Securities Commission (Comisso deValores Mobilirios).

(2) This classification follows the study by Leal, DaSilva and Valadares (2002).

(3) As provided by the study of Leal, Da Silva andValadares (2002).

(4) Twenty-four companies with the largest shareholder

holding between 20% to 30% of the voting capital,plus 18 companies with the largest shareholder hold-ing between 30% to 40% of the voting capital.

(5) For example, Bardella S.A. Indstrias Mecnicashas five minority shareholders with family links,Schulz S.A. and Baumer S.A. have three minorityshareholders with family links.

(6) See for example the studies by Zeckhauser andPound (1990) and Barnhart and Rosenstein (1998).

(7) The corporate governance guidelines of the Toronto

Stock Exchange (TSE, 1994) have motivated themeasure used to proxy for boards efforts in moni-toring managerial decisions. Guideline n.3, for ex-ample, suggests that every corporations board ofdirectors be constituted with a majority of individu-als who qualify as unrelated directors. An unre-lated director is a director who is independent ofmanagement and free of any interest, business, orother relationship that could, or could reasonablybe perceived to materially interfere with thedirectors ability to monitor management.

nisms of Brazilian publicly-traded companies, there are un-doubtedly a number of important empirical issues left to in-vestigate. For example, one interesting extension to this studywould be to refine the classification of large shareholders totake into account the voting privileges and fiduciary responsi-bilities of other large shareholders in the ownership structure.

Furthermore, incorporating financial variables and investigat-ing the sensitivity of the firms performance to the board com-position may provide some answers to the question of whethercontrolling shareholders use board composition to entrenchthemselves and extract non-justified pecuniary benefits. Fur-ther research in these directions could provide a very impor-tant contribution to both the study and practice of corporategovernance in Brazilian companies.u

(8) Institutional investors, for example, have emergedas an important group of shareholders in the UnitedStates and Canada, with an active governance roleand the potential to limit managerial discretionarypower. The literature suggests that, unlike individualinvestors, institutions invest other peoples moneyand have legal fiduciary obligations to take proac-tive monitoring actions. These actions may consistof influencing executive compensation packages,percentage of inside ownership, and board struc-ture (ANDR and SCHIEHLL, 2004). In short,since the previous evidence documents that the in-centive and influence to engage in monitoring ac-tivities remains a function of equity stake and share-holder fiduciary responsibilities, future studies ofthe Brazilian capital market and governance struc-tures may benefit from focusing on the identity oflarge shareholders, whether individual and/or insti-tutional investors.

(9) According to table 4, Panel C, 65 out of 167 com-panies (39%) with a controlling shareholder present

CEO duality and 24 out of 73 companies (33%)without a controlling shareholder.

(10) As discussed in Section 4 of this paper.

(11) Some examples are: Duratex S.A., Itautec PhilcoS.A., and Nadir Figueiredo Indstria e ComrcioS.A.

(12) Some examples are: GPC Participaes S.A., IochpeMaxion S.A., and Monteiro Aranha S.A.

NOTES

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Ownership structure and composition of boards of directors: evidence on Brazilian publicly-

traded companies

The purpose of this study is to provide preliminary evidence on the ownership structure and composition of the boardof directors of Brazilian publicly traded companies. The ownership structure of the firms investigated, along with theattributes of the boards of directors, including board size, proportion of outside directors and CEO duality. This study

documents that voting privileges and the total capital of Brazilian publicly-traded companies remain stronglyconcentrated, suggesting that the separation of ownership and decision-making control is not the most relevant agencyissue. The findings also suggest that majority shareholders in Brazilian public companies are most likely to be eitherexecutives and/or directors of the corporation. This leads to the argument that potential conflicts may exist, as well aspotential expropriation of minority shareholders by the controlling shareholders. Accordingly, the evidence suggeststhat the proportion of outside directors on the board is lower among firms having a single controlling shareholder inthe ownership structure, which is consistent with the argument that board independence is inversely related to thefirms ownership concentration. In addition, the study documents that the number of directors on the board in thissample is smaller than comparable samples of publicly-traded companies from the United States and Canada.Surprisingly, the incidence of CEO duality in this sample is significantly smaller than in similar samples of publiccompanies from the United States and Canada.

Uniterms: corporate governance, ownership structure, board of directors.

Estructura de control accionario y composicin del consejo de administracin: evidencia sobre

empresas brasileas de capital abierto

El objetivo de este estudio es proveer evidencias preliminares sobre la estructura de control accionario y la composicin delos consejos de administracin de las empresas listadas en la Bolsa de Valores de So Paulo (Bovespa). Los atributos delconsejo de administracin investigados, al lado de la estructura de control accionario de las empresas, son el tamao delconsejo, la proporcin de miembros externos y la dualidad del director general. Se constat que los privilegios de voto yel capital total de las empresas mencionadas permanecen fuertemente concentrados, lo que sugiere que la separacin entreel control accionario y el control de decisin no es el tema de agencia ms relevante. Los resultados tambin sugieren que,

en general, el consejo de administracin de esas empresas est compuesto predominantemente por accionistas mayoritariosy ejecutivos. Eso da base al argumento de que pueden existir conflictos de inters entre accionistas minoritarios y mayoritarios,as como oportunidades para la expropiacin de accionistas minoritarios por parte de controladores y/o ejecutivos. Adems,se observ que la proporcin de miembros externos en el consejo de administracin es menor entre empresas que poseenslo un accionista controlador en su estructura de propiedad, lo que es consistente con el argumento de que la independenciadel consejo de administracin est inversamente relacionada con la concentracin del control accionario de las empresas.Adems, el estudio seala que el nmero de miembros del consejo en la muestra brasilea es menor en comparacin conel de muestras de compaas abiertas de Estados Unidos y Canad, y que, asimismo, es significativamente menor laincidencia de la dualidad del director general.

Palabras clave:gobierno corporativo, estructura del control accionario, consejo de administracin.

ABSTRACT

RESUMEN

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