In 2019, Brazil was the site of one of its most significant environmental disasters—the collapse of a mining waste dam operated by Vale S.A., one of the country’s largest miners. This catastrophe released 12 million cubic meters of mud and waste into the municipality of Brumadinho in Minas Gerais, claiming 270 lives and erasing R$ 51 billion from Vale’s market valuation. In response, the Securities and Exchange Commission (CVM) initiated an Administrative Sanctioning Process (PAS) to assess the responsibilities of the company’s administrators under the duty of diligence mandated by the Corporation Law.

The charges alleged that Vale’s then-director of iron ore and coal did not fulfill his duty of diligence by failing to adequately inform himself about the actual condition of the B1 dam when it was feasible. In his defense, the director claimed that the vast scope of the company and the multitude of areas under his charge precluded him from having specific technical knowledge about risk management. He relied on the information from the individuals directly responsible for the dam.

The CVM ultimately fined the director R$ 27 million, concluding that he had neglected the required diligence in managing the company’s interests. This case has sharpened the understanding of the responsibilities held by corporate directors and the behaviors expected of them to prevent liability for losses suffered by the company.

The case judge highlighted that an administrator’s obligation to the company is a duty of means, not of results. In other words, evaluating a manager’s liability does not hinge solely on the harm inflicted on the company but rather on the decision-making process itself. Administrators must prove that they acted informedly and sought all necessary information before making any strategic decisions.

In this scenario, the Securities and Exchange Commission (CVM) pinpointed that the duty of diligence comprises four main aspects:

(i) qualification for the role;

(ii) proactive information gathering;

(iii) risk assessment; and

(iv) oversight of activities under one’s charge.

Additionally, three criteria have been defined to evaluate the fulfillment of these duties:

(a) the statutory authority of the administrator;

(b) the required technical level for managing the subject matter; and

(c) the presence of warning signs that could signal potential irregularities.

Based on these assessments, the CVM concluded that an administrator’s lack of technical knowledge does not absolve them from their duty of diligence. Rather, it obligates them to diligently seek detailed information, assess potential risks, and closely supervise their subordinates closely.

Furthermore, the CVM clarified that the so-called Right to Rely—the right to depend on information provided by third parties—is not absolute. Should there be any warning signs, it is incumbent upon the administrator to pursue additional information and conduct further risk assessments before making decisions. Regarding the B1 dam case, the CVM observed evident risks and noted the director’s failure to acquire necessary technical knowledge and monitor the dam’s management adequately, thereby violating his duty of diligence.

Glossary:

Right to Rely – A legal principle allowing company administrators to depend on information provided by experts or subordinates, provided that reliance is reasonable and justified under the circumstances.

Vale S.A. – One of the largest mining companies in Brazil, involved in the extraction of iron ore, among other minerals.

B1 Dam – The specific dam associated with the catastrophic failure in Brumadinho, Minas Gerais, which resulted in significant loss of life and environmental damage.

Securities and Exchange Commission (CVM) – The Brazilian federal agency responsible for regulating the securities market, similar to the SEC in the United States.

Administrative Sanctioning Process (PAS) – A formal process initiated by regulatory bodies such as the CVM to investigate and impose sanctions on entities or individuals for breaches of legal or regulatory obligations.

Duty of Diligence – A legal obligation for company administrators to act with care, prudence, and vigilance in managing the affairs of the company, ensuring they make informed decisions.

Corporation Law – Refers specifically to Brazilian corporate legislation that outlines the rights, duties, and responsibilities of corporations and their administrators.

Statutory Authority – The legal power granted to an individual by legislation, enabling them to act in a certain capacity within an organization.

Technical Level – Refers to the level of expertise and knowledge required to manage specific aspects of a company’s operations effectively.

Warning Signs – Indicators or hints that there may be underlying problems within the company that require attention from its administrators.

Risk Assessment – The process of identifying, analyzing, and responding to risk factors throughout the life of a project or business, in the context of corporate governance, to minimize negative impacts.

Subordinates – Individuals who work under the authority of someone else within the company structure, often referred to in the context of delegation and reliance on their work or reports.

Evident Risks – Clear and recognizable dangers or threats that could potentially lead to harm or losses.