A 2007 report on European corporate governance practices by Heidrick and Struggles notes that since 2003 Portugal’s record on corporate governance has improved from the last place in the 10 countries surveyed to the sixth position in 2007. The report attributed this improvement to two key developments: firstly, the introduction of the Commercial Companies Act in 2006 and secondly, the introduction of "Recommendation on Corporate Governance" by the securities market regulator – the Securities Market Commission (CMVM). These recommendations were implemented on a comply-or-explain basis in 2001 and have been frequently amended and updated, and are expected to be so in 2008 again. A 2006 International Monetary Fund (IMF) reports points out that the CMVM has been taking an active role in investor education and set up an Investor Assistance and Mediation Office which receives complaints of investors and also guides them in matters related to securities market. Despite these initiatives, there is lack of information specifically addressing Portugal's compliance with the Organization for Economic Co-operation and Development (OECD)'s Principles of Corporate Governance.

General Overview

According to a 2006 International Monetary Fund (IMF) Technical Note, the Commercial Companies Law provides the basic framework for corporate governance in Portugal. A decree law introduced in 2006 completely updated the framework for corporations in Portugal. The IMF Note explains that the key changes included: (1) creation of three different governance models; (2) independence and competency requirement for relevant bodies; and (3) majority of independent members’ requirement for financial oversight of listed companies. A 2007 report on corporate governance practices in Europe by Heidrick and Struggles notes that the Commercial Companies Act which lays down mandatory governance standards for all public companies attributed to the overall improvement in corporate governance practices in Portugal. More specifically, the report notes that since 2003 Portugal’s record on corporate governance has improved from the last place in the surveyed European countries to the sixth position in 2007. In addition to the Companies Act, the Securities Code also contains several provisions that address issues of transparency, minority rights, and investor protection. More recently, a 2007 article by Pinto and Guine explains that Decree No. 219 of 2006 transposed the European Union (EU) Takeover Directive into Portuguese legislation, thereby modifying the Securities Code. The amendment establishes a set of situations where voting rights are attributable to a given entity. EU Directive No. 2004/109/EC on transparency requirements was also implemented in 2007. An undated article by Mota and Alves notes that "although the amendments to the [Securities Market Commission] were mainly in line with the TD, some particulars of our regime were kept, such as the disclosure obligations at a 2% threshold of voting rights in Portuguese listed companies."

The securities market is regulated by the Securities Market Commission (CMVM) which developed a set of “Recommendations on Corporate Governance” in 1999. These recommendations, in accordance with CMVM Regulation No. 7, were implemented on a comply-or-explain basis in 2001. A 2004 article by Adelaide Moura explains that these recommendations pertain to the rules of conduct to be observed in the direction and control of listed companies and are accompanied by a previous recommendation that compliance must be reported in detail. The IMF adds that the new regime primarily covers the following areas: disclosure of information, exercise of voting and representation rights of shareholders, corporate rules, board of directors and institutional investors. Although a review conducted by the CMVM reported improvements since 2003, overall a low level of compliance with recommended practices was observed in 2005.

However, these recommendations have been revised and updated regularly and the 2006 IMF Note states that “altogether the different reviews carried out by the CMVM have resulted in a more comprehensive governance framework as well as in the transformation of certain disclosure recommendation into disclosure requirements” (p. 6). The Heidrick and Struggles report also argues that the role of the CVMV recommendations was essential in the general improvement in corporate governance related practices. An article by Alves and Mota adds that the CMVM will be proposing new recommendations in 2008. The IMF points out that the CMVM has been taking an active role in investor education and set up an Investor Assistance and Mediation Office which receives complaints of investors and also guides them in matters related to securities market. According to an October 2007 article on the International Financial Law Review website the Portuguese banking, insurance and securities market regulators joined hands to propose better regulation for the financial sector. The three regulators collectively made a number of proposals including introducing at least one independent auditor for banks and insurance companies, an obligation for financial companies to publish and monitor the performance of respective professional code of conduct and eliminating the need to duplicate reporting obligations on accounting information. The article states that these measures are likely to be implemented by 2008.

The World Bank’s 2009 Doing Business report published in 2008 notes that investor protection in Portugal is slightly higher than the average achieved by member states of the Organization for Economic Co-operation and Development (OECD). The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Portugal scores 6.0 in the disclosure index against an OECD average of 5.9. It scores 5.0 in the Director Liability Index against an OECD average of 5.0 and 7.0 in the Shareholder Suits Index against an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

II

According to the 2007 IMF Technical Note, the Commercial Companies Law provides the basic framework for corporate governance in Portugal. A decree law introduced in 2006 completely updated the framework for corporations in Portugal. The IMF Note explains that the key changes included: (1) creation of three different governance models; (2) independence and competency requirement for relevant bodies; and (3) majority of independent members’ requirement for financial oversight of listed companies. In addition to the Companies Act, the Securities Code also contains several provisions that address issues of transparency, minority rights and investor protection. The 2007 report by Heidrick and Struggles adds that the amended Commercial Companies Act laid down mandatory standards for all public companies resulting in an overall improvement in Portuguese corporate governance practices.

With regard to regulation for the securities market, the CMVM was established in 1991 under the Securities Market Code. The CMVM developed a set of recommendations on corporate governance practices following a comply-or-explain approach. The IMF Note adds that since 2001 the CMVM has conducted biannual reviews on the level of compliance which "resulted in a more comprehensive governance framework as well as in the transformation of certain disclosure recommendations into disclosure requirements" (p. 6). The above information, however, does not directly address Portugal's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

II

A 2002 report by Weil, Gotshal, and Manges, states that shares in Portuguese corporations may be in either registered or bearer form and all shares must have a par value. The report adds that all shares are freely transferable and preferred stock may be issued unless prohibited by the company's statutes. Furthermore, the report states that "preferential rights may not be altered without approval by a majority of affected shareholders" (p. 193) and it is prohibited for a single preferred shareholder to hold more than ten percent (10%) of the total voting rights of the corporation. Also, special meetings may be called by the board at the request of minority shareholders representing at least five percent (5%) of corporate capital. Shares may be voted by proxy. The above information, however, does not directly address Portugal's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

II

The 2002 Weil, Gotshal, and Manges report notes that special meetings may be called by the board at the request of minority shareholders representing at least five percent (5%) of corporate capital. Shares may be voted by proxy. More recently, a 2007 article by Pinto and Guine explains that Decree No. 219 of 2006 transposed the EU Takeover Directive into Portuguese legislation, thereby modifying the Securities Code. There is no further publicly available information as to Portugal's compliance with this standard.

Principle IV: The Role of Stakeholders in Corporate Governance

II

There is insufficient publicly available information as to Portugal's compliance with this standard.

Principle V: Disclosure and Transparency

II

The 2006 IMF Technical Note points out that the CMVM recommendations on direct exercise of voting, the constitution of internal committees, and the remuneration of board members are complied by less than 50 percent of the companies in Portugal. Further, the Note adds that the lack of specific committees to support the board in the exercise of its responsibilities and the refusal to divulge the individual remuneration of board members also impact the level of compliance with certain recommendations. Overall, the IMF observes that since 2003, Portuguese companies have shown improvement in compliance with recommendations related to the disclosure information. The IMF report adds that the latest amendments made to the CMVM recommendations provide "stronger emphasis to the role and definition of independent board members, disclosure of board remuneration and internal controls" (p. 6).

The 2004 Adelaide Moura article explains that the introductory section of Regulation No. 7 of 2001 states that its purpose is not to "require obedience to the substantive prescriptions relative to corporate governance, but rather to require disclosure of information on various related aspects to enable the market to assess the appropriateness of options taken." This regulation also emphasizes a listed company's obligations to report to the CMVM on stock distribution or stock option plans addressed to employees or to directors, and the obligation of members of the corporate bodies of the company, or its parent, to report the acquisition or disposal of shares listed on regulated markets.

An article by Mota and Alves notes that Directive 2004/109/EC on transparency requirements (TD) was also implemented in 2007. Further, the authors note that "although the amendments to the [Securities Market Commission] were mainly in line with the TD, some particulars of our regime were kept, such as the disclosure obligations at a 2% threshold of voting rights in Portuguese listed companies." Also, in line with the European Commission (EC) Regulation No. 1606 of 2002, Portuguese listed companies prepare consolidated accounts following International Financial Reporting Standards (IFRSs) endorsed by the EC, starting January 1, 2005. A 2008 Institute of Public Accountants self-assessment adds that Portuguese Auditing Standards are based on the International Standards on Auditing (ISAs) promulgated by the International Auditing and Assurance Standards Board (IAASB). The above information, however, does not directly address Portugal's compliance with this principle.

Principle VI: The Responsibilities of the Board

II

According to the IMF Technical Note, the 2006 amendment to the Commercial Companies Act resulted in the creation of three different governance models and also led to the prohibition of an "atypical" model. Furthermore, amendments require the clarification of the liability regime applicable to board members, the independence requirement for the Chairman and other officers of the General Assembly of Shareholders and competency requirements for the members of the oversight bodies. Additionally, the imposition of a majority of independent members in the bodies in charge of financial oversight was also required by these amendments. The 2002 Weil, Goshal and Manges study points out that directors may be removed by a vote of the annual general meeting and "when the removal is the result of misconduct by the director, removal is effected automatically when a decision is made to bring an action against the director" (p. 193). The above information, however, does not directly address Portugal's compliance with this principle.