Brazilian chief executive officers are fighting to keep their salaries secret.
Companies from Embraer SA to Itau Unibanco Holding SA to Vale SA, all with American depositary receipts, don’t disclose compensation for top officials, contrary to international norms in countries like the U.S. and U.K. Four years after securities regulator CVM ordered release of expanded pay details, more than a third of Brazil’s most-traded companies are refusing to do so as a court case against the decision plays out.
Shareholders say the information ensures CEOs don’t overpay themselves to the detriment of investors, while corporations say the rule violates managers’ privacy and puts them at risk for kidnapping. They cite the case of Abilio Diniz, who was held hostage for several days in 1989 when he was an executive at supermarket chain Cia. Brasileira de Distribuicao Grupo Pao de Acucar, and the escape of three children of billionaire Jorge Paulo Lemann from an attempted abduction in 1999.
“In Brazil, if you say how much you make, you’re an idiot, irresponsible, or an exhibitionist,” said José Roberto de Castro Neves, the lawyer who filed an injunction in 2010 against the CVM decision on behalf of the Brazilian Institute of Finance Executives in Rio de Janeiro. “Some executives have had to change their lives. In the suburbs of the U.S., they don’t even have walls around their homes. Here in Brazil, we live in bulletproof cars, in another environment.”
Companies’ Lawsuit
His firm — Ferro, Castro Neves, Daltro & Gomide — went to court to argue that companies should withhold salary information. The case remains under litigation in a Rio de Janeiro federal court.
The lack of salary data at Sao Jose dos Campos-based Embraer prompted advisory firm Institutional Shareholder Services Inc. to urge investors in a meeting tomorrow to reject 65 million reais ($29.4 million) in pay for executives and directors at the largest maker of regional jets.
“As evolved and as sophisticated as some of the criminal groups might be in Brazil, I seriously doubt that kidnappers are reading proxy statements,” said Cristiano Guerra, ISS’s head of Latin America and U.S. research. For minority investors, “remuneration is the next hot topic that they’ll start pressuring companies for.”
While many companies like Embraer release combined pay for executives and boards, they object to the 2010 rule requiring corporations to also report the highest, average and lowest salary figures for those officials. Individual wages, stock benefits and long-term incentives don’t have to be disclosed.
SEC Rules
Under U.S. Securities and Exchange Commission regulations, companies must show compensation paid to CEOs, chief financial officers and other senior executives in a “clear, concise and understandable” way, including the amount, type and criteria used in determining pay.
The Brazilian rule change was prompted by long-running fights in the U.S. over executive pay in the midst of the 2008 financial crisis, said Castro Neves. In Brazil, “we didn’t have such big distortions.”
“You can’t import everything — you have to look at our realities,” Castro Neves said in a telephone interview.
Embraer declined to comment about its pay policies, as did Vale, the world’s biggest iron-ore producer, and Itau, Latin America’s largest bank by market value.
CVM Victory
When asked about the dispute, the CVM cited its arguments in a case it won against linens maker Teka-Tecelagem Kuehnrich SA in which the regulator said divulging salaries is aligned with international regulations and provides transparency and credibility. Teka didn’t return an e-mail request for comment.
While kidnappings still rank as a concern for affluent Brazilians, incidents have plunged in recent years. In Sao Paulo state, Brazil’s richest with a third of gross domestic product, nine people were abducted in 2013’s fourth quarter, according to the state’s security department. That compares with 127 people in the same period of 2001.
“If you’re the head of a company that makes 2 billion reais a year, it doesn’t matter if you make 1 million, 2 or 3 million,” said Renato Chaves, a partner at Mesa Corporate Governance, a Sao Paulo-based consultant. “You’ll be a target because of what you represent, not because of what you make.”
ISS worked on pay disclosure with real estate company PDG Realty SA, whose market value of 2 billion reais is less than a fifth of its 2010 level. PDG shared details that year, then reversed course in 2011 after seeing its CEO on the cover of local magazines, making him a kidnapping target, Guerra said.
PDG’s Experience
Shareholders voted against the 2011 compensation package, which meant executives received no pay until a deal was reached letting investors request the numbers without having them published. After a new CEO took over in 2012, PDG again withheld the information, a step that Guerra said contributed to the stock’s 44 percent plunge that year.
In another turnaround, the company is providing full disclosure in 2014, he said. Rio de Janeiro-based PDG declined to comment.
Companies that don’t heed CVM’s rules tend to be less profitable, according to a 2013 report by academics led by Alexandre Di Miceli da Silveira, a University of Sao Paulo professor of corporate governance. Stock prices at non-compliant companies dropped the day they announced they wouldn’t give full details, the report found.
‘Don’t Issue Shares’
Embraer rose 0.3 percent this year through yesterday, while Vale declined 8 percent. Itau’s 11 percent gain topped the 0.2 percent advance for Brazil’s benchmark Ibovespa index.
Corporations have a responsibility to report salaries because stockholders need to know the incentive structure of those using their money, said Mauro Cunha, president of the Sao Paulo-based Association of Capital Markets Investors.
“You need relatively detailed information that includes a notion of the magnitude of what a bonus might be, what stock options might be,” Cunha said. “If a company doesn’t want to divulge that information, that’s fine, just don’t issue shares.”
