6 - Directors, Corporate Governance, and Executive Compensation in Brazil, c. 1909

Summary

Shareholder abuse today is commonly associated with excessively large executive compensation packages or outright fraud. Directors extract value, for example, through compensation packages that pay large fixed salaries and provide significant additional payments or fees if a company meets or exceeds performance goals. But many of these concerns are related to the secrecy of executive compensation. Both in Brazil and in other places such as the United States, shareholders in large corporations have no clear idea of how much the CEO makes after stock options and other fees and benefits are taken into account.

During the period under study in this book, Brazilian companies exhibited a very different approach to executive compensation. The statutes of all corporations had to be published in newspapers with wide circulation (in the state where the company was going to operate) and these statutes included valuable information for shareholders, including the fixed salary of all of the directors and the percentage of profits that they would receive as performance-based compensation.

The company statutes of Brazilian corporations typically included three provisions to keep directors' incentives aligned with those of shareholders. First, most company bylaws required that directors be shareholders. On average, corporations required that directors own at least 1.2% (standard deviation 2.5%) of total paid-up capital and keep their shares on deposit with the company throughout their tenure, a provision referred to as directors' “qualifications” in company statutes. Second, corporate statutes typically required that directors' annual or monthly fixed salaries be disclosed. Third, shareholders often used additional performance-based compensation to align directors' interests with their own.