This chapter gives an overview of how the directors’ fiduciary duties and the corporation's purpose have been understood in different jurisdictions. In most of them, the shareholder‑focused paradigm has been dominant, although, in recent years, some jurisdictions have amended their legislation to highlight the importance of stakeholders' interests. Furthermore, this chapter provides evidence from asset managers and listed companies in Latin America concerning i) the flexibility in the interpretation of the director's fiduciary duties, ii) practices on executive compensation plans, and iii) existing board committees.
Sustainability Policies and Practices for Corporate Governance in Latin America
Corporate Governance
5. The board of directors
Abstract
5.1. Legal frameworks for the responsibility of the boards
A significant portion of the academic and public debate on corporations during the last 50 years has been primarily based on two assumptions: (i) equity investors have the sole goal of maximising their financial returns relative to a risk they are willing to accept; (ii) companies’ stakeholders and society at large should have their well‑being properly considered in contracts and statutes (e.g., employment contracts and environmental laws). The most famous formulation of this logic was Milton Friedman’s argument that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (Friedman, 1970[15]).
More recently, there has been a shift of the general discourse in favour of broader consideration of non‑financial goals. In 2019, the Business Roundtable released a statement where 181 CEOs of large US corporations declared they “shared a fundamental commitment to all [their] stakeholders”, including to the delivery of value to their customers, to investing in their employees, to dealing fairly with their suppliers, to supporting communities in which they work and to generating long‑term value to shareholders (Business Roundtable, 2019[16]).
Clearly, a company’s commitment to all its stakeholders is not irreconcilable with its long‑term profitability. After all, loyal customers, productive employees, and supportive communities are essential for a company’s long‑term capacity to create wealth for its shareholders. In any case, it should be noted that corporate law does not generally fully adhere to the “shareholder primacy” view, allowing companies to prioritise stakeholders’ interests in some circumstances.
In Brazil, article 154 of the Company Law broadly establishes that directors’ fiduciary duties are towards the company, and it adds that directors should also satisfy “the requirements of the public good and the social function of the Company”. The same article’s paragraph 4 further clarifies that “the board and senior executives may authorise the practice of reasonable acts of generosity that benefit employees or the community where the company operates” (emphasis added). In a related provision (art. 116), the company law also establishes that controlling shareholders have “duties and responsibilities with all other shareholders, a company’s employees and the community where it operates, whose rights and interests the controlling shareholders should respect and fulfil” (emphasis added).
In China, article 147 of the Company Law establishes that “directors, supervisors and senior officers of a company shall observe laws, administrative regulations and the company’s article of association, and shall assume the duty of loyalty and duty of care to the company”. In the Code of Corporate Governance for Listed Companies issued by China’s Securities Regulatory Commission, article 86 stipulates that, “[w]hile maintaining the listed company’s development and maximising the benefits of shareholders, the company shall be concerned with the welfare, environmental protection and public interests of the community in which it resides and shall pay attention to the company’s social responsibilities”.
In France, legislation amended in 2019 establishes that “the corporation must be managed in the interest of the corporation itself while considering the social and environmental stakes of its activity” (art. 1 833, Civil Code). In the United Kingdom, Section 172 of the Companies Act provides that “a director of a company must […] promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to […] the long‑term, the interests of the company’s employees, […] suppliers, customers, […], the impact of the company’s operations on the community and the environment […]”.
In India, Section 166(2) of the Companies Act states that “a director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment”. A possible interpretation of the provision would be that the “good faith standard” of the first part of the provision would be a higher benchmark than the “best interest criterion” in the second part. Therefore, the shareholders’ interest would be central for directors, while they would also need to consider stakeholders’ interest.
In Delaware (United States), jurisprudence ranges from an identified director’s duty to maximise shareholder profits (especially in some takeover cases, such as Revlon v. MacAndrews & Forbes Holdings, Inc.) to rulings that suggest that insufficient attention to stakeholders’ interests may be legally actionable (e.g., Marchand v. Barnhill). Likewise, in the Hobby Lobby case, the US Supreme Court explained that “while it is certainly true that a central objective of for‑profit corporations is to make money, modern corporate law does not require for‑profit corporations to pursue profit at the expense of everything else, and many do not do so” (Fisch and Davidoff Solomon, 2021[17]).
In any case, from a pragmatic perspective, even if an executive needs to comply with a strictly defined “shareholder primacy” mandate, the Business Judgement Rule principle adopted in some legal systems and statutes authorising companies to donate money would afford the corporate executive significant discretion to consider different stakeholders’ interests (Fisch and Davidoff Solomon, 2021[17]). Except for cases of conflicts of interest, it has been unlikely that an executive would be held liable in court if he or she prioritised a stakeholder interest within reasonable limits at the expense of a company’s current profits. The judge would typically defer to the executive’s assessment of what would be likely best for the long‑term profitability of the corporation.
Among surveyed jurisdictions, as presented in Table 5.1, seven adhere to what some have named the “shareholder primacy” view (Chile, Colombia, Costa Rica, Japan, Mexico, Peru and the United States). While different legal systems have their particularities, directors in those countries would typically need to consider only shareholders’ financial interests while complying with the applicable law and ethical standards. This still requires attention to non‑shareholders’ interests, but only to the extent that those interests may be relevant for creating long‑term shareholder value.
As detailed in Table 5.1, five surveyed jurisdictions follow an approach close to the “shareholder primacy” view, but they also establish that directors would have to consider stakeholders’ interests and the social and environmental stakes of a company’s activity (Brazil, China, France, India, and the United Kingdom). Consideration in some cases might be interpreted as careful thought given to stakeholders’ interests to the degree that is equal to or higher than well‑established standards (such as those in the OECD Guidelines for Multinational Enterprises) but still falling short of what a social planner would prefer for society as a whole.
The Business Judgement Rule or a similar safe harbour has been adopted in nine of the fourteen surveyed jurisdictions (Table 5.1). The Business Judgement Rule has been either incorporated into statutory law (e.g., in Spain in 2014 – art. 226 of the Company Law) or has emerged from case law (e.g., in the US state of Delaware). The Business Judgement Rule acts as a presumption that the board of directors acted in the best interest of the company unless plaintiffs can prove negligence or bad faith. Similarly, if a director faces a conflict of interest, the court will not typically uphold the presumption.
The previous discussion on the purpose of the corporation and fiduciary duties applies to for‑profit companies. In all surveyed jurisdictions, despite some differences in corporate law, a company cannot meaningfully divert from its profit‑making goal without an authorisation from its shareholders. In response to the interest of some shareholders in adopting objectives other than simply maximising long‑term profits, some jurisdictions have recently amended their legislation to create the corporate model of Public Benefit Corporations (or “Sociedad de Beneficio e Interés Colectivo” in Spanish). As shown in Table 5.1, this has been the case in Colombia, Delaware (United States), France, Peru and Spain and, still as a proposal, in Argentina.
In Colombia, since 2018, companies may convert into public benefit corporations (“BIC” in the Spanish acronym) if they adopt the goal of both making profits and acting in the interest of the community and the environment (Congreso de Colombia, 2018[18]). To use the BIC name, companies need to state in their articles of association the benefit and collective interest that they intend to promote. Likewise, a BIC company’s management must annually publish a report that accounts for its i) business model, ii) corporate governance, iii) labour practices, iv) environmental practices, and v) its impact on the community. As of November 2021, 1 043 BIC companies were registered in the Colombia (Ministry of Commerce, Industry and Tourism, 2021[19]). Ninety‑eight per cent of Colombian BIC companies are small and medium enterprises.
In Delaware (United States), for‑profit corporations may, since 2013, be incorporated as or be converted into Public Benefit Corporations (PBC), which represents a legal obligation to “be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its [articles of association]” (Delaware General Corporation Law, Chapter 1, subchapter XV). In addition to identifying one or more public benefits to be promoted by the corporation in its articles of association, PBCs also have the two following obligations: (i) in any stock certificate and every notice of a shareholders meeting, they must note they are a PBC; (ii) the board of directors should at least every two years report to shareholders on the promotion of the public benefits identified in the articles of association (these articles may also demand a third‑party verification of the public interests’ fulfilment). As of September 2021, 207 private PBCs incorporated in Delaware contained the words “public benefit corporation” or “PBC” in their business names, including seven listed companies with a market capitalisation ranging from approximately USD 700 million to USD 50 billion as of September 2021 (OECD, 2022, p. 27[1]).
In France, for‑profit corporations may, since 2019, adopt social and environmental objectives in their articles of association and, therefore, register with the business name of société à mission (art. L.210-10, Commercial Code). There are four main conditions for a corporation to be registered with this name: (i) its articles of incorporation must specify a "purpose" (“raison d’être”) as defined in art. 1 835 of the Civil Code; (ii) inclusion of social and environmental objectives into the articles of incorporation; (iii) establishment of a committee – with the participation of at least one employee – responsible exclusively for verifying and reporting to the annual shareholders meeting whether the company fulfils its non‑financial goals; (iv) verification by an accredited independent third party of whether the company fulfilled its non‑financial goals and reported to the annual shareholders meeting. If a corporation does not comply with any of those requirements or the independent third party concludes a non‑financial goal was not fulfilled, public prosecutors or any interested party – which could arguably include stakeholders – may request the suppression of société à mission from the corporation’s business name. At the end of 2021, there were 505 sociétés à mission, double than at the end of December 2020, which reflects the dynamism of the model in France (Observatoire des sociétés à mission, 2022, p. 3[20]). Companies with less than 50 employees still represent a dominant share among the sociétés à mission, with 79% from the service sector.
In Peru, new legislation on BIC companies was enacted in 2020 (Gobierno del Perú, 2021[21]). There are three main conditions for a corporation to be registered with the designation “BIC”: i) to include in its articles of association social and environmental purposes (at least one purpose of each type); ii) to present within sixty calendar days after its registration a strategic plan with the activities that it will carry out to fulfil the purposes mentioned in its articles of association; and iii) to be annually audited by an independent third party to accredit the performance of the activities established in its strategic plan. As of June 2022, there were ten BIC companies in Peru (SUNARP, 2022[22]).
Table 5.1. Legal frameworks for the responsibility of the boards
Key: Information on jurisdictions with an asterisk (*) relates to proposals under consideration.
Notes:
1 In Argentina, the company law, court decisions and legal research do not allow for a clear definition of the fiduciary duties’ scope for the goals of this table.
2 In Chile, the Corporations Law establishes in its article 41 the duty of the board members to use in the exercise in their functions the care and diligence that people normally use in their own businesses and shall be jointly liable of any damage caused to the corporation and the shareholders for any fraudulent or negligent actions. CMF General Rule 461 requires the disclosure of information related to: (i) how the entity takes into consideration the interests of its stakeholders; (ii) description of how, and with what frequency, environmental and social issues are reported to the board of directors, especially with respect to climate change, and whether these issues are included when discussing and adopting strategic decisions, business plans or budgets, among others.
3 In Peru, the "Business Judgment Rule" has not been expressly regulated. However, the first paragraph of Art. 177 of the General Law of Corporations provides that "[t]he directors respond, unlimitedly and jointly, before the corporation, shareholders and third parties for damages caused by agreements or acts contrary to the law, the statute or by those carried out with fraud, abuse of powers or gross negligence.” Therefore, directors will not be liable when a party considers that their business decision should have been a different one, unless that party can prove fraud, abuse of power or gross negligence. Furthermore, article 180 of the General Law of Corporations deals with the situation where the director faces a conflict of interest, establishing that directors cannot adopt agreements that do not protect the corporation’s interest but rather their own interest or the one of related third parties. Additionally, the same rule states that any director who has an interest in any matter contrary to that of the corporation must express it and refrain from participating in the deliberation and resolution of said matter. Finally, it should be noted that a 2018 draft of a new General Corporations Law published on the website of the Ministry of Justice and Human Rights expressly recognises the Business Judgment Rule, protecting the discretion of directors and senior executives for their business decisions.
4 In Spain, Law 18/2022 of 28 September 2022, on the creation and growth of companies, recognises the figure of the public benefit corporations. However, it is pending regulatory development.
5.2. Practices and preferences in Latin America
As seen in Table 5.1 above, only Brazil among the seven surveyed Latin American jurisdictions has legal provisions requiring directors to take into account stakeholders’ interests, and the social and environmental stakes of a company’s activity. In Brazil, however, a company cannot meaningfully divert from its profit‑making goal without the authorisation of its shareholders. In practice, only a small minority of listed companies in Latin America report that the trade‑off between long‑term shareholder value and societal or environmental benefits would be authorised by their articles of association (Figure 5.1).
Figure 5.1. Articles of association in Latin American listed companies – the possibility of trade‑offs
Note: In the survey questionnaire, companies could answer or leave this question unanswered. The shares in this figure consider only the universe of companies that answered the question. On average, 71% of the companies responded within each category.
Source: OECD Survey on Sustainability Practices of Listed Companies in Latin America.
Nevertheless, most asset managers investing in Latin America are willing to accept a lower rate of return in exchange for societal or environmental benefits. It should be noted, in any circumstance, that the question did not stipulate by how much lower the rate of return would be (Figure 5.2).
Figure 5.2. Asset managers investing in Latin America – willingness to trade off financial returns
Note: In the survey questionnaire, asset managers could answer "yes" or "no" or leave it unanswered. The shares in this figure consider only the universe of asset managers that answered either "yes" or "no". On average, 78% of the asset managers responded within each size category.
Source: OECD Survey on Sustainability Practices of Asset Managers in Latin America.
Companies representing 85% of global market capitalisation have executive compensation policies linked to performance measures. Companies representing 44% of market capitalisation worldwide and 54% in OECD countries include a variable executive remuneration based on sustainability factors (Figure 5.3). Among Latin American listed companies, these percentages are lower. In the region, 59% of the companies by market capitalisation have performance‑based incentives for executives, and 27% have a performance compensation policy linked to sustainability factors. Brazil and Colombia stand out with percentages higher than the average for Latin American countries.
As recommended by the G20/OECD Principles of Corporate Governance, the board of directors is typically responsible for overseeing the company’s risk management. If sustainability risks are financially material for a company, they would have to be properly managed by senior executives and overseen by the board, therefore (OECD, 2020, pp. 74-75[23]), despite any more complex discussion about the purpose of the corporation. Establishing a board committee responsible for sustainability is not the only way for a company to manage its sustainability risks and a committee, if not well‑structured, may even be ineffective in doing so. However, the existence of a sustainability board committee may be a proxy for the importance given by boards to sustainability risks.
Around half of the world’s market capitalisation has established a committee responsible for overseeing the management of sustainability risks and opportunities reporting directly to the board. In the United States, 65% of the companies by market capitalisation have one such committee, 60% in the United Kingdom, 42% in the European Union, 21% in Japan and 13% in China. In Latin America, 44% of the companies have a board‑level committee responsible for decision‑making on sustainability matters, ranging from an average of 13% in Argentina, Chile, and Peru, to an average of 48% in Brazil and Mexico, up to 76% in Colombia (Figure 5.4).
Figure 5.3. Executive compensation linked to sustainability matters
Note: The “total” in “percentage of ‘Yes’ over the total” includes all listed companies within each category, including those for which there is no available information. For instance, in the case of the global category, the percentage is calculated over 42 019 worldwide listed companies, while in Latin America the percentage is calculated over 1 252 companies. The compensation policy includes remuneration for the CEO, executive directors, non‑board executives, and other management bodies based on “ESG or sustainability factors”.
Source: OECD Corporate Sustainability dataset, Refinitiv. See Annex B for details.
In addition to the differences across countries, small and medium enterprises face challenges assessing and implementing risk management policies due to higher costs and lower leverage to implement due diligence processes (OECD, 2021[24]). For instance, in Latin America, while almost half of the region’s market capitalisation has a committee responsible for overseeing sustainability risks and opportunities, when measured by the number of companies, only 8% (103) had one such committee in place.
Figure 5.4. Board committees responsible for sustainability
Note: The “total” in “percentage of ‘Yes’ over the total” includes all listed companies within each category, including those for which there is no available information. For instance, in the case of the global category, the percentage is calculated over 42 019 worldwide listed companies, while in Latin America the percentage is calculated over 1 252 companies. A company is considered to have such a committee if its responsibilities explicitly include oversight of CSR, sustainability, health and safety, and energy efficiency activities, regardless of the name of the committee. For example, a company with a “risk management committee” would be included in the category “Yes” if mentioned committee is responsible for managing sustainability risks.
Source: OECD Corporate Sustainability dataset, Bloomberg. See Annex B for details.