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Of the species that inhabit Boards of Directors, there are two that are probably the most pernicious ones: the “accomplice” and the “dodger.”
The accomplice is the one who agrees with everything. He or she arrives at the meeting, not necessarily having read the background materials, and nods to everything others say. In fact, whether he has previously read the material or not is irrelevant once he will agree with every single proposal. The CEO’s and the Chairman’s words sound like the proverbial siren song to his ears, leading to an uncontrollable desire to say yes, even if the ship is heading for the rocks. Occasionally, he suggests a compliment or a vote of praise. And seldom, he splutters some soundbites to show he is not sleeping.
The dodger is as destructive as the accomplice. He considers himself a “diligent” board member. He reads the material carefully and arrives at the meeting ready to present his arguments. But instead of cooperating so that the decisions are the best ones for the Company, his posture is only one: to avoid deciding. Based on the most contorted claims, the dodger seeks ways to not commit himself, usually claiming that it is not up to the Board to deliberate or analyze specific matters. He is a member who always seeks to be legally protected to avoid later claims. But, instead of contributing to the company, he ducks out and, accordingly, helps make the decision process even worse. He loves to abstain and dodge real decisions.
This month, CVM (the Brazilian Securities and Exchange Commission) has delivered a sharp message to our dodger directors. After an Amec’s inquiry, the regulatory entity stated that Boards of Directors are required to analyze and deliberate over quarterly financial statements – popularly known as ITR – Informações Trimestrais (equivalent to From 10Q in the USA). Amec members’ concern results from the perception that several companies do not submit their quarterly statements to the analysis and deliberation of their boards. Many directors become aware of these documents almost simultaneously to their disclosure to the market. Therefore, information that is highly relevant to form the market opinion is disclosed with no superior scrutiny to management. And what’s even worse: when quarterly financial statements are not analyzed, the annual analysis, established by the law, is undoubtedly affected. Problems accumulate throughout the year and, because they were previously made public, any decision to correct them in the end of the year becomes much more difficult.
There are two main reasons that lead Boards of Directors and their members to avoid the quarterly analysis. The first one, on the companies’ side – including their management and controlling shareholders – reflects a culture related to a posture of disdaining the Board of Directors as a relevant body in the corporate governance structure – with strict legal responsibilities. The management and controlling shareholders are the ones that manage the company – and the Board of Directors must not obstruct their work.
The second one, on the side of Board members who act as dodgers, their posture results from an extreme unwillingness to accept responsibility. It’s claimed that when quarterly financial statements are not audited, Board members cannot be held responsible for them.
CVM has clearly showed the misunderstandings regarding these postures in the official letter submitted to Amec (available at
First of all, the regulatory entity has admitted that, according to the text of the Law 6.404, companies are not obliged to submit their quarterly information to their Boards of Directors to be deliberated. The problem is in the way the law is worded. However, CVM was careful enough to address the issue in details, showing how Board members who are really concerned about playing their role must act.
In CVM own words: “In view of the competence attributed by the Law to Board members and, mainly, with a view to fulfilling their diligence duty, it’s recommended that members analyze financial information in advance.” The entity also considers that Board members can, on a proactive basis, request this information to be able to meet their fiduciary duties. CVM adds: the banning on the trading of shares by the management team in the 15 days prior to the disclosure of quarterly statements configures the assumption that this access exists.
In the case of companies that ban or restrict the access of Board members to financial statements reasonably in advance, the entity is even firmer: “The company cannot deny the previous access to quarterly statements (before their disclosure to the market) when requested by a Board member.
And CVM follows this same line when it comes to neglectful Board members, who prefer to abstain from their responsibilities: “Board members cannot excuse from acting diligently regarding the supervision of the company’s businesses and the preparing of financial statements by justifying there is no legal provision establishing they have to give their opinion about intermediate financial information.”
The above-mentioned comments were attested by an opinion issued by the Specialized Federal Attorney’s Office, responsible for CVM’s legal opinions. The office adds that “it’s recommended that Board members routinely analyze statements in advance.”
Working diligently on an issue it considers important, CVM has conducted a survey among the companies listed in Ibovespa index to check the standard practice they adopt to approve quarterly statements. It was found that Boards of Directors either approved or expressly authorized the disclosure of quarterly statements in nothing less than 55% of the companies.
The CVM´s declaration will certainly impact on the governance practices of a number of publicly held companies in Brazil. In those in which the diligent analysis of quarterlystatements is not a practice, it will become the rule. And in those in which the analysis is already part of the process, the importance of a serious work by Board members will be reinforced.
No doubt the sheriff’s position is a driving factor for the improvement of the corporate governance in Brazil.