For the sixth time in the last 12 years, the Portuguese Securities Commission (CMVM), updated its mandatory corporate governance regulation, Regulation No. 4/2013 on Corporate Governance ( “the new Regulation”), and published a revised 2013 Corporate Governance Code (the “Code”). Although many of the changes can be described as prudent and positive, several changes may lead governance enthusiasts wondering whether the revisions are headed in the right direction.

Starting with the clearly positive changes, the importance of comply or explain provisions was highlighted in the new Regulation. The comply or explain approach to corporate governance widely used in Europe is also embedded in Portuguese regulations. However, the CMVM reports that in 2011 only “53% of the non-compliance with the ‘comply or explain’ rules is explained by the company and accepted by the CMVM.” This is a staggeringly low percentage in comparison to other comply-or-explain markets. It may be difficult for shareholders to understand why 47% of Portuguese issuers did not fully conform with comply or explain recommendations– whether due to a total failure to explain non-compliance or a failure to comply at all. Perhaps in response to the low levels of compliance, the new Regulation brings the comply or explain provision to the forefront, outlining an acceptable explanation/level of compliance in Article 1 – rather than sticking it in an annex where it is currently found in Regulation No. 1/2010 – thus highlighting and reaffirming its importance.

Notable positive revisions made to the 2013 Corporate Governance Code include changes to remuneration and related party transaction disclosure recommendations, the addition of more specifically defined criteria that affect the independence of non-executive directors, and a new recommendation to appoint a lead independent director in the presence of an executive chairman.

Other changes to the Code may not be so well received. In the current corporate governance environment – which, for the most part, associates an independent board with an effective board – the elimination of a 25% minimum board independence recommendation from the Code is highly unconventional, especially when combined with the removal of the recommendation to establish a nominating committee. Portugal already recommends one of the lowest board independence thresholds from among its continental European peers, what board action is the CMVM hoping to promote by removing the current threshold?

These changes are a serious divergence from recent initiatives for corporate governance codes to include specific and increasingly rigorous independence requirements. Instead, the CMVM replaced the 25% independence requirement with a provision that allows boards to determine the appropriate number of independent directors based on the size of a company, its shareholder structure and free-float.

On one hand, the move represents an attempt to shift the corporate governance paradigm from a “one-size fits all” method to a more flexible approach that values proportional representation over a strict and somewhat arbitrary independence requirement. On the other, the corporate shareholding concentration is high in Portugal, meaning that boards are dominated by directors affiliated with controlling shareholders. The removal of the independence recommendation, even if a subjective one, may lead to perilously low levels of independence on Portuguese boards.

It is difficult to envision precisely how board independence levels will be explained by Portuguese issuers – if at all – pursuant to the new Regulation’s emphasis on comply or explain. Technically, there is no provision in this regard that requires compliance or explanation. Based on historically low levels of compliance, we are neither convinced that overall levels of board independence will be enhanced by these changes, nor that the explanations given by Portuguese issuers will suffice on this issue.