Brazil: State-Owned And Semi-Public Company Corporate Governance In Crisis

Last Updated: 4 November 2015
Article by Daniel Tardelli Pessoa, André Rainho Das Neves and Isabella Simão Menezes
Most Read Contributor in Brazil, July 2017

Recent investigation of cases of corruption involving Brazilian State-owned and Semi-public companies evidences the existence of a corporate governance crisis at present. The difficulty of administrative bodies responsible for regulatory supervision (e.g., the Brazilian Securities Commission - CVM) in guaranteeing enforcement of the law, political interference in these entities, the absence of internal controls and compliance policies and the management of corporate businesses with purposes divergent from the declared public interest that justified their incorporation are reflections of the crisis.

Inspired by international corporate governance models, such as the corporate statutes and other corporate documents of foreign State-owned companies, the OECD Guidelines on Corporate Governance of State-owned Enterprises and the guidelines of the Committee of Sponsoring Organizations of the Treadway Commission, some local initiatives seek its solution.

This April, BM&Bovespa introduced the State-owned Company Governance Program (Programa de Governança de Estatais – PGOV), still in its draft form. The PGOV is addressed to State-owned and semi-public companies, is not mandatory and would represent but a certification for the companies that would adhere to it.

Under the PGOV, the participating State-owned or semi-public company will be classified as Category 1 or 2 in accordance with all stated requirements or just those requirements that are obligatory. The PGOV establishes four lines of action:

1) Transparency. Among the measures for improving transparency are: (i) the publication of an Annual Corporate Governance Letter containing basic information on the company; (ii) adoption of a policy for dividend distribution; (iii) strict compatibility between the State-owned or semi-public company's purpose and the legislative authorization allowing for the incorporation of the respective company; and (iv) qualitative and quantitative improvement to the information provided by the company's reference form document.

2) Internal Controls. This line of action has four fronts: (i) management and employee action concerning the everyday implementation of internal controls and periodic training sessions; (ii) the establishment of a compliance and risk management department, responsible for evaluating company legislative compliance and internal policies and procedures; (iii) the adoption of a policy for related-party transactions; and (iv) the creation of an Internal Audit and a Statutory Audit Committee, responsible for, respectively, verifying the effectiveness of the company's control activities and assisting the Board of Directors in the exercise of its functions.

3) Management Composition. In addition to requiring minimum qualifications to occupy certain positions in the company's management, the PGOV calls for the minimum to maximum number of management members being between five and eleven and that at least 30% of them must be independent. Other rules prohibit the holding of consecutive positions and establish the duration of mandates and compensations.

4) Majority Shareholder Commitment. The PGOV determines that Codes of Conduct shall establish rules preventing that members of high administration (Brazilian government) make pronouncements on non-disclosed information that might impact on the market value of the company's securities, unless such disclosure is simultaneously made to the market.

In keeping with the intention of the PGOV, on September 10, 2015, the Brazilian Federal Senate approved urgency status for Senate bill (PLS) No. 555/15, which creates the State-owned Company Law. If approved in its original wording, PLS 555/15 will make the adoption of corporate governance standards by every State-owned and semi-public company mandatory.

Although having been amended 85 times up to the date of the publication of this article, the original wording of PLS 555/15 contains provisions similar to those of the PGOV, and likewise adopts the four lines of action set forth in the PGOV.

Even if the PGOV is not adopted by BMF&Bovespa and PLS 555/15 is not approved, the voluntary adoption of the above-referenced provisions by State-owned and semi-public companies would be desirable for minimizing the effects of the corporate governance crisis. More transparency, controls, meritocracy and government commitment fosters trust, provides heightened security to the investor, boosts the market value of these companies and facilitates capital markets transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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