Non-executive directors: an overview of their role, duties and obligations in Brazil

November 2013 | PROFESSIONAL INSIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

In recent decades, the corporate environment has seen significant changes to issues regarding the corporate governance landscape, raising public, political and investor appreciation of this issue and introducing a greater awareness among all corporate entities of the need for an enhanced and recurrent emphasis on governance, risk management and compliance matters.

Thereby, in order to maintain good governance policy, it is fundamental that a company is assessed by a board of directors which is jointly responsible for the evolution and success of the company. The board’s role is to ensure entrepreneurial leadership of the company within effective controls, enabling the company to meet its obligation to all stakeholders. To execute these responsibilities effectively, best governance practices suggest that the majority of the board should be composed of either independent or non-executive directors.

A non-executive director is a member of a company’s board who is not an employee, outsourced, a services provider, or part of the executive team. Thus, an independent director will always be a non-executive director. However, a non-executive director is not necessarily an independent director.

Essentially, the key role of a non-executive director is to provide objective guidance and supervision to the company’s management, bringing an external point of view and an independent judgment to bear on strategy and performance issues. Hence, the main contribution that non-executive directors offer to the company is that they have a wider and normally more experienced view in relation to board discussion and the decision making process.

Although all directors should be capable of advising the company and evaluating business issues with an appropriately broad perspective, non-executive directors are normally chosen because of their market experience, professional knowledge and skills. They provide the board with useful business insights that perhaps other executive directors could not perceive in the same sense, since they tend to have an internal and direct approach to general day-to-day business discussions.

In this regard, Brazil is making a huge effort to raise the bar of its own corporate governance standards. Pushed by globalisation, privatisation and deregulation of the economy, which converge in a more competitive business environment, the roles of non-executive and independent directors emerged as a way to track good corporate governance practices imposed in other countries, and in response to the need for Brazilian companies to optimise their management and become more attractive to investors and the market in general.

Nevertheless, there is no reference in Brazilian corporate legislation to the role of the non-executive director. Besides, Law n. 6.404/76 (Brazilian Corporations’ Law) only regulates board member responsibilities in a very broad way, without discriminating as to whether or not a particular board member also holds an executive position in the day-to-day management of the company.

On the other hand, Brazil’s corporation law imposes a limit to the number of board members that may also hold an executive position. No more than one-third of board members may be appointed to be an executive officer.

In this sense, Brazilian rules do not distinguish the duties and obligations due to an executive or non-executive director. According to Brazil’s corporation law, members of the board of directors shall, among others duties, assist and conduct the general business of the company and supervise the activities of executive officers, applying their best efforts, precaution, trust and diligence in their activities. Moreover, the company’s by-laws may also attribute complementary duties and obligations to board members, but cannot differentiate directors’ duties as well.

As a result, non-executive directors essentially have the same legal duties, responsibilities and potential liabilities as their executive colleagues. Although it is understood that non-executive directors do not give the same continuous attention to the business of the company, it is important that they show the same commitment to its success as the executive directors.

Furthermore, another contribution to Brazilian corporate governance practices was stated by São Paulo’s Stock Exchange BM&FBOVESPA, Brazil’s main stock exchange, which in 2000 created specific listing segments for companies looking for superior governance standards – i.e, Novo Mercado, Nível 1 and Nível 2. These segments outline additional governance rules that go beyond the duties and obligations that companies must comply with under the Brazilian rules, and aim to improve investor interest in companies that decide to adhere to these higher standard listing levels.

However, for governance purposes these segments’ rules indicate the role of an independent director instead of the role a non-executive director. Novo Mercado and Nível 2 regulation, which respectively have the most strict governance rules, require that at least 20 percent of the board members need to be independent directors. According to their regulation, ‘independent director’, among other aspects, means a member of the board of directors: (i) has no ties to the company, other than an equity interest; (ii) is not a controlling shareholder or a family member of a controlling shareholder and neither has, nor has had in the three previous years, any ties to any company or entity related to a controlling shareholder; (iii) has not, in the three previous years, been an employee or officer of the company, or of the controlling shareholder or of a subsidiary of the company; (iv) is not a stakeholder of the company; and (v) is elected by a minority shareholder.

In the same fashion, the Brazilian Institute of Corporate Governance (IBGC) and the Brazilian Association of Listed Companies (ABRASCA), through their respective self-regulation codes, also recommend certain practices for non-executive directors and independent directors. ABRASCA’s Self-Regulation and Best Practices Code for Listed Companies makes a very brief distinction between non-executive director and independent director, only to recommend that an audit committee be composed primarily of either independent board members or non-executive directors in order for the committee to perform its role effectively.

It is important to point out that such self-regulating codes are not legally binding codes to any company other than those adhering to them. In that sense, these documents only support and stimulate companies to adopt more improved governance practices; there are no legal penalties linked to them.

Therefore, and in consideration of the foregoing, it is envisaged that all directors, whether executive or non-executive, will share responsibility in relation to a company’s compliance with its legal obligations, the company’s interests, as well as to market and shareholder expectations. A non-executive director can bring important benefits to any corporate entity and it is essential that the non-executive director operates as part of, and alongside, the overall board of directors, and not in isolation from executive management.

However, non-executive directors must have independent judgment on issues of strategy, performance and resources, including key appointments and conduct standards. They should undertake an unbiased analysis of the matters to be decided by the board. Also, non-executive directors must not only avoid conflicts of interest but also ensure a balance of shareholder power in the company, i.e., if the non-executive director identifies any kind of constraints, by the controlling shareholder, for example, to exercise his duties, he shall assume an independent position when voting or, if applicable, resign.

Marcelo Freitas Pereira is head of the Corporate/Transaction team and André Franchini Giusti is an associate at Siqueira Castro Advogados. Mr Pereira can be contacted on +55 11 4085 6585 or by email: mfp@siqueiracastro.com.br. Mr Giusti can be contacted on +55 11 4085 6592 or by email: agiusti@siqueiracastro.com.br.

Marcelo Freitas Pereira and André Franchini Giusti

Siqueira Castro Advogados