The statement below is an extract of our annual report in form 20-F 2005, which summarizes significant differences between our Corporate Governance Practices and NYSE Corporate Governance Standards
We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (ii) provide prompt certification by our CEO of any material non compliance with any corporate governance rules, and (iii) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below.
Majority of Independent Directors
The NYSE rules require that a majority of the board must consist of independent directors. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company, which independence must be affirmatively determined by the board of directors. Likewise, the Novo Mercado Regulations requires that at least 20% of the members of the board of directors of a company listed on the Novo Mercado segment of the São Paulo Stock Exchange be independent. Independence of board members in accordance with the Novo Mercado Regulations is defined by criteria similar to those set forth in the NYSE rules. However, under the Novo Mercado Regulations and Brazilian law, neither our Board of Directors nor our management is required to test the independence of directors before their election to the board.
With the exception of Mr. Mauricio Novis Botelho (our CEO), Mr. Neimar Dieguez Barreiro (the representative of the Brazilian government, through the government’s ownership of the “golden share”) and Messrs. Paulo Cesar de Souza Lucas and Claudemir Marques de Almeida (both representatives of our employees), all the current members of our Board of Directors elected at the shareholders’ meeting held on March 31, 2006 have declared that they are independent for purposes of the Novo Mercado Regulations. While our directors meet the qualification requirements of the Brazilian Corporate Law, the CVM requirements and the Novo Mercado Regulations, our Board of Directors has not determined whether our directors are considered independent under the NYSE test for director independence.
The Brazilian Corporate Law and our bylaws require that our directors be elected by our shareholders at a general shareholders’ meeting. Our transition Board of Directors is composed of 11 members, including (i) one member appointed by each of our former controlling shareholders, (ii) one member appointed by the Brazilian government, as holder of the “golden share,” (iii) our CEO, and (iv) two members appointed by our employees.
Beginning after the annual general meeting of our shareholder in 2009 to approve our financial statements for the fiscal year ended December 31, 2008, our Board of Directors will be appointed for two-year terms by our shareholders and there will only be three permanent members on the Board of Directors: (i) one to be appointed by the Brazilian government, as holder of the “golden share” and (ii) two to be appointed by our employees. The remaining eight directors will be elected in accordance with the slate voting and cumulative voting rules contained in our bylaws. See “Item 7A. Major Shareholders - Board of Directors” and “Item 10B. Memorandum and Articles of Association - Description of Capital Stock - Election of Board of Directors.”
Executive Sessions
NYSE rules require that the non management directors must meet at regularly scheduled executive sessions without management. The Brazilian Corporate Law does not have a similar provision. According to the Brazilian Corporate Law, up to one third of the members of the board of directors can be elected from management. Maurício Novis Botelho, our president and CEO, is a member of our transition Board of Directors. The remaining non management directors are not expressly empowered to serve as a check on management and there is no requirement that those directors meet regularly without management. As a result, the non management directors on our board do not typically meet in executive session.
Nominating/Corporate Governance Committee
NYSE rules require that listed companies have a Nominating/Corporate Governance Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. We are not required under applicable Brazilian law to have a Nominating Committee/Corporate Governance Committee, and accordingly, to date, have not established such a committee. Pursuant to our bylaws, the members of our transition Board of Directors were appointed by our former controlling shareholders, the Brazilian government and our employees, as described above in “- Majority of Independent Directors.” The directors are then elected by our shareholders at a general shareholders’ meeting. Our corporate governance practices are adopted by the entire board.
Compensation Committee
NYSE rules require that listed companies have a Compensation Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, reviewing corporate goals relevant to CEO compensation, evaluating CEO performance and approving CEO compensation levels and recommending to the board non CEO compensation, incentive compensation and equity based plans. We are not required under applicable Brazilian law to have a Compensation Committee. Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for profit sharing payments to our executive officers is established by our shareholders at the annual general meeting. The Board of Directors is then responsible for determining the individual compensation and profit sharing of each executive officer, as well as the compensation of our board and committee members. In ma king such determinations, the board reviews the performance of the executive officers, including the performance of our CEO. Maurício Novis Botelho, our CEO and member of our transition Board of Directors, typically excuses himself from discussions regarding his performance and compensation.
In April 2004, our Board of Directors established an Advisory Committee with a term of 18 months with the task of reviewing the company’s policies regarding the compensation and profit sharing for our executive officers and making recommendations for the revision of such policies. The Committee completed its review by April 2005. As it was a temporary committee, it did not operate pursuant to a written charter. For a further discussion of our Advisory Committee, see “Item 6C. Board Practices - Advisory and Executive Committee.”
Audit Committee
NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, we need only to comply with the requirement that the audit committee, or audit board in our case, meet the SEC rules regarding audit committees for listed companies. The Brazilian Corporate Law requires companies to have a non permanent Conselho Fiscal composed of three to five members who are elected at the general shareholders’ meeting. The Conselho Fiscal operates independently from management and from a company’s external auditors. Its main function is to monitor the activities of management, examine the financial statemen ts of each fiscal year and provide a formal report to our shareholders.
We have a permanent Conselho Fiscal that consists of five members and five alternates and which has ordinary meetings at least every two months. The members of our Conselho Fiscal are all financially literate and one member has accounting expertise that qualifies him as an audit committee financial expert. In order to comply with the exemption requirements that allow our Conselho Fiscal to act as an audit committee pursuant to SEC rules, our Board of Directors approved the delegation to the Conselho Fiscal of certain additional responsibilities and the Conselho Fiscal and the Board of Directors adopted an additional charter that delegates to the Conselho Fiscal the duties and responsibilities of a U.S audit committee to the extent permitted under Brazilian Corporate Law. For a further discussion of our Conselho Fiscal, see “Item 6C. Board Practices - Conselho Fiscal.”
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under the Brazilian Corporate Law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. In addition to being subject to the Novo Mercado Regulations that include rules on corporate governance, we have not adopted any formal corporate governance guidelines. We have adopted and observe a disclosure policy, our Policy on Publicizing Acts or Relevant Facts, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, our Policy on Securities Transactions, which, among other things, establishes black out periods and requires insiders to inform management of all transactions involving our securities.
Code of Business Conduct and Ethics
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement. However, in April 2004, we adopted a Code of Ethics and Conduct applicable to our officers, directors and employees worldwide, including at the subsidiary level. We believe this code substantially addresses the matters required to be addressed pursuant to the NYSE rules. A copy of our Code of Ethics and Conduct has been filed as Exhibit 11.1 to this annual report. For a further discussion of our Code of Ethics and Conduct, see “Item 16B. Code of Ethics.”
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Our internal audit function is the responsibility of our risk and internal controls office, under the supervision of the Chief Financial Officer, assuring the necessary independence and competence to assess the design of our internal control over financial reporting, as well as to test its effectiveness as required by Section 404 of the Sarbanes-Oxley Act of 2002.
