Jonathan Mazon participates in the IR Global Guide – International Governance: The Risks You Face as a Global Director
Foreward by Andrew Chilvers
As companies continue to look for opportunities in global markets, directors from diverse jurisdictions are hired to serve on the boards of foreign businesses as well as domestic ones that have operations and assets in other countries.
Enterprises across the world look for directors from other jurisdictions for any number of reasons. Hiring board directors from other countries can help to build investor confidence, for example. Likewise, an enterprise that is headquartered in a different jurisdiction but with a subsidiary in the US or Europe could seek directors to gain expertise and credibility. The director may have valuable international or local geographic expertise regarding business objectives, strategy, operations and risk management.
Nevertheless, serving as a director on the board of a global enterprise can bring major challenges. It’s true that during the past few years corporate governance laws and regulations have started to converge across regions, but there remain critical international differences regarding the responsibilities and liabilities of directors.
With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?
Although mandatory adoption of the Brazilian GDPR was recently again delayed, experts agree that once it enters into force, on May 3rd, 2021, this legislation will affect all organisations that collect, treat or store personal data in Brazil. The fact that the Brazilian data protection law is based on its EU equivalent does not necessarily mean that there will be an unusual increase in litigation or in the amounts of potential fines to companies or in personal liability to directors.
For global directors, it is important to be familiar with the more critical legal aspects of each country where their organisations conduct business. Having robust risk management frameworks and board supporting committees in place is also key to allow board members to focus on their mandates. In Brazil, for instance, certain tax and criminal matters can become a source of personal liability to board members, as well as civil/commercial, environmental, labour and consumer claims, in case the legal entity is considered an obstacle to the compensation of damages.
The ongoing and very high-profile case regarding the 2006 acquisition and subsequent investments of Brazilian oil giant Petrobras in US refinery Pasadena Refining System Inc., is an example of how fiduciary duties are currently enforced in Brazilian courts and how cross-border responsibilities are an increasing part of the risk equation. In summary, all nine board members at the time are now involved in multiple claims related to the alleged breach of their duty of care, which led to the approval of the acquisition at prices above market, thus not taking into account the best interest of Petrobras. As the company’s securities are also traded on the New York Stock Exchange, after settling a class action lawsuit in the US, it also entered into agreements with the SEC and DOJ, which cost the company a combined amount in excess of $1 billion.
With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?
As mentioned earlier, it is vital that board members of global organisations have a broad vision of the potential risks and liabilities that the organisation faces in each jurisdiction where it operates or plans to operate. There are no safe alternatives for sound local advice from each geography, well-structured risk management and compliance programmes, and periodic training for directors and officers.
The basic law to govern fiduciary duties in Brazil is the Civil Code (Law No. 10406/02, art. 927, sole paragraph), which in fact sets the obligation to repair damages caused by any unlawful act. Then, there is the Brazilian Corporations Law (LSA or Law No. 6404/76, Chapter XII, Section IV) which deals specifically with directors’ and officers’ duties and responsibilities.
In a nutshell, acting in good faith and with the best interest of the organisation in mind, while exercising the duties of care, loyalty and obedience seem to be relevant defence arguments for directors at Brazilian courts. From a practical perspective, administrative decisions from the Brazilian Securities and Exchange Commission (CVM) also bring forth important concepts, such as the business judgement rule created by the US courts and still infrequent in Brazilian judicial discussions.
As far as guidance on the expectations of directors is concerned, the precedents from CVM administrative rulings seem far more numerous and illustrative than their judicial counterparts. These tend to concentrate on tax, criminal, and the other types of claims mentioned before in which the legal entity is disregarded due to being an obstacle to the compensation of damages.
In addition to the legal requirements, there are two other sources of guidance on such expectations in Brazil: the best practices compiled by entities such as the Brazilian Institute of Corporate Governance (IBGC) and each organization’s corporate governance documents.
How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?
While there is no risk-free solution to global directors’ liabilities, fostering a culture of ethics and compliance certainly helps to keep organisations on track and, in case something does go wrong, it also helps to contain the crisis and have better defence arguments. In this sense, there is no substitute for the tone at the top and boards are certainly a key part of setting the tone.
We have already seen the tough example of Petrobras. For a more virtuous example, we can look at the 2003 Coca-Cola Frozen Coke US scandal. This was a manipulation case that started by putting the company under the scrutiny of federal prosecutors and the SEC and ended with the replacement of their CEO. It also included a disclosure of the issue to markets, the restatement of earnings and a more active stance from its board with regard to strategy definition and management oversight.
Well-structured risk management teams and processes are also critical in helping organisations avoid foreseen operational and strategic risks, as well as to better tackle crisis events ranging from the ongoing COVID-19 pandemic, a bribery case in a foreign subsidiary or the materialization of an unforeseen risk, such as a next-generation cyber-attack that no one could predict its effects on the organisation. Integration between the risk management framework and the board is also key, as directors in Brazil are ultimately responsible, among others, for selecting and replacing external auditors, and approving the management’s accounts and the organization’s financial statements.
There is certainly a trend of corporate governance practices to become more aligned over time. Global investors and cross-border financing are both strong drivers of this process. Pressure from stronger economies, such as the US-sponsored Sarbanes-Oxley Act, as well as initiatives from international organizations, such as the G20/OECD, are also relevant.