by John Fitzpatrick

The Lord Mayor of the City of London, Sir John Stuttard, has been visiting Brazil, touting London as the world´s leading financial center and trashing the New York Stock Exchange. He has been going for what he regards as New York´s jugular – the Sarbanes-Oxley Act – which he described as a “nightmare” and claimed was causing some companies to de-list and putting off others from listing. Sir John says two Brazilian companies will list on London but refused to identify them. If this comes about, they would be the first Brazilian companies to list in London´s main market as opposed to New York where around 30 Brazilian companies trade. A handful of Brazilian companies are also traded on the Latibex exchange in Madrid. Sir John may be right to see this as a breakthrough but it will be a modest one since Brazil – and Latin America as a whole - is much more attuned to the United States than to London in terms of business practices and culture.

The Lord Mayor and his team bamboozled the various audiences with statistics and charts showing how successful London was and claimed it was friendly to foreign investors, lightly regulated and a truly global market. He also claimed it welcomed highly-skilled financial workers and students, many of whom he said were Brazilian. We were told that being listed on the London Stock Exchange was like a “vote of confidence in many eyes”. Copies of a recent Fortune cover story which highlighted London´s rise at New York´s expense were distributed even though this article is not as one-sided as the Lord Mayor´s comments would imply.

The downside of the Lord Mayor´s presentation was that he had no major Brazilian success story. Despite references to “companies like Petrobras, Perdigão and Bradesco which are finding a UK base valuable” there are only three Brazilian companies listed on London´s Alternative Investment Market (AIM) for smaller companies. The CEO of one of the companies, Clean Energy Brazil, made a presentation in São Paulo. However, it has only been trading in London since December last year so its experience is limited.

London has had great success in attracting companies from Europe and Asia but its record for Latin American companies is poor. I could only find two Latin American companies listed on the main market – a bank in Chile and an autoparts manufacturer from Argentina. No Mexican company is listed there which means that not a single company from the two largest Latin American economies – Brazil and Mexico - trades in London. Compare this with New York where a total of 90 Latin American companies are listed. Brazil leads the way with 38 companies, followed by Mexico and Chile with 17 each, and Argentina with 12.   

The attraction of New York is obvious. London may well be a bigger, more global financial center in some areas but that is not of great importance to Latin America which still has strong ties to the US. The US is  Brazil´s biggest foreign investor and Brazil´s main trading partner while UK interest in Brazil has been lukewarm in recent decades, to say the least. The recent report by the trade and industry committee of the House of Commons shows this clearly despite the diplomatic language used. (See the interview the chairman of the committee, Peter Luff, gave Brazil Political Comment in the Interview section of this site and the article “Brits Turn Their Backs on Brazil”.)

Around 1.3 million Brazilians live in the US and business students are more likely to go to the US than Europe. Despite the huge differences between Latin and American cultures, there is still a great deal in common as a walk down a São Paulo street, with its McDonald´s, Blockbuster stores, Citibank branches and, believe it is not, Starbucks cafes, will show. New York is also on the same time zone, so it is more convenient to do business.

The Lord Mayor may have been right to home in on the Sarbanes-Oxley Act and point out its obvious failings. This legislation was hurriedly put together in a bid to protect investors after a number of scandals and frauds involving some American companies were uncovered. It forced publicly-traded companies to make many changes, including swapping their independent auditors regularly, setting up independent audit committees and making senior executives personally liable in the event of illegal activities. The SOX, as it is called, imposes huge costs on companies and there has much been criticism that it is too wide-ranging and does not take individual factors into consideration.

This could be a good tactic in a country like Brazil where laws are generally given short shrift and the only way to do business is to cut through the bureaucracy. However, attitudes are changing and investors are demanding greater regulation here as well.

This is seen in the phenomenal growth of the Novo Mercado segment of the São Paulo stock exchange. This market only lists companies with transparent corporate governance practices and which grant minority shareholders tag-along rights. It only started in December 2000 and now has more than 80 companies ranging from smaller real estate developers and health plans to big companies like Embraer and Perdigão, both of which also trade in New York.

The success of the Novo Mercado shows that Brazilian investors and shareholders (and foreigners flocking to it) prefer transparency, respect and protection to a lighter regulatory hand. 

As a businessman, the Lord Mayor should know that being negative about your competitors is not the way to build up your own business. As far as I know, the SOX has not caused a single Brazilian company to cease listing in New York. In fact, Brazilian companies took great pains to meet the deadlines and some even anticipated them. Companies could have chosen not to make all this effort and investment and it is difficult to imagine them writing it off now.

The Lord Mayor focused on the AIM and highlighted its looser regulatory approach. However, if I were an investor I would be a bit wary of the AIM since some of the requirements for listing seem so relaxed as to be downright sloppy. These include no minimum size for admittance, no minimum financial history required, and no minimum amount of shares to be in public hands.

Most surprising, perhaps, is the fact that admission documents do not need to be vetted by the Stock Exchange or the regulatory operator, the UKLA.  No wonder some American critics have called the AIM an unregulated market.

The guarantee that all the rules are being respected lies in the hands of a local “nominated adviser” – called, without any sense of irony by the Lord Mayor, a “Nomad”.  The safeguard is that if the “Nomad” does not like what a company is up to, he will tell the regulators and it will not be allowed to trade any more.

London obviously has a lot going for it as a place to invest but whether Brazilian companies – and shareholders in these companies - will be happy to put their assets in the hands of “Nomads” is yet to be seen.
 

© John Fitzpatrick 2007