Eight years since its last update, and after two years of thorough review, on August 1st, 2023 the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governanca Corporativa – “IBGC”) published the 6th edition of the Corporate Governance Best Practices Code.

The new Code was formulated after a study of 15 governance codes from different countries, international institutions, and organizations, and is designed to be more concise, inclusive and principle-based, and less prescriptive. Based on our review, the IBGC appears to have focused on updating not just specific areas of guidance, but how that guidance is communicated, along with the Code’s philosophical approach. Rather than prescribing a uniform approach that every organization must follow strictly, regardless of their background, size, and complexity, this code provides general guidelines that companies can adapt to their circumstances.

Emphasis on Ethics and Inclusion

At 70 pages, the new Code is significantly shorter than the previous 5th edition. The IBGC explains that many of the removals relate to “practices and recommendations [that were deemed] too specific for certain types of organizations and therefore not inclusive enough.”

The Code emphasizes ethics as the foundation of corporate governance, with Pedro Melo, the CEO of IBGC, noting that “[t]here is a debate about whether there are governance failures or, in fact, ethical failures.” This emphasis extends to the five principles that permeate the best practices outlined by the Code, which now include integrity along with transparency, equity, accountability, and sustainability (previously referred to as “social responsibility”). By incorporating the integrity principle, the IBGC is urging Brazilian companies to ensure alignment between their words and actions.

Additionally, the structure of new Code reinforces the importance of ethical considerations. Discussion of the Code’s philosophical and definitional governance groundwork, previously buried within the 5th edition’s “Foreward”, has been spotlit in a new introductory “Foundation” chapter, which the IBGC describes as “essential” in setting out the Code’s philosophy and “the basis for the subsequent sections’ content.” Another example relates to conflicts of interest, which the 5th edition dealt with in a final chapter, separate from the rest of the Code, that focused primarily on the single (though admittedly widespread) issue of directors representing the interests of significant shareholders. By contrast, the introductory Foundation chapter of this edition includes a relatively robust principles-based discussion of the challenge of managing conflicts throughout governance, with specific conflict situations addressed in detail elsewhere in the document.

Sustainability

The Code also focuses on companies’ interdependence with the environment and society. It defines corporate governance as a system consisting of principles, rules, structures, and processes by which organizations are directed and monitored, with a view to generating sustainable value for the organization, its shareholders, and society in general. This system is based around a search for balance among the interests of all parties.

Under this framework, sustainability and diversity are in the new Code’s spotlight. Whereas the 5th version mentioned environmental issues seven times, the new code includes dozens of instances, including explicit references to board oversight of environmental risks and opportunities:

  • The board of directors should consider the sustainability agenda (including ESG aspects) and innovation in an integrated manner when making strategic choices;
  • The board’s supervision must not be restricted to financial-economic performance, as it should also contemplate environmental, social and governance factors; and
  • Board members should stay actively informed about the challenges and internal and external risks related to ESG aspects that the organization faces.

Diversity and Board Skills

In terms of diversity, the updated version challenges companies to broaden their approach when assessing the composition of their board of directors and management board members. The code mandates that companies “should consider the creation of a competency matrix and contemplate the diversity of knowledge, experience, age, gender, color or race, ethnicity, sexual orientation, among other aspects….”

Hopefully, this emphasis will lead Brazilian corporate issuers to present clear data on each director’s biographical details, skills and experience, rather than just a summary overview of the companies where they have previously worked, as is often the case.

Impact of the New Code

Although it is not mandatory for a company to follow the Code’s practices, the IBGC encourages companies to apply it as a means of showing “their commitment to align interests; prevent, mitigate, and address conflicts; and generate tangible and intangible value for all stakeholders, considering the impacts on the economy, society, and the environment.” Moreover, any unexplained non-compliance could indicate that the company has a weak corporate governance system, which can negatively impact its reputation, as well as its ability to attract investors. That said, given the limited implementation of ESG-related disclosures under the recent CVM Resolution 59/2022, the impact of the Code’s 6th edition on corporate disclosure and governance practices remains to be seen.

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