## **<mark>Box 5</mark>**

## **<mark>The Case of Brazilian Fiscal Boards</mark>**

<mark>Audit committees are uncommon even in most Brazilian listed private firms, but many firms use an alternate approach to ensuring financial statement accuracy -- establishing a Fiscal Board. The fiscal Board can engage experts (presumably a second accounting firm), at the company's expense. About 40% of firms have such a Board but only more than half of the firms include a member with accounting expertise. One might think that the audit committee and the fiscal Board are likely to be substitutes, so that even firms which had one or the other might not have both. This is only partly true. Two thirds of the firms have a Fiscal Board. Of the remaining firms, two have an audit committee, leaving the other with neither an audit committee nor a permanent Fiscal Board. Thus, the Fiscal Board is an important institution in Brazil. Further research is needed to understand its strengths and weaknesses, compared to an audit committee, and whether it makes sense for a firm to have both a Fiscal Board and an audit committee.</mark> _<mark>Source:</mark>_ <mark>Black</mark> _<mark>et al.</mark>_ <u><mark>(2008)</mark></u> What about other sub-committees? The CEO’s influence in director selection and retention can be reduced, for example, by the creation of a nominating committee staffed solely by independent directors. Directors picked by the CEOs are likely to feel a strong sense of loyalty to the CEO. In the US, CEOs successfully resisted reforms that would have increased shareholder influence in director selection, including the SEC’s 2003 shareholder ballot access proposal. Reforms entailed the creation of a nominating committee with responsibility for vetting and selecting director candidates and to set forth the standards that guide its work so as to provide a basis for ex post scrutiny.

# **4. Board Procedures**

# **4.1 Selection and Evaluation Process for Board of Directors**

Political influence in the nomination process is still strong in developing countries. The key challenge is to prevent the process to degenerate into a situation characterized as “political interference”. The political interference goes either through the nomination process itself, involving a complex political negotiation among different government organs, or through direct nomination of political appointees. This is often identified as a main weakness of SOE corporate governance, as too often Boards are populated with people chosen for their political allegiance rather than business acumen.

The main way of restricting such governmental or political interference in the nomination of SOE Boards and increasing their independence and professionalism is to put in place a structured nomination process, making sure that the ultimate selection criterion is competency. Moreover, focusing on setting up structured nomination processes allows ownership entities to perform their nomination mission with a limited administrative capacity. Until very recently, not even developed countries established procedures or criteria for appointment of Supervisory Board members, except for the recommendations of the responsible minister presented to the government as a whole. Very few countries, such as Australia, New Zealand and Sweden, have set up such structured and clearly skill-based nomination systems (see Box 6).

8