Foreign investors? The effects of the property structure and legal system as mechanisms of corporate governance in Brazilian regulated companies

Date07 October 2019
DOIhttps://doi.org/10.1108/CG-02-2019-0072
Pages1082-1116
Published date07 October 2019
AuthorRuan Carlos dos Santos,Lidinei Éder Orso,Mônica Cristina Rovaris Machado,Antonia Márcia Rodrigues Sousa
Subject MatterStrategy
Foreign investors? The effects of the
property structure and legal system as
mechanisms of corporate governance in
Brazilian regulated companies
Ruan Carlos dos Santos, Lidinei Éder Orso, Mônica Cristina Rovaris Machado and
Antonia Márcia Rodrigues Sousa
Abstract
Purpose This paper aims to contributeto research on corporate governance in regulatedsectors, with
emphasis in the fieldof activity of foreign investors through the ownership structureand legal system that
regulatescompanies in Brazil.
Design/methodology/approach In the first moment,the investigation had a quantitative approach of
relational nature.Based on the data about the valuation of actions, statisticalmethods were applied to a
secondary database containingmeasurable information provided by the organizations that operatethe
Brazilian stock-marketand documentary evidence providedby the companies. In the second moment,a
qualitative approachwas adopted, resorting on the use of semi-structured interviews with investorsand
agentsof the sector.
Findings The results lead to two paths: presenting the perspective that foreign investorsplay a key role in
improving governance practices because foreign ownership mitigates agency problems, provides
adequate follow-up and optimizes the use of corporate resources; and evidencing the existence of a
mitigation of operational risks in the face of the various obligations imposed by the concession contract with
the regulatory agency, without direct interferenceunder the ownership structure of regulated companies.
Research limitations/implications The literature portrays a distinct economic scenario in Brazil,
where stock control is pulverized and mechanisms of corporate governance and scope of action of
investorsand regulated sectors are well-definedand implemented.
Practical implications A great part of the studies from thisfield discusses the same object: the impact
of the adoption of corporategovernance mechanisms on selected efficiencyindicators or on the value of
the companiesactions.This investigation, on the other hand, targeteda differentiatedapproach so that
its contribution wouldlie in the investigation under the influence of the regulation on the legalattributions
and the performanceof the investors how many conflicts between the other shareholder/regulatory body,
as the controlmeasures import by the regulatory agent the concessionairesof the Brazilian highways and
transportationsector.
Social implications The identificationof the presence of foreign investors as a determinant for:better
performance of companiesin Brazilian regulated sector in terms of market valuation; bettermitigation of
requirements with the regulatory framework for the agencies that regulate the concession sector,
targetinga reduction in the asymmetry of informationand transparency among all stakeholders.
Originality/value The fact that Brazil is an emerging country that lacks a rigid legal system and
corruption-control measuresin corporate environments and public sectors, stresses the importance of
the applicationof the ‘‘Best Codes of Corporate Governance Practices’’in the main developed countries.
This also stresses the need for effective supervisory bodies that contribute to a better financial
performanceof companies, guaranteeing investorsthe legal system.
Keywords Foreign investors, Mechanisms of corporate governance,Property structure,
Regulated sector, Theory of the agency, Market value
Paper type Research paper
Ruan Carlos dos Santos
and Lidinei E
´der Orso are
both based at
Postgraduate Program in
Administration,
Universidade do Vale do
Itajai, Biguac¸u, Brazil.
Mo
ˆnica Cristina Rovaris
Machado is based at the
Program of Graduation and
Postgraduation of
Administration,
Universidade Federal de
Sergipe, Sao Cristovao,
Brazil.
Antonia Ma
´rcia Rodrigues
Souza is based at
Postgraduate Program in
Administration
Universisade Federal do
Ceara
´, Sobral, Brazil.
Received 24 February 2019
Revised 27 June 2019
5 July 2019
Accepted 11 July 2019
PAGE 1082 jCORPORATE GOVERNANCE jVOL. 19 NO. 5 2019, pp. 1082-1116, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-02-2019-0072
Introduction
In the 1990s, significant changes in the Brazilian economy resulted in a greater trade
liberalization, outsourcing of public services, and flow of foreign capital in the country.
These changes were driven by the process of privatization of large companies and public
sectors, which helped the government to reexamine the structure of Brazilian state-owned
enterprises. According to Carvalho (2011), the Brazilian highways were among the
government’s first privatizations, carried out to address the difficulties that the State was
experiencing in terms of raising funds for the maintenance of the roads, and expansion of
the transportation infrastructure to ensure the delivery of public services. The policy
decisions of the Brazilian government regarding the privatization/concessions of its
highways to ensure the developmentof the transport sector made the entire economy grow.
The infrastructure of a nation is vital for the effective functioning of modern economies.
Infrastructure, particularly road transport, is a fundamental pillar of productivity, costs and
competitiveness of a society (Guasch, 2004). According to Serman (2008), road
concessions arose from the need to attract investments to ensure the construction,
refurbishment, maintenance, and improvement of the infrastructure, as well as to pursuit
effectiveness and innovationin the provision of essential services to the society.
The privatization movements have impacts on the governance practices of newly privatized
companies. To Johnson and Shleifer (2001), without good governance, privatized
companies tend to perform poorly. To them, key factors to protect investors are as follows:
increasing domestic legal protection and enforcement, and minimizing the expropriation by
the controlling shareholders and the companys management. The regulation of the
Brazilian sector and its gross domestic product (GDP) evidence the efficiency of private
investments in public policies,with both economic and practical advantages, given that the
investor has the means to provide the population with better quality public services.
Therefore, it is increasingly important that society approaches the State of private initiative,
attracting private capital for financingpublic works and services (Bittencourt, 2006).
The growth strategies of the regulated sector in Latin America began to encourage the
participation of the private sector to the development of infrastructure, improvement of
performance and accelerationof the progress, given that most state-owned companies had
an urgent need for investments (Calderonand Serven, 2002).This urgency resulted from the
scarcity of public resources to invest in the social sectors, fulfilling their needs. Most
countries have opted for transferring the provision of infrastructure to theprivate sector. The
extent of participation and the degree of intervention of the private sector can, however,
vary significantly depending on its agreement with the government ranging from
management contracts and concessions to privatizations (Yescombe,2007).
Important aspects of the regulatory pillar of privatizations are: the extent of the
government’s intervention in theprivatized service, i.e. its ability to formulate and implement
policies and regulations that can interfere with the private sector; the degree of the
government’s protectionism,detected through the existence of minimum local content rules,
its control over essential aspects of production, and the privileges that it grants to state-
owned enterprises; the quality of the legal framework of the country in terms of facilitating
the creation and management of companiesby foreign investors; and, finally, the protection
of property rights, where the government has enough instruments to ensure that the owner
of an asset will have discretionary power to use it and benefit from the returns that it
provides (Rocha and A
´vila, 2015).
The adoption of Corporate Governance Mechanisms (CGM) mechanisms by companies
enables a better control of financial decision-making in relation to risks, which may increase
or decrease the market price of shares and, consequently, affect their performance and
market value (Adi et al.,2013). As a result, CG practices, coupled with adequate capital
structure, grant companies a higher status in the market, which facilitates fundraising,
VOL. 19 NO. 5 2019 jCORPORATE GOVERNANCE jPAGE 1083
reduces agency costs and risk of losses, improves performance and increases their
profitability (Koerniadi etal., 2014).
Most research on CG classifies mechanisms as internal (generated inside the company)
and external (generated outside the company). Internal mechanisms are more often
approached in the specialized literature, particularly the companies’ administrative board
and structure of equity stakes. However,internal mechanisms are, sometimes, not sufficient
to ensure transparent and efficient governance. In these cases, it is necessary to rely on
external mechanisms, such as the legal system, corporate controlling market, external
audit, rating agencies and the activity of the stakeholders and the media to ensure good
governance (Aguilera and Desender,2012).
In this scenario, the present study was designed to reveal the effects of the property
structure and legal system as corporate governance mechanisms in companies from the
Brazilian regulated sector. To pursuit this goal, this study sheds a light on the existing
CGMs, focusing on those that ensure the privateinitiative to regulate the sectors, given that
these mechanisms are more aligned with the strategy of the Brazilian Government of
promoting appropriate economicand regulatory environments for investments (Fontes-Filho
and Picolin, 2008). In addition to that, a combination of quantitative and qualitative data
enabled this study to verify the influence of foreign investors in the ownership structure of
Brazilian companies, and examine particularities in the legal system carried out by the
regulatory agencies in the Brazilian highway concession sector.
The choice of transportation sector companies, specifically the Brazilian highways
concessionaries listed on BM&FBovespa (2018), enables the dissemination of studies on
corporate governance, particularly those on internal mechanisms (ownership structure)
aspects previously approached by Aguilera et al. (2015) and Peng et al. (2008),who
presented CG in an institution-based view that demonstrates mechanisms such as control
of regulated firms and legislative guidelines to protect investors (Okimura, 2003;Aguilera
et al.,2013
).
In this sense, work progresses in relation to the characteristics of the ownership structureof
the management, the control between the largest shareholder and the presence of foreign
investors in the regulated sectorof the Brazilian highway concessionaires.
Literature review
Corporate governance as an agency problem
The agencies’ conflicts need to be monitored and mediated by a corporate governance
system to, not only, sustain the institutional credibility and confidence of investor and owner
(Andrade and Rossetti, 2007) but also to resolve agency problems (Adams et al.,2010).
This assertion is tied to the idea that shareholders in a public managerial-controlled firm
work towards reducing agency costs,to assure the return of their invested money.
Agency problems are a topic widely discussed among management scholars. In an article
on the fundamental agency problem, Dalton and Daily (2000) offered insightful arguments
on how the agency theory perspective affects different corporategovernance mechanisms,
such as boards of directors, ownership structures, and the market for corporate control.
From a finance and economics perspective, and still with the agency theory as the driving
force, Adams et al. (2010) reviewed the role of boards and the challenges of their
comprehensive study asa central piece of the corporate governance policy debate.
Carvalho (2011) warned that agencies play a fundamental role in compliance with the
policies determined by the State, and with managerial, technical and control duties over the
regulated entities. However, to reduce transaction costs and evidence the asymmetry and
contract opportunism among stakeholders, Williamson (2000) recommended:
PAGE 1084 jCORPORATE GOVERNANCE jVOL. 19 NO. 5 2019

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