Corporate governance came to prominence globally with the Asian Financial Crisis of 1997/98, the landmark scandals of Enron and WorldCom in the US in the early 2000s and the first issuance in 1999 of a global benchmark for corporate governance with the Principles for Corporate Governance by the Organization of Economic Cooperation and Development (OECD).
The main Latin American markets have seen a number of reforms in law and regulation, along with the issuance of voluntary corporate governance codes and the setup of institutes dedicated to the advancement of corporate governance. Still, critical issues remain, many of great relevance for investors in Latin American companies. Recent serious governance scandals in Brazil and Chile covered later in this guide underline the direct implications of governance lapses.
At the root of corporate governance issues in Latin America lies the concentrated ownership structure of corporations in the region. With the predominance of majority ownership in Latin American companies, the principal-agent problem shifts from being between management and ownership to an agency problem between majority and minority owners. Shareholder rights, especially for minorities, the handling of related party-transactions, the disclosure of ownership interests, and nomination procedures for the board of directors all gain additional importance if the interests of majority owners and management are closely aligned and outside minority investors need to ensure the rightful consideration of their interests. The monitoring costs for investors rise significantly in this context.
Furthermore, many companies in the region are reluctant to seek funding in equity markets, often because owners do not want to relinquish control. In conjunction with this, regional equity markets exhibit a lack of depth and liquidity. Access to equity markets is, however, one of the primary incentives to improve a company's governance practices. In addition to these market-structure driven factors, investors have to be aware of a business culture that has traditionally not paid much attention to corporate governance. Consequently, comprehensive change in the behavior of companies in the region has been slow to come about. In this report, progress and challenges in four areas will be covered:
- Institutional framework
- Shareholder rights
- Information flow
- Boards of directors
First, however, the report will take a closer look at the key features of Latin American equity markets, for they are driving the main characteristics of corporate governance in the region.