Could MILA and rise of multilatinas lead to improved Latin American corporate governance?

Business News Americas interviews Andreas Grimminger


The investors’ guide to corporate governance in Latin America published by BNamericas looks at the ownership concentration and a lack of minority shareholders’ rights that have defined the landscape for many years.

This week BNamericas spoke with the report’s author, Andreas Grimminger, founder and managing director of PGS Advisors international, a policy and corporate governance consultancy, to take a pragmatic look at the level of corporate governance standards in the region and gain a better understanding as to the role of capital market development in encouraging better standards.

The full report can be found here.

BNamericas: How do corporate governance standards compare between Latin America and other emerging markets?

Grimminger: Most emerging markets face very similar corporate governance issues, as concentrated ownership is a prevalent feature across markets. Asian markets, as well as some Latin American markets, are further characterized by significant cross-shareholdings and sometimes pyramid structures, which make related-party transactions an issue of particular importance.

Corporate governance practice standards and their integration into law and regulation have improved significantly in both developed and emerging markets over the last decade, but the distinguishing factor lies in their implementation and enforcement and in developing a culture of good corporate governance that is part of the business fabric.

For sound corporate governance practices to become truly engrained in the business culture, I believe a balanced mix between regulatory and private initiatives is essential. Latin American markets, especially Brazil, compare fairly well to other emerging markets in this respect.

Corporate governance reforms in Brazil have been to a large degree driven by private actors, such as the Brazilian institute for corporate governance (IBGC) and self-regulatory initiatives such as the Novo Mercado segment on BM&F BOVESPA.

On the other hand, initiatives in Malaysia, which can be considered a regional corporate governance leader in Asia, have been top-down, driven by the Malaysian Security Commission.

In contrast, investor groups like the Brazilian association of capital market investors (AMEC) are private investor initiatives. This is not to say that the Brazilian securities regulator CVM is not playing an increasingly important role in corporate governance reforms, but many initiatives have come from the private sector.

Other Latin American markets like Colombia and Peru and especially Chile, on the other hand, are predominantly driven by regulatory initiatives in their corporate governance reforms. So there is room for more private sector initiative, even though Chile can already count on three corporate governance institutes.

BNamericas: Can you differentiate the role of foreign investors from local investors when it comes to pressuring companies to follow certain standards?

Grimminger: Given the low liquidity of most equity markets in the region and the AFPs’ preference to invest locally, AFPs are clearly the dominant institutional investors and minority shareholders in the region. For minority investors, whether they are AFPs or foreign investors, securing representation on the board and obtaining the disclosure of relevant company information to protect their rights are the most important issues.

AFPs certainly have a leg up on foreign investors as they usually fill the few seats for independent directors, but there are already many successful examples of cooperation between AFPs and foreign investors and, ultimately, the growing influence of AFPs is beneficial to all minority investors.

This increased influence can, to a degree, be tracked to the introduction of regulatory requirements forcing AFPs in Colombia, Chile and Peru to vote their shares, nominate directors, actively consider corporate governance and report on all these issues.

BNamericas: What is required for the pace of improvement in corporate governance practices to speed up?

Grimminger: Good corporate governance practices are important for companies for two principal reasons. First, to assure outside investors that their investor rights are respected. Second, sound corporate governance structures, such as diverse and independent boards of directors, benefit any company regardless of its capital structure as they improve decision-making and risk management.

In order for reforms to continue or even accelerate in the region, two developments are necessary. First, liquidity needs to increase so outside investors become more relevant and companies more likely to listen to their governance demands. And second, companies’ awareness needs to be further raised with respect to the many economic benefits of good corporate governance.

We see both occurring, albeit at a slow pace. However, improved corporate governance practices, in particular when it comes to the disclosure of company information in the region, are critical for the continuous development of the regional economies and capital markets.

BNamericas: With the rise in cross-border consolidation within the region, do you foresee new issues arising with regards to standards of corporate governance and regulations?

Grimminger: Regional integration initiatives such as MILA and the rise of the multilatinas will not lead to the rise of new issues, but – in my opinion – to the intensification of already existing ones.

A larger and more diverse investor base will demand better governance standards, such as increased disclosure of company information ahead of the annual general meeting and more say on board nominations.

The current practice that board nominees are not disclosed until the AGM (with the exception of Brazil) will certainly come under increased pressure. We already see the disclosure of at least the names and background of nominees ahead of the board elections at companies needing the votes of outside investors to reach a quorum.

At PGS Advisors we believe that companies across the region will increasingly follow best practices, not only in the case of multilatinas and other blue chip companies, but also more and more in the case of medium-sized and even family-owned companies.

It is important in this context to demonstrate the economic and reputational benefits of good corporate governance and good sustainability practices for all kind of companies. The growing regional importance of ESG (Environmental, Social and Governance) standards for corporations and investors in the region will be an important trend to watch.