How far does an administrator’s duty of care go? How can we know if an administrator is responsible and prudent enough in the performance of his/her duties?

Recently, the board of the Brazilian Securities and Exchange Commission (CVM) concluded the judgment of the Administrative Sanctioning Proceeding (PAS) No. 19957.007916/2019-38, in which the conduct of Vale’s CEO and director of ferrous and coal was analyzed, in the context of the incident in the municipality of Brumadinho, in the state of Minas Gerais, on January 25, 2019, due to the rupture of “Dam 1 of the Córrego do Feijão Mine”, resulting in one of the greatest environmental and humanitarian tragedies in Brazil.

In the PAS trial, no violation of the duty of care was identified on the part of the CEO, who acted in accordance with the legislation and Vale’s Bylaws, thus acquitting him of the charges against him. However, the majority of the judges sentenced the director of ferrous and coal to pay a fine of R$27 million, given the failure to comply with the duty of care. The difference in treatment was due to the analysis of what was expected of each individual in their duties and the correlation with the incident. While the CEO’s duties were more linked to general management and less to technical issues, the director of ferrous and coal was expected to be directly involved in technical issues, including duties directly related to the incident, given the nature of his position.

Although rapporteur Daniel Maeda’s vote did not expressly address the duty of care as an obligation to achieve results, it was possible to identify a certain approximation to the result and an expansion in the interpretation of the duty of care by the CVM, in addition to the standards of conduct to be adopted by administrators within the scope of their functions.

It is important to clarify that the administrator must be qualified to perform his/her functions, and it is not necessary for him/her to be highly specialized in all matters that may be submitted for his/her consideration, but he/she is expected to have general knowledge about the activities developed in his/her area, seeking to stay informed about the matters, as well as question and investigate topics of greater relevance that may present potential risks to the company.

Administrators have the right to trust the information provided by their subordinates and other specialized professionals. However, this does not exempt them from the obligation to critically analyze the information received and, eventually, question and evaluate the need for supplementation. Therefore, the lack of technical competence and/or professional inexperience cannot be used as an argument to avoid the responsibilities and duties of directors, otherwise, the director would ultimately become a mere endorser of analyses performed or decisions made by third parties, which goes against the very essence of the position.

In addition to the relativization of the duty of care, which raises concerns about the predictability of directors’ liability, which may have negative repercussions due to legal uncertainty, it is important to mention the potential impacts resulting from this new interpretation: (i) increased cost of D&O insurance policies, which could impact companies’ operating costs; (ii) increased need for adequate asset planning to assume management positions; (iii) formalization of corporate acts with more detailed deliberations by directors, to record and map all strategic decisions with the maximum possible information; and (iv) discouraging qualified professionals from assuming management positions.

If this new interpretation is confirmed, in light of the PAS ruling, companies will face significant changes in corporate governance standards, requiring structured decision-making processes and a careful assessment of the responsibilities of directors, especially those who hold positions in sectors with high environmental and regulatory impact, seeking greater legal certainty in the corporate environment.

If you, as an administrator, still have doubts about the duty of care, it is important to check whether the points highlighted above are being routinely complied with, in order to mitigate the risks exposed, and whether your asset planning is appropriate for the risk you will assume. Ensuring compliance not only brings greater security and confidence to the business developed, but also strengthens the company’s reputation in the market.

By Bruna de Almeida Lins, associate at Candido Martins Cukier Advogados.