Washington DC, June 16, 2004 — Securing increased flows of portfolio equity finance into Brazil will require significant corporate governance reform, stated the Institute of International Finance (IIF) in a new report today. "Brazil is building many components of a strong, dynamic economy. However, Brazil lacks a broadly based equity culture and local equity markets are thin. These situations need to change to enable our companies to become fully competitive in attracting capital" said Dr. Roberto Egydio Setúbal, Vice Chairman of the IIF and President and Chief Executive Officer Banco Itaú S.A.

Dr. Setúbal added, "As Brazil has been steadily moving from a relatively protected and insular economy to greater global integration, many stakeholders have recognized the need to improve company performance. Critical to this goal is the promotion of sound corporate governance, which can help attract additional capital from portfolio investors and deepen capital markets. Although some companies already practice high level corporate governance, the overall legal framework needs to be improved. Some changes in that direction have been implemented recently, but the new IIF report points to important gaps that need to be considered in future reforms."

The IIF, the global association of financial institutions, established an Equity Advisory Group (EAG) in 2001 that has been reviewing corporate governance markets in the leading emerging market economies. EAG Chairman Edward Baker, Chief Executive Officer and Chief Investment Officer of Emerging Markets Equities, Alliance Capital, Ltd., stated that the IIF's Brazil Task Force found that, "there has been growing recognition in Brazil of the importance of good corporate governance to stimulate domestic capital markets and to improve economic performance. But, there has been relatively little progress in establishing an equity culture or reforming a number of key aspects of corporate governance, as a consequence Brazil is lagging many other leading emerging markets in this respect."

In preparing its report the members of the Brazil Task Force met with officials from the leading institutions such as Bovespa (the São Paulo stock exchange) and the Comissão de Valores Mobiliários (CVM, the securities and exchange commission) The Task Force noted in its report that these institutions have initiated a new series of corporate governance reforms that builds on recent improvements in the company law, such as extending voting rights to non-voting stock when key shareholder decisions are required, enhancing aspects of information disclosure, and raising audit quality. Dr. Setúbal said, "The Bovespa Level 2 and Nova Mercado standards are setting an important model that should become more widely adopted in Brazil."

Brazil Task Force Chairman Jeremy Paulson-Ellis, Chairman of Genesis Investment Management Ltd. in London, said, "Given the importance of family control over companies and their boards in Brazil, the authorities need to take steps to ensure minority shareholder rights are secured. There has to be greater transparency for all shareholders and greater accountability.

Mr. Paulson-Ellis noted, "Our Task Force found that in recent times, for example, there has been little improvement in opening up executive boards to non-executive and independent directors. Board committees still do not play a major role in systematically reviewing management performance or in strategic planning. Nomination, compensation, or audit committees are rare, although the existence of statutory audit boards mitigates the absence of audit committees somewhat."

The EAG Task Force recommended a series of actions to overcome deficiencies and to add momentum and support for improved corporate governance in Brazil for all listed companies:

• Establishing a single consistent set of standards.
• Extending voting rights to non-voting stock.
• Extending full tag-along rights to all shares.
• Requiring that a majority of directors be independent.
• Requiring the setting up of compensation, nomination, and audit committees (the last acts as a liaison between the company board and the statutory audit board).
• Improving enforcement, especially through mandatory arbitration.

IIF Managing Director Charles Dallara stated, "Brazil has made impressive progress under the Lula administration in establishing macroeconomic stability and in laying the foundations for renewed growth. This progress is underscored by the first quarter GDP growth figure of 6.6 percent on an annualized rate. However, today's report makes clear that the corporate governance environment in Brazil has serious deficiencies. To transform Brazil's public companies and its stock markets into attractive opportunities for international, and indeed domestic, investors will require far-reaching changes among traditional shareholders."

The new report pointed out that most companies that are not foreign or state owned are controlled by private owners with relatively little distinction between the majority owners, the board, and management. Majority shareholders have tended to maintain control primarily by restricting their issuance of voting equity to non-family members. Control by major borrowers are exercised through the election of what local observers often describe as "complacent" boards as well as the appointment of family members to senior management positions.

The IIF report noted that based on a recently published survey of the 100 largest non-financial companies (based on operating revenue), in 52 percent of firms families or family foundations controlled over 50 percent of the voting stock, while in another 40 percent a family or other company owned between 20 percent and 50 percent of voting shares.

The Task Force compared current practices in Brazil with the standards developed by the EAG for the IIF's Code of Corporate Governance. The Task Force found, for example, according to its report that, "The Brazil's corporate governance framework encompasses less than half of the guidelines pertaining to the board of directors in the IIF Code. Directors are rarely independent. Scope for significant improvement lies in introducing specific requirements for inclusion of independent directors on company boards and the formation of nomination, compensation, and audit committees."