Family groups and conglomerates largely control Colombia's corporate sector. Colombia is moving towards the creation of an environment in which medium-sized companies can raise capital in the market and help them make the transition from tightly-controlled family firms, to public companies. Colombia has put a minimum corporate governance disclosure regime in place for companies that wish to be eligible for pension fund investments. In general, private sector efforts in Colombia have been led by Confecamaras (the Confederation of Chambers of Commerce). The Confecamaras Corporate Governance Project has organized numerous events to raise awareness of governance issues throughout the private sector, inviting companies, investors, the mass media and national and international experts to participate. In August 2003, the Colombian Corporate Governance Code for Listed Companies was published. This code is not mandatory. The Capital Markets Law 964 was enacted on July 8, 2005. Its purpose among others is to regulate measures of corporate governance. It introduces the concept of independent directors. However, Colombia needs to adopt internationally acceptable auditing and accounting standards and improve minority shareholder rights.

General Overview

The IMF noted in its update to the 2000 Financial Sector Stability Assessment in 2005, that market liberalization has partially transformed business groups into more focused, professionally managed and transparent operations. However, corporate ownership is generally concentrated among a few, familiar in nature, and business groups with pyramid structures and cross shareholdings are frequent. Until the early 1990s, the enforcement of contracts through the judiciary was weak, information asymmetries were severe, and external financing was limited and expensive. Limits to capital mobility and to international trade provided incentives to domestic diversification of large groups, as well as shelter from foreign competition. Such a system fostered both vertical and horizontal integration. Conglomerates helped to mitigate the cost of market frictions, while pyramidal structures with a holding company wholly owned by the founding family at the apex of the pyramid, and cross shareholdings between companies affiliated to the group were efficient corporate structures in this environment. Moreover, institutional investors, acting in a fiduciary capacity, should disclose their overall corporate governance and voting policies with respect to their investment, including the procedures that they have in place for deciding on the use of their voting rights. (FSSA Update 2005)

In the last few years, Colombia has seen various regulatory and legislative initiatives. In March 2001, Colombia's securities commission, the Superintendencia de Valores ("Supervalores") enacted Resolution 275. Resolution 275 establishes a legal obligation for issuers who intend to be recipients of pension fund investment to disclose their governance practices in some detail. In recent years, a series of draft laws have been introduced to reform the framework of securities regulation. During 2001, the government submitted a draft securities law, but this was subsequently withdrawn from Congress in July 2002 as a result of intense political pressures from, among others, some of Colombia's largest companies. Supervalores is now working on a new draft for the law project. The provisions of this draft legal reform would require the establishment of audit committees, mandate that a third of board members must be independent, require disclosure of related party transactions and require tender offers under certain circumstances. . (OECD 2003)

One of the most important approaches to corporate governance in Colombia is Law 964 of 2005, the Capital Markets Law, and was enacted on July 8, 2005. Its purpose is to provide this market, among other aims, with a regulation allowing higher growth levels, alternatives to traditional corporate financing sources, and to regulate measures of corporate governance in this field. (CNGC Boletin 62, 2005)

The capital markets are small relative to the economy as is trading volume. As of August 2003, equity trading totals $1 million whereas fixed income trading is around $1 billion. After the pension reform in the early 1990s pension funds became a rapidly growing, and now large, source of funds, however they are still reluctant to invest in equity. International experience has proven that capital market development is positively correlated with the degree of shareholder protection and good corporate governance. Awareness of the importance of corporate governance issues is growing. Success stories of privatizations linked with good corporate governance highlight the importance of the issue. (ROSC August 2003)

Private sector efforts in Colombia have been led by Confecamaras (the Confederation of Chambers of Commerce). The Confecamaras Corporate Governance Project has organised numerous events to raise awareness of governance issues throughout the private sector, inviting companies, investors, the mass media and national and international experts to participate. In August 2003, the Colombian Corporate Governance Code for Listed Companies was published (Colombian CG Code) . This Code was drafted by a committee that included a broad range of private sector representatives, including the Colombian Stock Exchange, the National Association of Pension Funds, and the Chambers of Commerce of Bogotá and Cartagena. Overall co-ordination of this effort was provided by Confecamaras. In conjunction with the chambers of commerce of each region, Confecamaras has now developed a director training programme. (OECD 2003)

Additionally, the National Federation of Chambers of Commerce (CONFECÁMARAS) has prepared a draft code on Good Corporate Governance that covers small and medium companies (non-listed). Issued on 14 July 2004, this is an instrument to be gradually incorporated into small and medium-sized companies in an autonomous manner and in accordance with their characteristics. It is a point of reference for preparing their own codes. (CNGC Boletin 62, 2005)

In the development of the above-mentioned Framework Codes and for the study and discussion of this issue, CONFECAMÁRAS, through its Corporate Governance Department, has been participating in alliances with national and foreign organizations such as the International Financial Corporation (IFC), International Center for Private Sector Companies (CIPE), Global Forum on Corporate Governance (World Bank), Andean Promotion Corporation (CAF), and has followed the guidelines and principles established by the Organization for Economic Cooperation and Development (OECD) in this field. (CNGC Boletin 62, 2005)

Colombia's market capitalization totals USD 13.2 billion, or 15.8 percent of GDP. In May 2003, there were 109 companies listed on Colombia's only exchange, Bolsa de Valores de Colombia; only 20 of these trade regularly, and 52 do not trade at all. The turnover ratio declined from 0.22 in 1998 to 0.05 in 2002. De-listings outnumbered new listings and share offerings between 2000 and 2002, but companies continue to enter the market, including through privatizations. Free float averages 15 percent and has been decreasing as controlling shareholders increase their stakes. Ownership is thus highly concentrated. A recent study found that the three largest shareholders in the ten largest non-financial, privately owned firms owned 63 percent of capital - the third highest concentration of all countries surveyed. Four large business groups dominate Colombia's corporate sector, three include listed firms. In 2002, nine of the ten largest firms by trading volume belonged to one of the groups. (ROSC August 2003)

The Principles

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

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Colombia does not have a code or law for regulating corporate governance integrally. However, in certain sectors, corporate governance provisions exist and others are in the process of being introduced. In the securities market, Confecámaras (National Federation of Chambers of Commerce) together with several companies of the private and public sectors issued the Framework Code of Good Corporate Governance directed towards companies that obtain financing through the marketing of securities. This code is not mandatory. (CNGC Boletin 62, 2005)

The following are resolutions issued by the Superintendency of Securities: (a) Resolution 275 of 2001 regarding general standards to be adopted by legal business entities to which the investment resources of pension funds are destined, (b) Resolution 116 of 2002 against conduct with the purpose of preventing stockholders from exerting their rights to deliberate and vote freely and spontaneously, (c) Resolution 72 of 2001 for the promotion of equitable treatment for stockholders, (d) Resolution 157 of 2002 punishing conduct such as the sale and purchase of transactional securities. The Colombian Congress approved Law 964 of 2005, known as the 'Securities Market Law', which was sanctioned by the President of the Republic last July 8. This law seeks to regulate, among others, measures of corporate governance in this field. (CNGC Boletin 62, 2005)

Securities issues are now part of the Financial Framework Law, which focuses mainly on prudential regulation for banks. The proposed securities bill would repeal the law as it applies to securities and replace it with a bill based on the IOSCO Principles. It would help to clearly delineate the competencies of Supervalores and Superbancaria and provide an opportunity to set minimum corporate governance standards for issuers, broker/dealers, central depositories, trading systems, stock exchanges and rating agencies. The bill should focus on shareholder protections, more transparency and enhanced board responsibilities. (ROSC August 2003)

Key laws affecting corporate governance are the Commercial Code (amended by Law 222 of 1995), Financial Framework Law 35 (1993), Law 446 (1998), Resolutions 400 and 1200 (1995), Resolution 275 (2001) and norms issued by Supervalores Colombia follows a civil law tradition, but recent changes have been influenced by common law. (ROSC August 2003)

The capital market regulator is Supervalores. It reports to the Ministry of Finance and supervises the securities market. It has investigation and sanction powers. Sanctions can be appealed before an administrative judge. A committee of five acts as regulatory board, representing the Ministries of Finance and Economic Development, Superbancaria, Superintendencia de Sociedades and the President. The Superintendent can also issue regulations. The Superintendent is appointed by the President and can be removed at any time. The Bolsa is a de-mutualized stock company (Sociedad Anónima). Nominally an SRO empowered to monitor its members, the Bolsa is closely supervised by Supervalores. It does not have separate listing rules. (ROSC August 2003)

Supervalores Resolution 275 of 2001 was the first regulation to address corporate governance. It established broad conditions with which corporations must comply in order to be eligible for investment by pension funds. It requests that companies establish mechanisms to ensure the protection and equitable treatment of shareholders. These must be disclosed in a company level "code of good governance." While some companies just summarize bylaws with appropriate cross-references to Resolution 275, others understand that the code is a signal to investors of their commitment to corporate governance. A model code was drafted under the leadership of Confecámeras15 in 2001. Confecámeras also organizes awareness raising events and will soon open an institute of corporate governance and director training with regional offices. (ROSC August 2003)

Colombia is creating a director training organization. Given the high-profile, collaborative effort involved and the regional presence in the country's main commercial centers, this has the potential to become a strong, widely accepted director training organization. Consideration should be given to introducing director accreditation. (ROSC August 2003)

Principle II: The Rights of Shareholders and Key Ownership Function

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15 working days before the Annual General Meeting (AGM), companies must have their financial statements, dividends' distribution proposal, reports of the board and legal representative, as well as the report of the revisor fiscal available for inspection. Company bylaws, accounting books, AGM minutes and BOD minutes are kept in the mercantile registry managed by the chambers of commerce. All registered records are publicly accessible for a small fee. (ROSC August 2003)

Article 379 of the Commercial Code confers each holder of ordinary shares the right to participate and vote at the AGM. The AGM elects directors through an "electoral quotient" (cuociente electoral) system devised to safeguard proportional representation of all shareholders. Board members are chosen from shareholder-proposed lists. Firms are said to select board size in accordance with the controller's determination to appoint the board majority with the lowest possible number of shares. Cumulative voting is not allowed. (ROSC August 2003)

The 2003 World Bank ROSC recommended that the clearance and settlement cycle should be lowered substantially and DVP adopted in order to minimize transfer risks. Alternative board voting systems, e.g. cumulative voting and proportional representation, should be permitted under the law. (ROSC August 2003)

Fundamental issues are decided at extraordinary general meetings (EGM). Seventy percent of represented capital may rise and decide on issues not on the agenda. Share issuance up to the level of authorized capital is a board decision. The board may approve "large" transactions without shareholder approval. In some cases, mergers have been structured as acquisitions, thereby not requiring EGM approval. Most decisions are taken by simple majority. (ROSC August 2003)

The AGM takes place within three months of fiscal year-end. If no meeting is called, it takes place automatically on the first business day in April at company headquarters. SV may summon a meeting when it has failed to occur, the board members, senior executives and the liquidator (these are the administradores), committed irregularities, or at the request of shareholders holding 20 percent of capital. The AGM is summoned through a notice in the press. Financial statements are to be approved; notice must be made at least fifteen business days in advance. Otherwise, the minimum notice is five business days. The agenda always includes: (i) approval of financial statements; (ii) election of the board; (iii) election of the revisor fiscal. The agenda is not circulated in advance, and shareholders cannot add to it. They may, however, raise and vote on any issue not included. The quorum is half plus one of subscribed shares. If no quorum is met on first call, a new date is set within ten to thirty days with no quorum for the new meeting. (ROSC August 2003)

Shares are blocked from trading 11 days before the AGM for their associated votes to count. Shareholders may appoint proxies. Proxy appointments need not be notarized. Voting by mail and electronic voting are permitted, if all shareholders vote. If a single shareholder decides not to vote, the decisions adopted are null and void. (ROSC August 2003)

Companies may issue shares with varying voting rights. There are three basic share classes: common, non-voting preferred and privileged shares. Privileged shares have preferences similar to those of preferred shares, but also carry one vote per share. Multiple voting shares and voting caps are prohibited. Issuers must disclose the identity of their 20 largest registered shareholders in the annual report; however, this obligation does not extend to the ultimate beneficiary. Shareholders are not required to disclose beneficial ownership once their ownership exceeds a certain threshold. Intricate webs of ownership, including pyramid structures and cross-shareholdings, make it nearly impossible to ascertain the proportionality between cash flow rights and control. While shareholder agreements must be delivered to the company, and shareholders have a theoretical right to review them, shareholders do not always seem to be aware of their existence. (ROSC August 2003)

The 2003 World Bank ROSC recommended that the annual report should disclose the board and management holdings and the names of beneficial owners above a certain percentage of share capital. The onus for disclosure should be on the shareholder, as well as the company. All shareholders agreements should be disclosed. (ROSC August 2003)

There is no mention of the principle of one vote per share. Each share confers to its owner the right to attend and to vote at the general assembly (article 379). Under the "Código de Comercio", there are two types of shares, ordinary and preferential (article 381). Paragraph one of Article 381 states that the rights of ordinary shares are conferred under article 379. (Oxford Analytica 2005)

There is no mention of either cumulative voting or of proportional representation in the law. Rather, article 436 states that directors are elected through a method of voting known as "Electoral Quotient" (Cociente Electoral). Article 197 explains how this method of election works: candidates need to belong to a list. The 'Electoral Quotient' is determined by dividing the total number of valid cast votes by the number of seats to the Board of Directors that need to be renewed. Each list will be allotted a number of seats to this Board depending on the number of times that the 'Quotient' fits into the number of cast votes belonging to members of that list. If there are still seats to be assigned, then the party with the largest 'residue' will be able to choose another of its candidates. If there is a draw in residues, then the candidate will be chosen by lottery. Through this method of voting, majorities are given absolute priority to choose their own candidates. (Oxford Analytica 2005)

.Laws 100 and 50 regulate the pension fund system. Six pension fund administrators manage about USD 6 billion in mandatory pension funds, USD 1 billion in severance funds, and USD 1 billion in voluntary pension funds. Pension funds are supervised by Superbancaria. The equity investment limit for mandatory pension funds is 30 percent of assets; a much smaller fraction is actually invested. Market illiquidity and a distortion in the incentive system due to minimum return regulations that sanction under-performance do not reward above average returns and are disincentives for pension fund investment in equities. It is up to the pension funds to monitor whether their portfolio companies comply with the provisions of Resolution 275, e.g. whether they have adopted a code of good governance which addresses the points raised in the Resolution and whether they deem the code appropriate. Institutional investors do not disclose their voting policy and do not vote in practice. (ROSC August 2003)

The 2003 World Bank ROSC recommended that in order to make the obligation of complying with the code of good governance more enforceable and monitor compliance, policymakers should consider introducing a comply-or-explain mechanism, which requires that companies comply with the code or explain reasons for non-compliance in their annual report. This could become a listing rule or fall under Supervalores' disclosure oversight powers. Revisions to the pension funds law should include discussions on the role and responsibilities of institutional investors, their incentive system and obligation to disclose voting policy. Awareness of international experiences of shareholder activism should be raised. (ROSC August 2003)

Principle III: The Equitable Treatment of Shareholders

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In theory, shareholders have broad legal venues for redress. If a board or shareholder meeting decision violates the law or bylaws, it can be challenged before a civil judge within two months. In theory, shareholders have broad legal venues for redress. If a board or shareholder meeting decision violates the law or bylaws, it can be challenged before a civil judge within two months. Derivative suits against the firm's administradores can be initiated by an EGM called by shareholders with 20 percent of capital. Derivative suits against the firm's administradores can be initiated by an EGM called by shareholders with 20 percent of capital. Law 472 of 1998 introduces class action suits when collective rights and interests are violated. (ROSC August 2003)

Conflict resolution is subject to arbitration or the courts. Specialized commercial courts do not exist. The greatest barriers to redress are the cost of litigation and length of court procedures. Shareholders can "put" their shares to the company, if they do not agree with certain fundamental decisions. The put price is "fair market value" as determined by an independent expert appointed by the chamber of commerce. The new securities bill proposes to expand decisions where withdrawal rights apply to include the sale of substantial assets. The bylaws contain information on the various share classes and the rights assigned to them, the annual report does not. Changes to the rights of a particular class must be approved by supermajority vote in a special meeting for shareholders of the affected class. Custodians vote according to registered shareholder instructions. Owners generally give custodians wide discretion on how to vote. In the case of ADRs, it is the local trust that is the record holder and exercises all shareholder rights. The ADR contract specifies if the trust must obtain voting instructions from ultimate beneficiaries. (ROSC August 2003)

In practice, shareholder redress is generally unavailable. Reducing minority rights thresholds (e.g. five percent) would improve the situation. The new capital markets law proposes the creation of "minority shareholder associations" that could seek redress on behalf of individuals. It remains to be seen how this will encourage minority activism. The legal framework should encourage foreign investors to vote. (ROSC August 2003)

Administradores cannot purchase shares of their company, except with authorization from 2/3 of the board or the AGM. There are no black-out rules and no rules for controlling shareholders. No person, directly or indirectly, may perform operations in the market using privileged information; s/he can be sanctioned with a fine of up to USD 1765 or the value of the transaction, whichever is higher. Any employee, director or officer of a firm who, for his own or another's benefit, misuses information he obtains because of his corporate duties, is subject to a fine. In 2000, unauthorized use of insider trading information became a criminal felony. (ROSC August 2003)

Only one insider trading and self-dealing case has been sanctioned to date, but other investigations are underway. Supervalores and the Bolsa have insufficient tools to detect insider dealings; they lack an electronic surveillance system and have no method for monitoring practices like "front running." Surveillance is complicated by the fact that banks and insurance companies may trade over the counter. Anecdotal evidence and a strong suspicion by Supervalores and the Bolsa suggest that insider trading is common, especially in fixed income. (ROSC August 2003)

The 2003 World Bank ROSC recommended that administradores should be permitted to buy shares subject to strict disclosure and black-out rules. Insiders should include majority shareholders and groups of companies. Supervalores or the Bolsa should install an electronic surveillance system to monitor insider trading. Policymakers should consider obliging all institutions to trade on the exchange. (ROSC August 2003)

There is no accounting standard for related party transactions like IAS 24. Related transactions are disclosed as "material events" and in the footnotes. Loans to senior management and directors are permitted. An administrador may not participate in any transaction where there is a conflict of interest, except with AGM authorization. According to market observers, this rule is rarely observed. Related party transactions do not take place under desired levels of transparency and are not sufficiently regulated. (ROSC August 2003)

The 2003 World Bank ROSC recommended that if a director has a conflict of interest, s/he should have to advise the board and refrain from voting. This should equally apply to directors connected to major shareholders with a vested interest in board decisions. Transactions between issuers and shareholders with a participation above a given threshold, the legal representative, directors or their relatives should require unanimous board approval (without the interested party's vote). Policymakers should also consider to follow the Chilean example, where shareholders representing five percent of capital can request that the transaction be approved at an EGM with 2/3 of voting shares. Disclosure of ownership and related party transactions should be a top priority for the supervisor in monitoring disclosure. (ROSC August 2003)

Principle IV: The Role of Stakeholders in Corporate Governance

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The Labor Code, Commercial Code as amended, Corporate Restructuring Law 550 of 1999 and other laws and regulations set forth the rights of stakeholders, such as employees and creditors. Employees are considered creditors, allowing them to secure their wages when restructurings occur. When a firm seeks to restructure debt, employees and creditors have voting rights, and employees are represented on the board during liquidation. Although good governance codes should address stakeholder issues, no specific regulations about how to involve stakeholders exist. (ROSC August 2003)

The Constitution and other laws provide redress for consumer groups, creditors and others; obligations to labor are dealt with comprehensively. Environmental legislation is considered advanced for the region. Class-action type mechanisms permit affected parties to seek protection and/or compensation, but the court system is slow and inefficient. Insolvency laws favor debtors, leading to perceptions that creditor rights are poorly protected. (ROSC August 2003)

Listed companies have general obligations regarding dissemination of their financial statements and other corporate matters. Upon a merger or spin-off, the company must publish information that draws creditors' attention to their rights. In restructuring processes, notice must be sent to creditors so that they can attend the restructuring meeting and vote. (ROSC August 2003)

Options are not regulated by law, nor are they common. Employee share plans are approved by the AGM and disclosed as labor debt. (ROSC August 2003)

Principle V: Disclosure and Transparency

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Decree 2649 of 1993 defines Colombian GAAP, which differs materially from IAS. Accounting standards are issued by a number of superintendencies and other public bodies. Companies must prepare parallel information for different regulatory bodies, each based on a different standard and code. Policymakers agree that the quality of Colombian accounting standards is substandard. Colombian auditing standards do not comply with ISA. (ROSC August 2003)

The Colombian government, with the approval of Congress, has embarked on new strategies to advance structural economic reforms and macroeconomic stability, reform the regulatory institutions and systems of control, and improve law and order. One of the government's reform proposals involves a project to improve the corporate financial reporting regime. This project includes enacting a new law to reform and develop the accounting profession, fully adopting International Accounting Standards (IAS) and International Standards on Auditing (ISA), implementing international best practice on a professional accountants' code of ethics, and establishing an internationally comparable arrangement to license public accountants. (ROSC July 2003)

Listed companies have general obligations regarding dissemination of their financial statements and other corporate matters. Upon a merger or spin-off, the company must publish information that draws creditors' attention to their rights. In restructuring processes, notice must be sent to creditors so that they can attend the restructuring meeting and vote. (ROSC August 2003)

The Commercial Code as amended requires publication of an annual report and mandates its contents. Resolution 400 of 1995 stipulates the disclosure to SV and the Bolsa of periodic and material financial information for listed companies. The annual report includes a balance sheet, income statement, cash flow statement, statement of changes in equity and notes. It also includes the revisor fiscal's report and a management discussion and analysis, with limited discussion of company objectives. Information on risk management and material risk factors is mandatory, as is certification of internal control by the revisor fiscal. The names of board members and key executives are disclosed; there is little disclosure of remuneration and governance structures. Publication of material issues regarding employees or other stakeholders is not required. Accountability for financial statements rests with the legal representative and the revisor fiscal. According to market participants, the quality of financial information is poor. Between 1997 and 2002, the Superintendency brought 62 sanctions for disclosure violations against companies, their legal representatives and/or revisores fiscales. (ROSC August 2003)

There are 93,000 practicing accountants in Colombia. A university degree in accounting and one year practice are sufficient for registration as an auditor. Law 43 of 1990 regulates the accounting profession and sets up a rudimentary code of ethics. The law provides legal backing to the Junta Central de Contadores, the accounting and auditing oversight board, which reports to the Ministry of Education. While the Junta theoretically includes representatives from various superintendencies and other public bodies, in practice it is dominated by practitioners. (ROSC August 2003)

Fundamental issues are decided at extraordinary general meetings (EGM). Seventy percent of represented capital may rise and decide on issues not on the agenda. Share issuance up to the level of authorized capital is a board decision. The board may approve "large" transactions without shareholder approval. In some cases, mergers have been structured as acquisitions, therby not requiring EGM approval. Most decisions are taken by simple majority. (ROSC August 2003)

The Commercial Code created the figure of revisor fiscal, who combines the functions of an external auditor with those of what is known in Mexico as a comisario and in Brazil as the conselho fiscal. The AGM nominates the revisor fiscal, whose duties include: (i) certification of the quality of internal controls defined broadly (including processes and operations); (ii) certification that the firm complies with laws and bylaws; (iii) signing of financial statements together with the legal representative. There is an inherent conflict of interest in that the revisor fiscal gives the company instructions and then audits their execution. Market observers express concern about the independent judgment of the revisor fiscal, especially in cases where his or her salary is paid by the company. Accounting firms may provide auditing and consulting services to the same company, but they may not be performed by the same person. Auditing and consulting fees are not separately disclosed in the annual report. Current law requires the auditor's opinion to be signed by the individual auditor thus, responsibility and liability rests on the individual. (ROSC August 2003)

Principle VI: The Responsibilities of the Board

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The regulatory framework applies equally to all administradores, i.e. senior management, the legal representative, the liquidator, and directors. The board of directors consists of at least three members, each with an alternate. The board is accountable to the company and shareholders. Directors are expected to act in good faith, with loyalty and due diligence. While the law does not include a 'business judgment rule,' the director model is the diligent and careful conduct of a good businessman in the administration of his affairs. (ROSC August 2003)

The loyalty duty implies that the administradores have an obligation to act with integrity, giving priority to the corporation's interests above all others. When a board decision affects shareholder classes differently, the decision must comply with the law and bylaws and ensure equitable treatment of all shareholders. In practice, large shareholders appoint directors connected to them who tend to defend their interests. Policy recommendations: The "duty of loyalty" obligation should be strengthened by enhancing minority shareholder participation in the nomination and election of independent directors. Colombia should also build director professionalism by supporting the Institute of Directors. (ROSC August 2003)

The Commercial Code as amended establishes that the administradores and the revisor fiscal must ensure compliance with law and bylaws. There is an automatic presumption of fault or negligence when a director (i) breaches the law or bylaws; (ii) exceeds authority limitations set in the bylaws or AGM or; (ii) distributes dividends in violation of Commercial Code provisions. While board liabilities are extensive, they are not matched by corresponding powers, given that boards are often simply the instrument of the controller. There is no legal provision that establishes a board obligation to take into account stakeholder interests, but Resolution 275 recommends that companies recognize stakeholder rights and promote synergies between them. (ROSC August 2003)

The 2003 World Bank ROSC recommended that boards are often just rubber stamp bodies, but their legal liabilities are huge. Conversely, controlling shareholders who exercise indirect power over the boards, are not liable for their actions. Policymakers should consider introducing the concept of "shadow director," whereby controllers would be held liable if they take decisions formally reserved to the board. Boards must be educated about stakeholder rights as an integral part of director training. (ROSC August 2003)

The legal framework says little about director responsibilities; most specifics are left to company bylaws. The Commercial Code empowers the board to sign and execute contracts on behalf of the company and take all decisions needed to fulfill corporate interests. Legal duties include (i) furthering the firm's social purpose; (ii) ensuring strict compliance with the law and by-laws; (iii) overseeing the revisor fiscal's fulfillment of duties; (iv) safeguarding industrial secrets; (v) abstaining from disclosure of privileged information; (vi) treating all shareholders equitably; (vi) respecting shareholders' rights to inspection; (vii) abstaining from direct or indirect participation in activities that compete with the company, or any act that could imply a conflict of interest unless expressly authorized. According to the Commercial Code, it is the board that appoints the legal representative or CEO and sets his remuneration; however, market participants report that the controlling shareholder often chooses the CEO. The administradores are charged with ensuring the integrity of the corporation's accounting and financial reporting systems. They, together with the revisor fiscal, are liable for damages from a company's failure to submit financial statements. (ROSC August 2003)

The 2003 World Bank ROSC recommended that the new law should unambiguously assign certain non-transferable duties to the board, such as setting corporate strategy, hiring and firing the CEO, approving related party transactions, monitoring conflicts of interest. The code of best practice should expand on the law and include clear guidelines as to the board's role, responsibilities, operation, structure, and qualification requirements. The proposed Institute of Directors should focus on director training - both on the technical side and on fiduciary duties and liabilities. Consideration should be given to introducing director accreditation. (ROSC August 2003)

The concept of "independent director" is absent from Colombia's legal and regulatory framework. Some blue chips have "independent directors," but they are mostly trusted friends and acquaintances appointed by the controller without minority shareholder involvement, unless shareholder agreements specify board representation for minorities. Audit committees are not mandatory. The board is not required to meet regularly, and directors need not disclose attendance. Directors must not serve on more than five boards at a time. In practice, the positions of chairman and CEO are usually separate; in this case, the CEO is not a director, but sets the board agenda, controls access to information and often dominates the board. (ROSC August 2003)

The 2003 World Bank ROSC recommended that the new securities bill should require a minimum percentage of independent directors and define "independence" within the Colombian context. If policymakers decide to continue with the tradition of alternate directors, each alternate should be elected together with the principal director on an individual basis, rather than numerically. Alternate directors serving for independent directors, should also be independent. Special training courses for independent directors should be developed, along with a potential certification program for independent directors. Audit committees, made up of a majority of independent directors, should be made mandatory and their functions clearly defined. (ROSC August 2003)

Under article 45 of the new Securities Law 964 of 2005, the issuers of the securities must create an auditing committee that will be formed by at least three member of the board. The president of said committee must be an independent member. (CNGC Boletin 62, 2005)

The concept of non-executive directors does not exist in Colombia. Nevertheless, the new Securities Law 964 of 2005 contains the following tow provisions in this respect. A prohibition upon the administrators of listed companies as well as for their partners or shareholders, to be administrators or auditors of companies whose stocks or securities are registered at the National Registry of Securities and Issuers, except for stock exchanges, the administrative companies for security negotiation systems or its own commissioning company. Nevertheless, the directors of the home office and its legal representatives may be members of its boards (article 20). A requirement for the boards of securities issuers to comprise at least 25 per cent independent members (article 44). (CNGC Boletin 62, 2005)