Latin Finance - June 2008 - 40

corporate governance Brazil Extends Governance Lead by Staff Reporters apital markets have turned against corporate borrowers, who for at least five years had held the whip hand over fixed income investors. This makes it even more important for them to highlight their strengths to the buyside now, not least when it comes to corporate governance. Brazilian firms continue to set the pace in LatAm when it comes to sustainability issues, which are increasingly important differentiators for higher quality investors. The second annual LatinFinance ranking of the corporate governance of the 50 largest public LatAm non-bank corporations by Management & Excellence (M&E) shows a huge gulf in compliance. “Investors should always care about how their companies are run,” says William Cox, managing director at M&E, the Madrid-based consultancy. “If they have fewer rights as shareholders, conflicts of interest among managers or a board only controlled by a toothless auditing committee, they are inviting a second Enron, especially if the company is not listed on the tough Brazilian indices,” he adds. Investors can follow a simple rule, the M&E study shows. Companies listed abroad – including FTSE, NYSE and Latibex – are best for governance, followed by Brazil. “All others are likely to be risky,” says M&E. Only a handful of non-Brazilian companies fare well in the survey, and they are mostly part of global groups, such as Endesa Chile, Walmart Mexico and Femsa. (See chart.) “Only Brazilian companies offer sufficient governance, security and transparency to warrant serious investment,” states M&E. C Brazil leaves LatAm in the dust when it comes to corporate governance. Deficiencies at bluechip Mexicans América Móvil, Cemex and Bimbo are particularly disturbing. “Brazilian companies achieve the highest Mexico falling behind absolute number of percentage points and the best average 80% score, just slightly 70% ahead of Colombia and Peru,” M&E 60% states. Bovespa’s Novo 50% Mercado, its ISE sustainability index 40% and IGC corporate 30% governance index all put pressure on 20% larger companies to give shareholders 10% more rights, ensure better control 0% through auditing Brazil Mexico Chile Argentina Colombia Peru committees and Source: Management & Excellence achieve greater transparency in financial and strategic reporting. Latin equities traded enough to lure The positive Brazilian wave is expected institutional investors, today there are more to continue. “After attaining investment than 250, according to Urban Larson, head of F&C’s LatAm equity fund, which has £37 grade, [Brazil] will see even more capital inflows, both from Latin and emerging million under management. market funds, and from more conservative Brazil has a 61.7% weighting in the pension funds worldwide,” says Cox. “Given MSCI Latin America, compared to Peru’s that pension funds particularly in Europe, 3.4 %. Schroders has two-thirds of its $2.4 are applying SRI screening and Brazilian billion International Selection LatAm fund companies are highly rated in SRI, we invested in Brazil, but just 20% in Mexico. should see investor interest in secondary Threadneedle’s LatAm fund has similar Brazilian blue chips, such as Vivo, Usiminas proportions of its $1 billion in assets and CCR Rodovias go up,” he adds. invested in Brazil. This overweight in This should push lower tier corporates Brazilian equities coincides with that towards more sophisticated governance country’s performance in the M&E policies, including independent boards, corporate governance study. regulatory committees and more frequent Brazil leads in every respect, with 25 of meetings of both, Cox adds. the top 50 companies from that nation. Average Corporate Governance Score by Country Money Pursues Quality As corporate governance at big Latin companies becomes more important, investors appear to be allocating accordingly. While a decade ago only 35 40 LATINFINANCE June 2008

Latin Finance - June 2008

Table of Contents for the Digital Edition of Latin Finance - June 2008