In mid-June, the Organisation for Economic Co-operation and Development (OECD) held its 2018 Latin American Corporate Governance Roundtable. Regulators, policy-makers, investors, market participants (and Glass Lewis) flew in from all over the region, and from all around the world, to gather at the Buenos Aires Stock Exchange. The agenda (PDF) included a series of roundtable discussions and three breakout sessions, centered around four key points:
- Opportunities and obstacles for the development of Latin American equity market;
- Emerging stock exchange developments and their corporate governance implications;
- Strengthening private enforcement and the use of arbitration; and,
- Flexibility and proportionality in regulatory frameworks.
With these four topics as the starting point, speakers, panellists, and attendees engaged in two days of lively discussions aimed at finding common ground from which to move forward. Among the many issues tackled, some struck the core of what we, as proxy advisors, have observed for some time now:
A hugely relevant issue is the disconnect between what investors want versus what issuers think investors want. While in other markets issuers have a fair understanding of what sort of information investors are looking for, and how governance policies must be applied, in Latin America there is a conflicting view of what is relevant. This creates a significant gap that needs to be addressed by both issuers and regulators alike. Investors have made it clear that sheer volume of information does not necessarily add any value; the information needs to be relevant to the company, presented as part of a narrative to create a cohesive whole. With this in mind, investors call for more developments on the regulatory front. Governance codes are a necessary starting point, but in these markets, where issuers seem to be particularly reluctant to share information, legal requirements would help to force change and set a standard.
In this context, non-financial reporting becomes all the more important. In particular, the disclosure of detailed data on board directors’ areas of expertise, duties, skills, etc. is increasingly important for investors looking to responsibly fulfill their duties towards the companies they own. Experience, however, suggests that any incremental requirement for more information will most likely meet issuers’ resistance. There’s a remnant obscurantism in these markets, with any new requirement that does not come from the hand of a legal regulation invariably facing significant opposition. This is a two way street though, and proactive exercises of responsibility are being demanded from investors as well. In particular, we heard discussion of stewardship codes, which are used in a number of more developed markets to set expectations and disclosure standards for investors themselves.
Another matter that generated a general consensus is the continued gap between Latin America governance standards and those of the most developed markets. As it currently stands, every market within Latin America is at a different point with regards to their needs within the capital markets. For example, Colombia is still struggling to make listing appealing for companies, whereas Mexico is mainly focused on establishing a second stock exchange. Instilling homogeneity across such a mix of markets would be a significant obstacle in and of itself; instead, the goal appears to be not so making the journey together, but instead ensuring that each market reaches the same destination – and adopts internationally respected standards along the way.
One subject of discussion may have come as a surprise to governance enthusiasts: the benefits of having independent directors on boards. While scepticism regarding their presence was only expressed in passing, it’s nonetheless a sentiment we had not expected to hear in this context. There are certainly outlier companies in every corner of the world that produce sustainable results despite unusual governance structures; however the value of independent oversight has long been accepted as international best practice, and board independence requirements already form part of the regulatory/governance regime in all Latin American markets.
The Roundtable provided a lively forum. Regulators and market participants have clear ideas about where they need to get, and investors know exactly what they want. Hopefully some issuers were listening too, and get the opportunity to voice their thoughts; after all, they are the ones around which each market revolves.
Eva is an analyst covering Latin American markets.