Portuguese newspapers have devoted a lot of space recently to detailed accounts of how much top bankers and leading business executives earn. The information has been made public as a result of recommendations on corporate governance made by the Comissão do Mercado de Valores Mobiliários (CMVM), Portugal’s securities market regulator.
Corporate governance is only one of several areas in which the CMVM has been highly active in recent years. The regulator has been working to keep Portugal ahead of the curve as the nature of financial markets evolves and Europe moves towards common stock market standards and harmonised regulations.
An important reform of Portugal’s capital markets, including a new securities code, was completed in 1999. Since then a lot of new ground has been covered by mandatory regulations and non-compulsory recommendations in areas ranging from corporate governance and market communications to insider trading and mutual funds.
The merger of the Portuguese stock market with Euronext, the pan-European bourse that includes the French and Dutch stock markets, has also had important implications for the supervision and regulation of the market. It requires Portugal to move towards regulatory harmonisation ahead of most other European countries.
Fernando Teixeira dos Santos, CMVM chairman and executive chairman of the International Organization of Securities Commissions (IOSCO), tells The Banker how the CMVM is working to keep Portugal aligned with the best international practices.
Q The CMVM has been highly active in recent years. How would you describe your main objectives?
A The initiatives that we have taken during the past four years have been largely aimed at keeping Portugal in line with the best international standards. This is particularly important in the light of the major changes that financial markets, particularly European markets, have been undergoing and the perception that we are facing new challenges and new risks. We need to have an appropriate regulatory and supervisory framework to cope with those challenges.
Big financial scandals on an international level have heightened the concerns that followed the September 11 attacks in the US over the ability of regulators to fight financial crime worldwide. At the same time, Europe is moving rapidly towards the harmonisation and standardisation of corporate governance and capital market regulations.
Our goal is a regulatory framework that enables us to deal with these new challenges and risks but that also allows the market to develop. In a context in which competition is growing and financial innovation increasing, we must be careful not to asphyxiate the development of the market. At the same time, we need to provide a safety net. This is a balance that is not always easy to find but for which we have to strive.
Q How has joining Euronext affected market regulations and supervision in Portugal?
A It means we have had to move a little faster than Europe as a whole in terms of regulatory harmonisation. But we have also had to be careful not to advance in a direction that will conflict with the overall regulatory framework towards which Europe is moving. Paris, Amsterdam and Lisbon have had to implement a common rulebook governing trading and operations on their markets.
In terms of primary markets, for example, we have been working on the harmonisation of rules governing prospectuses for stock market issues. A basic framework has already been established for an EU directive on this issue and we will wait for the outcome of that before concluding the process.
Euronext also means that the three countries involved have to standardise their supervisory practices. This will increasingly become an issue for Europe as a whole. Different countries may have the same rules but supervise and enforce them in different ways.
Q How is the Portuguese market responding to your non-compulsory recommendations on corporate governance?
A Our purpose in making recommendations is to suggest good practices that we believe will improve the transparency and good working of the market but which we do consider to be essential. They represent improvements beyond the minimum required. We sometimes experience initial resistance from some players but they usually come round to agreeing that our suggestions make sense.
Implementing our recommendations can improve a company’s image and, in time, the market starts expecting companies to adopt these good practices. We do not have to intervene. The pressure to apply them comes from the market itself.
A good example of this was our decision to recommend that listed companies should disclose how much their board members are remunerated. This is mandatory in some countries and, partly because the European Commission considers it a good practice, we thought we should recommend it. Companies have responded positively, and several important listed groups have adopted the recommendation and adapted it to their own corporate governance practices.
We also recommended that companies disclose how and to what extent remuneration is linked to company performance, so that the market knows how this relationship is established and defined.
Q Will your recommendations become compulsory regulations in the future?
A Not necessarily. A recommendation does not have to become a mandatory requirement in the future. We aim to keep up with what is happening internationally and many of our recommendations have their origin in international and EU discussions on stock market regulation.
For example, when we began making recommendations on corporate governance in 1999, we also recommended that companies should regularly disclose to what extent they were adopting those recommendations. Two years ago, we decided to make that recommendation mandatory.
This proposal is now on the table at a European level. By perceiving in this way how regulation is evolving internationally, we can ensure that Portugal is well prepared and constantly moving forward.
Q How have Portuguese companies responded to the requirement to produce quarterly reports?
A We made quarterly reports mandatory for listed companies six years ago. There has been some reaction against this requirement at a European level, mainly because a strong UK lobby is opposed to the measure. But I believe regular company reports on the evolution of their financial situation helps to avert the spread of rumours and erroneous information. Companies already have this information and it does not have to be audited, so it is not costly to provide.
However, in the give and take of the negotiations on the new EU transparency directive, the mandatory requirement for traditional financial reports on a quarterly basis is being abandoned. Companies will be required to produce only a quarterly declaration. In this context, it will make no sense for Portugal to maintain a requirement that could be perceived as a disadvantage for our market. So we will also abandon it.
In my personal opinion, however, I do not think that the EU is making the right decision in abolishing this requirement.
Q How is supervision of the Portuguese market changing?
A It is not enough to have good laws and good regulations. They also have to be enforced. I think we have been successful in improving our capacity in this area. For example, between 2001 and 2002 we made on-site inspections of every financial intermediary acting in a market. This provided the basis for a broad analysis in terms of human resources, how people work, procedures, record keeping, etc. From an analysis of all those aspects, we were able to identify areas on which we needed to focus our attention and resources.
We have been giving special attention to questions relating to conflicts of interest, for example, detecting where they exist and implementing appropriate control mechanisms. We have also focused on combating financial crime, insider-trading and manipulation. We have been able to send a number of cases to the criminal authorities and recent court decisions have led to the first convictions in Portugal’s financial history.
Q Is the Portuguese market prone to manipulation?
A No, I believe it is on a par with other markets. However, there is a characteristic of our market that might give the impression that it is more subject to manipulation than some other markets. A number of the securities listed have a low level of liquidity and a small volume of transactions. A large order to sell or buy can have a big impact on their price. This volatility sometimes wrongly creates an impression that some kind of manipulation or wrongdoing has occurred.
We have a system of warnings that flags up big fluctuations in prices. When we analyse them we often find that there was a large order and that the price went up quite legitimately. We are constantly engaged in trying to improve our methods of detection. People find new ways to manipulate markets and we have to keep our alarm systems permanently up-to-date.
