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Could Vale Improve Its Transparency?

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Apr. 10 2018, Updated 8:03 a.m. ET

 
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Vale’s improved corporate governance policies

Vale (VALE) has come a long way in its corporate governance policies and transparency. In February 2017, the company announced that it was seeking to merge its two stock classes, which would enable 100% of stocks to carry voting rights (versus ~61%). The corporate restructuring was concluded in August 2017, when Valepar was merged into Vale. With this merger, Valepar ceased to exist and Valepar’s shareholders gained direct interests in Vale. The company is proposing a three-year transition period for this restructuring to take place so that “the company and investors can get adapted to this change,” as stated in a February 2017 conference call.

Major governance overhaul

This move was seen as a major governance overhaul, as it will enhance transparency and equal rights for all shareholders and reduce the potential for government interference. These steps were seen as positive by investors and the company’s stock price rose in reaction to the restructuring announcement. This move is expected to translate into a faster convergence of Vale’s stock price and a decline in its cost of capital.

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The company plans to become more predictable. During Vale Day on December 6, 2017, Vale CFO chief financial officer Luciano Siani Pires said “we will become a boring company, a no-frills company, a company that will deliver and run like a clock. And if you look back to the trajectories of cost reductions in all of our businesses, the trajectory of CapEx reduction, this will continue into the future.”

Pay disclosure policy

There are some more improvements the company could make. One step still necessary to achieve total transparency is the breakdown of executive pay. According to Bloomberg, to withhold specific remuneration details, Vale has been invoking a 2010 court ruling to protect top executives from kidnappings. Vale’s two new independent directors have pushed for compensation to be disclosed, but unsuccessfully.

One reason Vale has been trading at a discount to peers (PICK) such as BHP Billiton (BHP), Freeport McMoRan (FCX), and Rio Tinto (RIO) is its lower transparency and predictability. With improved corporate governance policies, the company expects to see a valuation re-rating.

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