White Paper proposes CG overhaul in Latin America

12 January 2004

A radical overhaul of corporate governance in Latin America is urged by the Organisation for Economic Cooperation and Development (OECD) in a White Paper published after nearly three years of wor k by international bodies, regulators, business leaders, institutional investors and government policy makers.

Among the key priorities for action identified in the White Paper are taking voting rights seriously; treating shareholders fairly during changes in corporate control and de-listings; ensuring the integrity of financial reporting and improving disclosure; developing effective boards of directors; improving the quality, effectiveness and predictability of the legal and regulatory framework; and continuing regional co-operation.

The White Paper makes a powerful case for the need to improve corporate governance in the region, describing it as a "crucial part of private sector-led economic growth".

"It is recognised as a public policy concern of rapidly growing importance in the region, which relies on the private sector as an efficient vehicle for welfare creation", the OECD says." The impressive reforms of the public and private pension schemes in much of Latin America and their projected growth provide additional justification for giving special attention to the questions of good corporate governance".

The Paris-based body sets out a number of "key shared characteristics" in the economies of the region, which have special significance for corporate governance. These include:

• Extensive privatisation, with a consensus that the private sector must provide most goods, services and pensions.
  
• A high concentration of ownership, with families often controlling the largest public companies. Sometimes this ownership and control is spread across a variety of big industrial groups in different sectors."It is common for the profits of some group companies to serve as 'cash cows' to finance the growth of more capital hungry enterprises in the group".
  
• Restructuring of Banking Systems. The structure of domestic financial systems has changed dramatically in recent years in some of the largest economies in the region. State ownership has declined, and in some countries international banks have replaced domestically controlled institutions that were once closely linked to domestic industrial groups.
  
• Regionalisation, Internationalisation, and the Importance of Multinational Enterprises. Even during the period of import substitution in the middle to latter part of the twentieth century, economic links with Europe, North America and Japan remained important.
  
• Other key factors include limited capital markets and mandatory privately funded pension schemes. The degree to which pension fund managers view promoting transparency and corporate governance as part of their mandate is likely to determine the pace of reform.

In its long list of recommendations, the White Paper puts taking voting rights seriously at the top. It says: " Legal frameworks need to provide greater certainty in the relationships among the investors in the equity of an enterprise and the way the various organs of governance may exercise power. Legislative frameworks, stock exchange requirements and securities regulations need to weigh carefully the advantages and disadvantages of permitted forms of equity, and assess whether permitted forms of equity serve the long-run needs of companies and the capital markets. It should be taken into account that large differences in voting rights among the same class of shareholders may create incentives for those with disproportionate voting rights to take decisions that are not in the common interests of all shareholders."

The OECD suggests he most appropriate solution may be to mandate a one-share one-vote rule.

For full details o f the proposals and the White Paper click here.