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Outline of the Evolution of

Corporate Governance in Latin America

(1997-2009)

Mike LubranoCartica Capital

January 26, 2010Santiago de Chilewww.CarticaCapital.com

Definitions of Corporate Governance

“Corporate governance involves a set of relationships between a company’s

management, its board, its shareholders and other stakeholders. Corporate governance also

provides the structure through which the objectives of the company are set, and the

means of attaining those objectives and monitoring performance are determined.”

OECD Corporate Governance Principles, 2004


The Elements of Corporate GovernanceShareholder Rights and Treatment

• For Whose Benefit is the Company Run?Boards of Directors

• Role, Composition, Organization and Quality

• Accountability and IncentivesControl Environment

• Identifying, Quantifying and Addressing Risk

• Internal and External Checks and Balances

Transparency and Disclosure• Accounting and Audit Standards

Supervision and Enforcement• Public and Private Mechanisms


The Prequel :The 90s

The Decade Started off Pretty Well…• Privatizations after the lost decade• Pension reforms• New Issuances in domestic markets• American Depositary Receipt Boom• CTC breaks the ice in July 1990• Chile, Brazil, Mexico, Argentina

…but it Ended in Tears• Tequila Crisis (‘94 – ’95)• Asian Crisis (‘97)• Drop-off in listings / volumes



Investors’ experience left a bitter aftertaste:

• Poor equity returns on a risk-adjusted basis• e.g., IFC portfolio review

• Inequitable treatment in changes of control• “Low-ball” bids in delistings• Suspicious related-party transactions

• Mispricing of sales• Tunneling

• Rich controllers, poor companies



What did policy makers and investors learn?

• Macro measures and Market reforms/regulatory framework are not enough

• The proper functioning of the corporation cannot be assumed

• Corporate Governance failures can contribute to economic crisis (Korea ‘ 97)

• Company success does not necessarily translate into profits for minority shareholders


Early Latin American Milestones

1997 – “Chispas” case (Enersis/Endesa España)• Treatment of minorities in Changes of Control

1999 – COSRA/IOSCO Governance Initiatives

1999 – OECD Principles

2000 – Proposals to revise Brazilian Company Law• Rights and treatment of non-voting shares

2001 – Latin America CG Roundtable


Role of the Latin America CG Roundtable

Forum for Research, Discussion and Debate among all Participants in Corporate Governance• Regional and international• Public and Private Sector

Develop Consensus on Problems to be Tackled, Priorities and Policy Responses

• White Papers• Revision of OECD Principle

Sharing of Experience Assists Policymakers and Private Sector Agents to Adapt Solutions to Local Circumstances


Governance Begins with Ownership / Control Structures

Stereotypical US/UK Public Co.• “The Modern Corporation and

Private Property” (1932) – Berle & Means

• Dispersed Ownership/Control in the Market

• Principal / Agent Problem• Separation of Ownership and

Control• Conflict: Managers vs.

Dispersed Shareholders• Discipline: Market for

Corporate Control / Civil Litigation


European / Emerging Markets• Concentrated Ownership• Minority of Voting Shares in

the Market• Concentrated Business Elites• Management Selected by or

are Controlling Shareholders• Personal/Family Identification• Conflict: Controlling

Shareholders vs. Minority Shareholders

• Discipline: Minority Shareholder Rights / Regulation / Governance Discount

Typical Pathologies – US/UK vs. Europe/LA

Dispersed Ownership

• Empire building by CEOs • Excessive remuneration

(stock options; nest feathering)

• Insider trading• Defense mechanisms

(poison pills, staggered boards)

• Non-disclosure of information (manipulation of financial statements)

• Internal control problems (independence of auditor)


Concentrated Ownership

• Ineffective Boards• Poor Capacity• Passive Approach• Low independence

• Conflicts of Interest; RPTs• Minority Shareholder

mistreatment, especially in changes of control

• Succession / Family Business Issues

• Transparency / Internal Controls / Audit Function

Typical Weaknesses of Emerging Markets


• Director pool (independence, qualification, training, D&O insurance)

• Internal Controls• Accounting and Audit standards and

practices• Compliance culture• Regulatory oversight and enforcement• Market discipline / Informational

Infrastructure• Civil litigation

Menu of Responses

• Legislation (e.g., Chile, Sarbanes Oxley)• Voluntary Standards (Code Movement)• “Private Governance Infrastructure”

• Proxy Advisors / Information Services• Rating Agencies (Credit and

Governance)• Opt-in Regimes (Novo Mercado – Brazil)• Shareholder Activism / Relational

Investors


Latin America Timeline

1997 – Chispas Scandal (Chile)

1999 – OECD Principles Issued

2000 – Ley de OPAS (Chile)2000 – 1st Meeting of Latin America CG

Roundtable (São Paulo)

2001 – Brazilian Legal Reform

2001 – Enron Scandal



2002 – Bovespa Novo Mercado / IGC Index

2002 – Peruvian Code (Conasev)

2002 – Sarbanes-Oxley2003 – Roundtable White Paper on

Corporate Governance

2004 – OECD Principles Revised



2005-7 – IPO Boom in Brazil

2006 – Ley de SAPIs (Mexico)

2007 – Colombia Código País

2007 – Poison Pills in Brazil2009 – Ley de Gobiernos Corporativos

(Chile)


Brazilian Response 2000-2002

Limited Legal Reform • Limits on PN shares, but “Grandfathering”

for existing firms• Partial tag along rights• Delisting rules • Regulator’s (CVM) powers increased

Voluntary Codes• CVM –“ Comply or Explain”• IBGC – Aspirational

Opt-in System (Novo Mercado)


2006 Revisions

Amendment Process• Closed hearing with the NM’s

companies• Not rejected by more than 1/3 listed

companies• Approval of securities regulator

Revision (main topics)• Independent director requirement

(20%)• Directors’ unified term at most 2 years • Arbitration applied for all shareholders • Definition of diffuse control


Novo Mercado Takes Off (2006-2008)


Listed Cos. Equity Offerings

Mkt. Cap.US$ mm

MC/GDP%

Brazil 404 43+7+8=58 1,369,711 104 Russia 328 28 1,104,974 117 Bombay 4887 86 1,819,101 155 Shanghai 833 223 3,694,348 194 Mexico 367 6 397,725 39 Turkey 319 34 286,572 44

2007 data

Chilean Response 1997-2009

1997 - Enersis / Endesa Scandal(Chispas)

2002 - Ley de OPAs• Equal Treatment of

Shareholders in Changeof Control

• Responsibility of Directors

2008 – Centro de Gobierno Corporativo y Mercados de Valores

2009 – Ley de Gobiernos Corporativo


Thanks!

Mike LubranoManaging Director, Corporate Governance

Cartica Capitalwww.carticacapital.com

+1-202-367-3011


http://www.carticacapital.com/

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