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Board Independence (Brazil)

Background and Overview

In late 2010, the Sao Paulo Stock Exchange (BM&F Bovespa) attempted to raise the minimum board independence threshold for the Novo Mercado, its highest governance-differentiated listing segment, to 30 percent from 20 percent. However, issuers belonging to this voluntary listing segment voted against this proposal. As a result, the minimum board independence requirement remains at just 20 percent. The current wording of the listing segment regulations also permits issuers to "round down" the number of required independent directors, thereby allowing companies with six or seven-member boards to maintain only one independent director.

This 20-percent minimum has become increasingly inadequate as the average free float among Novo Mercado companies has risen to 46.5 percent and average board independence to 34.12 percent; it also falls well short of the Brazilian Institute of Corporate Governance's (IBGC) best practices code recommendation that boards be at least majority-independent.

According to ISS’ 2011-12 Policy Survey, 38 percent of institutional investors supported an increased board independence threshold of 30 percent for the Novo Mercado, while another 46 percent favored even higher thresholds.

Key Changes under Consideration

ISS' proposed policy in 2012 will be to recommend  AGAINST management proposals to elect a slate of directors or individual non-independent directors at Novo Mercado companies if the post-election board is not at least 30-percent independent.

Intent and Impact

The proposed policy would be more aligned with proportional board representation best practices and the growing expectations of institutional investors.

The proposed policy could have a significant impact on the percentage of ISS' against recommendations on these proposals:  ISS recommended AGAINST 25 percent of the 116 board election proposals presented by Novo Mercado companies during the 2011 proxy season. After the proposed policy change, this number could increase to 57 percent.

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

  • The proposed policy applies only to the Novo Mercado, which has accounted for nearly 90 percent of all IPOs in Brazil over the past three years. Should a higher board independence threshold (30 percent) also apply to the Nivel 2, the second-highest tier of the governance-differentiated listing segments? If no, what should be the threshold for Nivel 2 companies in your organization's view?
  • Should the proposed policy allow an exemption for companies whose free float is below 30 percent? Note that the minimum free float for Novo Mercado companies is 25 percent.

To submit a comment, please send via e-mail to policy@issgovernance.com.Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.