Latin American Capital Markets

446 MIKELUBRANOboard composition. Not surprisingly, this resistance was grounded in a concern that listingrules that exceeded the minimum requirements of local company law might discouragenew listings, particularly by start-up, founder-controlled companies. Most establishedlisted companies were also less than anxious to change their practices. As withlegislation, listing rules can suffer from the "one size fits all" problem.That is, all issuersare usually required to meet the same minimum standards, so the old guard resists.Born of Need and DisappointmentThe Novo Mercado initiative of the Sao Paolo Stock Exchange (Bovespa) traces itsroots to the efforts to reform Brazilian company and securities legislation.The initiativerepresents a quasi-private effort to make up for the perceived shortcomings oflegislative reform by creating a voluntary mechanism to encourage adherence to appropriatestandards and providing specialized private dispute resolution. Bovespa'sleadership conceived the Novo Mercado at a time when two trends particularly worrisomefor a stock exchange were evident. First, market capitalization and trading volumesin the public equities markets were contracting dramatically. Second, efforts toenact comprehensive corporate governance reform were encountering strong politicalresistance.By the end of the 1990s, the weaknesses of the Brazilian capital marketwere painfully evident. In 1999 and 2000, there were no initial public offerings (IPOs),few new issues by companies already listed, and a growing number of delistings. Liquiditywas drying up for all but the largest companies as trading volumes declined.Another ongoing challenge for Bovespa was a shift of trading in shares of the largestBrazilian companies to the ADR market in New York Although these disturbing trendswere attributable to many factors, one of the more important was the perception bydomestic and international investors that Brazilian companies had poor corporategovernance practices and inadequate legal protections (particularly those dealing withminority shareholder rights). 7 Bovespa decided that perception called for some sortof response. 8The compromises that were made in the course of legislative considerationof the initial company and securities law reform bill in Brazil guided the content of the7 McKinsey Global Investor Opinion Survey 2002. The survey key findings can be accessed at www.mckinsey.com/Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubcorporategovernance.8 The president of Brazil's securities commission took a leading role in the effort to reform the company and securitieslaw precisely because he shared the view that, while improvements in corporate governance of Brazilian companiesalone would not effect a recovery of the equity market they were a necessary condition.