- Significant Differences between the Company’s current Corporate Governance Practices and the New York Stock Exchange (NYSE) Corporate Governance standards
We are subject to NYSE’s corporate governance standards. As a foreign private issuer, the standards applicable to us significantly differ from those applied to U.S.-listed companies. According to NYSE rules, the requirements we must comply with are limited to (a) maintaining an audit committee or board of auditors, under the applicable exemption available to foreign private issuers, that meets certain requirements as explained below; (b) promptly providing a certificate issued by its Chief Executive Officer proving no material non-compliance with corporate governance rules; and (c) offering a brief description of the significant differences between the Company’s corporate governance practices and those of NYSE that must be followed by U.S.-listed companies.
Under the Novo Mercado’s Listing Regulations, the significant differences between the Company’s current corporate governance practices and those required of U.S.-listed companies are summarized below.
- Majority of Independent Board Members
NYSE rules require that the majority of the Board consists of independent members. Independence is defined based on several criteria, including the absence of any material relationship between the Board member and the listed company. Under the Novo Mercado Regulations, the Board of Directors must evaluate the independence of Board members before their election. This evaluation is based on a declaration prepared by the candidate. Furthermore, Brazilian Corporation Law and the Brazilian Securities and Exchange Commission (CVM) have established rules requiring that Board members meet certain qualification criteria. However, these do not require a majority of independent Board members, as required by NYSE rules. Under the current Bylaws, approved on October 28, 2024, the Board of Directors shall be comprised of nine sitting members elected and removable from office by the General Meeting, all serving a unified two-year term of office starting from election, with reelection permitted. At least three members must be independent, as defined by the Novo Mercado Regulations. Currently, three out of nine Board members are independent, under the Novo Mercado Regulations. We believe that these rules provide adequate assurance that the Board members are independent.
- Executive Meetings
According to NYSE rules, non-executive Board members must meet periodically in executive sessions without the presence of management. This requirement is not outlined in Brazilian Corporation Law. Under this law, up to one-third of the Board members may also be elected to compose the Executive Board. All other Board members fall under NYSE’s definition of “non-executive” Board members. There is no requirement in Brazilian Corporation Law for non-executive Board members to meet regularly without management. However, the Board of Directors’ Internal Regulations provide that, at the discretion of the Chair of the Board of Directors, meetings may be held exclusively for external Board members without the presence of executives. Sabesp’s Board of Directors currently consists of nine non-executive Board members.
- Fiscal Council
Under Brazilian Corporation Law, the Fiscal Council is an independent corporate body separate from management.
A Fiscal Council is neither equivalent nor comparable to a U.S.-style audit committee. Its primary responsibility is to review the activities of management and the Company’s Consolidated Financial Statements and report its findings to the Company’s shareholders. Brazilian Corporation Law requires that Fiscal Council members receive compensation equal to at least 10% of the average annual compensation paid to the Company’s executive officers. Brazilian Corporation Law requires that a Fiscal Council consist of at least three and at most five sitting members and their respective alternates.
Additionally, Brazilian Corporation Law stipulates that Fiscal Council members cannot (i) serve on our Board of Directors; (ii) serve on our Executive Board; (iii) be employees of the Company or its subsidiaries; (iv) be spouses or relatives of any member of management up to the third degree.
Our Fiscal Council currently comprises five sitting members and five alternates. The meetings of the Fiscal Council are held once a month.
- Audit Committee
According to NYSE rules, listed companies must maintain an audit committee that (i) consists of at least three independent members with substantial financial expertise, (ii) complies with SEC rules regarding Audit Committees for listed companies, (iii) includes at least one member with experience in accounting or finance, and (iv) is governed by a written charter that outlines the purpose of the committee and details of its responsibilities. However, as a foreign private issuer, we are only required to ensure that our Audit Committee complies with SEC rules for listed company Audit Committees to the extent compatible with Brazilian Corporation Law.
Our Audit Committee, which is neither equivalent nor comparable to U.S. audit committees, supports the Board of Directors in matters involving accounting, internal controls, financial reports, and compliance. The Audit Committee is primarily responsible for advising and assisting the Board of Directors in ensuring the quality, transparency, and integrity of published financial information and Financial Statements. The Audit Committee is also responsible for overseeing all matters related to the Code of Conduct and Integrity, accounting, internal controls, internal and independent audit functions, compliance, risk management, and internal policies, such as the Related-Party Transactions Policy.
The committee shall be composed of at least three and at most five members appointed by the Board of Directors and, according to our Bylaws. The Audit Committee members can be appointed either concurrently with their election to the Board or through a subsequent resolution.
According to our Bylaws, our Audit Committee may have a mixed composition (external members as well as members who are independent directors). In reliance on the SEC’s interpretive letter issued on Nov. 8, 2018 (Compliance with Rule 10A-3 by Brazilian Foreign Private Issuers), we consider that such mixed composition of our Audit Committee qualifies for the exemption provided in Rule 10A-3(c)(3). Currently, our Audit Committee is composed of four members (two external members and two independent directors).
The Audit Committee members who are also a member of the Board of Directors must perform their functions for as long as their respective terms of office last as a Board member or until otherwise decided by the Board of Directors. In the case of resignation or removal from office of an Audit Committee member who has served their terms of office for any period, they cannot rejoin the Audit Committee for at least three years after the end of their term of office. All members meet SEC’s and NYSE’s independence requirements, as well as other NYSE-specific requirements.
- Nomination/Corporate Governance and Compensation Committees
NYSE’s rules require listed companies to have a Nomination/Corporate Governance Committee and a Compensation Committee, both entirely composed of independent members and governed by a written charter that identifies their purpose and details their responsibilities. The Nomination/Corporate Governance Committee’s responsibilities include identifying and selecting candidates qualified to serve as members and developing corporate governance principles applicable to the company. The Compensation Committee’s responsibilities include evaluating corporate goals related to the CEO’s compensation, assessing executive performance, approving compensation levels, and recommending to the Board the direct and variable incentive-based compensations, including share-based compensation attributable to other Company executive officers.
Under Brazilian Corporation Law, there is no requirement to maintain a Nomination/Corporate Governance or Compensation Committee. However, during the General Meeting held on April 27, 2018, Sabesp established the Eligibility and Advisory Committee, now the Eligibility and Compensation Committee, composed of five members. Members must have relevant academic qualifications or professional experience in areas within their competence, as outlined in the Bylaws.
According to the best practices in corporate governance, the company have a structured onboarding program for new Board of Directors members so that the aforementioned members are introduced to key personnel and company facilities, and essential matters for the understanding of the company’s business must be addressed.
Under B3’s Novo Mercado Regulations, we conduct annual performance evaluations for its administrators. The performance evaluation process covers both individual and collective performance and is carried out by a specialized external consulting firm through an electronic system for each group of administrators, with personal credentials, security protocols and certifications, which addresses: effectiveness of management, contribution to the Company’s results, business plan performance and achievement of strategic goals.
Under Brazilian Corporation Law, the total amount available for members’ and executive officers’ compensation and profit-sharing payments is determined by our shareholders at the General Shareholders’ Meetings. Individual compensation, profit-sharing for each executive officer, and compensation for Board members and committee members are determined according to our compensation policy, which is approved by the Board of Directors.
The internal charter defining the committee’s purpose and detailing its responsibilities must be approved by the Board of Directors.
- Shareholder Approval of Share-Based Compensation Plans
NYSE rules ensure shareholders’ rights to vote on all share-based compensation plans and any significant amendments, with certain exceptions. We currently do not have any share-based compensation plans. If such a plan is implemented, Brazilian Corporation Law does not require shareholder approval. However, if the issue of new shares associated with any share-based compensation plan exceeds the limit of authorized capital in the Bylaws, increasing this limit would require shareholder approval.
- Corporate Governance Guidelines
NYSE rules require listed companies to adopt and disclose their corporate governance guidelines. We comply with the corporate governance requirements and guidelines outlined in the Novo Mercado Regulations. For further details, refer to “Item 9.C. Markets––Novo Mercado Segment” in our Form 20-F, our Corporate Governance Report under the Brazilian Code of Corporate Governance and our policies, which are available in the “Corporate Governance” section of our Investor Relations website. We understand that the corporate governance guidelines applicable to us do not conflict with the guidelines established by NYSE. Our governance guidelines and practices can be accessed on our website at www.sabesp.com.br under “Investor Relations – Corporate Governance”.
- Code of Conduct and Integrity
NYSE rules require listed companies to adopt and disclose a Code of Ethics and Integrity for executive officers, executives, and employees, as well as promptly disclose any waivers granted to executive officers or executives regarding compliance with such a code. Brazilian Corporation Law does not require the adoption or disclosure of a formal code.
However, the Novo Mercado Listing Regulations require the adoption of a Code of Conduct and Integrity, which must include, among other provisions, guidelines to prevent conflicts of interest, fraud and corruption, whistleblowing channels, anti-bribery measures, protections to prevent retaliation against whistleblowers, periodic training on the code’s content, and sanctions for violations of the code.
We have adhered to and disclosed a Code of Conduct and Integrity that complies with Brazilian laws and regulations while also addressing applicable NYSE and SEC rules.
Sabesp has relied on a Code of Conduct and Integrity since 2006. Its last update was approved by the Board of Directors in February 2021 and is available on the Company’s website at https://ri.sabesp.com.br/en/corporate-governance/code-of-conduct-and-integrity/ and on the CVM website (www.cvm.com.br).
The Code of Conduct and Integrity is presented to the Board of Directors, the Audit Committee, the Eligibility and Compensation Committee, and all other employees during role-specific onboarding programs. Additionally, we require that our suppliers and other related parties comply with the Code of Conduct and Integrity through contractual agreements. Any violations are subject to sanctions according to contractual terms and other measures under applicable laws and regulations. Any breaches of the Code of Conduct and Integrity are subject to internal investigations and applicable disciplinary measures on a case-by-case basis.
The Code of Code of Conduct and Integrity is frequently updated according to new laws and regulations.
- Internal Audit Function
NYSE rules require companies to maintain an internal audit department to provide management and the audit committee with ongoing assessments of the company’s risk management processes and internal control systems. Our internal audit department is linked to the Board of Directors through the Audit Committee and reports to the Chief Executive Officer.
The internal audit is responsible for assessing (i) the adequacy of internal controls, (ii) the effectiveness of risk management and governance processes, (iii) the reliability of the process for collecting, measuring, classifying, accumulating, recording, and disclosing events and transactions aimed at preparing Consolidated Financial Statements, and (iv) the proper application of the segregation of duties principle, aimed at avoiding conflicts of interest and fraud.