2012 Annual Sustainability Report

Grupo Algar follows the best corporate responsibility practices in its operations even though it is not a publicly-held corporation, with listed stock. In fact, this has made it a benchmark among family-owned businesses. Principles such as ethics, transparency and a commitment to the future, inherited from its founder, Mr. Alexandrino Garcia, have always been part of its DNA. This legacy led to the introduction of a modern well-structured evolutionary model of corporate governance during the restructuring process in 1989, when the Group adopted professional management. At present, this model is extremely reliable and serves as a reference for other companies in Brazil and other countries.

The fact that the family's interests are in line with corporate needs is one of the main pillars of governance at Grupo Algar, which also has tools to ensure safe decision-making, control and manage corporate risks, promote synergy among all its companies, value associates, disseminate the internal culture and seek improvements that lead to an even stronger commitment and greater transparency toward its stakeholders. The Company currently has no formal, structured process to engage or define a stakeholder, but it seeks to understand its stakeholders' needs by means of an ongoing dialogue.

Owing to the efficiency of this evolutionary dynamic model, Grupo Algar has been part of the Companies Circle of Latin American Corporate Governance, a group of 15 Latin American companies that have been leaders in adopting good corporate governance practices, since 2010. These companies meet to promote better governance in Latin America by sharing experiences, under the auspices of the International Finance Corporation (IFC/World Bank), Global Corporate Governance Forum (GCGF) and Organization for Economic Cooperation and Development (OECD).

Regardless of all the recognition that it has earned and the tools that it has developed, Grupo Algar considers corporate governance a living organism, in an ongoing process of evolution and improvement, following the best standards and practices.

Corporate Structure

Corporate Governance Structure

Family Council

Essential to ensure the sustainability of Grupo Algar's businesses, the Family Council was introduced in 2002. It manages the interests shared by shareholders descended from the founder, Mr. Alexandrino Garcia, as well as their spouses and heirs. It consists of nine members, three representatives from each of the family-run holding companies (Elgar, Lagar and Walgar), and is chaired by Ms. Eleusa Maria Garcia Melgaço, who currently also chairs the Brazilian chapter of the Family Business Network (FBN), an international organization that brings together over 5,600 business-owning families from 56 countries to share experiences, develop future generations and disseminate good governance practices.

The Family Council presently represents 45 family members, 32 are direct descendants. It meets every two months–all shareholders may attend these events–to validate and execute the Family Constitution. This document sets the guidelines for the descendants' three fundamental roles (the family as a family, the family as a business owner and the family as staff), its relationship with the Board of Directors and the Company's executives, the dividend policy and succession processes among others.

The Family Council also organizes events to integrate the family and improve governance tools. As a result, the Skill-Building Program for Shareholders, Spouses and Heirs was developed. Funded by the family-run holding companies, the program is intended to prepare all family members for the role of shareholders and help them develop their life plans. The program consists of different modules covering from basic skills, such as knowing Algar's culture and businesses, to specialized, customized training programs, including courses in top universities out of Brazil. In 2012, 14 family members from the third and fourth generations took the Family Business: from Generation to Generation course, at the Business School of Harvard University, in the U.S.

Since 2002, the Family Council has been organizing the Family Meeting, a two- to three-day event with all family members, to integrate the shareholders, improve information sharing and discuss other issues. The Family Council also has a Family Portal, which continuously provides information in a comprehensive and organized manner.

This management model of the family members' interests–with formal, clear and established rules–minimizes any conflicts that may arise and prevents relationships from deteriorating and emotional issues from affecting corporate issues, thus creating a healthy working environment valued by the market. As a result, Grupo Algar won a corporate governance award from IBGC (Instituto Brasileiro de Governança Corporativa, Brazilian Institute for Corporate Governance) in 2009 and was the object of a case study in the book Governança Corporativa em Empresas Familiares (Corporate Governance in Family-Owned Companies), published by the same organization in 2011.

Board of Directors

Introduced in 1999, Grupo Algar's Board of Director sets the strategic guidelines to ensure the sustainability of the Group's business, uphold its values and beliefs and ensure a balance between the interest of the family and those of the other stakeholders. It also examines and approves the annual budget and the strategic plans put forward by the Board of Executive Officers, and monitors the long-term performance of the companies.

Algar's Board of Directors is composed of nine members, most of whom are independent. They are elected by the Annual General Meeting for a one-year term and may be re-elected. In December 2012, the Board of Directors consisted of eight elected members, five of whom were independent–that is, they have no emotional or business ties with Grupo Algar or the family that owns it. Even though its shares are not publicly traded, the Company decided to have a Board of Directors consisting mostly of independent members. It is planning to have the position currently vacant filled in 2013. The new board member will be elected at the next Annual General Meeting (AGM), on April 29, 2013. The new member to be appointed is Mr. Sérgio Alair Barroso, who has been sitting at the Risk Audit and Management Committee since 2012. The new member was appointed under recommendation of the Board of Directors in its latest annual evaluation and took into account his experience as an executive and knowledge of agribusiness among others. In addition, there was no conflict of interest in appointing Mr. Barroso, who will be a valuable addition to a team consisting of professionals with different career paths in the corporate world.

The Board usually meets six times a year, according to a pre-established topic-based schedule, and at such other times as may be deemed necessary. There were 5 meetings in 2012, two of which out of the Group's headquarters. The idea is to have meetings in areas in which the Group is expanding as well.

Board members can use the Governance Portal, a restricted-access, exclusive online channel that contains documents and information that they need in their activities. All Board activities follow the guidelines set out by the policies and procedures guide, prepared in accordance with the Brazilian Corporate Law and the Company's Bylaws, and based on the recommendations contained in IBCG's Code of Best Corporate Governance Practices. A self-assessment of the Board and an individual evaluation of each Board member have been done every year since 2005. It is a three-step process, with interviews, questionnaires and improvement plans.

Composition of the Board of Directors on 12.31.2012:

Luiz Alberto Garcia	Chairman
Alexandrino Garcia Neto	Board member and member of the Corporate Governance Committee
Hélio Marcos Machado Graciosa	Board member and member of the Corporate Governance Committee
Darc Antônio da Luz Costa	Independent member
Eduardo Moreira da Costa	Independent member
Geraldo Sardinha Pinto Filho	Independent member and member of the Audit and Risk Management Committee
Ozires Silva	Independent member
Walter Fontana Filho	Independent member and member of the Corporate Governance Committee

Luiz Alberto Garcia
(Chairman)
Shareholder and member of the second generation of the family that owns the Algar Group's shareholding control. Mr. Garcia has a degree in electronic engineering from Escola Federal de Itajubá (Minas Gerais State), and specializations in (i) Global Business Leadership from Georgetown University Washington, DC/USA; Leading the Family Business from IMD, Lausanne (Switzerland); and (iii) Owner/President Management Program from Harvard University (USA). He is a former CEO of the Brazilian National Association of Cellular Phone Service Providers (ACEL), member of ANATEL's Advisory Council, member of the Brazilian Agribusiness Association (ABAG), of TELEBRASIL and SINDITELEBRASIL. He was also a Board member at Fundação Orsa. Besides serving as the chairman of Grupo Algar, he is the chairman of the Board of Trustees of CPqD Foundation, member of FIEMG's Board, member of the Institute for Industrial Development Studies (IEDI), and of the Research Foundation of the Federal University of Uberlândia (FUNDAP).

Alexandrino Garcia Neto
(member)
Mr. Garcia is an agribusiness entrepreneur and shareholder, and belongs to the third generation of Grupo Algar's controlling group.

Hélio Marcos Machado Graciosa
(member)
Mr. Graciosa is telecom engineer and has a master's degree in Electric Engineering from Pontifícia Universidade Católica do Rio de Janeiro (PUC/RJ). He is a former Research & Development officer of Telecomunicações Brasileiras S.A. (TELEBRAS), president of Sociedade de Telecomunicações (SBrT) and chairman of the Board of Directors of TELESC and TELEBAHIA. He is currently the president of the Telecommunications Research & Development Center (CPqD) in Campinas (São Paulo State), and of CPqD Technologies & Systems Inc., Fort Lauderdale, Florida (USA). He also serves as an officer at TELEBRASIL, chairs PADTEC's Board of Directors, sits in CLEARTECH's and TELEBRASIL's Boards of Directors and is a member of the Board of Trustees of Fundação Forum de Campinas (São Paulo State).

Darc Antônio da Luiz Costa
(independent member)
Mr. Costa has a degree in engineering from PUC (Rio de Janeiro State), a master's degree in production engineering from the same university and a doctor's degree in production engineering from COPPE/UFRJ. He is a former Vice-President of BNDES (Banco Nacional do Desenvolvimento Econômico e Social, or Brazilian National Bank of Economic and Social Development). He is also a member of the Managing Board of CEBRES (Centro Brasileiro de Estudos Estratégicos, or Brazilian Center for Strategic Studies); sits in the Board of Directors of Centro de Estudos Estratégicos da Escola Superior de Guerra [Center for Strategic Studies of the War College], where he was a coordinator and president of the Brazil-Venezuela Trade and Industry Chamber in Rio de Janeiro and president of the Federation of the Chambers of Trade and Industry of South America (FEBRASUR); a member of Academia Brasileira de Ciências Morais e Políticas [Brazilian Academy of Moral and Political Sciences] and a Managing Partner of DLC–Desenvolvimento, Logística e Cenários Simples Ltda.

Eduardo Moreira da Costa
(independent member)
Mr. Costa holds a PhD in electronics from the University of Southampton, U.K. He served as an Innovation Officer at the Studies and Projects Funding Institution (FINEP), a government-run company linked to the Science and Technology Ministry, and an officer and researcher at CPqD. He is currently CEO at ÁgoraLab, an international multi-institutional laboratory for the production and sharing of knowledge about smart cities. He is a part-time professor at the Federal University of Santa Catarina State and PUC (Rio de Janeiro). He sits in SENIOR Sistemas' Board of Directors and is a member of the Order of Scientific and Technological Merit of Brasil.

Geraldo Sardinha Pinto Filho
(membro externo)
Mr. Pinto Filho has a degree in Economics from Economic Sciences College of the Federal University of Minas Gerais State and a specialization in Finances from J.L.Kellogg Northwestern University, USA, and from Insead – The Business School for the World, France. He is an officer at Sardinha & Sant'Ana Consultoria Empresarial, in which he is a corporate finance consultant for large corporations focusing on introducing value creation-oriented management models. He is a visiting professor at Sauder School of Business – University of British Columbia (Canada), and in The Business School for the World (INSEAD) (France). In addition, he is an associate professor at Fundação Dom Cabral (Brazil). Mr. Pinto Filho also sits in the Boards of Directors of Grupo Seculus, Grupo Raimundo da Fonte, Hospital Mater Dai and Grupo Kyli.

Ozires Silva
(independent member)
Mr. Silva has BSc in aeronautical engineering from ITA (Technological Institute of Aeronautics) and a graduate degree in aeronautics from the California Institute of Technology, USA. He headed the group that created Empresa Brasileira de Aeronáutica S.A. (EMBRAER), a company that he managed between 1970 and 1986 and between 1991 and 1995, when he conducted the company's privatization process. He was also CEO at Petrobras and Varig S.A. and Brazil's Minister of Infrastructure. He is currently the dean of Centro Universitário Unimonte (Santos, São Paulo State) and a member of several trade and civil servant associations, besides sitting in the Boards of Directors of prominent companies.

Walter Fontana Filho
(independent member)
Mr. Fontana Filho has an undergraduate and a graduate degree in Economics from PUC (São Paulo) and a specialization in Marketing Management from Fundação Getúlio Vargas. He is a former CEO and chairman of the Board of Directors of Sadia. He sits in BRF Brasil Foods' and Repom S/A's Boards of Directors, and in the Advisory Council of O Estado de São Paulo newspaper.

Advisory Committees to the Board of Directors

These are support bodies that make recommendations based on expert analyses of specific issues to help the Board of Directors make decisions more assertively and more quickly. Created in 2005, the three Advisory Committees consist of professionals not connected with the Board of Directors, as well as internal and external experts. They are appointed by the Board of Directors, to which they respond, on an annual basis. The policies and procedures guide stipulates the roles, basic duties and working rules for the Committees.

Audit and Risk Management:

This committee ensures that the financial statements are prepared in an appropriate, comprehensive, transparent and trustworthy manner and disseminates the risk management culture at all levels of Grupo Algar. It also assesses and provides guidance for internal and independent audit, internal controls and compliance with the applicable legislation. It also ensures that corporate risks are properly identified and managed. It consists of five members (four of whom are experts) and meets on a quarterly basis.

Human Talents:

This Committee enforces the Group's policy of valuing and developing its Human Talents, following the best people management practices, in keeping with Grupo Algar's different business segments. This committee tackles issues such as the organizational climate, programs for potential successors, leadership development programs, compensation, dissemination of the Company's values and the Brazilian labor market. It is composed of four members, one of whom is an advisor and one is an external expert, and meets once a year.

Corporate Governance:

This five-member Committee consists of two independent members and one from each of the three branches of the owning family. It meets on an annual basis. Based on the principles of transparency, fairness, accountability and corporate responsibility, it discusses and makes proposals for the ongoing improvement of the Company's corporate governance practices. It also assesses the effectiveness of these practices, examines the Board's assessments and makes suggestions for improvement.

Executive Governance

Executive Committee

The Executive Committee is the top governing body. It monitors, discusses and shares with the senior executives of Group's companies the current challenges in terms of Strategic Planning and operating units' Strategic Projects, based on directives and goals discussed and agreed upon. The Executive Committee consists of twelve members–the holding company's Board of Executive Officers and the companies' senior executives–and meets twice a month.

Board of Executive Officers

The Board of Executive Officers is responsible for strategic management and corporate controls. It safeguards the Group's cultural unity and values, carries out the management policies, manages corporate risks, promotes synergies, and develops leaderships and institutional relations, in line with the Board of Directors' guidelines. It is composed of five members: the CEO and four executive officers from specific areas. It meets once a week or as needed to discuss and make decisions on strategic corporate issues. Composition of the Executive Board on 12.31.2012.

Composition of the Board of Executive Officers on 12.31.2012:

Luiz Alexandre Garcia	Chief Executive Officer (CEO)
Cícero Domingos Penha	Human Talents Officer
Eliane Garcia Melgaço	Marketing and Sustainability Officer
Marcelo Mafra Bicalho	Chief Financial Officer (CFO)
Mauri Seiji Ono	Corporate Strategy Officer

Luiz Alexandre Garcia
(CEO)
Mr. Garcia is an economist and has a specialization in Marketing, from the American University of Paris (France); MBA from the Catholic University of America, Washington, DC (USA); Leading the Family Business and Program for Executive Development, both from IMD, Lausanne (Switzerland). He has worked for the IFC/ World Bank (Washington, DC); Ericsson in Dallas (USA) and São Paulo; and Groupe Bull (France). He served as the president of the Trade and Industry Association of Uberlândia (Aciub) for two terms, and as the president of the Brazilian National Association of Mobile Phone Service Providers (ACEL). Mr. Garcia belongs to the third generation of Grupo Algar's owning family. He has been the Group's CEO since 2006. He also sits in IBGC's Board of Directors and is the President of the Companies Circle of the Latin American Corporate Governance.

Cícero Domingos Penha
(Human Talents officer)
He holds a degree in Law from the Federal University of Uberlândia (State of Minas Gerais), with executive specialization in Strategic People Management from INSEAD (France), and in Human Resources Leadership from IMD (Switzerland). Mr. Penha has over 35 years' experience in Human Talents Management. He has published several articles on people management and is the author of Atitude É Querer (Attitude Means Wanting) (Qualitymark Publishing House) and Empresa Rede-Talento Nota 10 (Network Company-Top Talent) (Cultura Publishing House).

Eliane Garcia Melgaço
(Marketing and Sustainability officer)
Ms. Melgaço has a degree in Business Administration from Pontifícia Universidade Católica de Minas Gerais (PUC/MG), an MBA from the Catholic University, Washington, DC (USA), Leading the Family Business from IMD (Switzerland), Family Business: from Generation to Generation from Harvard Business School (USA) and Advanced Management Program, from FDC/INSEAD (France). She has worked for Banco Nacional, Cartão Unibanco and ATL in relationship and commercial Marketing. Ms. Melgaço belongs to the third generation of Grupo Algar's owning family. She has been Grupo Algar's Marketing and Sustainability officer since 2010.

Marcelo Mafra Bicalho
(CFO)
Mr. Bicalho holds a BSc in Metallurgical Engineering from the Federal University of Minas Gerais State, and graduate degrees in Financial Administration from Fundação João Pinheiro (Minas Gerais State) and Advanced Management Program from FDC/ INSEAD. Mr. Bicalho has over 25 years' experience in the fields of controllership and finance. In the last 14 years, he has been CFO at large multinational and national groups, such as SAP, SKY, MetroRed, Proceda, Lucent and Grupo Sharp. He has been Grupo Algar's CFO since 2009.

Mauri Seiji Ono
(Corporate Strategy officer)
Mr. Ono holds a BSc in Electrical Engineering with an emphasis on Electronics from Faculdade de Engenharia Industrial (FEI), a graduate degree in Business Administration from Fundação Armando Álvares Penteado (FAAP) and an MBA in Corporate Management from Fundação Getúlio Vargas de São Paulo (FGV/SP). He has 22 years' professional experience in the telecom and technology industries, mainly in commercial and new business development divisions. He has worked for several Algar companies since 2002, and has been the Group's Corporate Strategy officer since 2010. He also chairs the Brazil-China Corporate Council (CEBC).

Management Evaluation

The annual 360º evaluation of all the Company's executives was introduced over 20 years ago. It allows assessing the essential Algar skills, as well as the specific skills for each position and those of its current holder, through an assessment done by peers, subordinates and seniors. This evaluation shows each professional's strengths and weaknesses, and leads to an action plan that includes executive education.

Audit

Grupo Algar has had two audit teams since 1988. They hierarchically report to the Board of Directors through the Audit and Risk Management Committee. Concerning functional issues, they report to the Group's holding company so that they can operate independently.

Consisting of 10 people, the Internal Audit Committee assesses the Group's performance and internal controls in an independent manner, thus helping Management achieve the organizational goals and maximize shareholder return.

On a quarterly basis, Grupo Algar hires independent audit services to assess its reporting standards and compliance with accounting rules laid down by the current legislation. KPMG Auditores Independentes has been providing these services for the Group since 2009.

Code of Ethics

Corporations play a key role in sustainable growth on a global level. As a result, ethical business practices are essential.

Algar's Code of Ethics sets out the ethical principles and conduct rules that serve as guidelines for all associates' internal and external relations regardless of their duties and in keeping with the concept of Sustainability, thus involving economic, social and environmental aspects. The Group also seeks to use all resources in a responsible manner so that they are also available for future generations. The Code of Ethics was officially approved by all relevant parties, including the Associates' Committee, the Executives' Meeting and the Board of Directors and is available on the Company's website.

Grupo Algar believes that being a responsible Company means behaving in an ethical manner in all aspects of its business, thus respecting the environment, setting good examples in terms of stakeholder relations and complying with laws and regulations wherever it is present.