Contrary to global trends, corporate governance only began to show signs of development in Brazil at the end of the 1990s, when economic activity was still very much marked by the presence and activities of state organizations.
Giulia Keese Montanhesi
Lawyer at Marcos Martins Advogados
Far from dictating the best corporate governance practices, Brazil is trying to catch up with other countries, such as the United States, France and England, pioneers in this field precisely because they implemented organizational practices based on economic stability and market reliability, which Brazil lacked in the 1990s and early 2000s. Gradually, governance began to appear in the Brazilian financial market , encouraged by the growth of the capital market and the expansion of investments in the country.
Corporate governance can be present in all types of organization and is conceptualized as a set of practices that serve to monitor the management and performance of organizations, through a continuous effort to align the objectives of top management with the interests of shareholders, partners, owners and maximize the perspective of long-term business values.
It involves the implementation of legal statutes, methods, rules and regulations based on transparency and truthfulness of information for the management and protection of the company itself and the rights of shareholders, boards and executive management and other stakeholders, with the aim of maximizing the organization’s performance.
Although the costs of maintaining and implementing these practices are high, adherence to them improves the institutional image in the market, increases the confidence of investors and the general public, and generates an increase in the brand value of companies that follow this system.
Furthermore, the investors who initially supported the company’s project are not only interested in seeing the return on their investment in terms of market value, dividends, visibility and profit, but they also want to participate in its management, the direction of the business and its growth strategies.
The effects of implementing a good governance policy are:
a) Clearer separation of roles between shareholders, board members, executives, partners and owners, especially in family-controlled companies;
b) Improvement of the top management decision-making process, with a clearer definition of those responsible for the initiation, approval, implementation and evaluation stages;
c) Improving the mechanisms for evaluating performance and rewarding executives, including structuring more appropriate packages and remuneration;
d) Reducing the likelihood of fraud, as a result of better risk management and improved internal controls;
e) Greater institutionalization and transparency towards the company’s stakeholders.
The design of each company’s corporate governance invariably depends on its size, type of company, structure, corporate purpose, financial capital, number of partners, shareholders, etc. In large companies , many tools are used to help with governance, including the activities of boards and committees (Board of Directors, Audit Board, Advisory Board, etc.).
However, it is a misconception to associate corporate governance and good management practices with public limited companies and large companies, as the work of boards and specific management mechanisms are expressly provided for in Law 6.404/1976 (or the “LSA”).
More recently, we have seen an exponential growth in medium and small-sized companies, with Limited Liability Companies and Startups, mainly in the technology, data, medical and scientific fields. Not only because of the increase in the number of small and medium-sized entrepreneurs, but also because of the growing demands of investors , it has become essential to devise appropriate corporate governance and management practices for these structures to develop more quickly and adequately, adding value and mitigating the risks of new businesses.
It is true that the management of a limited liability company is independent of all the requirements and formalities of the management of a corporation. However, the Limited Liability Company is also allowed to apply the rules of the Corporations on a subsidiary basis, so that advice typical of this structure can add to the organization and management of the Limited Liability Company, as well as generate value and mitigate the risk of investors, in a way that characterizes a good and advantageous governance practice.
The Limited Liability Company can also look for the best way to organize itself internally, defining its own – lawful – governance strategies.
The Advisory Board, in this scenario, has proven to be an effective and appropriate tool for achieving these ends, since it is a body with technical and specialized capacity, created to issue opinions, recommendations, proposals and guidelines to the directors, on the social and management issues of the organization, in an exempt and independent manner from the company’s partners. Its viability is concluded by the fact that it is not prohibited in Limited Liability Companies, allowing its composition to be distinct from the management formed by the partners.
The partners are therefore free to set the number of members of the Advisory Board, its competence, responsibilities and operating rules in the Articles of Association and/or shareholders’ agreement. All the rules will be set out in your articles of association, including the composition of this select group, the matters that can be submitted for analysis by the advisors, always observing what should be the exclusive competence of the partners.
In order for its actions to contribute to the governance expected by investors in these companies, it is recommended that the Board be made up of professionals with experience in the areas of their duties, generating credibility in the market and attracting the trust of the directors, who may or may not follow the recommendations made (depending on the role provided for in its constitution). We would also point out that there are no restrictions on the nationality of board members and consultants, and the company may also appoint foreigners who are not domiciled in the country.
As for its leading role, this can be to a greater or lesser extent, so that it can be more deliberative or more consultative. It is important to be careful when delimiting its functions and activities in the Articles of Association so as not to confuse it with a Board of Directors or with the activity of the directors themselves. The areas of expertise of its members can be very diverse and their activities can vary according to the interests of the company. By way of example, a board can be formed both to advise on the preparation of strategic plans and operational policy definitions (including accountants, administrators, managers and economists) and to give technical/scientific opinions on projects and activities developed in the company’s field of operation (including scientists, market professionals or leading figures in the field ).
It is also important to emphasize the responsibility of the directors in relation to acts carried out by the management that are based on their deliberations, i.e. if they recommend the practice of an illegal act or one that is contrary to the articles of association, they should be held jointly and severally liable with the company’s directors.
We believe that this definition is very important if not crucial to the success of small companies and startups, especially those that are setting up their governance and starting their activities involving science, medicine or technology, which can undoubtedly benefit from a team of professionals offering specialized advice.
In this way, the introduction of the Advisory Board in Limited Liability Companies and Startups promotes corporate governance, with all its benefits, such as trust and credibility in the market and with investors and supporters, as well as boosting business and professionalizing the activity conducted by partners and managers.
Any questions? Talk to our lawyers and get advice.
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