Member Article

The CorporateGovernance Code of the Portuguese Corporate Governance Institute (Instituto Português de Corporate Governance – “IPCG”) waspublished on 30 January 2013. For the first time, commercial companies haveaccess to a corporate governance best practice code prepared by civil societywhich is an alternative to the existing corporate governance code of the SecuritiesMarket Commission (CMVM).

Althoughit is intended for general application (that is, application to all commercialcompanies), the IPCG Code recognises that its natural targets are companiesthat issue shares admitted to trading on regulated markets("Issuers"). This is because the regulations that govern suchcompanies require them to adopt a corporate governance code.

The IPCGCode is based on a presumption of flexibility and adaptability and it uses aset of principles and recommendations with content that is elastic andadjustable to the situation of each one of the companies it is targeted at. Theobjective the IPCG Code’s approach is for Issuers to adopt corporate governancepractices that enable them to comply with the principles and recommendations,but without imposing rigid and universal content.

For thispurpose, the IPCG Code opted for a division between principles andrecommendations and this is something new compared to governance codes thathave existed to date in the Portuguese legal system. With this structure, the IPCGCode seeks, among other things, to give a new relevance to the exercise ofexplaining, allowing Issuers to consider certain principles as having beencomplied with, even without observing all the recommendations that constitutethem.

In thisway if Issuers adopt practices that do not conform to the content of a certainrecommendation, but they provide a grounded explanation for their choice thatdemonstrates that, in terms of purpose and function, they are apt to complywith the justifying principle, such an explanation will be deemed equivalent tocompliance by the Issuer.

The broadapproach of the IPCG Code has been to rely on the implementation of internalregulations on certain issues without imposing strict and mandatory content.

The IPCGCode is divided into the following seven chapters which feature a number ofvariable principles and recommendations:

(i)       A general part containing provisions on therelationship of the company with investors and information on and operation ofthe corporate bodies and their inter-relationship and conflicts of interest.

(ii)     Shareholders and the general meeting

(iii)    Executive management

(iv)   Monitoring and supervision

(v)     Performance appraisals and remuneration

(vi)   Risk management

(vii) Financial information

Withoutany claim to being exhaustive, we will now highlight some of therecommendations of each one of these chapters which will, perhaps, contributeto drawing a distinction between this and the CMVM Corporate Governance Code.

Rightaway in the introductory chapter, the IPCG Code addresses the problem ofconflicts of interest and recommends that, by means of internal regulation, anydirector that finds himself in a situation of conflict must inform the body orcommittee to which he or she belongs about the facts that may amount to such aconflict, and this director must not interfere in the decision-making process.What is new in this respect is the fact that the supervisory body has toconfirm the existence of the conflict whenever the director requests, or wheneverthe decision of the body or committee on the existence of a conflict ofinterests has not been unanimous.

In thechapter on shareholders and the general meeting, what merits special attentionis the recommendation on the establishment of criteria and terms under whichthe management body asks the general meeting to decide on management matterswithin its power. This is the first time this issue has been addressed in acorporate governance code on a national level.

Asregards executive management, the IPCG Code recommends that the internalregulation of the management body provides that the exercise of executiveduties in companies outside the group by executive directors must be authorisedby the board of directors or the supervisory body. Therefore, the IPCG Code hasresponded to the discussion on the accumulation of duties by executivedirectors by requiring authorisation from the Issuer, without establishing anystrict number that might not be appropriate for all.

In monitoringand supervision, one of the areas of great sensitivity lies in the notion ofindependence and the establishment of the number of independent non-executive directors.In this area, the IPCG Code chose to adopt the criterion of independence thatis legally established for members of the supervisory body, but it admittedthat, if it is justified by the size of the company, the percentage ofindependent non-executive directors may be lower than 25% of the total numberof directors.

Also in this respect, the IPCG Code recommends thatinformation on the relationship of directors with shareholders to whom morethan 2% of the votes may be imputed, or suppliers or clients with whom the companyhas significant commercial relationship, must be made available.

Inrespect of performance appraisal and remuneration, there are, in particular,two new features: (i) the compositionof the remuneration committee – a majority, not all, of independent members ofthe management – and (ii) thepossibility for non-executive directors to be given executive duties from timeto time, which should be reflected in their remuneration (specifically by thepossibility of attributing variable remuneration to any director in thissituation).

The issueof risk management is the area in which the IPCG Code made less ground-breakingchoices and the recommendations it has laid down are very close to those thatalready exist.

Finally,in the chapter on financial information, it should be noted thatrecommendations are made on external auditing and here the IPCG Code chose notto recommend limits on the number of "terms of office" of theexternal auditor, and not to limit the provision of non-auditing services by it.Instead it preferred to provide that: (i)Issuers establish, by internal regulation, that services other than auditingservices, should not be provided by the external auditor and (ii) the supervisory body should issuean opinion on whether or not the external auditor should be maintained at theend of each term of office.

As ouranalysis has been carried out immediately after the appearance of the new code,it is preliminary and, as of necessity, it does not address every issue. Wemust now wait and see what the reaction of Issuers and the CMVM will be to thisnew code. It is still early to draw any conclusions, but it seems we are now ona path to the existence and implementation of a corporate governance code otherthan that of the CMVM, and one with all the advantages such a code brings tothe functioning of commercial companies and, in particular, Issuers.