Corporate Governance in Portugal: A Literature Review

Introduction

What do we know on the corporate governance mechanisms effects on the outcomes of Portuguese firms and non-profit organizations (NPOs)? The aim of this research is to provide answers to this fundamental question.

The governance structure of the organizations is crucial since they execute the strategic plan approved by shareholders and manage the daily operations. Shareholders also define the governance model of their organizations in order to better protect their own interests. Despite the shareholders’ power in the organizations, there is a constant conflict of interests between the managers they hire to run the organization and their own interests. The agency theory addresses this tension and suggests ways to mitigate this problem (Jensen & Mecklin, 1976). Following the findings and recommendations of researchers, countries started to develop regulations (e.g. Cadbury Report,1992, for the United Kingdom) related to how organizations should draw their governance structures, in terms of executive management and internal (e.g. independent directors and audit committees) and external (e.g. auditing firms) control mechanisms. Concomitantly, these regulations also framed the scope of information that management should publicize in order to protect shareholders’ interests, namely the interests of minority shareholders.

The first Portuguese Corporate Governance Code (PCGC) is dated from 1999, and was developed by the Comissão de Mercado de Valores Mobiliários (CMVM, 1999). This document contains 17 recommendations organized in five chapters: the dissemination of information; voting and representation of shareholders; institutional investors; the corporate rules; and the structure and functioning of the board. Since then, the Portuguese Corporate Governance Code has been updated and it was created, in 2003, the Instituto Português de Corporate Governance (IPGC). The current PCGC is dated from 2018, and the responsibility to evaluate the code, the level of firms’ compliance and to update it is presently in the hands of the Comissão de Acompanhamento e Monitorização (CAM), created by IPGC.

Vieira and Neiva (2019) and Lisboa, Guilherme and Teixeira (2020) provide a compelling vision of the corporate governance practices conducted by Portuguese firms. According to Vieira and Neiva (2019), the prevailing governance model of the Portuguese firms is the Latin model, where the governance structure is composed by a board of directors (BoD) or a sole director and an audit committee or a statutory auditor. In addition, the authors conclude for an increase of the fraction of independent directors and the fraction of women directors on the BoD, over the past years. Lisboa et al. (2020) provide additional information and report that almost half of the Portuguese listed firms are family firms, that the firms’ remuneration plans of the board members have increase its fixed component to around 75%, and a small percentage of firms uses stock options in their remuneration systems. The authors also document a consistent increase of merger and acquisitions (M&A) operations and a growing presence of international institutional investors in the shareholders’ structures.

Literature on the corporate governance mechanisms impact in Portuguese firms had its beginning with the investigation conducted by Alves and Mendes (2004). In this research, the authors conclude for a positive association between the level of compliance of some of the recommendations of the Portuguese Corporate Governance Code and firms’ performance. Nevertheless, the authors conclude for a non-systematic effect between the level of compliance and performance. Research on this topic has been growing and covers a wide range of governance mechanisms, firm outputs and firm types.