A Primer on Corporate Governance

Mexico

Jose Luis Rivas

• Éditeur: Business Expert Press
• Année: 2019
• ISBN:
  9781631575822
• Sujet: Negocios y empresa
• Sous-sujet: Gobierno empresarial

Mexico is a land inhabited by several indigenous civilizations and was conquered by Spain in 1521. The country is mostly a racial mix between the Spanish and native cultures. It is a traditionalist society where family, religion, and culture play a key role. The role of the marketplace is constrained by the government and local interest groups such as unions, political parties, commerce chambers, and private firms. The market for corporate control is scarce. Corporate governance codes are voluntary.

Corporate ownership is concentrated with few institutional investors. Shareholder activism is uncommon. Corporate boards are single tier in nature. CEO duality is common practice. Boards are made mostly of insiders and shareholder representatives. Independent board members hold minority stakes.

This book starts by describing the macro context in which Mexico is embedded. We then focus on its corporate governance system: laws, regulatory bodies, code of good governance, stock market and the peculiarities of local business groups. The central part of the book summarizes key characteristics of board structure and networks in the country. The book ends with interviews of two well-known directors and suggestions to move the governance field forward in Mexico.

CHAPTER 1

The Emerging Market Context: Why Does It Matter?

Corporate governance is the “set of mechanisms used to manage the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations” (Lynall, Golden, and Hillman 2003). Corporate governance helps ensure that a firm’s strategic decisions are made effectively and in line with shareholders’ interests. It aligns owners’ and managers’ decisions. It is also a reflection of the firm’s values and beliefs. Efficient corporate governance mechanisms can be a competitive advantage for a firm.

Until recently, the need for corporate governance laid on the idea that when separation exists between firm ownership and its management, self-interested managers can take actions to benefit themselves, with firm stakeholders bearing the cost for this action. This scenario is typically referred to as the agency problem. Costs associated with the agency problem can include:

1. A)Financial restatement
2. B)Fraud related to bankruptcies
3. C)Stock option backdating
4. D)Earnings manipulation

Corporate governance is then implemented to decrease the risk of incurring agency costs.

According to a McKinsey study (Newell and Wilson 2002), institutional investors are willing to pay premiums for well-governed firms. Premiums go from a low of 11 percent in Canada to a high of 40 percent in Egypt. Foreigners invest less money in firms that insiders control and that are domiciled in countries with weak investor protection (Leuz, Lins, and Warnock 2009). Because institutional weakness makes law enforcement costly and more difficult to achieve, the quality of country-level institutions influences corporate governance at the firm level. High ownership concentration is a response to the lack of legal protection.

Weak corporate governance, ownership concentration, and limited protection of investors—all of them emerging market characteristics—intensify principal–agent problems and create unique agency problems where majority owners take advantage of minority ones. This has been labeled the “principal–principal” problem (Young et al. 2008).

In emerging countries, laws and regulations on accounting requirements, information transparency, and stock market transactions are absent or deficient. Hence, standard structures of corporate governance have little institutional support. Therefore, diversified business groups, family connections, and government contacts play a larger role in a firm’s governance activities and conflicts between majority and minority shareholders are the norm.

The expropriation from minority shareholders can take place in several ways:

1. A)Designating nonqualified individuals to key corporate roles.
2. B)Buying and selling at nonmarket prices from organizations related to majority shareholders.
3. C)Pursuing strategies that advance personal, family, or political agendas in detriment of firm performance objectives.

Hostile takeovers or a market for corporate control is the ultimate solution for this problem, but this mechanism does not exist in most emerging countries.

Institutional weakness also inhibits majority owners from sharing sensitive information with potential investors; building trust is difficult and this probably inclines controlling shareholders to prefer loyalty over aptitude when choosing among potential directors and top managers. A negative family dynamic in a context of low legal protection will probably increase the risk of expropriation for minority shareholders even if they are members of the founding family (González et al. 2015).

Research evidence has shown that principal–principal problems in emerging countries can be decreased by having multiple block holders (i.e., banks or private equity funds) that help monitor the firm and stronger legal institutions. On the other hand, expropriation of minority shareholders tends to increase with a family chief executive officer (CEO) and the political involvement of owners (Azoury and Bouri 2015; Jiang and Peng 2011).

Within emerging countries, most public firms are family owned, and the identity of large owners often determines the control structure of the firm. Family owners are more reluctant to draw equity from the stock market, fearing loss of control and family cohesiveness (Thomsen and Pedersen 2000). When families appoint an owner CEO, they have an information advantage over minority shareholders (Anderson and Reeb 2003a). In family-owned and -managed firms, the sharing of sensitive information with outside managers and investors is unlikely because of the weak institutional environment. Hence, the controlling family and its members serving in top management roles have information advantage over minority shareholders. Corporate governance practices designed to protect minority shareholders in Latin America are minimal (Castro, Brown, and Baez-Diaz 2009); more than 40 percent of the firms in this study did not have independent directors, and eight out of nine board members were insiders (they reclassified gray/affiliated directors—those with a business or family relationship to key shareholders—as insiders). These numbers probably reflect the degree of control that families still have on Latin American firms. In this same study, 79 percent of Mexican firms had a family as its main shareholder. That same figure was 48 and 43 percent for Brazil and Chile, respectively. Finally, these authors find that in Mexico 48 percent of sampled firms have a dual share structure. For Brazil it is 14 percent and for Chile 7 percent. A dual share structure means that there are two types of stock per firm: one with voting and the other without voting rights. This strategy is often used when controlling shareholders want to maintain control and can exacerbate conflicts between majority and minority shareholders.

Weak institutions contribute to the intervention of politicians in business activities (Hellman, Jones, and Kauffman 2000). Politically connected managers and owners can use their influence to reduce regulatory pressures or to gain preferential access to government contracts. On the other hand, politically connected managers and owners could also use the firm and its resources to serve political objectives to the detriment of minority shareholders. Controlling shareholders with political ties in Indonesia prefer the private benefits of control over external financing opportunities, although the latter would be beneficial to all shareholders (Leuz and Oberholzer-Gee 2006). Political connections in family firms can also result in excessive employment or in favoring employees with political connections rather than those that have the necessary skills.

Expropriation of minority shareholders is not easily observed in good times. But, during economic downturns, controlling shareholders may feel tempted to extract firm resources to protect their own wealth (Young et al. 2008). During the 1997 Asian financial crisis, even firms with a good reputation exploited their minority shareholders (Johnson et al. 2000).

Resolving principal–principal conflicts in emerging economies requires creative solutions. An institution-based view of corporate governance suggests that individual countries will need to work out answers appropriate to their own institutional conditions (Peng and Jiang 2010). Eliminating concentrated ownership structures in emerging markets is probably not ­realistic because of the scarcity in supporting institutions—takeover markets, effective boards of directors, and rule of law.

CHAPTER 2

The Mexican Context

The Economy

Mexico’s US$2.3 trillion economy is the 11th largest in the world. It has become increasingly oriented toward manufacturing since NAFTA was signed in 1994. Per capita income is roughly one-third that of the United States. Income distribution is highly unequal. The country is now the United States’ second-largest export market and third-largest source of imports. Mexico has free trade agreements with 44 countries, and 90 percent of its trade is regulated by these agreements. The country is the 13th largest exporter in the world. In 2017, 81 percent of Mexican exports went to the US market. GDP size has quadrupled since NAFTA was signed in 1994. Mexico manufactures and exports the same amount of goods as the rest of Latin America together (Heritage Foundation 2018).

Mexico’s economy has grown slower than most Latin American countries for more than a decade. Obstacles to economic growth include violence from drug cartels, major tax evasion, and trade disputes with the United States and other partners. Mexico suffered its worth slump since 1932 during the financial crisis of 2009.

The economy’s recovery was supported by both external and domestic demand. Mexican manufacturers managed to increase their market share in the United States and Canada. A continued inflow of foreign direct investment into manufacturing, especially in the automotive sector, was very important. The gap between Mexican wages and those of rivals such as China has also narrowed, boosting Mexico’s competitiveness (BMI Research 2018).

Growth of real GDP slowed in 2013 after debt defaults by the nation’s largest homebuilders (Homex & GEO), a drop in public spending, and a slump in exports. Mexico also suffered two hurricanes causing an estimated US$6 billion in damage. Driven mainly by the service sector, the economy improved modestly in 2014 to 2016. Mexico’s tax rate is one of the lowest among Organisation for Economic Co-operation and Development (OECD) countries. There are too many tax exemptions, and the tax revenue base is small. A tax reform was enacted in 2014; it substantially raised nonoil revenue and started to cut expenditures. Disparities between a highly productive modern economy in the North and in the Center and a lower productive traditional economy in the South have widened.

Public and private monopolies still dominate a large part of the economy. Former President Felipe Calderon used to say that Mexicans pay on average 50 percent more than US citizens for their daily goods and services. Fortunately, new antitrust regulations have been enacted in the past three years. The recent telecommunications regulation overhaul has led to a substantial fall in prices (up to 75 percent) and a sharp increase in users. The energy reform has significantly increased private investment. These reforms could add as much as an extra one percentage point to the country’s annual growth rate. As a result of the energy reform, private oil companies have been allowed to invest in the industry for the first time since 1938. The government expects a decade of annual auctions. By the end of 2019, Mexico plans to have auctioned more than a third of the country’s prospective resources.

Overall, Mexico has embraced economic orthodoxy: sound monetary and fiscal policy, open trade, investment in education, and, more recently, improved competition policy. Between 1995 and 2015, real GDP per person increased by an annual average of 1.2 percent, less than in any Latin American country except Venezuela. If we consider workers coming into the labor force, Mexico does worse: GDP per worker expanded by just 0.4 percent a year (The Economist 2018).

Institutions

In order to provide an overview of Mexican institutions, we use the Worldwide governance indicators (Kauffman, Kray, and Mastruzzi’s 2010) based on World Bank data from 2016. Thus, from a total sample of 214 countries we find that Mexico ranks as:

• •94/214 on voice and accountability. This indicator reflects the ability of citizens to participate in selecting their government. It also measures the extent of freedom of association, expression, and media.
• •43/214 on political stability and absence of violence. This measures perception of the probability that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence. A high incidence of drug-related violence is a likely cause for the low score in this indicator.
• •128/214 on government effectiveness. This measures public and civil services quality, the extent of governmental independence from political pressure, quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.
• •138/214 on regulatory quality. Regulatory quality measures government’s ability to formulate and implement policies and regulations that promote development of the private sector.
• •71/214 on rule of law. This indicator measures confidence in following societal rules, the quality of contract enforcement by police and courts, and the likelihood of crime and violence.
• •49/214 on corruption. This measures the extent to which public power is applied for private benefit. The perception includes the handling of minor and major corruption cases. Corruption is perceived as a major problem; its costs are estimated to be 9 percent of GDP. More than 40 percent of Mexican businesses admit to paying a bribe. Another related problem is the size of the informal sector; although its size has declined recently, more than half of the workforce is still informal.

In terms of business regulations, the World Bank’s doing business report for 2018 finds that Mexico:

• •Ranks 49/190 countries sampled. Thus, the country ranks in the first quartile of countries in terms of friendliness for conducting business
• •Takes 8 days to start a business and 7.8 associated procedures
• •Total tax rate as a percentage of profit is 52.1 percent
• •Ranks 62/190 in terms of protection of minority investors
• •Takes 341 days to enforce a contract with a 33 percent cost of the associated claim

From the institutional indicators we can conclude that Mexico is not the country that the media often portrays as violent and dangerous. It is true that insecurity and corruption are both key challenges but, according to the indicators presented, the country appears to be doing relatively well when compared to large country samples. For those afraid to visit the country, we can say that accor...

Table des matières

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Foreword
• Acknowledgments
• Introduction
• Chapter 1 The Emerging Market Context: Why Does It Matter?
• Chapter 2 The Mexican Context
• Chapter 3 The Mexican Governance Model: A Comparative Perspective
• Chapter 4 Corporate Governance in Mexico
• Chapter 5 Family Involvement
• Chapter 6 Board Composition in Mexico
• Chapter 7 Corporate Networks in Mexico
• Chapter 8 An Interview with Jaime Serra-Puche
• Chapter 9 An Interview with Claudio X Gonzalez
• Chapter 10 Suggestions to Move Forward
• Epilogue
• References
• About the Authors
• Index