I OVERVIEW OF GOVERNANCE REGIME
The corporate governance regime in securities markets with an international reach requires standardisation of corporate governance practices. Mexico has joined the efforts made by international organisations, such as the International Monetary Fund, the World Bank and the Organisation for Economic Co-operation and Development (OECD), through the implementation of several reforms that aim to frame and harmonise best practices and strengthen investors’ confidence. Mexico has been taking consistent steps in the strengthening of regulations for corporations, specifically corporate governance, since the mid-1990s because of the economic crisis of that period.
While the Mexican authorities have made significant advances in the way corporate governance is regulated and enforced, there is still a long way to go when practice in Mexico is compared with international standards. The aim of this chapter is to provide a general overview of the Mexican corporate governance framework and regulations, and the areas of opportunity the situation presents.
The Mexican securities market is relatively small when compared with other economies in the developed world, but it is relatively large and lively when compared with other markets in Latin America. Throughout the development of this market, financial and industrial groups have played a key role through the way in which they have traditionally conducted business. Unlike a dispersed ownership model, the predominance of family owned businesses in Mexican securities market shapes the challenges and opportunities for Mexican corporate governance. Consequently, the application and institutionalisation of good governance practices must accommodate the right checks and balances in the controlled share ownership model to encourage investment confidence and to allow shareholder value creation. The typical Mexican public company corporate structure is characterised by having a holding company make most of the key decisions, independent of the vertical, horizontal or conglomerate integration of the group. Decisions on financing, dividend policy and other key firm decisions are made at the holding company level. Because of this relatively centralised structure, and because of the nature of the international markets where most of the principal Mexican firms do business, both the private and public sectors have realised that a robust corporate governance apparatus is necessary for the orderly conduct of business.
Moreover, owing to the frequent problems of the national economy and financial markets, political discussions on corporate governance reform have usually been focused on regaining investors’ confidence, providing security to investors and thus generating a climate that incentivises economic growth.
The federal legal framework is based on civil law and regulates corporations and their internal governance. It is composed primarily of the General Corporations Law (LGSM), the Securities Law (LMV) and the Commerce Code.
The LGSM establishes the basic ways in which companies can organise themselves, including shareholders’ rights and other regulations that derive from business organisations. There are six main forms of business organisation, primarily differentiated by:
- a the degree of partner liability with respect to obligations contracted by the firm;
- b the freedom awarded for the transfer of interests; and
- c the degree of participation and influence in the firm’s management.
However, although the LGSM regulates six types of business organisation, most have fallen out of use in common practice. The two most commonly used types are:
- a the business corporation, which is characterised by having its capital stock divided into shares, limiting each shareholder’s liability to the amount of the contribution made to the firm; and
- b the limited liability company, which is characterised by having partners as opposed to shareholders, with no negotiable interest representing the partnership interest and the liability limited to the contribution made to the partnership.
A new type of business organisation was launched in 2016, the business corporation with simplified shares, or SAS, which can be incorporated by a sole or more shareholders and has a limit on revenues. The purpose of this type of private business organisation is to incentivise and facilitate the establishment of micro, small and medium-sized enterprises.
The LMV, which specifically regulates publicly traded companies, governs the following three types of companies:
- a The investment promotion corporation – one of the most flexible business organisations foreseen in the Mexican regulations because it provides for more protection for minority shareholders and contemplates corporate government standards.
- b The stock market investment promotion corporation, which allows companies to issue and place shares and offer them to the general public in a less severely regulated environment than the stock market corporation, with the condition that they must adopt the standards applicable for publicly held companies within a period of three years.
- c The stock market corporation, also known as a publicly held company. These types of firm are required to register their shares with the stock market institutions and to adhere to a more strictly enforceable set of laws.
In addition to the regulations set in place by the state, in 1999 an organisation that unites the main representatives of the private and business sector, the Business Coordinating Council (CCE), issued a voluntary Code of Corporate Best Practices (CMPC) that includes, among other provisions, recommendations on the way a corporate board should be organised, its structure and functions, advice concerning the audit committee, and provisions regarding the protection of minority rights. The CMPC was developed in consultation with a wide array of experts in the matter and, although originally the CMPC was not mandatory and adoption by private or publicly held companies was voluntary, companies that decided to adopt these best practices sent a message to investors about the professional manner in which they ran their business, thus increasing investor confidence.
Only two short years after the CCE issued the CMPC, an effort was made at the national level to include the provisions of the CMPC in a variety of laws, including the LMV and the Banking Institutions Law, in effect making the CMPC provisions mandatory for all firms regulated by these laws, and prompting their inclusion in the companies’ by-laws. In recent years, the CCE has issued revised versions of all the annexes of the CMPC, notably including a requirement assessing board gender diversity in the questionnaire that public companies have to complete and disclose each year for evaluation of the level of adherence to the CMPC.
Mexico’s capital market regulator is the National Banking and Securities Commission (CNBV), a decentralised body of the Ministry of Finance that supervises banks and the securities market and is tasked with defending shareholder rights.
The authority assigned to this regulatory body in the diverse financial regulations discussed throughout this chapter is far-reaching, including the imposition of economic fines or requesting that Mexican courts impose penalties and institute criminal proceedings. In addition, the CNBV also has multiple enforcement powers with regards to the timely and full disclosure of the standards of compliance with these practices regarding investors, and compliance by the relevant entities of the CMPC.
In the exercise of its mandate, the CNBV has issued a number of memoranda that regulate diverse aspects of corporate governance, including disclosure obligations. In November 2014, the CNBV adopted new rules to enforce the disclosure of transactions involving securities of public companies’ directors and managers, and employees of financial entities and public companies. These new rules show the increased scrutiny and importance the CNBV is giving to transparency in the dealings of individuals involved in positions of influence in public firms.
As a consequence of the issuance of the different memoranda, the CNBV has strengthened the corporate governance of financial institutions and other entities, specifically public companies, further preventing the misuse of material confidential information that could lead to illegal profits by noted persons who, by virtue of their functions and activities, have access to said information and could, in theory, take advantage of it in the public markets. Moreover, confidential information relating to processes like listings in the National Securities Registry, public offers, purchase and sale of shares and other operations of the sort would also be more strictly regulated by these rules.
II CORPORATE LEADERSHIP
Mexican public companies have a one-tier corporate board structure, meaning that managerial and supervisory responsibilities are invested in the board of directors. One of the OECD principles of corporate governance, which is also included in the CMPC, concerns the areas of responsibility of the board, including in relation to its structure, practices and fiduciary duties.
In contrast to other markets, there are still many private firms in Mexico that are managed by sole administrators, although private companies making public stock offerings must adopt a corporate board of directors as proposed by the CMPC and required by the LMV, to demonstrate that the decisions of the firms are made in a consensual manner and deliberated on by a collegiate body instead of a single individual, with the aim of making decisions in the most objective and impartial manner possible.
It is not only the board of directors that must abide by the governance rules; senior management are also subject to the duties of the LMV, as is the secretary of the board of a publicly held company. The duties of care and loyalty that are incumbent upon the board of directors in other markets are similarly enforced in the Mexican market. Responsibility for the decisions a firm makes falls primarily on the board of directors, and its members are expected to behave and hold themselves to a similar ethical standard as directors in the United States. Moreover, any person with the authority to materially influence the decisions of the shareholders’ meetings or the board of directors is also subject to these liabilities because, more often than not, controlling shareholders have decision-making power and thus are also subject to the duties and responsibilities that the corporate governance regulations impose on notable persons or persons with notable influence on a firm. These liabilities have not yet been expanded in the Mexican regulations to include third-party consultants or external auditors.
There are several regulations and restrictions on appointing members of the board of directors. The duties of a member of the board of directors of a public company listed in the Mexican market shall be performed personally or by an alternate director appointed by a shareholder resolution and, in the case of business corporations and limited liability companies, the duties of a director continue, even if their term has expired, until a replacement is named. As with many other markets, the duties of the directors are to the shareholders as a whole, and not only to the group of shareholders that elected them to the board. Directors assume personal responsibility that could arise from civil lawsuits initiated by shareholders and are jointly liable before the company for:
- a contributions made by shareholders;
- b the fulfilment of any legal and statutory requirements, such as dividends;
- c the existence and maintenance of accounting, control record, filing or information systems provided by the law; and
- d the exact fulfilment of the resolutions adopted by the corresponding shareholders’ meeting.
Moreover, there are several specific corporate governance responsibilities and obligations that are imposed on the board of directors:
- a establishing general strategies for the conduct of business activities of the firm;
- b approving the policies and guidelines, with the appropriate committee’s input, for the use of the assets that are part of the company’s wealth; and
- c monitoring the company’s management and direction.
For publicly held companies, minority shareholders that hold at least 10 per cent of the stock are entitled to appoint and revoke, in a shareholders meeting, one member of the board of directors.
The board of directors has the power, inter alia, to represent the company in lawsuits; acts of administration for tax purposes, labour matters and general matters; orders to subscribe and issue negotiable instruments; and also to grant powers of attorney.
The meetings of the board of directors must be held at least on a quarterly basis and, to be a legally valid meeting, at least one half of its members must be in attendance. Its resolutions shall be valid when adopted by the majority of the directors at said meeting, and companies can grant a casting vote to the chairman in the event of a tie. The board of directors of a publicly held company needs to have at least 25 per cent of its members qualified as independent board members. For an individual to be considered independent, he or she should have enough experience, skill and professional prestige and no conflict of interest with the firm and its decisions.
With regards to remuneration or consideration for directors, there are no mandatory rules that set a minimum or maximum monetary amount that board members should receive for their services, but the CMPC put forth a set of guidelines in an attempt to standardise compensation for board members across different firms. Members of the board of directors are also generally entitled to officers’ liability insurance if the firm agrees that it is beneficial and in line with the firm’s interests.
As a result of the incorporation of the guidelines set forth by the CMPC, there is now a regulatory obligation to create certain bodies within the board of directors to ensure the board fulfils its duties. These include the audit committee, the corporate practices committee and the chief executive officer (CEO), among others.
The purpose of creating these committees is to ensure that the board of directors exercises its duties correctly. The audit committee is responsible for, inter alia:
- a evaluating the internal controls and procedures, and identifying deficiencies, following up with corrective and preventive measures in response to any non-compliance with the operation and accounting guidelines and policies;
- b evaluating the performance of the external auditors;
- c describing and valuing non-audit services performed by the external auditor; and
- d reviewing the financial statements.
The corporate practices committee is responsible for, inter alia:
- a evaluating, hiring, firing and calculating the compensation of the CEO;
- b reviewing the hiring and compensation policies for the executive officers;
- c reviewing related party transactions;
- d reviewing policies regarding the use of corporate assets; and
- e reviewing unusual or material transactions.
Mexico has a comprehensive system of information disclosure that has been improved year on year. Certain accounting, administrative and legal information must be disclosed by public companies.
Each public company must file an annual report, which should include, as a minimum:
- a a report issued by the directors regarding the company’s operation, as well as the policies followed by the directors;
- b a report in which the directors present the main accounting policies and criteria regarding information used to prepare the financial information;
- c a statement showing the company’s financial position;
- d a statement showing changes in the financial position; and
- e a statement showing the company’s profits and losses.
In addition, publicly held companies need to present in their general shareholder’s meeting:
- a a corporate practices report and an audit report;
- b a general manager report regarding the company’s financial information; and
- c a report regarding operations and activities in which the company participated in terms of the LMV. They must also file quarterly disclosures of unaudited quarterly financial statements (with comparisons to the previous year). Quarterly filings are due 20 days after the end of the first three quarters and 40 days after the fourth quarter. Publicly held companies must immediately disclose material events that could influence market price.
Directors and managers are responsible for the company’s relevant information. The general manager becomes the person responsible for signing the company’s relevant information with the directors in charge of the main areas, such as finance and legal, as well as complying with the LMV provisions and for the content and timeliness of said information. It must be noted that in November 2014 the CNBV issued the rules and regulations referred to in Section I, above, which came into effect in 2015, with the aim of bolstering controls of directors’ and managers’ personal transactions in the stock market to prevent insider trading and protect the investing public. These rules and regulations impose certain responsibilities on publicly traded companies – and on their directors and managers because of their access to material and non-public information – which have improved the transparency of the market. They require, for instance, that publicly traded companies not only create and maintain internal controls so that personnel with access to sensitive information are formally made aware of their status, but also that they observe certain reporting obligations regarding record-keeping on the instances and type of access their directors and managers have had to privileged information that may provide them with an unfair advantage. The obligation to maintain these records expires after five years.
The external auditor has an active role in the disclosure of information. The LMV limits the statutory auditors with regard to the advisory relating to financial statements. Also, as mentioned before, the LMV requires companies to set up committees with the intention of delegating roles to the board of directors to create efficiency and transparency. Auditors usually report to management, although they are formally appointed by the board on the audit committee’s recommendation. The law requires the auditor to sign the opinion, placing the burden of responsibility and liability on the individual.
Finally, all the information filed with the CNBV is accessible through its Mexican Stock Exchange (BMV) website. All relevant information is also available to the CNBV, the BMV and the public in general.
IV CORPORATE RESPONSIBILITY
Corporate social responsibility is still in the early stages in Mexico. The traditional perspective of Mexican civil society is centred on legal compliance and characterised by a complicated attitude towards the private sector. The interaction between Mexican civil society and business-oriented organisations is still very limited.
To date there is no law that compels companies to establish policies regarding corporate social responsibility. Companies may voluntarily establish social project participation policies at their own discretion.
i Shareholder rights and powers
The corporate governance framework aims to protect shareholders’ rights. These rights vary depending on the type of corporation. Basic shareholders’ rights include:
- a the right to access secure methods of ownership registration;
- b the freedom to convey or transfer shares;
- c the ability to obtain relevant information on the company on a timely and regular basis;
- d the ability to participate and vote in general shareholder meetings;
- e the ability to elect members of the board; and
- f a share in the profits of the company.
Shareholders’ meetings must be held at least once a year. Publicly held companies must discuss in their annual shareholders’ meeting:
- a the appointment of directors and auditors;
- b the approval of the annual financial statements;
- c the determination of compensation of the directors; and
- d the appointment of the chairpersons of the audit and practices committees.
Shareholders’ meetings can be ordinary or extraordinary. It is common for meetings categorised as ordinary to also be considered as the annual meeting, and the items discussed are those mentioned above. Extraordinary shareholders’ meetings take place whenever necessary to discuss any of the following topics:
- a the early dissolution of the company;
- b a capital stock increase or decrease;
- c the extension of the company’s term;
- d the possibility of company transformation;
- e a possible change of corporate purpose; and
- f any other item for which the law or by-laws require a special quorum.
In addition, for publicly held companies governed by the LMV, shareholders have the right to:
- a appoint one member of the board of directors for each 10 per cent of the voting shares individually or collectively held;
- b request the calling of a general shareholders’ meeting at any time;
- c appoint one statutory auditor for each 10 per cent of the voting shares individually or collectively held; and
- d judicially challenge the resolutions adopted at the shareholder’s meetings.
In private business corporations and companies governed by the LMV, there is the option to restrict voting rights with respect to some matters, issue shares with no voting rights, grant differentiated rights, impose tag and drag-along clauses, preference rights and deadlock mechanisms.
ii Shareholders’ duties and responsibilities
Shareholders have limited responsibilities towards their corporation, such as creating control, management and surveillance bodies, and periodically reviewing the actions of these bodies. The reason for this is that most of the obligations intended for the fulfilment and execution of healthy corporate governance lie with the management, as previously mentioned, and therefore the activities of the shareholders are not permanent, in contrast to the management obligations.
As an example, in recent years Mexican courts have issued important decisions that have created an interesting precedent in extending shareholders’ liability, stating that if the shareholders have effective control of the holding company and intend to evade complying with the law, or cause any damage to any third party, they may be held liable and, thus, it is possible for the corporate veil to be lifted. In addition, the LMV allows for the establishment of causes for shareholders’ exclusion or causes for the exercise of separation, even though the list of causes is not established.
On the other hand, shareholders have the right to enforce the corporate governance rules and, if breached, they are entitled to sue the directors and even the company itself in some cases. In the cases of publicly held companies and other regulated financial entities, members of the board of directors shall be liable and accountable to the shareholders for the performance of their duty.
Finally, since 2002 takeover regulations have protected minority shareholders during changes of control, and these provisions have been significantly increased in recent years, as we will more fully explain in the next section.
iii Takeover defences
The LMV generally stipulates the requirements for publicly traded corporations can include takeover defences in their by-laws: (1) they can be approved by 95 per cent of the shareholders; (2) the measure taken once a takeover threat is announced must apply equally to all current shareholders; (3) the prohibition must not be absolute; and (4) it does not otherwise contradict the LMV’s tender offer provisions.
Moreover, the LMV stipulates that tender offers launched by companies must apply to all share classes, at the same price, and must be valid for at least 20 business days. Complex shareholding structures serve to protect controlling shareholders and management, and independent appraisals or valuations should be required to set the reasonable price of a tender offer.
However, although there are in fact provisions in the LMV allowing companies to include classic takeover defences in their by-laws, such as a stock option plan (commonly referred to as a ‘poison pill’), board approval for high-percentage share acquisitions and ‘wolf pack’ acquisition limitations, in most cases it is difficult to execute a hostile takeover via the Mexican stock market. As already mentioned, the reality of many publicly traded corporations is that they are controlled by a very small group (often a single family unit) of shareholders, and the percentage of their stocks that is publicly traded, commonly known as the ‘float’, is much smaller than the stake that would allow someone to acquire control.
The discussion of corporate governance in Mexico began relatively early, meaning that the regimes, as well as information disclosure and the protection of minority shareholders, have been broadly established by diverse reforms of the Securities Law. The influence of the Anglo-Saxon system and the progress in Mexico can be considered examples of developing countries adapting their legal approaches to international standards as a result of economic globalisation.
As shown in this chapter, Mexico is struggling with the legal regime itself, owing to the regulatory framework only considering public companies. We believe that more time is needed to adapt to the new system, and entities such as investor promoter corporations and stock market investor promoter corporations need more incentives from the Mexican government to develop as start-ups and have greater market access.
Another issue to be dealt with is greater corporate governance in the opening up of the family business model. As touched on briefly in Section I, above, it is estimated that up to 95 per cent of Mexican businesses are still wholly family owned and run, a situation that is in stark contrast with the most robust securities market and system in the world, the United States, where institutional investors hold over 50 per cent of all corporate securities. In Mexico, institutional investors do not hold controlling positions in Mexican corporations, leading to the fragmentation of the corporate governance endeavour.
Some of the recommendations that Mexico could adopt are:
- a new reforms in line with international standards, such as those of the International Monetary Fund, World Bank and OECD. The country is already making some improvements, with the adoption of the new rule described in Section I, above, but there is still room for significant improvement of our regulations and enforcement of the laws;
- b incorporation of greater and more detailed disclosure standards regarding gender diversity on board of directors, as well as other instrumental measures to facilitate an extended stakeholder approach;
- c enforcement of the current laws – the CNBV should continue to strengthen its capacity to monitor disclosure and enforce the corporate governance provisions of the Securities Law. It should also train staff to increase awareness of corporate governance issues and abuses; and
- d pension funds (AFORES) and other institutional investors have grown in recent years and, therefore, with the National Commission for the Pension System, the CNBV should continue developing corporate governance standards for the AFORES and other institutional investors.
1 Alberto Saavedra is a managing partner, and Alfonso Monroy and Daniel Velázquez are senior associates at Santamarina y Steta, SC.