Recommendations on Corporate Governance

Introduction

The development of securities markets has led to intense debate on the structure and
control of public companies. By no means a new problem, it has generally been
categorised as an issue relating to corporate governance. Furthermore, with respect to
the universal question of how to improve mechanisms designed to protect investors,
the aforementioned topic has extended to all international markets.

The term "corporate governance" refers to the system of rules and codes of conduct
relating to the direction and control companies issuing shares admitted to trading on a
regulated market. This analysis of corporate governance is not designed to impose
rigid and uniform models. It is rather aimed at contributing to the optimum
development of companies and at protecting the interests of all those who are
involved in these companies - namely investors, creditors and workers.

Corporate governance has both an internal aspect and an external one: internal in the
sense that it implies the application of sets of organisational rules within each listed
company, and external in that it relates to the evaluation of the general performance of
companies based on the normal functioning of market mechanisms, something for
which the participation of institutional investors is of the utmost importance.

The internationalisation of companies has made the standardisation of security and
organisational parameters of agents involved in the markets even more important.
Thus, in view of the globalisation of markets and the impact of the introduction of the
euro, this problem can no longer be ignored in Portugal.

In this respect, based on the conviction that the national legal system is already
equipped with solutions which, in spite of not having been specifically designed for
the purpose in question, adequately address problems associated with the matter of
corporate governance, the present document aims to deal with the matter in a national
context, through the presentation of a series of recommendations.

By endeavouring to reflect upon the matter of corporate governance in Portugal in a
critical fashion, these recommendations represent not only the lowest common
denominator for the matter in question, but also a range of indicators adapted both to
the Portuguese legal system and to Portugal's markets.

Although companies issuing shares admitted to trading on a regulated market and
institutional investors lie at the heart of this problem, these recommendations may,
naturally, also be adopted by companies whose shares are not admitted to trading on a
regulated market.

As this document comprises a set of recommendations, an assessment of its
acceptance, to be carried out by the securities market, is essential. After all, the
market itself is in the best position to evaluate the readiness of listed companies and
institutional investors to adopt recommended governance strategies and options.
Thus, CMVM Regulation Nº 07/2001 obliges companies issuing shares admitted to
trading on a regulated market to divulge annual information on various aspects of
corporate governance in an appendix to their annual management report. Of particular
importance is information related to the level and means of adoption of the present
recommendations.

These recommendations are intended to be regarded as recommendations by and for
the market. Therefore, the CMVM continues to be open to suggestions and opinions
on the document in question, for which reason the recommendations in question are
subject to revision and additions.

I – DISCLOSURE OF INFORMATION

1. The use of new information technology resources is encouraged with respect to the
disclosure of financial information and of preparatory documents for General
Meetings.

The use of new information technology resources, such as the Internet, may facilitate
the preparation of General Meetings, favouring a rationalisation of the costs and time
involved. New technologies are, therefore, not only an instrument for the
modernisation of companies with shares admitted to trading on a regulated market,
but also a requirement arising from the globalisation of markets.

 2. Each listed company is required to ensure the appointment of a permanent
representative for liaison with the market, respecting the principal of equality among
shareholders and preventing uneven access to information on the part of investors.
The creation of a department designed to assist investors is therefore recommended.

The setting up of a department for investor assistance is by now a common practice in
the Portuguese capital markets, and is to be encouraged, insofar as it provides a
centralised forum for questions posed by investors and for any subsequent
clarifications deemed appropriate and disclosed to the markets.

II - THE EXERCISING OF VOTING AND REPRESENTATION RIGHTS BY
SHAREHOLDERS

3. The active exercising of voting rights, whether directly, by post or by proxy, is to
be encouraged.

The generic regulations set out in Portugal's Commercial Company Code (Código
das Sociedades Comerciais) on the exercising of voting rights allow companies to
develop measures in their own statutes aimed at combating the level of absenteeism
among shareholders at General Meetings. In light of this philosophy, the new
Portuguese Securities Code (Código de Valores Mobiliários) confirms the
acceptability of postal voting by shareholders in public companies at their General
Meetings. The Code also develops a framework for the representation by proxy of
shareholders, thus signalling legislative developments that must be accompanied by
changes in practices observed at company level. Further to these developments, the
CMVM drew up a set of Recommendations on Postal Voting in Public Companies
involving a series of practical advice aimed at contributing to the equitable and
efficient application of the right to submit postal ballots.

 4. The principles of good professional conduct and transparency, which should be
observed with regard to corporate governance, stress the importance of promoting the
perfection of procedures linked to requests for representation by proxy at Annual
General Meetings. It is fundamental that shareholders be provided with the
information they require to make the right decisions regarding the stipulation of
voting instructions, and that the grounds for their choice of vote be made clear,
especially in the event of a lack of instructions provided by the represented party.

Given the nature of voting by proxy, it is only natural that its acceptance gives rise to
the need to ensure the availability of all information required by represented
shareholders in order to allow them to make an informed decision regarding their
vote, especially in cases where the decisions to be made are critical to the survival of
the company or could eventually lead to conflicts of interest. The clarification by
represented shareholders of the reasons behind their choice of vote is also of great
importance, particularly when the represented party fails to give instructions
pertaining to the vote. Article 23 of the Securities Code already safeguards the legal
rights of shareholders in cases where more than five requests for representation by
proxy are made. The present recommendations may only be regarded as such (and
not as legally binding Regulations) in cases where the number of requests for
representation by proxy is less than 5.

III – CORPORATE RULES

5. It is recommended that companies establish their own internal organizational
regulations aimed, firstly, at resolving conflicts of interest between members of the
board and the company, and secondly, at responding to duties related to the diligence,
loyalty and confidentiality of the members of the board, particularly regarding the
prevention of improper use of business opportunities and company assets.

In order to ensure the observance by companies of principles of good professional
conduct, by definition universally applicable to the organization of any company, it is
necessary to allow for the specific characteristics of the company in question (i.e. the
dimensions of the company, shareholders, management experience etc.). In line with
guidelines already established by law, namely Articles 397, 398, 428 and 437and of
Nº 6 of article 410, all of the Portuguese Companies Code (Código das Sociedades
Comerciais), this recommendation is intended to encourage the establishment or
development of codes of conduct and internal regulations with respect to sensitive
matters, such as conflicts of interests, confidentiality or diligence in the day to day
management of the company.

 6. It is recommended that companies establish internal control systems, aimed at
efficiently detecting risks arising from the activities of the company, and thereby
helping to safeguard the assets of the company and the transparency of its corporate
governance strategies.

Internal control systems help the directors of companies to detect relevant risks
(financial, environmental and legal, among others). The creation of a risk-rating
system (e.g. through the existence or organic units designed to carry out internal
audits and/or risk management) constitutes not only a means of reducing such risks,
but also of increasing the quality of information disclosed to the market. Furthermore,
it provides a privileged means of guaranteeing transparency as regards corporate
governance.

 7. Measures adopted to prevent the success of public offerings for acquisition should
respect the interests of the company and its shareholders. Measures considered
contrary to these interests include defensive clauses intended to cause an automatic
erosion of company assets in the event of the transfer of control, or of changes to the
composition of the board which prove detrimental to the free transferability of shares
and the free assessment by shareholders of the performance of members of the board.

The efficiency of the shareholder control market is based essentially on the right to
transfer shares, on the unwaivable right granted to the shareholders to assess the
situation of the company and on the responsibility of its leaders for the financial
results obtained. These principles require a distinction to be made between benign
defensive measures and those that harm the rights and expectations of shareholders
and the market in general. For this reason, it is important to condemn the adoption of
certain defensive measures which, in seeking at all costs to limit the success of public
offerings for acquisition without the agreement of the board, end up damaging the
interests of partners in the company.

IV - COMPOSITION OF THE BOARD OF DIRECTORS

8. The board should be composed of a number of members who provide managers
with effective guidance for the management of the company.

It is important that the board exercises effective control over the day-to-day
management of the company, reserving the sole right to make decisions on important
matters. In order to pursue this objective, it should convene at regular intervals, be
duly informed at all times and ensure the efficient supervision of the management of
the company. In particular, procedures should be put in place to ensure the provision
of all information necessary for members of the board to carry out their functions
effectively.

 9. The inclusion on the board of one or more members who are independent in
relation to the dominant stakeholders is encouraged, with a view to maximising the
pursuit of corporate interests.

The board of directors should be comprised in such a way as to ensure that the
management of the company is not only geared towards the protection of the interests
of majority stakeholders, but also of investors in the company (irrespective of the size
of their stake) and workers alike. It is therefore recommended that independent
members exercise significant influence on collective decision-making and that they
contribute to the development of the strategies of the company, thereby acting in the
interests of the company as a whole. To this end, it is essential that each company
determine the concept of independent director which is best suited to its particular
characteristics, and that the said concept is explained publicly.
10. In the event of the creation of an Executive Committee, its composition should,
insofar as it is possible, reflect the balance existing on the board between independent
directors and those who are linked to major stakeholders in the company. In
accordance with the Principle of Transparency, the board of directors must be duly
informed at all times of all matters brought before it and all decisions taken by the
Executive Committee.

The creation of an Executive Committee can be a valuable tool in the management of
complex corporate organisations. In order to avoid the diminishment of the influence
of independent directors on corporate governance, it is recommended that the
composition of the Executive Commission in question be a true reflection of the
balance existing within the board of directors. Regardless of the power conferred
upon boards of directors under the terms of Nº 5 of article 407 of the Portuguese
Securities Code, namely that which allows them to adopt resolutions on matters
delegated to their Executive Committee, and of the responsibility of boards to monitor
the activities of the said Commission, it is recommended that the relations between the
two bodies in question be guided by the Principle of transparency. To this end,
procedures should be adopted which ensure that the board of directors of a given
company is, at all times, fully aware of decisions made by its Executive Commission.

 11. The board is encouraged to set up internal control committees, made up of non-
executive administrators, with the power to intervene in relation to all matters which
could potentially lead to conflicts of interests, such as the evaluation of corporate
structure and governance.

Given that conflicts of interest are more likely to arise with relation to members of the
Board of Directors which have managerial functions, in order to maximise the
efficiency of internal control committees, it is recommended that such Boards be
comprised of members who are not directly involved in the day-to-day running of the
company. The creation of a separate committee for all areas which could lead to
conflicts of interests is not necessary. Nor do the members of each committee
necessarily need to be different. However, the setting up of a single committee to
respond to all potential conflicts of interest is inadvisable, given that the excessive
workload involved and the concentration of powers would pose a threat to the
efficiency of the committee.

 12. It is recommended that part of the remuneration of the members of the board, in
particular of members involved in current management, depend on the results of the
company.

In bridging the gap between the interests of members of the board of directors of a
given company and its shareholders, such a remuneration policy would maximise the
exercising of good management practices devoted to increasing the income and
decreasing the expenses of the company, something from which shareholders in the
company would in turn benefit.
13. It is recommended that the proposal presented at the Annual General Meeting of a
given company related to the approval of plans to allot shares and/or options for the
purchase of shares to members of the board and workers include all the elements
required for the correct evaluation of the proposal in question. If a regulation
regarding the proposal is already available, it too should accompany the proposal.

Several different types of stakeholding by members of the board and the workers of a
given company in its capital (e.g. the allotment of shares at discounted rates and the
creation of long-term stock option plans designed to prevent options to purchase)
have, over the last few years, become an increasingly popular and common
phenomenon. Considering that proposals relating to disposal of own shares depend
on the authorisation of the General Assembly (Nº 1 of article 320 of the Commercial
Company Code) and given the influence of these allotments, regardless of the type, on
the financial situation and remuneratory policy of securities issuers, particularly as
with the case of members of the board of directors, it is recommended that the
proposal related to the approval of such plans, presented at the Annual General
Meeting, be as complete as possible. To provide an example, without prejudice to
other legal requirements, in the case of allotment of shares, and/or options, mention
of the justifications for the adoption of such a plan, the category and number of
people involved, the conditions governing the allotment, criteria for determining the
price of the shares or stock options, the number and characteristics of the shares to be
allotted, the term within which they can be traded, the incentives for purchasing the
shares/stock options and the role of the board of directors in carrying out/modifying
the plan, all contribute towards the presentation of a comprehensive and complete
proposal.

V - INSTITUTIONAL INVESTORS

14. Institutional investors should take into consideration their responsibility to
contribute to the diligent, efficient and critical use of the rights conferred on them by
the securities they hold or whose management has been entrusted to them, particularly
with regard to information and voting rights.

With the development of the securities markets, the significance of the independent
role afforded to institutional investors (i.e. investment fund management companies,
pension fund management companies and asset management companies) is clearly
growing. Furthermore, empirical research has revealed that the effective management
of securities by institutional investors, which is, of course, required by law,
contributes in a highly positive way to the development of companies. It is therefore
appropriate to stress the importance of the diligent, efficient and critical application
by institutional investors of the aforementioned rights conferred on them.

15. Institutional investors should disclose all information on their exercising of the
voting rights afforded to them by the securities they are called upon to manage.

It is important that the market should be easily able to assess the attitudes of
institutional investors with regard to corporate governance. This is particularly the
case for investment fund management companies, whose use of the rights attached to
the securities that make up the assets of such funds should be transparent at all times,
in particular as regards participants in the fund.