Por Jonathan Mazon >
Just as the beginning of each year is the time when people evaluate their achievements in the previous year and decide in what aspects they will seek to improve in the year that begins, partners or investors also have an opportunity at that moment to examine how operational and financial results of their businesses reflect the alignment of management initiatives with the guidelines of the General Meeting and the extent to which corporate governance contributed to this alignment.
Corporate Governance
Bearing in mind the duties of the Board of Directors to exercise the role recommended by the IBGC[1] of “guardian of the organization’s principles, values, corporate purpose and governance system, as its main component, (…) deciding the strategic direction of the business [and,] according to the best interest of the organization, monitoring management, acting as a link between officers and partners”; this moment of reflection helps to highlight the need for any adjustments to the Bylaws and other governance documents of the business in order to promote and facilitate the exercise of these prerogatives by the Board of Directors.
How did your company treat its Board of Directors? In relevant topics such as “transparency and access to information”, “budget and autonomy for hiring advisors” or “insider trading”, was the Board given “more”, “less”, or “just enough” resources to support the business in achieving its goals? The answers to these questions are important indicators of how much a business is committed to governance.
Pursuant to Brazilian Corporate Law[2], Directors have a legal duty to act in an informed manner, in good faith and with diligence, aiming at the best interests of the company. The best corporate governance practices indicate that the access of members of the Board and, when necessary, of their trusted advisors, to company information, in addition to being recommended, is necessary for the full exercise of their duty of care. In this context, advising with specialists on topics that deserve further study is part of the duty of care of a member of the Board.
As this right of access to non-public information of the company generates an asymmetry of information relative to the market, it must be subject to the adherence of these professionals to the rules of confidentiality and to the prohibition on the trading of the applicable securities. Therefore, it is also necessary to assess whether the existing corporate governance documents[3] include sufficient legal protections to enable this access safely.
The limit for deepening and complementing information for informed and adequate decision-making by a Director is defined by the reasonableness of the company’s resources necessary to achieve this objective.
Recent precedents in Brazil and abroad demonstrate that, just as the rewards for organizations that take corporate governance seriously are the best possible in terms of reputation and appreciation in market value, the risks for those that do not are also quite relevant.
Sadia/Derivatives: fines imposed on directors and officers
- In the judgment of the Brazilian Securities and Exchange Commission (CVM) Sanctioning Process No. 18/08, CVM understood that the members of the Board of Directors, especially those who were also part of the Financial Committee or the Audit Committee, failed in their duty of care for not adequately monitoring (i) the effectiveness of its risk management mechanisms, (ii) its adequacy to the company’s policies, as well as (iii) the performance of its CFO, who reported directly to the Board. There were hundreds of thousands of reais in fines imposed on directors and officers, a much greater reputational damage and a financial consequence that compromised the company’s continuity.
Wells Fargo/Commercial misconduct: USD3 billion settlement and USD40 million in fines
- In February 2020, the bank – one of the largest in the United States – formalized a settlement with the US Justice Department and the Securities and Exchange Commission, with the payment of USD3 billion to end discussions regarding abuses and fraud committed in opening accounts and selling products over a 14-year period to its retail customers, and harassment of the retail bank’s employees for results that led them to commit the abuses and fraud. In January of that same year, two of the bank’s top executives at the time the abuses were committed received fines totaling more than USD40 million based, among others, on the fact that they failed to disclose the bank’s commercial practices with respect to its retail customers, and labor practices with respect to employees in the same area to the Board of Directors.
Petrobras/Pasadena: to be judged
- Although CVM Sanctioning Process No. 0014/2014 has not yet been judged, it has the objective of investigating irregularities related to the possible non-observance of fiduciary duties by the Petrobras Board of Directors in relation to the controversial and (subsequently) litigious acquisition of Pasadena Refinery System Inc., in the United States. This refinery, whose acquisition ended up costing the company USD1.2 billion, was recently sold to Chevron for less than half that amount.
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[1] IBGC, Code of Best Corporate Governance Practices, 2015, p. 39.
[2] Art. 153 of Law No. 6,404/76.
[3] In particular the Board of Directors’ Internal Regulations, and the Company’s Information Disclosure and Securities Trading Policies.
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