Amid turmoil, exchange advances project to reform Novo Mercado

Despite the whirlwind engulfing the Brazilian capital market after the testimonies of JBS owners Joesley and Wesley Batista, the timetable for the Novo Mercado reform is not under risk and continues as planned by exchange operator B3, which this month ends the period of restricted hearing and in June begins the period to vote rule changes.

Yet experts say that even if it represents advancements over the current regulation, the reform is not capable of removing from Novo Mercado, B3’s strictest corporate-governance listing segment, the stigma of having listed companies whose controlling shareholders were involved in bribery cases. Examples pile up: in addition to JBS, a Novo Mercado listing since it went public in 2007, the segment has OGX, oil company now under bankruptcy reorganization, and MMX, mining company of businessman Eike Batista, who is investigated by Operation Car Wash.

Still, market entities expect the rule changes to be approved in order to ensure that the segment, created ten years ago and without relevant changes since then, can take a step forward. The first reform attempt at Novo Mercado, in 2010, had no success.

One improvement in the new Novo Mercado rules is the demand of an audit committee. Currently there are no definitions on the matter; in the new text, B3 wants to demand that companies maintain a committee, set in bylaw or not, in the mold established by the Securities and Exchange Commission of Brazil’s (CVM) Instruction 308. Moreover, it is expected to require companies to have an internal department responsible for such monitoring, and in case of outsourcing, limited to an external audit properly registered with the CVM.

Still, even with the approval of the reform in sight, situations like JBS’s expose the fact that internal controls and risk management may not be sufficient. The CVM has already opened five administrative proceedings to investigate transactions with which JBS would have profited on the financial market from the effects of its executives’ plea bargain — including a probe into whether its managers complied with the duties set by the Brazilian Corporate Law.

One of the biggest foreign asset-management firms with presence in Brazil, argues that the punitive role is more a responsibility of the CVM, and that Novo Mercado is made to provide specific protections to minority shareholders. The firm’s head in Brazil believes in the possibility of approval of the reform and highlights that it is also the role of investors to monitor companies’ management.

Source: Valor Econômico