“Corporate Governance in Major Economies of the Americas”

INTRODUCTION
Corporate governance involves the relationships among a company’s management, its board of directors and its shareholders. It concerns the means by which a corporation assures investors that it has well-performing management in place, and that capital investments made by shareholders are being put to appropriate and profitable use. Recent allegations of accounting improprieties at companies that were seemingly under-scrutinized by corporate governance mechanisms have caused significant turmoil in global capital markets.
Corporate governance has increasingly been the subject of considerable attention among corporate executives, institutional investors and market regulators worldwide. In the United States, Congress passed the Sarbanes-Oxley Act to enhance corporate disclosure, transparency and responsibility for financial statements, and the United States Securities and Exchange Commission has implemented significant portions of that legislation.
Now, Latin American regulators are looking at their own corporate governance standards and considering enhancements to such standards. Clearer corporate governance standards and a stronger rule of law would help to improve investor confidence and economic growth in Latin America and other emerging markets. Policy makers, investors and companies recognize that weak corporate governance systems, together with corruption and cronyism, distort the efficient allocation of resources, undermine opportunities to compete on a level playing field, and ultimately hinder capital formation and economic development.
This article analyzes laws, listing requirements and voluntary private-sector practices in the United States and four major economies in Latin America: Mexico, Brazil, Argentina and Chile.
MINORITY SHAREHOLDER PROTECTION
This is the fundamental question in corporate governance. Minority shareholder protections vary from (1) the right to vote on important matters to (2) the right to participate in transfers of control. As a general rule, there should be equal treatment of international and local shareholders, and no limitation of international ownership rights.
Voting on Extraordinary Transactions
Shareholders should have the legal right to vote on all matters of importance, including mergers and acquisitions, and sales of substantial assets. In most jurisdictions, shareholders elect and remove directors and approve fundamental changes to the company’s business. In the United States, under state corporation law, shareholders typically have a right to approve or disapprove of mergers, dissolutions, compulsory share exchanges, or dispositions of substantially all of the corporation’s assets. In addition, the NYSE and NASDAQ reserve additional decisions to the shareholders of listed reporting companies, such as the issuance of common stock to directors, officers, significant shareholders or their affiliates.
Under Mexican company law, shareholders must approve significant actions of the company, such as premature dissolution of a company, increase or reduction of the corporate capital of a company, mergers or spin-offs, and issuance of preferred stock or debt securities.
Brazilian corporation law has similar provisions as the Mexican company law in this respect. Shareholders of a Brazilian corporation must approve certain significant actions of the company, such as any modification to the by-laws, dissolution of the company, increase or reduction of the corporate capital, the issuance of stock (provided the company does not have authorized capital, in which case such powers are delegated to the board of directors up to the amount of the authorized capital), mergers or spin-offs, and distribution of dividends. Additionally, certain of the actions listed above generally require the approval of a statutory qualified quorum of at least 50% of all the voting stock, instead of a simple majority of the shareholders in attendance.
Argentine shareholders must approve: (1) the corporation’s annual financial statements; (2) the appointment of the corporation’s auditors; (3) the distribution of dividends; (4) capital increases (within certain limits); (5) the appointment and remuneration of directors (unless otherwise provided for in the by-laws), the comptroller, shareholder representatives and members of the surveillance council; and (6) transactions between the corporation and the directors outside the ordinary course of business.
The Chilean corporations act reserves several matters to a vote of the shareholders at their annual general meeting, including, but not limited to: (1) the approval of the annual financial statements and auditor’s report rendered on them; (2) the distribution of dividends; (3) the appointment and removal of the directors and auditors; (4) the dissolution, conversion, merger, consolidation or division of the company, or any amendment to the by-laws; (5) the issuance of convertible debt; (6) the transfer of 50% or more of the assets of the company, whether or not such transfer includes the company’s liabilities, as well as the formulation or amendment of any business plan contemplating the transfer of assets in an amount in excess of such percentage, or the transfer of 50% or more of the liabilities of the company; (7) the creation of any security interest or the granting of any guarantee in favor of third-party obligations, except in the case of subsidiaries where a decision of the board of directors is sufficient; and (8) any other matter reserved by law or the by-laws to a decision at the shareholders’ meeting.
In addition, publicly-listed companies whose shares are eligible for investment by Chilean pension funds also reserve the following matters to a decision at the shareholders’ meeting: (1) the approval of the investment and finance policy of the company; (2) the transfer of, or creation of any security interest on, assets or rights of the company declared in the investment and finance policy as essential for its operation; and (3) the amendment of the investment and finance policy.
In general, these Latin American jurisdictions all reserve to shareholders the approval of non-ordinary course transactions, and Chilean pension fund laws provide additional levels of shareholder protections.
Full and Limited Voting Rights
Another important voting right is the “one-share-one-vote” capital structure, which is the simplest and ensures the most accountability because influence is proportional to ownership, as opposed to super-voting rights and non-voting shares.
In the United States, under most state corporation laws, a corporation generally may issue classes of stock with different voting rights or even no voting rights. Generally, if a corporation issues a class of non-voting common stock, it must have an outstanding class of common stock with full voting rights. Exchange listing rules generally prohibit listed companies from reducing or restricting the voting rights of existing stockholders unilaterally.
Mexican company and securities laws permit companies to issue non-voting shares, shares with certain corporate limitations and “restricted voting shares”. Restricted voting shares are entitled to vote only on certain limited, significant actions, such as extension of the corporate life of the company, premature dissolution of the company, changes in the corporate purpose of the company, change of nationality of the company, and mergers or spin-offs. Restricted voting shares may not exceed 25% of the capital value of the total number of publicly-placed shares, though, in certain circumstances, the Mexican regulators may permit up to 50% of publicly-placed shares to be restricted voting shares.
Under Brazilian corporation law, common shares must have voting rights on a one-share-one-vote basis. Voting rights in excess of the “one-share-one-vote” rule are prohibited. Generally, companies may issue non-voting or limited-voting preferred stock of up to 50% of the total share capital.
Under Argentine law, more than one class of shareholders may exist and each must elect at least one director. If provided for in the by-laws, a special surveillance council may elect the directors.
Pursuant to the Chilean corporations act, unless the by-laws of the company contemplate other series of stock with additional or limited voting rights, each shareholder has one vote per share of common stock held. Shares with additional voting rights are prohibited. The by-laws of listed publicly-held corporations may only include series of shares with additional voting rights granting the holders a preponderance of control of the company for periods not exceeding five years. The renewal of such a privilege must be agreed at the shareholders’ meeting.
Interestingly, the United States is more permissive than these Latin American countries with “one-share-one-vote” capital structures. However, the relative flexibility of U.S. state laws has to be analyzed together with exchange listing requirements in mind as well, which are more stringent.
Dissenting Shareholders’ Rights
Jurisdictions should enact rules limiting the possibility that a controlling block of shares, the entire company or a substantial company asset may be sold to benefit controlling shareholders and managers at the expense of minority and public shareholders.
In the United States, state corporation laws give shareholders the right to dissent from certain transactions and obtain the appraised value of their shares through a judicial action. Shareholders who have not voted in favor of or consented in writing to mergers or consolidations are granted a court appraisal of the fair value of their shares. In addition, federal securities laws require that, in a tender offer, all shareholders receive the same price for tendered shares.
Mexican company and securities laws do not include specific regulations regarding minority shareholder rights in the event of mergers, takeovers and corporate transactions. Nevertheless, special voting quorums may be required in the by-laws of the company to provide that minority shareholders must approve corporate actions such as mergers and takeovers. In addition, Mexican securities laws permit shareholders holding at least 20% of the voting shares to judicially oppose resolutions adopted at a shareholders’ meeting under certain circumstances.
Under Brazilian corporation law, dissenting and non-voting shareholders of a company that will be merged out of existence generally have an appraisal right with respect to their shares at either book value or fair economic value, in accordance with the by-laws of the company, unless the relevant shares or class of shares have liquidity and dispersion in the capital markets. This appraisal right is also available in certain other corporate transactions, such as certain spin-offs, the decrease of the mandatory dividend, and the creation of preferred stock or increase of one of the existing classes of preferred stock without maintaining the original proportion with the other classes of existing preferred stock of the company. In the case of a change of corporate control of a publicly-held corporation, a mandatory tender offer for voting shares at a price equivalent to at least 80% of the amount received by the controlling shareholders is required. The acquirer of corporate control may offer the minority shareholders the option to remain as shareholders of the company, by means of the payment of a premium equal to the difference between market value of the shares and the amount paid per share comprising the controlling block.
Under Argentine law, holders of at least 5% of the corporation’s capital (unless a smaller percentage is provided for in the by-laws) may request a general shareholders’ meeting to discuss any specific issue.
In turn, the Chilean corporations act grants appraisal rights to the dissenting shareholders in certain matters required to be voted on at a shareholders’ meeting (such as the merger of the company, the creation of any security interest or the granting of any guaranty in favor of third-party obligations, etc.). The appraised price per share is determined with reference to book value for privately-held companies and publicly-held companies whose shares are not actively traded, and to weighted average prices on a stock exchange for publicly-listed companies whose shares are actively traded. On a related matter, upon acquiring two-thirds or more of the voting shares of a publicly- listed company, the controlling shareholder must make a tender offer for all the outstanding shares. This offer must be made at a price not lower than the price at which appraisal rights may be exercised by the shareholders. If the controlling shareholder does not make this purchase offer within 30 days following the date of the acquisition, the remaining shareholders will be entitled to exercise appraisal rights according to the provisions of the Chilean corporations act.
This is an area in which different approaches are apparent, from the non-regulated regimes (Mexico) to regimes where non-voting shareholders receive only 80% of the price offered to voting shareholders (Brazil). The United States and Chile, on the other hand, require parity of treatment for all shareholders and provide appraisal rights.
Share Dilution
Share dilution actions, such as capital increases and the issuance of convertible bonds or stock options beyond a certain threshold, should (1) require approval of a super-majority of all shareholders, and (2) apply on a pro rata basis across all shareholders.
In the United States, shareholders have the right to authorize the number of additional shares that may be issued by the corporation in the future under most state corporation laws. However, once shareholders authorize an issuance of shares, state corporation law gives the board of directors great flexibility in determining when or how many of those shares to actually issue. Also, stock exchange rules require that shareholders approve any issuance of common stock that will have voting power equal to or greater than 20% of the voting power of the corporation prior to such issuance, or that will result in the issuance of a number of shares of common stock equal to or greater than 20% of the number of shares outstanding prior to such issuance.
In contrast, most share dilution actions specifically require the approval of shareholders of companies organized in Mexico, Brazil, Argentina and Chile. Chilean law has particularly strong anti-dilution rights. Pursuant to the Brazilian corporation law and the Chilean corporations act, a company must offer to its existing shareholders any proposed new issuance of shares, convertible bonds or other securities that confer future rights over such shares. In Brazil, the only exception to this rule applies when a publicly- listed corporation, which has authorized capital, has a provision in its by-laws authorizing its board of directors to issue shares or convertible bonds or other securities that confer voting rights to the holders, without observing the pre-emptive rights of existing shareholders in the event of a (1) sale in the stock exchange, (2) a public offer of securities, or (3) an exchange of shares in a tender offer for the acquisition of control of another publicly-listed company. In Argentina, shareholders must approve capital increases, within certain limits.
In both Brazil and Chile, shareholders may waive or assign their pre-emptive rights. In accordance with the Chilean corporations regulation, upon the expiration of any pre-emptive rights period, the shares may be offered to third parties, but not at an lower price or on more favorable economic conditions than those offered to the current shareholders. However, in the case of publicly- listed companies, the non-subscribed portion of shares may be offered to third parties on different terms and prices, provided such transactions are conducted through the stock exchange.
BOARD OF DIRECTORS
Boards of directors should be structured to provide an independent check on management. A substantial majority of board members should be independent from management. Boards of directors should be responsible for disclosure of information to shareholders.
Independence of Board of Directors
In the Unites States, state corporation laws do not require independence of members of the board of directors. However, the NYSE and NASDAQ do impose independence requirements on listed companies, and are currently proposing additional rule making in this regard. The definition of independence is currently receiving additional scrutiny and is being expanded by the NYSE and NASDAQ. In general, a director is not considered independent if he or she was employed by the company or its affiliates during the last three years, or if he or she accepted compensation in excess of a certain amount during the prior fiscal year, or has been a controlling shareholder or principal of any business which made or received payments to the company in excess of a certain percentage of the company’s gross revenue or a certain amount, whichever is more, in any of the past three years. Under current proposals a majority of board members should be independent from management.
Mexican securities laws require that a board of directors be comprised of a minimum of five and a maximum of twenty members, of whom at least 25% must be independent. A board member is not considered independent if he or she has been an employee or officer of the company during the previous 12 months, is a shareholder that has authority to direct the company’s officers, partners or employees of corporations or associations that provide advice or services to the company where such earnings represent 10% or more of the company’s total earnings, is an employee of a foundation or civil company that receives donations from the company representing more than 15% of all donations received by the institution, or a director or officer at a company where an interlock exists among boards of directors or committees thereof. In addition, Mexican securities laws provide a significant amount of detail with respect to family relationships that could undermine the independence of a board member.
Brazilian corporation law does not have a requirement for independent directors. The Brazilian Institute for Corporate Governance recommends that a majority of directors be independent, though this is still unusual in practice.
In Argentina, there is no requirement for independent directors. However, publicly-listed companies must have an audit committee made up of at least three directors, all of whom must be independent. A majority of the board members must reside in Argentina.
Under the Chilean corporations act there is no minimum number of independent directors. However, each publicly- listed company having a significant market capitalization must appoint at least three of the members of its board of directors to form an audit committee, the majority of which must be independent of the controlling shareholder, if any. If the minority shareholders cannot elect the necessary independent directors, the board still must appoint an audit committee, but the members of such committee do not need to be independent.
Independence requirements in respect of the composition of the board of directors and its committees vary greatly throughout the United States, Mexico, Brazil and Chile. This is an area in which harmonized practice might enhance perception of strong corporate governance and create stronger investor confidence.
Separation of Chairman and Chief Executive Officer
In some jurisdictions, the company’s chairman of the board of directors and chief executive officer function separately.
In the United States, there is no legal requirement or listing rule that mandates whether the position of chairman of the board of directors and chief executive officer are held separately or jointly. Frequently, in the United States, the Chairman and CEO are held jointly. However, some U.S. best practice codes recommend a clear division of responsibilities between the Chairman and the CEO to ensure that the board maintains its ability to provide objective judgment concerning management.
Mexican company and securities laws do not specifically require separation of the functions of Chairman and CEO. Separation may be agreed to by the shareholders and set forth in the company’s by-laws, however.
Brazilian corporation law similarly does not require separation of the functions of Chairman and CEO, although Brazilian corporate governance best practice would suggest such a separation.
Argentine law does not prevent the separation of these functions, although usually the chairman of the board of directors is also the CEO.
In contrast, under Chilean securities laws, the CEO of a publicly-listed company is precluded from simultaneously holding the office of board chairman, director, auditor or accountant.
Board Committees
Board committees are established by the board of directors to monitor company operations effectively.
Both the NYSE and NASDAQ require audit committees composed of qualified independent directors. It is proposed that compensation committees be comprised solely of independent directors and, in the case of the NYSE, that the nominating committee and audit committee each be comprised solely of independent directors. Current NASDAQ rules already require that all members of the audit committee of NASDAQ-listed companies must be independent.
Mexican company and securities laws, and applicable listing regulations, require companies to have an audit committee. The audit committee acts as a supervisory board, and is composed of members of the board of directors, of which at least the chairman and a majority must be independent. The presence of statutory auditors is required at audit committee meetings. Companies may form other committees of the board of directors.
No specific provision of Brazilian corporation law requires the board of directors to maintain any committee. However, Brazilian corporation law provides for an independent fiscal council (conselho fiscal), which, if of a non-permanent nature, can be installed by the vote of 10 percent of the voting stock or 5 percent of the non-voting or limited voting stock of the company. The fiscal council must be comprised of three to five members, none of whom can be an officer or director of the company, an employee of the company or of any of its affiliates, or a spouse or relative of any officer or board member of the company up to the third degree. The holders of non-voting or limited-voting preferred stock have the right to appoint, in a separate vote, one member of the fiscal council. Minority shareholders representing at least 10 percent of the voting shares have the right to appoint another member of the fiscal council. The power and duties attributed to the fiscal council cannot be delegated to any other person or body of the company. Its responsibilities include the duties to survey the acts of both officers and board members, and their compliance with their obligations according to both the law and the company’s by-laws, opine on and examine the annual report, the interim financial statements (at least quarterly) and the annual financial statements of the company before they are submitted to the shareholders’ meeting, and opine on the proposals by the board of directors to the shareholders’ meeting relating to modifications to the capital stock, issuance of debt securities or warrants, investment plans or capital expense budgets, dividend distribution, transformation of the corporate type of the company, its merger or spin-off.
In Argentina, publicly-listed companies must have an audit committee made up of at least three directors, all of whom must be independent. A supervisory role is usually preformed by a comptroller, who must be appointed by the shareholders. Comptrollers must be attorneys, certified public accountants or associations of such professionals, and must reside in Argentina.
As mentioned above, under the Chilean corporations act, each publicly-listed company having a market capitalization above a certain amount must appoint at least three of its members to form part of an audit committee. Other committees of the board may be formed but are not required.
Again, a wide variance of regulation is apparent in the composition of committees and other board practices. Greater harmonization and specificity of permissible practices likely would enhance investor perceptions of the Latin American marketplace.
ACCOUNTING AND AUDITING
Accurate accounting and auditing are at the core of transparency and good corporate governance, and they strongly influence capital investment decisions. Compliance with International Auditing Standards or U.S. generally accepted accounting principles (GAAP), or at least conformity with local general accounting and auditing practices, is recommended.
Reports and accounts should include detailed information on off-balance-sheet transactions and business risks, as well as a mechanism for periodic review of risk by auditors. Companies should publish their interim reports at least every quarter.
Effective use of the audit committee can be a crucial tool in corporate risk management. Ideally, a written charter should spell out the committee’s responsibilities, and investors should have access to a copy of the charter. The audit committee should be composed of at least three directors, the majority of whom should be independent. All members should be financially literate and at least one independent director, usually the chairman, should have a financial background.
The audit committee should advise shareholders in proxy statements of specific factors regarding preparation of the company’s financial statements, and should discuss the company’s accounting principles with outside independent auditors. These responsibilities should not reside solely with the chief financial officer.
Auditors of a listed company should discuss with the company’s audit committee the quality (not just acceptability) of the company’s accounting principles and underlying estimates in financial statements.
REGULATORY ENVIRONMENT
Finally, the regulatory environment in which companies operate must also be credible and transparent. Regulators must not be perceived to be under the control or influence of any particular special interest group, and should be independent from both the regulated industry and the executive branch of government.
Officials who head the regulatory body should be perceived as independent from political parties, and should undergo a public confirmation process. Regulatory bodies should have enforcement and oversight capabilities. Exchanges should have the power to grant, review, suspend or terminate the listing of securities, and should be responsible for monitoring all listed securities.
CONCLUSION
Good corporate governance contributes to the success of companies and national economies. Most companies adopt “customized practices” with a view towards their particular needs. Mexico, Brazil, Argentina and Chile have foundations of corporate governance. However, in practice many issuers may not fully comply with such rules. Also, in some jurisdictions such as Mexico, lack of specificity in corporate governance matters leaves the board with perhaps excessive amounts of discretion. The regulatory environment must also be credible and transparent to create a foundation for corporate transparency, good accounting practices and protection of shareholder rights.
Countries with stronger shareholder rights have more valuable stock markets, larger numbers of listed securities relative to the population, and higher rates of initial public offering activity than do countries that have weaker shareholder protection.
The United States, despite experiencing recent failures in corporate governance, continues to strive to set the standards for the disclosure of material information and protection of minority shareholders.

Azevedo Sette Advogados