Corporate Governance in Latin America

1
Corporate Governance in Latin America

• Fernando Lefort
• Business School
• PUC, Chile

2
Literature

• Non specific papers LLSV (1998a, 1998b, 1999..)
• Regional papers ?
• Country specific papers
• Argentina few, poor data
• Brazil several, empirical
• Chile several, empirical
• Colombia ?
• Mexico some, relatively poor data

3
Issues

• General corporate governance mechanisms
• Ownership identity and structure
• Board practices
• Disclosure practices
• Institutional investors
• Market for control

4
Issues

• Latin American specific issues
• Conglomerates
• Financial market development
• Macroeconomic and political instability
• Legal reform

5
Ownership identity and structure

• High ownership concentration
• Conglomerates
• Pyramid structures
• Dual class shares
• Foreign ownership

6
Ownership identity and structure

• Argentina
• Apreda (2001), de Michele (2002)
• Incomplete data
• Among 20 largest listed companies controlling
  shareholders hold 65 of equity.
• Considering 40 largest companies
• 25 foreign
• 14 local
• 1 State owned
• Non voting shares and pyramids are used. No data
  available.

7
Ownership identity and structure

• Brazil
• Leal et al. (2002), Leal and Oliveira (2002),
  Siffert (2002)
• Five largest shareholders hold 84 of voting
  capital and 58 of total capital.
• Considering the 100 largest non financial firms
• Disperse ownership 2.2 family (local group)
  28.9 foreign 37.2 government 31.8
• 1/3 of voting shares to 2/3 of non voting. It
  has ghanged to 50.
• Pyramid structures are uncommon.
• Controllers hold more equity than strictly needed
  for control.

8
Ownership identity and structure

• Chile
• Lefort and Walker (2000), Agosín and Pastén
  (2000), Majluf et al. (1998)
• Three largest shareholders hold 73.6. Five
  largest hold 88.6
• 91 of listed assets controlled by conglomerates.
  Half of them are foreign
• 57 of consolidated equity directly or indirectly
  owned by controllers
• Control mechanisms
• Conglomerates use simple pyramid structures 1/3
  of listed companies are second tier or higher
• Only 7.5 of listed firms have dual class shares
• Cross-holdings are forbidden

9
Ownership identity and structure

• Mexico
• Babatz (1997), Castañeda (2000), Husted and
  Serrano (2001)
• Deficiencies in data make impossible to get
  detailed information on ownership.
• Related stockholders hold, on average, 65.5 of
  shares. For firms with ADRs in the NYSE this
  figure is 49.
• 18 of 150 largest companies are foreign
  controlled.
• Most traded stocks have limits regarding voting
  rights
• Usually, class A gives full voting rights to
  family owners.
• Other classes provide only limited voting rights
  for minority interest.

10
Board practices and composition

• Boards have mainly advisory character.
• Very few independent board members.
• Few committees
• Interlocking of boards

11
Board practices and composition

• Brazil
• Ventura (2000), Leal and Oliveira (2002), Spencer
  Stuart (1999), Outra and Saito (2001)
• Boards have mainly advisory character
• 49 of board members represent directly to
  controlling shareholders
• CEO tend to be related to controllers
• Less than 20 of directors could classify as
  independent
• Only 17 of companies have permanent committees.

12
Board practices and composition

• Chile
• Lefort and Walker (2000), Iglesias (1999), Majluf
  et al. (1998), Spencer Stuart-PUC (2000)
• Only 55 of directors have no direct family or
  work relationship with the company or related
  companies.
• 10 of board members in companies where pension
  funds own shares are elected by pension funds.
• 71 of listed companies have no comittees.
• Board interlocking
• In conglomerates 1.6 seats/director 72/1530 sit
  on at least 2 groups.
• 5 largest groups control 121/141 board members.

13
Board practices and composition

• Mexico
• Babatz (1997), Husted and Serrano (2001), LLS
  (1999)
• Appointing directors in Mexico is largely a
  family matter.
• 53 of directors are either top executives of the
  firm, of other firms of the group, or relatives
  of such executives.
• The lack of independence is probably worse
  because political, compadrazgo, or other kinds
  of dependence.

14
Institutional investors

• Fund suppliers
• Pension reform triggers capital market reform
• Role as minority shareholders

15
Institutional investors

• Walker and Lefort (2000), Husted and Serrano
  (2001), Siffert (2000)
• By the year 2000 pension funds holdings of
  corporate bonds and stocks accounted for
• 15.9 in Chile 24.8 in Argentina 32.1 in
  Perú.
• In Mexico small presence (yet) of institutional
  investors.
• In Brazil increase in companies displaying
  shared control, with institutional investors
  (domestic and foreign) as the principal
  stockholders.

16
Market for corporate control

• High concentration implies absence of hostil
  takeovers
• Large control premium
• Foreign companies
• Tender offer requirements

17
Market for corporate control

• Argentina
• Apreda (2000)
• US30 billion in MA during the nineties.
• No data on premia.
• Brazil
• Valadares (1998)
• Control premium up to 150 in changes of control
  transactions
• Chile
• Lefort and Walker (2001), Parisi et al. (2001)
• Around 20 large acquisitions since 1998.
• Average control premium 70, average stake traded
  40, average abnormal return 4.

18
Conglomerates and economic performance

• Benefits of internal capital markets
• Conglomerate premium or discount?
• Financial policies

19
Conglomerates and economic performance

• Brazil
• Sronr (2002)
• Firms with better CG (less separation between
  ownership and control) respond better to crisis
  and economic downturns.
• Mexico
• Castañeda (2002), de Gortari (2000)
• Firms affiliated to conglomerates have better
  access to external finance.
• Fixed investment of affiliated firms is less
  sensitive to own retained earnings.

20
Conglomerates and economic performance

• Chile
• Gálvez and Tybout (1985), Medina and Valdés
  (1998), Khanna and Palepu (1999), Lefort and
  Walker (2000, 2002), Claessens et al. (2000)
• During the debt crises groups outperformed non
  affiliated firms.
• Discounts (Tobins q) on affiliated firms. Less
  separation between ownership and control raises
  q.
• Betas of affiliated firms are lower.
• Affiliation mitigates companys financial
  constraints. Affiliated firms have more access
  to long term bank and bond financing, while non
  affiliated (smaller) firms rely heavily on
  suppliers credit.

21
CG and capital market development

• Degree of financial liberalization and importance
  of foreign capital flows
• Importance of domestic financial markets as fund
  providers versus migration or internal capital
  markets
• Relationship with CG
• Adequate CG fosters capital market development,
• Financial liberalization and development makes CG
  more important

22
CG and capital market development

• Argentina
• de Michele (2002)
• During the nineties Argentina pursued financial
  liberalization, pension reform and
  privatizations. Outcome
• Timid participation of pension funds in
  corporations
• Huge transfer of property from the government and
  families to foreigners
• Small effect on domestic capital markets

23
CG and capital market development

• Brazil
• Siffert (2002), Srour (2002), Gledson (2002)
• Issuing ADR level II and migration to Novo
  Mercado with higher CG requirements increased
  price, volume and liquidity.
• Chile
• Saenz (1999), Parisi et al. (2001), Lefort and
  Eyzaguirre (2000), Lefort and Walker (2002)
• Important development of Chilean capital markets
  during the nineties. Deepening financial reform.
  Banks play almost no role on CG.
• Positive abnormal returns when issuing ADRs.

24
CG and capital market development

• Mexico
• Castañeda (2000), Husted and Serrano (2001)
• Stock market is relatively small, low traded
  volumes, low participation of pension funds. High
  concentration.
• Almost 60 of BMV index market capitalization
  rests on the value of 5 companies.
• Banks play little role on CG.
• Important role of internal capital markets in
  explaining financial crisis recovery.

25
Legal framework

• French origin
• Capital Markets and Corporations Laws recently
  reformed under IFC advice
• Incomplete disclosure
• Poor enforcement
• Poor judiciary long and cumbersome procedures.
  Uncertain outcomes.
• Political opposition to reform

26
Legal framework

• Argentina
• Brazil
• Novo mercado, code of best practices, opposition
  to reform
• Chile
• Recent reform (transitory clause)
• Mexico
• Code of best practices, reform
• Colombia
• Code of best practices, reform

27
Macroeconomic and political instability

• LA is very sensitive to external shocks.
• Domestic capital markets are not well developed
  to provide funding during crisis.
• Risk premia increase makes very expensive to
  raise capital
• CG tends to exit the political and economic
  agenda during crisis