Corporate leadershipi Board structure and practices
Brazilian listed companies are managed by a board of directors and by an executive office. Brazilian companies can also install a fiscal board, which does not have the nature of a managerial body but rather of a supervisory body.Board of directors
The board of directors is a decision-making body with authority to:
- establish the company's business policy in general;
- elect and dismiss officers;
- set the duties and monitor the day-to-day managerial actions of officers;
- express an opinion on any matters to be submitted to the shareholders; and
- approve the implementation by the executive office of specific matters prescribed by law or under the company by-laws.
The authority of the board of directors established by the Corporation Law cannot be delegated to other bodies.
The Corporation Law sets out that the board of directors shall be composed of at least three members, who are not required to be Brazilian residents.
In the case of the companies currently listed on the Novo Mercado, considering the changes approved in its Listing Rules in 2017, they must observe the following rules:
- until the ordinary shareholders' meeting that shall approve the financial statements related to the fiscal year of 2020, the board must be composed of at least five members, and at least 20 per cent of the members must be considered to be independent; and
- as from the ordinary shareholders' meeting that shall approve the financial statements related to the fiscal year of 2020, the board must be composed of at least three members, and at least two or 20 per cent of the members, whichever is greater, must be considered to be independent.
Companies that became listed on the Novo Mercado as from 2 January 2018 shall apply the rule provided in item (b) above, as from its listing.
In the case of the companies currently listed in the Level 2 segment, the board must be composed of at least five members and at least 20 per cent of the members must be considered to be independent.
The requirements for appointment to occupy a position on a board of directors are established in the Corporation Law. Generally speaking, a director must be someone with an unblemished reputation who has not been convicted in an administrative or judicial procedure in relation to corporate crimes or irregularities.
The board of directors can create specific committees (e.g., compensation, related-party transactions and audit) to assist it in the management of the company. For the companies currently listed in the Novo Mercado segment, it will be mandatory to install an audit committee, statutory or not, as from the ordinary shareholders' meeting that shall approve the financial statements related to the fiscal year 2020.
Listed companies must rotate their independent auditor every five years and must wait at least three years before rehiring the same auditor. However, if the listed company has installed a statutory audit committee, rotation can occur every 10 years instead of five.
In the event of a tender offer for the acquisition of the control of a listed company (Takeover TO), in principle, the board of directors of the listed companies is not under an obligation to make a statement as to whether or not it agrees with the terms and conditions of the Takeover TO.
If, however, the board of directors decides to make a statement on the Takeover TO, the statement must be disclosed to the market and must address such issues as provision of information on all aspects necessary to allow an informed decision by the investor, especially with regard to the price being offered; and any material changes in the company's financial condition since the date of the most recent financial statements or quarterly reports disclosed to the market.
In the case of companies listed on the Novo Mercado and Level 2 listing segments, the board of directors is required to prepare and disclose a reasoned opinion on the Takeover TO – in favour or against it – and to address the following topics:
- the suitability of and opportunities presented by the Takeover TO;
- the impact of the Takeover TO on the interests of the company;
- the offeror's stated strategic plans for the company; and
- any other point of consideration the board may deem relevant.
The executive board shall be composed of at least two officers. The officers of Brazilian listed companies can be elected and removed at any time by the board of directors.
Up to one-third of the board members may be elected for executive board positions held concurrently. Pursuant to the rules of the Novo Mercado, Level 2 and Level 1 listing segments, the offices of chair of the board of directors and CEO cannot be held by the same individual. However, the holding of these positions concurrently is allowed on an exceptional basis:
- in the case of the companies listed in the Level 2 and Level 1 listing segments, for a maximum period of three years from the date that the company's shares start to be traded on the special listing segment; and
- in the case of the companies listed in the Novo Mercado listing segment, in the case of vacancy for a maximum period of one year, within such period the company shall disclose the accumulation of positions owing to vacancy not later than the business day following its occurrence, and disclose within 60 days of the vacancy the measures taken to end the accumulation of positions.
Among other duties, the executive board represents the company in dealings with third parties. The by-laws may establish that certain managerial decisions should be taken in executive board meetings only.
The by-laws will establish the number of officers permitted, the manner of their replacement, their term of office, and the assignments and powers of each officer. Officers will perform their duties separately, according to their assignments and powers, but in keeping with the other officers, and will not be held liable for any obligations assumed on behalf of the company as regards routine acts necessary for the company's management.
If the by-laws are silent or there is no resolution adopted by the board of directors prescribing the officers' duties, any officer may represent the company and take the actions necessary for its routine operations.Compensation of the members of the board of directors and executive board
The shareholders' meeting shall prescribe the aggregate or individual compensation of the members of the board of directors and executive board, including benefits of any kind and representation allowances, taking into consideration their responsibilities, the time devoted to their duties, their skills and professional standing, and the market value of their services. If the shareholders' meeting approves the aggregate compensation to be paid to the company's directors and officers, it will fall under the authority of the board of directors to approve the allocation of the compensation between the company's directors and officers.
If the company's by-laws set forth a compulsory dividend equal to or above 25 per cent of the net profits, it may establish a share in the company's profits to the benefit of the company's directors and officers, provided that the total amount thereof does not exceed the annual compensation of the directors and officers, or one-tenth of the profits, whichever is the lower. Nevertheless, directors and officers shall only be entitled to a share in the profits in a financial year for which the compulsory dividend is paid to the shareholders.
Detailed information on the compensation paid to the company's directors and officers, including, but not limited to, the breakdown of the compensation (e.g., fixed and variable compensation), and the minimum, lowest and average compensation paid, must be disclosed in the company's reference form. In addition, the companies listed in the Novo Mercado segment must have and disclose their compensation policies.Fiscal board
The fiscal board is a supervisory body responsible for supervising the company's directors and officers and providing information in this respect to the shareholders.
The fiscal board is a compulsory body, but need not operate on a standing basis. A non-permanent fiscal board must be instated upon the request of shareholders representing at least 10 per cent of the voting stock or 5 per cent of the non-voting stock.
The fiscal board is composed of three to five members and a like number of alternates. The conditions for election and impairment of fiscal board members (who must be Brazilian residents) are prescribed by law.
The fiscal board has the authority to, among other things:
- monitor the actions of the company's officers and directors and verify their compliance with their legal and statutory duties;
- review and give an opinion on the board of directors' annual report;
- review and give an opinion on proposals of the management to the shareholders' meeting relating to changes in capital, the issuance of debentures or warrants, investment plans or capital budgets, dividend distributions and certain corporate reorganisations;
- report any error, fraud or criminal act, and suggest measures useful to the company to any officer or member of another administrative body, and, if these fail to take any necessary steps, to act to protect the corporation's interest and report to the shareholders' meeting;
- review the balance sheet and other financial statements periodically prepared by the company; and
- examine the financial statements for the fiscal year and give an opinion about them.
The fiscal board's authorities can be neither delegated nor attributed to any other body of the company.ii Directors
As mentioned above, the board of directors is a decision-making body of the company, but the daily routine of administration of the company shall fall to the executive board. All the members of the board of directors, including the outside or independent members, must receive in advance of the meetings of the board of directors information about the matters that will be discussed and put to the vote.
Brazilian legislation does not expressly state that the directors have the right to visit the company's facilities and its subsidiaries, or that the directors should have free access to the lower management of the company. However, considering that among the duties provided for the board of directors in the Corporation Law, it is established that the board of directors shall 'supervise the performance of the officers, examine the books and records of the company at any time, request information on contracts signed or about to be signed, and take all other necessary action', it is expected that the directors shall have free access to the company, its subsidiaries and its lower management.
Pursuant to the Corporation Law, the directors have the following duties and obligations:
- a duty of diligence, employing the same care and diligence that every diligent and honest person employs in his or her own business;
- to act within the scope of their duties without misuse of power, refraining from the performance of gratuitous or non-authorised acts and from the receipt of personal advantage by reason of the performance of their duties;
- even if elected by a certain group or class of shareholders, they have the same duty to the company as everyone else, and must not, even in the defence of the interests of those who elected them, fail to fulfil these duties;
- a duty of loyalty;
- to act without conflict of interest, not intervening in any transaction where they have an interest conflicting with that of the company; and
- a duty of information.
As regards the liability of the directors, directors shall not be held personally liable for the obligations assumed on behalf of the company as a result of a regular act of management. However, directors shall be held liable in civil lawsuits for losses that they cause owing to acts of negligence or fraudulent intent and in violation of the law or the company's by-laws.
Note that the directors shall not be liable for unlawful acts performed by other directors, unless they are involved with these directors or they neglect to perceive them, or if, having knowledge of them, they fail to act to prevent their performance. However, directors are held jointly liable in the case of decisions taken by the board of directors.
In this particular, we note that each of its members is personally liable for any act of omission or negligence of the board of directors, and a dissident director shall express his or her disagreement regarding the resolutions taken through the clear and written register in the minutes of the meeting of the competent administration body, to release him or herself from any eventual civil liability. Any director who agrees with the performance of acts that violate the law or the company's by-laws shall be held jointly liable for the losses resulting from said act.
The members of the board of directors are elected by the shareholders, who can dismiss them at any time. The shareholders representing at least one-tenth of the voting capital may request that a multiple voting procedure be adopted to entitle each share to as many votes as there are board members, and to give each shareholder the right to vote cumulatively for only one candidate or to distribute his or her votes among several candidates.
The term of office of the directors must be defined in the by-laws, but cannot exceed three years, although re-election is permitted. In the case of companies listed in the Novo Mercado, Level 2, Level 1 and BOVESPA MAIS listing segments, the term of office cannot exceed two years, although again re-election is permitted.
The requirements for appointment to occupy a position on the board of directors are established in the Corporation Law. Generally speaking, a director must be someone with unblemished reputation, who has not been convicted in an administrative or judicial procedure in relation to corporate crimes or irregularities. Furthermore, unless waived in a shareholders' meeting, individuals who hold positions in companies that may be regarded as market competitors of the company, or who have any interests that conflict with those of the company, cannot be elected as a board member.
As regards conflicts of interest, a director shall not take part in any corporate transaction in which he or she has an interest that conflicts with an interest of the company, or take part in the decisions made by the other directors on the matter. He or she shall disclose his or her disqualification to the other directors, and shall cause the nature and extent of his or her interest to be recorded in the minutes of the meeting of the board of directors.
Notwithstanding compliance with the conflict of interest provision, a director may only contract with the company at arm's length. Any business contracted other than on an arm's-length basis is voidable, and the director concerned shall be compelled to transfer to the company all benefits that he or she obtains through such business.