Good corporate governance is a practice which has only recently found its way into every company’s handbook – Ultrapar however, has been applying it for decades
Corporate governance being an essential part of public company management is an idea that only became a priority for companues and investors in the Brazilian capital markets in the last decade. At Ultrapar, however, thirty years ago, in the early 1980s, it became an integral part of its strategy as an instrument to build a stronger, more profitable and successful company over time.
Pery Igel, who was then the group controlling shareholder and president, began to think about the need to establish a management culture that would focus on value creation, assuring the company’s enduring future. There was no model to follow – the concept of corporate governance did not even exist. The answer Pery found was a simple idea, but one that proved itself very powerful: the alignment of interests.
The seed was planted when Pery decided to make a group of executives his partners in the company, requiring them to act like its owners. The executives had to wait 20 years before taking full possession of their shares. Meanwhile they participated in the company’s results and dividends as if they were already shareholders. Interests were therefore aligned: the executives would be more successful personally if they were able to get results for the shareholders as well as preserving the company’s long-term financial structure.
Ultrapar had found a management model that expressed its business philosophy.
That was a bold move for the Brazilian market, which was still closed and had faced its first experience of regulation not long before. Brazil’s securities commission was created and its corporate law was passed only a few years earlier, in December 1976. These were regulations framed for a capital market structured especially around the state as the main sponsor, direct investor and developer.
Leading by example
Making senior executives long-term partners proved so effective that it was applied to each new generation of the company’s managerial leaders. Two more groups of executives since then have been invited to take part in the equity programme, in the 1990s and 2000s, and they have left their mark on the company’s management. They are Ultrapar’s current leaders. Under their leadership, the company has grown consistently year on year, and since going public in 1999 has grown profits by more than 20 percent a year and delivered a total shareholder return of more than 20 percent a year.
The success achieved by this first step proved that good corporate governance creates value, and it rewards the implementation of new solutions. Since then, a lot of new practices have been introduced to Brazil’s capital market by the company, many of which have now become commonplace. When they were implemented by Ultrapar, however, they were pioneering and pointed the way forward.
So has it been since the beginning. In 1999, when it went public, the company was the first to have its IPO on both New York’s and São Paulo’s stock exchanges simultaneously. From the outset, the company wanted to be judged by the highest standards of corporate governance (those on the Brazilian market were less demanding than in the US at the time). The company was thus required to go public with a world-class vision of corporate governance.
At that point, the process of aligning interests embraced a third element – capital markets.
Many of the decisions that led to important steps being taken in the company’s corporate governance in the years that followed were born out of dialogue between executive management and long-term investors. It was in response to suggestions from investors that Ultrapar and its controlling shareholders decided to offer all shareholders a tag-along right in the event of a takeover bid at the same price paid by the acquirer. It was the first Brazilian company to offer this right to the market. From that point on, with the intense exchange of ideas and information with the market, Ultrapar continued to adopt measures to improve its corporate governance on an almost yearly basis.
A state of independence
In 2002, Ultrapar’s board of directors took on a representative of the holders of (non-voting) preferred stock. That same year the group would take a 100 percent stake in all its businesses, eliminating any misalignments with the goals of other shareholders at its subsidiaries. In 2005 the company made a follow-on share offering to increase the liquidity of its shares on the stock markets. Two years later, the roles of CEO and Chairman were taken on by different executives. Many of these changes came before the existence of specific regulations on the Brazilian market.
The latest milestone in Ultrapar’s development came last year. The controlling shareholders decided to enter the BM&FBovespa’s Novo Mercado and convert all of the company’s preferred shares into ordinary shares. A distinct control group was voluntarily abandoned in order to become a dispersed control public company, which is now no longer dependent on specific shareholders to move ahead continuously on its mission to create value. The ordinary shares were offered the same economic rights and liquidity as preferred shares, and the preferred shares acquired the voting rights that had been exclusive to the ordinary shares.
In our view, corporate governance models do not follow guidelines in a strict form and must respond to specific conditions and objectives found at each company. A lot of proposals to develop corporate governance that have not been accepted by most Novo Mercado companies do make a lot of sense – and create value – for Ultrapar. This is why, when the company joined this segment of the stock market, its by-laws were changed to incorporate the proposals from BM&FBovespa which had not been accepted by the other companies listed when consulted about reform of the rules of Novo Mercado.
Today, two-thirds of the members of the board are considered independent by the criteria of the Novo Mercado. Ultrapar also has two more committees: a compensation committee, with two independent members, and an audit committee, with three independent representatives. This new corporate governance structure has been welcomed by the market as a definitive step for professional management – besides allowing an even greater alignment of interests with shareholders.
A new style of authority
The new by-laws have also incorporated in the corporate governance structure the requirement for a public offer to be made in case a shareholder acquires a relevant stake in the company (20 percent of the capital). This aims to ensure the right of shareholders to sell their shares at the highest price paid in the last six months to the purchaser, if any investor acquires a relevant stake that grants them key influence in the running of the company. Another difference in Ultrapar’s by-laws with regard to many Brazilian companies is that there are no poison pills, voting limitations, or different treatment for anyone. The goal is clear: to provide transparency and equal treatment for all shareholders.
The changes made in the new articles of association, going far beyond what is currently practised by Brazilian companies, reflect a degree of maturity that is the result of 30 years of decisions taken with the same focus. With the change, Ultrapar has become the largest Brazilian company in revenue to have its capital dispersed on the market. With its revenues of $30bn, solid financial position, reliable growth rates, and a leading position in the four sectors in which it operates, this change may once again pave the way for many of the best companies in Brazil to follow.
Anyone who is unaware of Ultrapar’s history of corporate governance may have been surprised by the controlling shareholders’ decision to relinquish their control of a group that had been getting attractive results. The former controlling shareholders decided to do so because they believe that the relative reduction of influence over the company will be thoroughly made up for by the increased value of their investment, in the form of more valuable shares. Furthermore, the new structure will create an even greater investment capacity, with easier access to capital markets to facilitate large acquisitions.
With a consolidated stock market in Brazil today, it is natural to expect that more Brazilian companies will disperse their capital and improve their corporate governance. The best contribution we can make is to continue developing our own corporate governance and prove that the results justify such an effort.