B3 announced last week that from 2023 onwards it will have rules on diversity and inclusion applicable to all companies listed on the Exchange. In particular, it proposes that shareholders should elect at least one woman and one member of a “minorized community” as effective members of the board of directors or the executive board.
It’s yet another move based on the controversial “practice or explain” doctrine, only more radical. Now it will just be “do what I tell you, or you’ll be expelled from the stock exchange”. This may sound anachronistic to the ESG moderns, but the criteria for hiring and appointing directors and directors should be determined by the company itself and by its shareholders, not by the stock exchange. in which its shares are traded. Through the imposition of quotas, B3 will interfere in the management, governance and fundamental purpose of companies: the incessant pursuit of maximizing their value. The obligation by B3 may be unconstitutional, as article 7 of the Magna Carta prohibits admission criteria based on sex or color.
The problem is not the requirement itself, but the fact that there is no alternative. The company that wants to have its securities traded in Brazil must use B3. So, any rule imposed by it, however absurd, must be followed.
Milton Friedman, an American economist, studied natural monopolies and found only two that persisted without governmental privilege or market reserve: the Nyse (New York Stock Exchange) from 1870 to 1934, and the DeBeers diamond company. But these are still questionable examples, as DeBeers currently has less than a 30% share and Nyse competes with 23 other national exchanges. In addition, there are 58 alternative over-the-counter platforms in the United States that absorb around 40% of the volume traded. There is no competition here.
As a result, B3 is accommodated, a typical state-owned company. It is the financial sector company with the highest remuneration for directors, averaging R$19 million per director in 2019. Directors receive R$2 million a year, according to a JPMorgan report, more than full-time directors of many listed companies.
The bank also points out that B3 charges higher fees than developed market exchanges and Mexico, earning three to five times more revenue per value traded. Not surprisingly, it has an Ebitda margin above 75%.
Why are there no other exchanges or over-the-counter markets? There is a powerful institutional market reserve. CVM Instruction 461/2007: (a) prohibits internalization (that is, large platforms cannot close trades in-house, hence they are obliged to use B3), (b) prohibits brokers and platforms from holding more than 10 % of equity interest, which hinders those most interested in creating competition for B3, (c) requires a minimum structure of heavy and expensive governance, which makes it impossible for small over-the-counter platforms to enter.
The most brazen market reservation of Instruction 461, however, is the ban on the company having its shares traded on a second platform (dual listing). Two months ago, listing on two Exchanges was allowed. However, the company is still unable to trade on an exchange and on an over-the-counter platform simultaneously. Substantial market reserve persists.
Improving the capital market requires removing B3’s market reserves for competitors to emerge. Only then will B3 itself be driven to modernize, improve the Novo Mercado rules, facilitate the listing of smaller companies, simplify the bizarre public offering prospectus, and eventually even make market data available for free.
These are essential themes for the small retail investor: themes that do not seal, but profit.
Shall we open this market?
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
