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corporate governance Slim Empire Shortfalls A major finding of this year’s M&E research is the looming gulf between compliance at different entities. Compared to Brazil, Mexico is very weak and lacks proper national guidelines. Mexican corporates do best at very basic governance activities such as reporting financials. Shareholder rights are next in line and improving. But board governance is still uneven, with a low proportion of independent directors and many auditing committees only meeting once or twice annually. Culturally, Mexico has tended to favor informal governance structures that lack transparency. Surprisingly, one of LatAm’s leading listed entities, América Móvil, ranks below average for corporate governance. “Like most modern telecoms in LatAm, it grew up from nothing to a big company in only a few years. Sales, not governance, dominated its priorities,” says Cox. Other blue chip Carlos Slim entities, as well as Cemex and Bimbo are run like family businesses or even autocracies, says Cox. “In general, this seems to be a Mexican phenomenon. And autocrats do not like to share power with committees or talk too much about what they do. This is certainly a reason why Mexican equities are decreasingly weighted in LatAm and emerging market funds,” says the analyst. Cemex, for example, is poor on shareholder rights and splitting power at the top between CEO and chairman. Less than half the directors are independent, there is no nomination committee and it does not rotate the auditing committee every five years. “Thus, although Cemex is a global player in cement, it is still a Mexican run company adhering to the clan-like unwritten rules of the Monterrey establishment,” says M&E. However, Cox anticipates improvements in this area. “The big discrepancy between good and bad companies in Mexico and Chile should begin to narrow. These companies will break down barriers The Corporate Governance Gap Brazilian firms lead the pack Rank 1 2 4 5 6 Company CPFL GOL Aracruz Wal Mart Mexico Petrobras FEMSA CEMIG Endesa Chile Natura Enersis CSN Tractebel Embraer Ambev Telesp YPF Argentina TIM Brasil Bavaria Vivo Southern Copper Usiminas Telemar AES Eletropaulo CCR Rodovias ALL Vale Telmex Arcelor Televisa Gerdau Souza Cruz AVERAGE Eletrobras América Móvil WEG Grupo Carso Tenaris Soriana Cemex Falabella Cencosud CMPC Carso Global Telecom Liverpool Inbursa Grupo Modelo Grupo Mexico Kimberly Clark Bimbo Copec Telebras Country Brazil Brazil Brazil Mexico Brazil Mexico Brazil Chile Brazil Chile Brazil Brazil Brazil Brazil Brazil Argentina Brazil Colombia Brazil Peru Brazil Brazil Brazil Brazil Brazil Brazil Mexico Brazil Mexico Brazil Brazil Brazil Mexico Brazil Mexico Argentina Mexico Mexico Chile Chile Chile Mexico Mexico Mexico Mexico Mexico Mexico Mexico Chile Brazil Score 92.68% 90.24% 90.24% 87.80% 85.37% 82.93% 82.93% 82.93% 80.49% 80.49% 80.49% 80.49% 78.05% 75.61% 73.17% 73.17% 73.17% 70.73% 70.73% 70.73% 70.73% 70.73% 68.29% 65.85% 65.85% 65.85% 65.85% 65.85% 63.41% 63.41% 63.41% 62.34% 60.98% 58.54% 56.10% 53.66% 51.22% 48.78% 48.78% 48.78% 48.78% 48.78% 46.34% 43.90% 43.90% 41.46% 29.27% 24.39% 19.51% 9.76% 2.44% and establish rules on succession at the top, more director independency and transparency on the contents of board and board committee meetings,” says the analyst, asked about predictions for the 2009 study. Andean Surprises The positive surprises are Colombia and Peru, although they are disproportionally weighted by being represented by only one company. Chile is helped by two top performers, Endesa (7) and Enersis (9), but harmed by the weakness at Falabella, Cencosud (both 37), and Copec (49). Overall, there is also no connection between industries and performance, unlike the 2007 survey, which saw higher risk companies such as oil and other pollution intensive industries do best. “Corporate governance seems to be more a matter of size and interest in attracting investors than of combating image risk factors for which social responsibility programs are preferred instruments,” says M&E. However, the region fares better than other emerging markets, says Cox. He adds that LatAm comes out especially positively when compared to Russia, whose best governed companies – Lukoil and Gazprom – score just 40% and 23%, respectively, in M&E’s 2008 oil and gas governance study. By comparison, BP and Shell got more than 86%. The last five years of LatAm bull market helped conceal corporate governance shortfalls. But as liquidity continues to dry up and the region is tested by external volatility, this aspect of sustainability comes to the fore. “Cracks start to appear when the economy or sector weakens,” says Cox. “Then such factors as too high debt, insecure shareholders, poor IR, finances weakly controlled by audit committees or irrational autocrats can bring down even large companies,” he concludes. LF 9 13 14 15 18 23 24 29 32 33 34 35 36 37 42 43 45 46 47 48 49 50 Source: Management & Excellence June 2008 LATINFINANCE 41

Latin Finance - June 2008

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