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Forbes. do latin american management structures pose a risk for investors


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Artículo de Nathaniel Parish en Revista Forbes (Sept. 2011). América Latina es atractiva para inversionistas Europeos y Norteamericanos, pero la debilidad de los Gobiernos Corporativos de las empresas de la región representan un obstáculo que muchos de ellos perviben más poderosos que las expectativas de recompensa, disuadiéndolos o problematizando la opción de hacer negocios con empresas LAtinoamericanas.

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Forbes. do latin american management structures pose a risk for investors

  1. 1. Parish Flannery, ContributorI write about Latin American companies and political risk.FollowFollowingUnfollow(17)Leadership|9/27/2011 @ 3:09PM |1.185 viewsNew Survey: Do Latin AmericanManagement Structures Pose a Risk forInvestors?+ Comment now Over the last twenty years, many LatinAmerican companies have emerged as global leaders and attracted the attention ofinternational investors. Companies like LAN Airlines and Vinas Concha y Toro (Chile),Cemex, Televisa, and America Movil (Mexico), Embraer (Brazil), and Bancolombia(Colombia) have built strong brands and stepped into the global spotlight. In the last fewyears, as growth in mature markets has slowed, investors have shown heightened interest intapping into fast growing markets in Latin America. According to the InternationalMonetary Fund, Latin America’s economy should expand by 4.5% this year. Many
  2. 2., however, have expressed concern over the fact that Latin American corporategovernance practices lag behind globally recognized best practices. According to a recentsurvey by J.P. Morgan’s Depositary Receipts (DR) business, institutional investors in NorthAmerica and Europe “believe that corporate governance standards in Latin America haveimproved, but stress how vital it is for companies to further bolster their efforts” in thisarea.The survey, which was conducted in June and July of 2011, gathered the opinions of 40institutional investors, a group that holds a combined US$57 billion of actively managedequity in Latin American companies.According to the study, investors recognize the value of solid corporate governance. Over50% of survey participants said that they believe that Brazil has the best corporategovernance standards in Latin America, primarily due to the creation of the Novo Mercado,a special market for companies that voluntarily adhere to a set of governance guidelinesthat more closely track recognized governance best practices.According to the study, some of the major weaknesses of Latin American companiescorporate governance policies are executive compensation disclosure, board independence,related party transactions, and share structures. Latin America, after all, is defined by thepresence of conglomerates and family owned firms. Controlling shareholders are commonand most companies have not appointed majority-independent boards.According to data from GMI, the New York City-based corporate governance research firmthe 124 largest companies in Brazil, Chile, Colombia, Mexico and Peru have an averagelevel of board independence of only 31%. In other words, more than two thirds of directorsat Latin America’s major companies are not independent. By contrast, GMI data shows thatthe 1742 largest publicly listed companies in the U.S. have an average level of boardindependence of 75%.Corporate boards are charged with the responsibility of overseeing companies’ operations.In the U.S., most boards are filled with independent directors. In Latin America, bycontrast, most boards are filled with directors who have ties to the company’s managementand may be compromised in their ability to provide independent oversight on behalf ofshareholders.For example, at Televisa, the media company that has been controlled for three generationsby Mexico’s Azcarraga family, only five of the company’s 20 directors appear to be fullyindependent from management and fully disconnected from any type of related partytransactions with the company. This low level of board independence, which is typical atmajor Latin American companies, means that investors must be confident in management,since independent voices are largely shut out. Mike Lubrano, the Managing Director ofCorporate Governance at Cartica Capital, a Washington D.C.-based emerging marketsinvestment specialist, explained that in Mexico, controlled companies are the “dominantform.” In Mexico, he explained, “you have to be confident in the controlling shareholder oryou wouldn’t be there.”
  3. 3., the number of interconnections between Televisa’s board members and the company’smanagement is striking.For example, Televisa has made a donation to a school that company director CarlosFernandez partially owns and sells advertising to Grupo Modelo, a beer company hemanages. Several of Televisa’s other directors serve on the boards of companies likeBanamex, Grupo Mexico, FEMSA, and Kimberly Clark de Mexico, companies that areinvolved in business deals with Televisa. For instance, Banamex has given Televisa a loanworth US$180 million. These types of relationships matter, because directors with strongrelationships with company management are usually less able to provide effectiveindependent oversight.America Movil, Telmex, and other companies owned by Mexican billionaire Carlos Slimshow similar governance structures. According to data from GMI, the corporate governanceresearch firm, on average the largest 22 Mexican companies fill only 40% of their boardseats with independent directors. In other words, most Mexican companies have boards thatare mostly filled with directors who have connections to management. Furthermore, not oneof Mexico’s largest corporations has appointed an independent board chairman.Similar governance structures can be found at major companies in Colombia, Peru, Chileand Brazil. Overall, less than one fifth of Latin America’s major corporations haveappointed majority independent boards.Many Latin American companies have delivered impressive returns to investors andemerged as global leaders within their industries. However, the experiences of companieslike Cemex and Comercial Mexicana, both of which were severely affected by the outbreakof the global financial crisis, show that concentrated leadership can lead to increased riskexposure.As global financial markets become increasingly integrated, and Latin American companiestry to attract the attention of international investors, competition for capital is becomingincreasingly fierce. After all, Latin American companies are no longer just competing witheach other for capital, but also with companies in other emerging markets, such as SouthAfrica and India. Companies like LAN Airlines, Cemex, Televisa, and Embraer havesucceeded in building global brands. Major companies in Latin America would do well tobring their governance practices in line with globally recognized best practices.After all, companies like Natura Cosmeticos, the Brazilian cosmetic manufacturer, haveshown that implementing governance reforms can help attract attention from internationalinvestors.To see a recent article I wrote about governance risks at Cemex, click here.To see an article I wrote on improving governance practices in Brazil, click here.