baffle them with bullshit!
Things continue to cloud the horizon in Brazil.
It just doesn’t stop. Dilma Rousseff has written a provisional measure to grant leniency reportedly to favor some of those firms involved in the Lava-Jato investigations.
If I read the anti-corruption law correctly, a firm caught for corruption can request leniency if (and I think only if) it has a proper code of ethics and a compliance code. Granted, firms cannot be put in jail but the anti-corruption law specifies that draconinan fines and restitution of public funds (if involved) accompany any request for leniency. Moreover, the individuals responsible for the corruption must be subject to the law. Leniency is not the same as a “pardon” either for individuals or for firms.
In the case of the Petrobrás scandal, the firms involved in the corrupt schemes were largely owner-managed firms. And in some cases, it was the owner-manager who was sentenced. Most ethics codes require that malefactors be summarily dismissed so the question is how that is expected to work for owner-managed companies. In theory it should not make a difference. But it will in Brazil, especially if the Board of Directors is composed entirely of family members.
A good example of how ethics violations are handled in large firms was provided by the CEO of Volkswagen when the company was accused of fraudulent practices regarding the pollution levels of the company’s vehicles. Knowing that he would be fired, the executive quit almost immediately. VW has to pay some fines but qua company it continues.
There is no reason why this cannot work in Brazil as well. If the owner-manager is essential to the business then one option is to sell the company. Another would be to bring in a professional non-owner manager.
The implicit claim of the administration is that Lava-Jato has impeded progress in Brazil and some “slack” should be cut not just for the companies but also for the owners in order to protect the jobs of the innocent. I submit that the jobs of the innocent can be protected without pardoning the malefactors. A leniency agreement is the corporate equivalent of a plea bargain. The company agrees to cooperate with the authorities to investigate the alleged corruption and to punish the transgressors as they are found.
If anything, the Lava-Jato investigation has actually furthered progress in Brazil by ferreting out and sanctioning fraud, cartel formation, money laundering, and a host of other issues related to poor governance.
We will have to see how this all plays out going forward, but as an attorney might say, “it has yet to pass the smell test”.
On the issue of Dilma’s announced plan to resurrect the Accelerated Development Program, I confess that I have some concerns. She has suggested that the civil construction sector will be the main driver of a recovery since it is one of the sectors that most quickly hires workers and that would ease the unemployment issue. Representatives of the sector indicated that a first step might be for the government to pay some R$7 billion of pending receivables for work already done!
Another cause for concern is the statement that Dilma intends to follow through and stimulate growth through the Minha Casa – Minha Vida low-cost housing program. It would be the first time in my limited economic development experience that a development drive would be based on the lowest income levels of the economy, the lowest of which in Brazil is 95% subsidized. It would seem to be a rather weak driver. I would have expected an emphasis on short-term returns from such areas as transportation, communications, and distribution infrastructure in the first instance, followed by education and public sanitation/health investments for longer-term returns and productivity increases. But, maybe I just read the wrong Economics books back in the 60s when “development planning” was in vogue!
The political “bar fight” continues. Vice-president of Brazil and President of the PMDB, Michel Temer is now facing increased dissidence within the ranks of his party. He is reportedly concerned for his continuation as president of the party. Aside from the “normal” power disputes in any political party, the issue of support for Dilma’s impeachment is a factor. Some suggest that the PT could be fomenting dissent within the PMDB to ensure that Dilma has some supporters in the party that was once the key to PT hegemony.
Unemployment continues to grow. The auto sector is preparing for yet another round of layoffs after a 27% reduction in sales in 2015. This is the sharpest reduction in vehicle sales in 28 years!
Finally, the real estate sector suffered an unprecedented decline in housing prices in 2015. When inflation is rising, real estate values tend to match or exceed inflation rates. That did not happen in 2015. While the inflation rate was 10.72%, 20 of Brazil’s principal cities showed that real estate values grew by substantially less than inflation and four of the 20 showed absolute value declines (e.g. Rio at -1.36%).
As I wrote in previous posts, the one area where you might expect some growth is in M&A. High debt levels and scarce and expensive credit will open the door for mergers and acquisition opportunities. Just make sure your timing is right and you are prepared for managing for long-term results. Pick your targets carefully remembering that this government is not particularly enamored of foreign investors in general, and in particular if they are buying the assets of “national” companies. And make sure your due diligence work is as thorough as possible.
Carpe diem!
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