State Owned Enterprises: 05 years of the New Corporate Governance Rules

Empresas Estatais: 05 anos das Novas Regras de Governança Corporativa

Empresas Estatales: 05 años de las Nuevas Reglas de Gobierno Corporativo

Ricardo Lupion ricardo.lupion@pucrs.br

Pontifical Catholic University of Rio Grande do Sul (PUCRS), BR

Improving corporate governance in Brazilian state-owned enterprises was the path chosen by the legislator to mitigate political influences and appointments in the top-level management of companies controlled by the federal government, in which the president has the power to elect and dismiss members of the Board of Directors and the Executive Board:

The fact is that throughout its history, Petrobras has suffered from political interference that ran counter to its business interests. The state-owned enterprise was asked to build several industries, such as petrochemicals, fertilizers, ethanol, and thermal-based energy generation. [...] Colonel Ozires Silva, former president of the oil company during the Sarney presidency period, defined the company's position precisely: 'Petrobras' decision-making center is not on Avenida Chile [address of the company's headquarters in Rio de Janeiro ]. It's in Brasília (PADUAN, 2016, p. 13).

This article intends to address the new regulatory environment created by the SOEs Law (Law No. 13,303, of June 30, 2016) with the purpose of protecting the public company, the mixed joint-stock corporation, and its subsidiaries ("state-owned") against any possible (and unfortunately common) political-partisan interference in the appointment of the members of the top-level management positions in the SOEs. The text will also review cases of progress, setbacks, and the future of this new legal norm.

Despite the need to enact Law 13,303/16 being expressed in the constitutional text since Constitutional Amendment No. 19 of 1998 , its text arose from an independent initiative of the National Congress in a context of political and economic crisis aggravated by accusations of corruption, related, in some way, with state-owned enterprises (ANTUNES, 2017).

Despite the good intentions of the SOEs Law and the undeniable advances made by Brazilian state-owned enterprises, “among which the SOEs Law is, without a doubt, the most relevant”,1 however, some voices questioned the adoption of corporate governance practices in state-owned enterprises, "because such governance criteria already exist in constitutional norms, administrative law rules, corporate law, capital market regulation and the laws that actually establish state-owned enterprises”, in the words of Warde Junior (2017, p. 105).

This article will address the topic in four sections: the first one reports corporate governance in state-owned enterprises, the new Brazilian regulatory environment and the important decisions of the Brazilian Securities Commission – CVM to immediately apply the new governance rules; the second one presents an important advance with the new Petrobras Bylaws, the new Integrity Background Check requirements; in the third one, the text addresses the election of a member of the board of directors appointed by the Brazilian government at Itaipu Binacional and the election of the chairman of the board of directors of Petrobras that took place in 2019, which represent, in form and content, examples of setbacks in the application of this new legal norm; at the end, in the fourth section, the future of the SOEs Law in the hands of the Federal District Court of the 1st Region and the Supreme Court is discussed.

One of the most relevant aspects of the SOEs Law was the creation of minimum requirements for academic background and professional experience for the appointment of applicants for positions in the top-level management of state-owned enterprises, as a measure to mitigate the political-partisan allotment of high-level positions in the management of state-owned enterprises, until then reserved for political appointments. With this measure, the aim is to professionalize the top-level management of state-owned enterprises.2

These are already common requirements in the private sector, as it is usual for applicants for positions in the top management of a large company to have previous experience and professional background, compatible with the responsibilities of the intended position.

Thus, those appointed for member of the Board of Directors3 or for positions on the Executive Board4 of the state-owned enterprises, will be chosen among citizens of unblemished reputation and notable knowledge and must meet the requirements of professional experience or academic background and also cannot fit into any of the prohibitions and impediments,5 all as provided for in the SOEs Law and related to situations that could compromise the independence and impartiality of the director or officer, necessary for the correct and appropriate decision-making in the interest of the state-owned enterprise.

The SOEs Law provided for the emergence of a new Brazilian regulatory environment, with the issuance of decrees, regulations, ordinances and other normative acts that aim to improve new governance practices in Brazilian state-owned enterprises, such as Federal Decree No. 8,945, of December 27, 2016 with rules regulating the application of the SOEs Law in the scope of state-owned enterprises controlled by the federal government, including companies in which the federal government holds equity interest.

In 2017, the Brazilian stock exchange (B3)6 amended the Regulation of the SOEs Outstanding Governance Program to adapt it to this new regulatory environment7 and the Brazilian Institute of Corporate Governance (IBGC)8 edited the booklet Corporate Governance in Listed SOEs in Brazil.

Also, in these years of validity of the legal norm, important decisions of the Brazilian Securities Commission - CVM declared unlawful certain political-partisan appointments for failure to comply with these new requirements of the SOEs Law. At least three decisions issued by the CVM reveal that, at first, there was an attempt to continue the political-partisan appointment for positions in the top-level management of state-owned enterprises, despite this new regulatory environment requiring a new attitude from controllers for the appointment of directors and officers of state-owned enterprises (governance beyond form).

In the Light case,9 CVM examined whether the appointment for member of the board of directors by the shareholder and state-owned enterprise Cemig10 fitted (or not) with the impediment rule provided for in art. 17, § 2, item II of the SOEs Law. The CVM board decided that the appointment made by the shareholder and state-owned enterprise Cemig to Light's board of directors fitted the impediment rule provided for in the aforementioned legal provision, because the applicant "participated, in a relevant manner, in carrying out the electoral campaign of Mrs. Dilma Rousseff in 2014”, in the campaign committee in the 2014 presidential elections.11

In the case of Copel,12 CVM examined whether the appointment made by the Government of the State of Paraná for a member of the Appointment and Evaluation Committee (AEC) of the state-owned enterprise Copel fitted (or not) the case of prohibition provided for by the SOEs Law. After recognizing the application of the impediment rule to AEC members, the CVM board concluded that the appointed fitted the impediment rule because all AEC applicants are disqualified for having political-partisan links.13

Finally, on another occasion, also involving the company Light, CVM examined whether the appointment made by the shareholder and state-owned enterprise Cemig for a member of the fiscal council would (or not) be subject to the impediments by the SOEs Law. In this case, based on the precedent of the administrative process that judged the “Copel Case” - referred to above – the CVM board also concluded that the applicants were impeded because they had political-partisan links.14

Petrobras is a mixed joint-stock corporation or mixed capital company. Part of its share capital belongs to the Federal Government and part belongs to private investors. The Federal Government is the company's controller and private investors (minority and preferred shareholders) bought shares to obtain financial profit.15 These investors have no influence on Petrobras' management. Minority shareholders, although they have voting rights, do not exercise power (exercised by the Federal Government, which holds 50.26% of the common shares, and by BNDESPar with 0.16%, BNDES with 9.87% and Caixa Econômica Federal with 3.24%).16 Preferred shareholders do not have voting rights. Thus, the controlling shareholder of Petrobras is the Federal Government.

The stoppage of truck drivers in May 2018 and its serious economic consequences for the country triggered an intense debate about the origins of this crisis and placed Petrobras' pricing policy under intense questioning17, which to this day is present in the Brazilian news, even motivating the replacement of the Company's President.

For the purpose of receiving private investments to be consequent, it is necessary for investors to have a realistic expectation of return, in the form of dividends or in the form of appreciation of the acquired shares, thus the expectation of private investors for the management of the company to be efficient is legitimate. Private shareholders are right to demand that prices be fixed in such a way that, most of the time, the company is profitable and does not get tangled up in financial difficulties that are difficult to overcome. If it were not for taking this expectation seriously, the Federal Government should have incorporated Petrobras as a company with share capital composed exclusively with public funds from the Federal Government and not as a mixed joint-stock corporation with share capital composed both with public funds from de Federal Government and with private investments (SOUZA NETO, 2018).

This subject brings the debate around art. 238 of Law 6,404, of 1976, according to which, the government legal entity that controls a mixed capital company “may guide the company's activities in order to meet the public interest that justified its creation.” (BRAZIL, 1976, online).

It so happens that Petrobras was not created to serve the public interest to ensure reasonable fuel prices. On the contrary, Article 3, § 1, of the company's bylaws imposes on its managers the duty to manage “activities related to the corporate object shall be developed by the Corporation on a free competition basis with other companies according to market conditions.” (PETROBRAS, 2018, p. 1).

In order to have ample and unrestricted freedom to guide the federal state-owned enterprise exclusively to the achievement of public interests, a company could have been incorporated, formed exclusively by financial contributions from the state controller, without private investors.18

In line with the purposes of the SOEs Law, on 15/12/2017, the Federal Government promoted an amendment to Petrobras' bylaws to include the criteria to be followed by the company when the Federal Government guides the company's activities to contribute to the interest public that justified its creation. According to the new wording of the bylaws, these activities must be carried out by Petrobras under the same conditions as any other private sector company operating in the same market and, otherwise, the company may only assume obligations or responsibilities, when: I – it is established by law or regulation, as well as provided for in a contract, agreement or arrangement entered into with the competent public entity to establish it, observing the wide publicity of these instruments; and II – its costs and revenues are broken down and disclosed in a transparent manner, including in the accounting plan.

Verification of compliance with the requirements of the "conditions identical to those of any other private sector company operating in the same market" will be carried out by the Finance Committee and the Minority Shareholders Committee, in their duties of advising the Board of Directors, which will evaluate and measure, based on the technical-financial analysis criteria for investment projects and for specific operational costs/results practiced by Petrobras' management, if the obligations and responsibilities to be assumed are different from those of any other private sector company operating in the same market.

When the Federal Government directs Petrobras to contribute to the public interest (not related to the public interest that justified its creation), in addition to meeting the above conditions, the Federal Government will compensate Petrobras, each fiscal year, for the difference between the market conditions that would be practiced by any other company in the private sector and the operating result or financial return of the assumed obligation (PETROBRAS, 2018).

This reform of the bylaws ensures, on the one hand, the prerogative of the Federal Government, as Petrobras' controller, to guide the company's activities to serve the public interest, but, on the other hand, it establishes that these activities must be carried out under conditions identical to those of any other private sector company that operates in the same market and, when that is not the case, the Federal Government shall compensate Petrobras, preserving and harmonizing the interests that coexist in a mixed capital company: the public interest of the controlling state entity and the private interest of the shareholders who invested their private funds in the company.

Finally, on July 9, 2020, Petrobras held an Extraordinary General Meeting to update some of the criteria for characterizing an unblemished reputation for members in the top-level management (directors, officers) and the fiscal council (Integrity Background Check), “so that the created environment of compliance may remain appropriate to the current moment of the company and the market”. This review includes (I) verification of the regularity of the Individual Tax ID (CPF), (II) aspects related to business interests, (III) examination of the history of internal investigation and disciplinary sanctions detailed in the Employee Registration Form, (IV) inexistence of non-conformities in the quarterly reports of the internal audit, and inexistence of (V) commercial and financial pending issues and (VI) judicial and/or administrative proceedings.19