In Argentina, institutional corporate governance (CG) is considered to be relatively developed compared with similar countries, according to a paper published by the Center for Financial Stability in 2005. In 2001, Decree No. 677 was a first and major step in the adoption of good CG practices for publicly-traded companies. Although the reform was warmly welcomed by the market, evidence shows that there is still much potential for improving institutional CG in Argentina, including not only publicly-traded companies but also privately-held firms and financial institutions. In September 2004, the Argentine Institute for Corporate Governance published a Code of Good Practices for Corporate Governance in conjunction with KPMG and the Institute for Enterprise Development in Argentina. The Code is primarily aimed at listed companies, but can also be applied to privately held and small and medium-sized enterprises. Its recommendations are based on the Organization for Economic Co-operation and Development's (OECD) Principles on Corporate Governance and the recommendations of the OECD's 2003 White Paper on Corporate Governance in Latin America. The Code is voluntary in nature and companies who adhere to the principles of the Code must make a public declaration regarding their compliance with it.

General Overview

According to a 2005 report by the Center for Financial Stability (CEF), Decree No. 677 of 2001 was the first and major step to introduce good corporate governance practices for public companies in Argentina. The Decree brought the country to a relatively advanced stage on this field, compared to its peers in the region. Nevertheless, improvements are still needed in the governance of privately owned companies and financial institutions. The report points out the need to strengthen the enforcement mechanisms and the regulator's supervision powers. Moreover, both the CEF report and a 2006 progress report on corporate governance in Argentina by the Organization for Economic Co-operation and Development (OECD) have asserted that institutional investors, recognized as essential participants in effective enforcement, play no active role in promoting good governance practices in Argentina.

The 2005 CEF report explains that the Companies Law of 1972 and the National Securities Commission Law of 1980 only distinguish between privately-held and publicly-traded companies that are listed in stock exchanges. Decree No. 677 sets the legal framework for public companies, governing transparency practices, the public offering regime, illegal actions, and standards. The CEF report describes as illegal actions: "insider trading, market fraud and manipulation, liability for defective prospectus; tender offers and stock repurchase market transactions" (p.21). Public companies are required to set up an Audit Committee with a majority of independent directors, a special procedure for related-party transactions and the publication of an extended annual report. The 2003 OECD report affirms that Decree No. 677 covers several aspects of good corporate governance practices, such as "mandatory tender offers once 35% of shares have been acquired by a single shareholder or controlling group; procedures to ensure that minority shareholders receive a "fair price" in squeeze-outs and de-listings; a majority of independent members of the audit committees; establishment of arbitration courts for the resolution of conflicts; and a greater role for shareholders through increased participation in shareholders meetings" (p.36). In September 2004, the Argentine Institute for Corporate Governance (IAGO) published a Code of Good Practices of Corporate Governance together with KPMG, and the Institute for Enterprise Development in Argentina. The code was elaborated for listed companies but can be applied to privately-held companies or small and medium-size companies. The code is based on the OECD's principles. The adoption of the code is voluntary and companies have to declare when they decide to do so..

The 2006 OECD report states that recent reforms have been made. In 2006 the National Securities Commission (CNV) proposed a Resolution to introduce a yes/no questionnaire of governance practices for listed companies. The questionnaire is based on the IAGO code and the requirements of Decree No. 677. It includes matters such as "the procedures and operation of the Board on matters such as management of conflicts of interests, committees, information, independence of its members" (p.2). The reform was finally released in October 2006 as General Resolution No. 493 of 2006 and is of the "comply or explain" type. However, any other requirement can be demanded by the CNV. The CNV allows companies to adopt the governance practices that they consider most effective. In May 2007, the CNV released a proposal for public debate about the adoption of a code of good corporate governance practices for listed companies. The proposal demands certain minimum criteria that any code should contain, including board composition and responsibilities, internal controls, treatment of shareholders, and remuneration policies. According to the CNV website, the proposal came into effect in October 2007 as a General Resolution No. 516 of 2007.

The 2006 OECD report states that some regulations have not been helpful in generalizing the spread of governance practices in Argentina. One such regulation is the (non-compulsory) provision in Decree No. 677 governing takeover processes. A lack of market culture and liquidity has been blamed for the fact that there is no market sanction for the failure to adopt governance practices. In addition, firms that choose not to do so have not seen the value of their shares decline. Lastly, the report points out the negative role played by corporate culture in the adoption of good practices. For instance, a director may feel he owes loyalty to those who voted for his appointment, rather than to the shareholders.

According to the 2005 CEF report, one of the main conditions for the adoption of good corporate governance is the development and strengthening of the institutional infrastructure of the capital market. The report notes that the Argentine courts are seen as inefficient and poorly qualified. Minority shareholders and other stakeholders find it very difficult to exercise their rights. To address this matter, Decree No. 677 sets arbitration proceedings that are mandatory for issuers and optional for investors, in order to reduce the time and cost of legal proceedings and help each regulatory market to find dispute resolution mechanisms. Pricewaterhouse Coopers (PWC) confirms the lack of established corporate governance culture in its 2006 report. According to PWC most Argentine corporations do not have boards with independent directors; an internal control culture in all the areas of the organization; channels for disseminating information about actions that go against to the corporative ethic; or risk management that is independent from the operative sector. However, 55% respondents asserted that their corporations did have a corporate governance code. The CEF 2005 report finds that, overall, the level of capital market development in Argentina is relatively low compared to other emerging economies and other countries in the region. This applies to the level of primary and secondary issue, the level of capitalization, trade volume, and the number of listed companies. Apreda's 2001 paper by Apreda asserts that, among the 20 largest listed companies, controlling shareholders hold 65% of equity. Pyramid structures are commonly used in Argentina, according to the 2003 OECD report: "Using data of the 24 Argentinean firms that have issued American Depository Receipts (ADRs), we find 93% of affiliation to groups through pyramids but little use of non-voting shares (only 3.9%). In these companies, the controlling group has rights, directly or indirectly, over 68% of firm's cash flows" (p.48).

The Investor Protection Index (IPI) is a subcomponent of the World Bank's 2007 Doing Business Indicators. The IPI consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). These indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Argentina scores 6 in the Disclosure Index, against a regional average of 4.2 and an OECD average of 6.4. It scores 2 in the Director Liability Index, against regional average of 5.0 and an OECD average of 5.1, and it scores 6.0 in the Shareholder Suits Index against a regional average of 6.0 and an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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According to the 2005 CEF report, the CNV regulates and organizes the securities market. Law No. 17811 of 1968 on Public Offerings of Securities empowers the CNV with the ability to issue regulatory standards for the capital market. The CNV is also in charge of the supervision of publicly-traded companies. The CNV is a self-regulatory governmental agency that directly reports to the Ministry of Economy and Production. Decree No. 677, issued in 2001, and CNV General Resolution No. 400 of 2002 have strongly enhanced the CNV's supervisory powers. The CEF 2005 report observes that these new regulations include "action rules in the CNV administrative proceeding regulation in case of initiation of summary proceedings by the Commission" (p.21) and imposes more severe sanctions. However, the publicly available information does not address Argentina's compliance with this principle.

The Companies Law No. 19.550 of 1972, which regulates business entities, includes "formation, accounting standards, mergers, spin-offs and controlling relations between firms, share issues, shareholders' meetings, board composition, special committees, supervisory boards, shareholders' rights, dissolution, liquidation and winding up, and so on" (p. 24). The act was last amended in 1983 and does not address the issues of corporate governance. However, the Companies Law balances rights among different business participants: "(1) directors' liability for actions which may be contrary to the firm's interest; (2) shareholders' access to corporate information, specifically for monitoring and meeting participation purposes; (3) sustaining shareholders' right to either accept or refuse financial information supplied annually; (4) granting privileges and protective measures to shareholders in case of capital increase or exchange delisting of companies; (5) defining general rules to avoid conflict of interest in case of shareholders occupying senior management or board positions; (6) granting special rights at shareholders' meetings to minority holders of more than 5% ownership interest" (p. 20).

Principle II: The Rights of Shareholders and Key Ownership Function

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Boards and board committees must protect the firm's interest and shareholders' rights, according to the 2005 CEF report. Minority shareholders can nominate up to one third of the board and ensure their representation. As the Morgan Lewis 2004 report states "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" (p. 2). The report adds that shareholders representing at least 5% of the corporation's equity capital can request board meetings to discuss any specific topic. However, the publicly available information does not address Argentina's compliance with this principle.

Voting rights are protected according to the 2006 OECD report. The Companies Law No. 19.550 of 1972 permits the issue of multiple voting shares (five, on average), and preferred shares which have no voting rights (except in default scenarios). However, these two instruments are rarely used. Nevertheless, the 2006 OECD report cautions that "there has been a number of transactions where multiple voting shares have been used to affect exchange offers, which enhanced the voting power of certain controlling groups, arguably to the detriment of minority shareholders" (p. 3). Regarding other shareholder rights, the 2002 COSRA report affirms that shareholders have the fundamental right to obtain a benefit for the contribution made. The shareholder meeting determines if all or part of the benefits should be distributed among shareholders as profits. Shareholders have the right to be informed about the current business conditions. When fundamental decisions must be made (acquisitions, sale of strategic assets, etc.), an extraordinary shareholder meeting shall be called which must fulfill major requirements about quorum and voting majorities. Shareholders shall be informed before any of these changes occur by means of the call to the extraordinary meeting.

The 2006 OECD report asserts that institutional investors have not been active in promoting corporate governance. Pension funds, the most relevant local institutional investors, are required only to attend shareholders meetings when they hold more than 2% of equity capital of a particular corporation. In addition, pension funds can only invest in investment grade securities. Institutional investors have a large proportion of their portfolio invested in public bonds, which prevents them from acquiring private securities. Due to their relative low stakes, they have little incentive to monitor private firms. The 2007 Estudiu Durrieu report titled Getting the Deal Through states: "Whenever a corporation acquires more than 25 percent of another company's shares, Section 33 of the [Companies Law] states that it must report the situation to the controlled company for the shareholders´ meeting to take notice of the purchase" (p. 9). The Companies Law allows the use of anti-takeover device, but listed companies are strongly monitored by controlling shareholders. Therefore these kinds of devices are rarely used.

Principle III: The Equitable Treatment of Shareholders

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The Companies Law No. 19.550, issued in 1972, sets the civil actions rights of minority investors in public companies. The 2005 CEF report states that the two main actions are: "invalidity against decisions adopted by the shareholders meeting and the action for liability against board members or company managers" (p. 28). Moreover, there is the right to request court intervention to prevent directors or managers from damaging the company by their behavior. However, the publicly available information does not address Argentina's compliance with this principle. Nevertheless, the corporate governance framework provided by the Companies Law is described as "extremely general and ineffective for the complexities which characterize capital markets, and even unpractical at the time of granting rights to minority shareholders" (p. 29). The 2005 CEF report admits that Decree No. 677 has increased the capabilities of minority shareholders to protect their rights. For example, the corporate liability action limits the use of court rate which has to be paid by minority shareholders on the total amount of the damages suffered by the company. However, it is not clear if such sanction strengthens minority rights enforcement. The CEF report list the following additional minority shareholder rights: "the right to claim redress vested in minority shareholders damaged by related-party transactions carried out in violation of the procedure set forth in the [Decree No. 677] (Section 73 of Act 17.811); the right to file a claim in case of mandatory acquisition of residual ownership interests (squeeze out) or removal from the registration and listing system, where minority shareholders are not paid a fair price for their shareholdings (Sections 25 to 32 of [Decree] 677/01); and the right to recover profits obtained by directors and insiders who make use of privileged information for their own benefit or the benefit of third parties (Section 33 of [Decree] 677/01)" (p. 29).

Decree No. 677 of 2001 and the CNV's regulatory regime regarding takeovers, known as Oferta Publica de Adquisicion Obligatoria, or OPA regime, have helped to improve corporate governance legislation, according to the 2006 OECD report. The OPA regime requires that when the offer is for more than the 35% of the total shares of the company, the tender offer shall be made open to all shareholders in proportion to their holdings. If the transaction is for less than 35%, the parties will negotiate freely. The price is determined by the offer, but there are some guidelines to determine its fairness. The regulator can decide the price if it considers it unfair. The board should include in the offer a public statement of its opinion regarding fairness. If the members of the board are shareholders, they should disclose their decision. The 2006 OECD report notes that, unfortunately, the adoption of the OPA regime is voluntary, which has worked against the generalization of its provisions. The Buenos Aires Stock Exchange or MERVAL has published a list of the companies that have adopted the regime and those that have not.

Writing in 2001, Grondona et al. note that MERVAL and the CNV require a minimum quorum of 75% and the approval of shareholders holding more than 10% of the total outstanding shares in order to act upon a decision to de-list a firm. The point of this requirement is to increase the amount of information available for offers. Nevertheless, some are concerned about MERVAL's ability to issue regulations and have observed that the method to determine the appraisal price of the shares has not changed. Since exchanges can issue regulations and impose sanctions, Grondona et al. note that "they have the power to request companies that wish to list their shares to insert in their by-laws governance clauses protecting minority shareholders from actions such as delisting, changes of control, and changes in the capital structure" (p.3). However, it is unlikely that they have the power to change the by-laws of currently-listed companies.

A 2002 COSRA questionnaire on corporate governance in Argentina notes that, within any given class, all shareholders have the same voting rights. According to the CNV, all investors shall obtain information about the rights conferred by the shares to be offered to the public. They also can obtain information from the by-laws. Principal can make recommendations to proxy holders with respect to the way they must vote regarding each of the issues of the agenda, or they can let their proxy holders vote in accordance with their own criteria. Insider trading is explicitly forbidden by the CNV Rules and Decree No. 677 of 2001.

Principle IV: The Role of Stakeholders in Corporate Governance

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The 2002 COSRA questionnaire discloses that, during the 1990s, state enterprises were privatized in Argentina. Part of the capital thus raised was transferred to the employees, under the Participatory Property Program (PPP). The PPP shares constitute a special class, with special rights. One such right is the right to participate in the corporation's government by appointing certain number of corporate and supervisory board members. However, the source does not directly address Argentina's compliance with this principle.

Principle V: Disclosure and Transparency

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According to the 2006 KPMG report, a plan to converge to US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRSs) was adopted in 2000. The 2006 OECD report states that Argentina has made progress in converging with international accounting standards, especially with regard to disclosure of related-parties transactions. The COSRA 2002 questionnaire observes that the Companies Law and regulations issued by the CNV specify the information on public corporations that shall be disclosed and made available to the shareholders and to investors. Financial statements must be prepared, audited, and presented according to the International Accounting Standards and Technical Resolutions issued by the Argentine Federation of Councils of Accountants. The Estudio Durreiu report, in addressing the disclosure and transparency requirements of listed companies, states that the "quarterly report, including the financial statement and the board's approval thereof, a balance sheet report, an external accountant's and the internal comptroller's report" must be disclosed (p.12). The CNV Resolution No. 493 requires listed companies to attach to the annual report a document with their response to a CNV questionnaire, or to explain why they choose not to do so. The questionnaire consists of 14 questions about the board activities, responsibilities and composition, shareholders meetings procedures, and conflict of interest policies. To date, there has not been any assessment on the adherence of this new regulation to OECD standards.

According to the 2006 OECD report, Decree No. 677 offers a clear definition of the term "related party," and sets forth procedures for dealing with related party transactions. The Decree states that "this is a material event which, as such, must be disclosed and made public, including in the disclosure the report of the Audit Committee, and if that is the case, the report of the independent appraisal firms" (p. 7). The OECD finds that Decree No. 677 has enhanced the CNV's regulations governing the disclosure of shares held by board members as well as disclosure of changes in controlling groups. Nevertheless, full ownership structures are not disclosed by listed companies in Argentina, according to the 2003 OECD report.

The 2006 PWC report states that current legislation empowers Audit Committees with the competence to carry out management and legal compliance controls in any corporation. However, there is an overlap between the committees' responsibilities and the activities undertaken by the Internal Comptroller (Sindicatura). This constitutes an unclear separation of responsibilities and accountability among different bodies within the organization. In 2005, Bebczuk developed a quantitative measure of the quality of corporate governance and the ownership structure of 65 non-financial listed companies in Argentina, using data compiled for 2003-2004. From this data he created a Transparency and Disclosure Index (TDI) that is highly correlated with the Corporate Governance Index. The TDI is based on public information on each company (balance sheets, annual reports, regulatory filings, company websites, and the like) and reflects their degree of transparency and public disclosure. The document concludes that Argentinean companies need to improve their governance to rise to the standard of international practice. Overall, however, the publicly available information does not address Argentina's compliance with this principle.

Principle VI: The Responsibilities of the Board

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In its 2005 report, the CEF asserted that boards of listed companies shall comprise a minimum of three members and that mandatory audit committee shall comprise no less than three members, two of whom must be independent directors. The Companies Law of 1972 requires cumulative voting for the appointment of board members. Therefore, minority shareholders can nominate up to one-third of the board, thus ensuring their representation. The publicly available information does not directly address Argentina's compliance with this principle however. The OECD's 2006 report states that "laws and practices reflect that all directors, individually and collectively, should act independently in the interest of the company and all of its shareholders" (p. 7). The OECD adds that further enhancements of corporate governance have been achieved, including the creation of Audit Committees with a majority of independent directors, and the obligation to disclose the independence (or lack thereof) of newly appointed board members. Nonetheless, the OECD notes that further efforts are needed to improve transparency with regard to the responsibilities of boards and board committees, the procedures for dealing with conflicts of interest, and compliance with laws and ethical standards.

The 2002 COSRA questionnaire disclosed that the board is responsible for reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets, and business plans. It sets performance objectives; monitors implementation and corporate performance; and oversees major capital expenditures, acquisitions, and divestitures. The board is also responsible for monitoring and managing potential conflicts of interest among the firm's management, board members, and shareholders, including misuse of corporate assets and abuses in related-party transactions. The board monitors the effectiveness of the governance practices under which it operates and determines when changes are needed. Finally the board must oversee the process of disclosure and communications. The law provides two general standards and duties that must follow and accomplish the members of the board towards the corporation and the shareholders: (1) they must faithfully adhere to and comply with the company by-laws, legislation, and shareholder resolutions, and (2) they must conduct the business with diligence. Even though the Companies Law requires "loyalty and diligence," it is considered to be obsolete. The 2006 OECD report states that the 2001 issuance of Decree No. 677 has clarified the terms of the Law. The OECD further argues that the Decree allows shareholders to file individual damage claims, encouraging them to take legal action against board members and be indemnified. The report admits that it is too early to assess the effectiveness of the new measures, but suggests that the implicity reduction in cost will result in an increase in the number of legal actions filed against boards. Also, the Decree has improved the disclosure of board members' compensation policies.

The 2004 Morgan Lewis report states that "Argentine law does not prevent the separation of the company's chairman of the board of directors and chief executive officer function, although usually the chairman of the board of directors is also the CEO" (p. 7). According to the 2006 report by PWC on Corporate Governance in Argentina, in most cases, Argentine corporations do not have: (1) boards with independent directors; (2) an internal control culture in all the areas of the organization; (3) channels for disseminating information about actions that go against to the corporative ethic; or (4) risk management that is independent from the operative sector. However, 55% of respondents confirmed that their corporations did have a corporate governance code. Article 66 of the 1972 Companies Law states that the board must disclose all relevant information on the present and future performance of the company. Managers must present a report that includes explanations of significant variations in the firm's assets and liabilities and an adequate explanation of the company's extraordinary expenditures and earnings, together with their origin and a detailed estimation and orientation about the firm's future operations.