Managing the Covid-19 Pandemic in Brazil: Issues and Recommendations for Directors and Officers

Introduction

As in other parts of the globe, the covid-19 pandemic had severe human, social and economic consequences in Brazil. In addition to the tragic death toll and immense human cost brought by the disease, the necessary lockdown measures, closing of non-essential economic activities and other response actions by governments created a wide range of economic disruptions.

Although the worst effects of the health crisis seem to have peaked, following recent vaccination efforts, the lasting effects of the pandemic will continue to impact the Brazilian economic and corporate environments. The gradual economic recovery continues to demand careful attention from companies, for a safe and productive return to in-person activities.

In March 2021, the Brazilian Institute of Geography and Statistics (IBGE) reported a 4.1 per cent reduction in Brazil’s gross domestic product (GDP) in 2020, the worst result in more than 20 years. According to the IBGE, the national unemployment rate reached a historical record of 14.7 per cent in the first quarter of 2021 – a total of 14.8 million people. Also according to the IBGE, Brazil’s inflation reached the highest rate for the month since 1994, with annual inflation of more than 10 per cent in September 2021.

The economic downturn has also been made worse by a severe budgetary crisis. The Brazilian government was affected by significantly higher debt and wider deficits due to the covid-19 crisis. Brazil’s external debt reached approximately 90 per cent of its GDP in the first quarter of 2021, according to the Brazilian Central Bank – another unprecedented percentage. On top of that, Brazil’s water supplies are running significantly low in 2021, raising alerts of potential energy rationing.

As the uncertainty caused by covid-19 continues to affect all industries in Brazil, companies and their senior management continue to face risks and challenges related to the pandemic, including resuming in-person activities. In striving to cope with such risks, business leaders must continue to keep in mind their legal and fiduciary duties, seeking ethical and informed decision-making to lead their people and organisations to a better post-crisis future.

In this chapter, we discuss the scenario above from a Brazilian law perspective. In the first section, we describe the legal and fiduciary duties applicable to senior management in Brazil, and how those duties play out in managing the post-covid-19 crisis from a corporate perspective. We then focus on three areas to which senior management in Brazil should continue to be particularly attentive in decision-making: compliance, criminal law risks and labour law risks. We conclude by offering recommendations on general crisis management best practice.

Legal and fiduciary duties of senior management and crisis management

Corporate crises are usually defined by their novelty, uniqueness, uncontrollability and range and scale of impacts on companies and their stakeholders. When dealing with crises related to their activities and known or foreseeable risks, well-managed companies usually resort to preconceived risk matrices and crisis management plans that guide management’s responses and remediation actions. The covid-19 pandemic, however, presented unprecedented challenges that even the best pre-conceived crisis management plan could not have foreseen.

In modern corporate governance practice, there was no parallel situation to guide senior management during a crisis of the scale and reach of the pandemic. Never in contemporary times had corporate managers been put to such a test. Therefore, the necessary responses depended in large part on management’s capacity to make innovative and on-the-go decisions without complete information, having in mind their legal and fiduciary duties. These efforts and the set of lessons learned will remain necessary to strategically move businesses into a post-pandemic scenario.

In Brazil, directors and officers are subject to certain duties and may be liable for breaches, as determined by law. The Brazilian Corporations Law (Law No. 6,404/1976) sets forth the following fiduciary duties applicable to senior management:

• duty of diligence;
• duty to pursue the company’s interest;
• duty of loyalty;
• duty not to act in conflict of interest; and
• duty to inform.

The Brazilian Securities and Exchange Commission (CVM) also considers the business judgement rule when assessing liability: senior management must make well-informed decisions in the best interests of the company and in good faith. Thus, they should take all reasonable steps to become informed about the matter and, in the absence of any conflict of interest, create a rational basis for reaching a decision in the best interests of the company.

For example, when covid-19 struck in Brazil in March 2020, the CVM issued a specific normative instruction related to the effects of covid-19 on the financial statements of listed companies (Ofício-circular/CVM/SNC/SEP/n. 02/2020), and how directors and officers should approach their disclosure and information duties. The normative instruction provided that companies should evaluate if risks and forward guidance related to covid-19 should be disclosed as material facts to the market. On 29 January 2021, the CVM enacted further guidance (Ofício-circular/CVM/SNC/SEP/n. 01/2021) on the effects of the pandemic, regarding the preparation of 2020 financial statements. The agency emphasised that it would be necessary to disclose uncertainties regarding companies’ ability to continue operating – and that income or expenses related to the pandemic should not be labelled as ‘extraordinary’. The CVM highlighted that judging whether a result is ‘unusual’ or ‘extraordinary’ should be up to the readers of the financial statements (i.e., investors and creditors); therefore, accounting information should be neutral and not biased.

Corporate leaders must consider several factors to fulfil their duties and adequately respond to the lasting covid-19 challenges for companies. First, how to keep protecting the health of employees and personnel while resuming the company’s activities. Second, how to ensure the timely understanding of new rules, regulations and best practices issued by governments and other public organisations and industry groups, especially as they impact the company’s activities. Third, how to ensure business continuity and fulfilment of the company’s obligations in a continuous scenario of supply chain and distribution disruptions, and in a volatile post-crisis environment – even if it means devising fundamentally new ways of doing business. Fourth, whether, when and how to resume operations and monitor developments going forward. Finally, how the company should work with government and other stakeholders in addressing the wider impacts of the crisis from a social responsibility perspective.

In this scenario, directors and officers should be particularly attentive to issues related to compliance and criminal and labour risks and liabilities, each discussed in detail below.

Compliance and the covid-19 pandemic

A primary area of focus for directors and officers while dealing with the lasting effects of the covid-19 pandemic is anti-corruption compliance.

Under the Brazilian Anti-Corruption Law (Law No. 12,846/2013 or ‘ACL’), companies are strictly liable for acts of corruption, bid rigging or obstruction of justice against government agencies or instrumentalities by their employees or any third party acting on a company’s behalf. The covid-19 pandemic presented new challenges for compliance departments, as it generated and intensified risks related to fraud, non-compliance with internal policies, potential acts of corruption and other improper interactions with governmental authorities. An efficient response required companies to re-evaluate, adapt and put into practice new or revised controls.

Directors and officers are responsible for maintaining an appropriate tone at the top after the pandemic, so that companies can get through this stage and the skills developed may leave a constructive legacy for the business environment.

Public procurement

Commercial opportunities appeared during the covid-19 pandemic (in particular related to providing services to governmental entities), and primary exposure sources were revealed. As several governments in Brazil declared a state of emergency to deal with the spread of covid-19, a number of public procurement laws and methods were adapted to enable quicker and emergency transactions. The pandemic response actions also increased and highlighted the risks of corruption and improper use of government funds, particularly for the purchase of products subject to technical variations and price fluctuations.

Corporate compliance departments must continue to follow up on updates to legislation, to comply in good time with its determinations and requirements. Since the beginning of the pandemic, governmental authorities in Brazil have issued more than 4,800 normative acts regarding the fight against covid-19. Laws and regulations waived certain legal requirements for public procurement during the pandemic, such as accepting contracting with debarred companies.^[2] While such measures reduce bureaucracy, enhance agility and facilitate public procurement, they represent higher compliance risks associated with these transactions.

In this respect, since the beginning of the pandemic, Brazilian law enforcement agencies have also launched other investigations into allegations of fraud, overpricing and public procurement violations, particularly in the healthcare sector. Up to 20 April 2021, the Federal Police had carried out 77 police operations to investigate irregularities in contracts and bids, and misuse of public resources within the scope of responses to covid-19. In this context, more than 1,000 search and seizure warrants and 100 arrest warrants were served.

On 27 April 2021, the Brazilian Senate launched a Parliamentary Inquiry Committee (CPI) to investigate the federal government’s pandemic response – including alleged misconducts in the government’s spending and in the actions of companies in the pharmaceutical and healthcare sectors. During the inquiry, several individuals and companies, including their directors and officers, have been targeted by requests for information – including bank, tax and phone records and summons for depositions.

Some specific probes and operations are worth mentioning. Operations such as ‘Polygraph’, ‘Select’ and ‘False Negative’ were launched by the federal police to gather evidence on alleged irregularities in public bids for the purchase of covid-19 tests, which were allegedly overpriced and not registered by the National Health Surveillance Agency (ANVISA). Operations such as Dyspnea, Para Bellum and Sangria are investigating the hiring of companies with uncertain technical and financial capacity to sell overpriced respirators to the government.

This hectic law enforcement scenario should serve as a warning sign for companies and their directors, officers and compliance departments, particularly those companies that have done business with government entities during the pandemic, both directly or through distributors or other third parties.

Contracting needs and interactions with government officials

The covid-19 pandemic caused disruption in production and supply chains. In this new scenario, employees may have faced pressure to achieve their goals and lost sight of the importance of compliance vetting procedures. In other situations, companies may have needed to secure quick emergency hiring of new and unknown suppliers and vendors to continue operating or preventing additional losses, particularly during the worst periods of the pandemic.

Therefore, emergency or unconventional contracts represent a significant new source of compliance risk, considering the strict liability rules for acts of third parties provided under the ACL, especially for vendors that interact with government officials. Directors, officers and compliance departments must work to design and implement policies that allow their companies to respond to such emergency or new contracting needs, document any exceptions in the future to make sure they are duly justified and ensure adequate record-keeping. Once activities resume, directors and officers should ensure post-contract reviews as soon as is practical, to identify and address any past issues.

In this sense, the Brazilian Senate’s CPI and other law enforcement agencies have been particularly focused on investigating corruption-related irregularities in the purchase of covid-19 vaccines and treatment equipment by the government. There are concerns that several third parties may have engaged in overpricing, bribes or kickbacks. Even if misconduct is limited to such third parties, Brazilian law still allows manufacturers to be held liable.

Therefore, employees and third parties must continue to be reminded that promising, offering or giving unlawful benefits to government officials is illegal and will not be tolerated, even during a crisis or post-crisis scenario. Certain practical measures may be enforced to mitigate risks of improper conduct, such as:

• the need to have at least two employees representing the company in meetings with government officials;
• restrictions to interactions of third parties with government officials on the company’s behalf; and
• documentation and registration of interactions.

If an official makes an improper request, employees should be instructed to communicate the company’s strict ethical standards and report the situation to the compliance department immediately.

Directors and officers also need to be mindful of the increased likelihood of government inspections following the pandemic, especially those related to in-person working and sanitary conditions. In this respect, they should ensure that the company has appropriate communication plans and policies to respond to inspections, and clear identification of the employees responsible for accompanying governmental inspections (including redundancies, in the case of any absences due to covid-19).

Donations to government agencies

Besides doing business with the government, companies can also continue to receive requests for donations of funds and goods to assist in recovery from the impacts of covid-19 – not only from government agencies but also from non-governmental organisations that operate with government funds.

The applicable Brazilian laws do not prevent companies from making donations to government entities, but there may be specific legal requirements, such as those introduced by Decree No. 10,314, of 7 April 2020, which updated the procedures applicable to donations to the federal government. Furthermore, directors and officers should carefully consider other precautions before approving such donations, particularly if the donations were made during the municipal elections held in Brazil in late 2020.

To avoid any future challenges to donations, directors and officers should not only abide by the applicable laws and regulations, but should also adopt certain best practices. Making direct, unconditional donations can mitigate compliance risks. For donations to non-governmental organisations, beneficiaries and the purposes of donations should be subject to a strict compliance evaluation. Money donations should be avoided.

Another essential protection is documenting the donation through a written agreement that specifies the purpose of the donation, the destination of the funds or goods and the absence of any consideration by the government entity, including proper anti-corruption provisions. Transparency is another crucial element when making donations and interacting with government entities.

Directors and officers should ensure that the company puts in place adequate procedures and controls to evaluate and approve donations, if they have not already done so. They should also make sure that the employees responsible for implementing and executing such donations are keeping adequate and appropriate records of the information and documents related to transactions, including of any interactions with government officials.

The need to maintain a risk-based compliance programme

Despite the increased difficulty of controlling internal processes during the worst of the covid-19 pandemic, maintaining an effective compliance programme during the crisis was critical. Periods of crisis tend to expose weaknesses and facilitate, or even encourage, rogue employees to engage in unethical conduct. Directors and officers must continue to take the necessary measures not only to ensure the continuous application of existing compliance procedures as the pandemic recedes, but also to maintain the ability to identify, monitor and implement controls to address risks that may have arisen or worsened during the peak of the crisis, or new risks associated with new working models as companies resume in-person activities.

Any exceptional measures must be documented and registered, as well as the rationale used to change procedures. This requires a full understanding and assessment of the company’s current situation, needs, weaknesses and risks – so that the right responses may be reached during current and future challenges. Identification, treatment and continuous reassessment of new risks are also essential to keep directors and officers adequately updated, ensuring a fully informed decision-making process, setting up priorities and establishing a proactive (rather than reaction-based) approach to compliance challenges. Adequate communication remains a key aspect of an appropriate compliance programme.

In this respect, directors and officers should consider the lessons learned during the period of remote work. This means seizing new channels to set the tone and communicate and promote compliance. Online tools and platforms may continue to be used to clearly express the support of directors and officers to the compliance programme and provide continuous compliance training to employees.

Companies that succeeded in keeping their compliance programmes working properly during the covid-19 crisis may also benefit from such actions if they face investigations or prosecution in the future. If a violation did take place during the pandemic despite existing or new policies and procedures, showing that appropriate measures were in place can lead to reduced fines and protection against other penalties.

Managing criminal law exposure in connection with covid-19

Potential criminal liability of directors and officers under Brazilian law related to the pandemic

When managing during the covid-19 crisis and making decisions related to response actions, directors and officers should continue to be mindful of the potential criminal implications that may arise over the next few years, particularly as in-person activities resume.

In Brazil, criminal liability is personal and subjective, which means that directors and officers can only be found guilty of a crime if they act with intent or fault (negligence, recklessness or malpractice), either directly or by aiding and abetting. Under the Brazilian Penal Code, a violation can only be attributed to individuals who commit an act or an omission that:

• results in a crime;
• poses or increases the risk to a legal right (such as life); or
• violates a duty of care that is attributable to an individual because of his or her position, and who has the duty and means to understand the risks of a legal violation and to take measures to prevent it or make it cease.

Criminal liability of companies is an exception under Brazilian law, and only exists for environmental crimes.

Considerations on criminal liability related to the covid-19 crisis

Throughout 2020 and 2021, we have observed an increase in allegations of criminal liability related to emergency contracts and other covid-related measures. Operations and probes by the Brazilian police authorities were characterised by preventive arrests of executives, as well as search and seizure warrants in households and company headquarters. The investigated crimes include bid-rigging, criminal organisation, corruption, money laundering, cartel formation, fraudulent misrepresentation and embezzlement, and crimes against the public health.

The above-mentioned CPI of the Brazilian Senate has also raised criminal law concerns. Investigated parties resorted to the Supreme Court (STF), challenging the extent of the investigative powers of the CPI. On different occasions, the STF has ruled, for example, that:

• refusal to appear as a witness or investigated individual may give rise to a coercive attendance order (STF, HC 203.387/DF);
• investigated individuals have the right to remain silent during the deposition, so that they are not required to produce evidence against themselves (STF, HC 203.387; HC 203.381 and HC 201.912/DF); and
• as to the extent of precautionary measures, such as search and seizure and breach of banking, telematics, tax and phone secrecies, the decisions of the STF are consistent in accepting them if a CPI decree justifies probable cause for the implementation of the exceptional measure (STF, MS 37.972/DF; MS 37.974/DF).

The advance of vaccinations worldwide, including in Brazil, also had a considerable impact on pandemic-related criminal liability, especially about the understanding of the risk imposed on the life and health of workers in the return to post-isolation activities. Authorities and state governments began to require proof of vaccination to authorise the return to activities, to avoid undue health risks. Therefore, complying with this requirement can be taken as proof of good faith and care on the part of companies in returning to activities and, consequently, means of preventing the criminal accountability of directors.

There is concern regarding the exposure of workers to contamination by covid-19 in the workplace – imminent risks to the lives and health of employees. Therefore, directors and compliance officers should continue to give special attention to the return of activities after quarantine periods and the application of social distancing measures set forth by local laws precisely designed to prevent such risks. In this context, even if the worst of the health crisis seems to have passed, the breach of rules to prevent contamination or the failure to implement such protection measures may continue to provide grounds for authorities to recognise the criminal liability of directors and officers involved in the decision-making, regardless of wilful misconduct. This can lead to criminal liability for crimes against life, health and even freedom of labour organisation. It is essential that companies keep records showing that all efforts were made to comply with guidelines and rules established by health authorities, or showing the reasons why the company was unable to do so.

These topics that exemplify potential criminal liability due to the pandemic show the importance of directors and officers supporting effective compliance measures when dealing with the effects of the covid-19 crisis, which may last many years. Moreover, it is indisputable that increased vaccination and the establishment of a CPI brought new parameters for the measurement of risks related to criminal liability and involvement in investigations in Brazil, which should also be considered by companies during covid-19 crisis management.

Brazilian labour and employment response to covid-19 crisis

Since the beginning of the covid-19 pandemic, the Brazilian government has taken measures aiming to reduce company losses and to secure jobs and income. On 1 April 2020, for example, the federal government enacted Provisional Measure No. 936 (PM 936), implementing methods to ensure temporary savings on employers’ budgets during the state of emergency arising from the pandemic, including reducing employees’ salaries (‘reduction') or suspending employment agreements for 60 days (‘suspension’).

If companies resorted to reduction and suspension, by means of collective bargaining or individual agreements, adequate records should have been kept in case such decisions are challenged in the future.

PM 936 was converted into Federal Law No. 14,020 on 6 July 2020, and its effects expired in 2020. Thus, the government edited two new Provisional Measures with similar subjects to the previous ones: PMs 1,045 and 1,046. PM 1,045 established a new 120-day term for employers to suspend employment contracts and reduce salaries, as well as financial aid to the employees.^[3] Neither PM was converted into federal law, and therefore they expired and are currently inapplicable.

Vaccination and resumption of business activities

Before vaccination, the key area of attention for directors and officers was the partial resumption of business activities, particularly for businesses that require the physical presence of employees. During the first months of the pandemic, only essential services could operate with on-site employees and the list of such services varies between states, and even, in some cases, between different municipalities.

However, because of the advancement of the vaccination campaign and the reduction of covid-19 numbers in Brazil, some of the restrictions to in-person operations that were imposed by local and state authorities have been relaxed. Most of the companies at this stage have been slowly resuming their in-person business activities, and now the main issue has shifted to the discussion of the employer’s liabilities and the demand for employees to be vaccinated.

Immediately after a period of more restrictive lockdown at the beginning of 2020, restrictive measures started to be reduced and on-site activities have gradually been authorised, depending on the industry and location. This movement was not always straighforward: in some cases, activities went through bouts of partial restriction and partial release, even within short periods of time. A key point of discussion was the implementation by employers of occupational health and safety (OHS) and sanitary measures to guarantee employee safety (e.g., use of masks and alcohol, constant cleaning, social distancing and separation of employees who belong to risk groups).

In 2021, the vaccination campaign began in Brazil, and now most Brazilians have received at least one dose (for instance, in the state of São Paulo, more than 90 per cent of the population has already received at least one dose of the vaccine).

Because of the vaccination progress, employers started to look into whether and on what grounds they could (or should) require their employees to be vaccinated – to prevent, control and mitigate the risks of transmission or contamination in the workplace. Currently, Law No. 13,979/2020 provides that vaccination could be determined as mandatory by public authorities according to their competencies. However, no law has yet been enacted to make vaccination against covid-19 mandatory. Furthermore, on a decision issued in December 2020, the Supreme Court affirmed that the vaccine could not be physically enforceable against the individual. However, the Court argued that individuals who refuse to be vaccinated could have their individual rights limited in the interest of protection of collective health (e.g., the individual could be barred from entering a restaurant).

When it comes to the workplace, the law provides that employers have the duty to maintain a healthy working environment and protect the collective well-being of employees. In this sense, recent literature and court precedents have been discussing whether the unjustified refusal to be vaccinated should represent a barrier for the employer to comply with OHS rules and a threat to the collective wellbeing of the other workers, which theoretically could enable a termination for cause.

However, the Brazilian Consolidation of Labour Laws establishes a restrictive list of grounds for termination in its Article 482, which does not foresee such refusal to vaccinate, especially considering that there is no law imposing the forced vaccination of individuals. It is not possible to categorically affirm that employers have grounds to dismiss their employees for this reason, and this controversy is still under discussion.

On 18 June 2020, the Labour and Social Security Department and Ministry of Health issued Joint Ordinance No. 20 (Ordinance 20), addressing measures to be taken and observed by employers to reduce the chances of contamination by covid-19 in the workplace, which are still enforceable, regardless of the vaccination advancement.^[4]

Directors and officers have primary responsibility for the implementation of protocols (preferably supported by the advice of a multidisciplinary group of experts including occupational physicians, epidemiologist and human resources personnel) to make sure the necessary measures are in place to prevent, control and mitigate the risks of transmission or contamination in the workplace. These include:

• keeping a distance of at least one metre between all occupants; or, in cases where keeping a one-metre distance is not possible, providing face masks, protective glasses and face shields, or installing partition walls made of impermeable material;
• restricting or limiting the use of lifts and common areas; and
• avoiding in-person meetings.

Ordinance 20 also provides that employers must remove confirmed and suspect cases of covid-19 from the workplace, as well as people who had contact with confirmed cases of covid-19. They must also keep updated records with information about employees (classified by age, risk, suspect cases, confirmed cases, workers who had contact with confirmed cases) and all measures taken to ensure adequate prevention of covid-19 in the workplace.

Failure to ensure proper implementation and monitoring of the measures described above may subject the company to enforcement actions by authorities and individual or collective lawsuits by employees. Depending on the consequences that could arise from such a failure, directors and officers may be considered individually liable, including under applicable criminal laws. Therefore, directors and officers must ensure the proper understanding and implementation of the recommendations above.

Building a solution

Directors and officers have the primary responsibility for developing and keeping in place robust response actions regarding efforts to overcome the pandemic and the economic recovery, and to document lessons that may be valuable in the future. While dealing with the covid-19 pandemic and future crises, directors and officers must tackle risks related to internal and external stakeholders and aim to ensure good decision-making. Ineffectiveness in responding to the urgent demands may cause enduring damage and harm stakeholder confidence and trust. As discussed above, criminal, labour and compliance are key areas of concern.

In general, the best way to mitigate criminal liability of directors and officers and the risks of labour-related litigation is to make sure to be in full compliance with the recommendations of health and labour authorities, especially Ordinance 20, and abreast of the rules issued by federal, state and municipal authorities related to fighting the pandemic.

Once a company’s risk profile is updated with the specific risks related to the covid-19 pandemic and its consequences, directors and officers should keep monitoring such developments and ensure that compliance departments have enough resources going forward, particularly as companies move to resume in-person activities. Compliance departments should increase oversight to ensure that companies’ internal policies keep on being followed. Mechanisms that may assist in the identification of potential breaches, such as whistle-blowing channels, should be publicised and supported by senior management. Frequent and real-time communication of the proper tone at the top also minimises the risk of non-compliance. The compliance programme’s communication tools may be adapted, and new ones devised based on the lessons learned from the crisis.

Conclusion

As the covid-19 health crisis eases and its lasting effects unfold, directors and officers should consider how to tackle the lingering financial and economic impacts that will keep affecting companies in all sectors, keeping in mind the issues above, among others. Anticipating challenges and dealing with more limited resources will continue to require creativity, resilience, sound decision-making and a clear sense of priorities and risks. The fact that the worst period of the pandemic and the health crisis now seem to be behind us does not mean that business leaders can resume business as usual and simply return to previous practices. They should remain attentive and diligent for the foreseeable future, as implications continue to unfold.

Notes