According to a 2006 Inter-American Development Bank (IDB) donors' memorandum, Ecuador is increasingly recognizing the significance of corporate governance practices. However, a significant portion of Ecuador's corporate sector is made up of family enterprises, which seem reluctant to change. Nonetheless, in 2005, Ecuador became the first country in the Andean region to adopt the Andean Corporate Governance Code (CAGC) as national standard. The CAGC constitutes a framework and compilation of policies, standards, systems, and guidelines based upon the 2004 Organization for Economic Co-operation and Development's (OECD) principles and the 2003 Latin American White Paper on Corporate Governance. It includes a set of systematically arranged basic rules, with 51 specific measures that define internationally accepted standards of corporate governance. Part of an ongoing IDB-funded project is to disseminate the code and train professionals in understanding and implementing the CAGC. Overall, Ecuadorian capital markets remain underdeveloped, and trading on the stock exchanges of Quito and Guayaquil primarily consists of fixed-income government bonds.

General Overview

According to the 2007 Organization for Economic Co-operation and Development (OECD) Latin American Corporate Governance Roundtable held in Colombia, the Andean Corporate Governance Code (CAGC) provides a corporate governance framework for five Andean countries, including Ecuador. The CAGC was developed as part of a project titled "Drafting of the Guidelines for an Andean Corporate Governance" based upon the OECD Principles of Corporate Governance of 2004 and the Latin-American White Paper of Corporate Governance financed in 2003 by the Corporacion Andina de Fomento (CAF). The Code takes into consideration the original and revised principles developed by the OECD that focus on shareholders rights, equitable treatment, transparency and disclosure, and board responsibility. It includes a set of systematically arranged basic rules, with 51 specific measures that define internationally accepted standards of corporate governance. It also provides secondary recommendations to help conduct enterprise management in a more competitive, efficient, and transparent manner, as explained in a 2006 Inter-American Development Bank (IDB) donors' memorandum on "Development of Supply and Demand for Corporate Governance Practices in Ecuador." The memorandum notes that Ecuador is the first country in the Andean region to adopt the CAGC as national standards. This was accomplished by setting up a National Executive Committee on "Good Corporate Governance," made up of the Superintendent of Companies, the Superintendent of Banks and Insurance (SBS), both corporate supervisory and regulatory agencies in Ecuador, the Quito and Guayaquil Stock Exchanges, and several other private- and public-sector stakeholders. This Committee appointed the Quito Stock Exchange as the Technical Secretariat and, in January 2005, the CAGC was adopted.

Following the adoption of CAGC, in 2006 the IDB funded a project focusing on the promotion of the competitiveness and sustainability of Ecuadorian businesses. Specifically, the project aims to develop a demand for corporate governance practices in Ecuadorian enterprises and increase local capacity for implementing these practices. According to the 2006 donors' memorandum, Ecuador is increasingly recognizing the significance of corporate governance practices. However, enterprises such as family-owned businesses seem reluctant to apply such practices. Moreover, capital markets in Ecuador are a very small part of the financial system. According to the 2004 World Bank report and the 2006 U.S. Department of Commerce (DoC) Country Commercial Guide, the Ecuadorian capital markets are dominated by large national banks and, as of 2004, trading on the stock exchanges of Quito and Guayaquil mainly consisted of fixed-income government bonds, short-term commercial paper, bank obligations, and government debt. The DoC noted that privatization, public offerings by major Ecuadorian firms, and the development of private pension funds could help deepen the market.

The formation of Companies' and their operations are governed by the Companies Law, notes the U.S. DoC. The main types of companies in Ecuador comprise the corporation, the limited liability company, and branches of foreign companies. Corporations are the most flexible form of companies, providing limited liability for its shareholders and the possibility of unrestricted transfers of shares. The limited liability company is more restrictive and provides limitations on the transfer of shares. The shareholders' meeting is the supreme governing body of a corporation or LLC. The shareholders appoint a legal representative and may also appoint a board of directors with an elected chairman with special powers. Fnancial reporting requirements for corporate entities are prescribed in the Companies' Law of 1999. The 2004 World Bank report noted that the Companies' Law does not provide for any governance arrangement within the company to monitor the independent audit process on behalf of shareholders. However, per the requirements of the Companies' Law, shareholders must appoint a "comisario" at the annual general meeting of shareholders to supervise the management of the company.

Additionally, listed companies in Ecuador also follow requirements laid out in the Securities Market Law (LMV), according to the 2004 World Bank report. Empowered by the LMV, the National Securities Council (CNV) is the official securities market regulator and is responsible for "issuing the chart of accounts and accounting standards for market registrants" (p. 3). However, ensuring compliance with the LMV or the CNV regulations is delegated to the Superintendency of Companies (SCE). The Superintendency of Companies, therefore, has the authority to conduct inspections and impose sanctions on auditors. Banks and insurance companies adhere to separate financial reporting regulation. Governed by the General Law of the Financial System Institutions (LGISF) of 2001, banks, investment funds, savings and loans institutions must prepare their financial statements in line with the accounting requirements issued by the SBS.

The Quito Stock Exchange lists 114 enterprises and the volume traded on national markets in December 2005 represented approximately 10% of GDP. In its 2008 Doing Business report, the World Bank rates investor protection in Ecuador as being below the regional and the OECD averages. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three aspects 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). The 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 therefore, better investor protection. Ecuador scores 5.0 in the disclosure index, against a regional average of 4.2 and an OECD average of 6.4. It scores 0.0 in the Director Liability Index, against a regional average of 5.0 and an OECD average of 5.1; and it scores 7.0 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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Ecuador is the first country in the Andean region to adopt the CAGC as national standard. The CAGC was adopted in 2005 and constitutes a framework and compilation of policies, standards, systems, and guidelines based on the OECD's principles and the Latin American White Paper on Corporate Governance financed by CAF. It includes a set of systematically arranged basic rules, with 51 specific measures that define internationally accepted standards of corporate governance. According to the Ecuador chapter of a 2004 Global Corporate Governance Guide, in general, the enforcement of corporate governance regulations set out in the Companies Law is effective. Additionally, listed companies in Ecuador also follow requirements laid out in the LMV. Empowered by the LMV, the CNV is the official securities market regulator and, according to the 2004 World Bank report, it is responsible for "issuing the chart of accounts and accounting standards for market registrants" (p. 3). However, ensuring compliance with the LMV or the CNV regulations is delegated to the Superintendency of Companies. The Superintendency of Companies, therefore, has the authority to conduct inspections and impose sanctions on auditors. Overall, however, the information does not directly address Ecuador's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to the 2004 World Bank report, Ecuadorian law requires that shareholders appoint a "comisario", a traditional figure (with no professional title) in Latin American corporate law. Under the Companies Law, a comisario must be appointed at the annual general meeting of shareholders for a one-year period to supervise the management of the company. The comisaro's responsibilities include reviewing the balance sheet and profit and loss statement and present it to the shareholders' general meeting. The comisario must also report to the Superintendency of Companies any irregularities witnessed. The comisario has broad power to carry out his duties. However, this person can be dismissed anytime by the shareholders' meeting. As for banks, other financial institutions, and insurance companies, the SBS mandates that the comisario's report be issued by external auditors. The role of the comisario, as noted by the World Bank, is mostly redundant and is an inadequate substitute for a governance body in line with international corporate practices. Furthermore, the Companies Law does not provide for any governance arrangement within the company to monitor the independent audit process on behalf of shareholders.

The joint study by the Center for Latin American Monetary Studies and the World Bank (CEMLA/WB) noted that shares are issued by open stock companies that are controlled by the SCE or the SBS. There are two types of shares: common or preferred. Common shares, represented by securities, grant to their holders the same basic rights as to any other shareholder, as stated in the laws. Additionally, common shares provide preferential rights in the subscription of new paid-in capital and can be incorporated in fully negotiable preferential certificates. With regard to preferred shares, the CEMLA/WB report pointed out that these shares give special rights associated with dividend payments and in the event of the liquidation of the company, although, they do not give voting rights. Overall, however, the information does not directly address Ecuador's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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According to the 2004 Global Corporate Governance guide on Ecuador, "all clauses or agreements that eliminate or hinder the rights attributed by law to minority shareholders will be void" (p. 4). Furthermore, the Superintendency of Companies assists minority shareholders through administrative and financial controls and its supervision of legal formalities. However, serious disputes between shareholders and management must be heard before the courts. Although commercial arbitration is well developed in Ecuador, the report noted that this could delay resolution because not all judges have the technical expertise to resolve such issues efficiently. The report also pointed out that, in general, the corporate governance framework was well-developed. Overall, however, the information does not directly address Ecuador's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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There is insufficient publicly available information as to Ecuador's compliance with this principle.

Principle V: Disclosure and Transparency

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According to the 2004 World Bank report, the Companies' Law does not provide for any governance arrangement within the company to monitor the independent audit process on behalf of shareholders. Under the Law, auditors are appointed by, and must report to, the shareholders' general meeting. However, since neither the Law nor the Superintendency of Companies' regulation requires companies to establish audit committees, the process of appointing, monitoring, and renewing the external auditors' mandate is highly informal. For instance, companies are not obliged to invite auditors to attend the shareholders' general meeting to answer questions. However, management and shareholders representing at least 10% of outstanding stock may call upon the auditors to clarify any matter related with the fiscal year-end financial statements subject to the audit. The World Bank report, therefore, recommended that governance mechanisms within public-interest entities be established so as to ensure the transparency of the audit process, including the appointment and remuneration of independent auditors.

Under the Companies' Law, all companies incorporated in Ecuador are subject to the supervision of the Superintendency of Companies and must provide the Superintendency with their fiscal year-end balance sheet and profit and loss statement by the pre-specified deadline, according to the 2004 World Bank report. In the case of companies whose financial statements must be audited, the auditors must provide the Superintendency with a copy of their report no later than eight days following its issuance. Under the Companies' Law, a comisario must also be appointed at the annual general meeting of shareholders to serve a one-year term as supervisor of the company's management. The comisario's responsibilities include reviewing the balance sheet and profit and loss statement and presenting it to the shareholders' general meeting. The comisario must also report any irregularities to the Superintendency of Companies. The comisario has broad power to carry out its duties; but can be dismissed anytime by the shareholders' meeting.

With regard to the accounting framework, the World Bank noted that national companies follow the Ecuadorian Accounting Standards (NECs), which are based on the International Financial Reporting Standards (IFRSs). However, the national standards were found to be incomplete and the World Bank, therefore, recommended the adoption and mandatory application of IFRSs by all public-interest entities in Ecuador. Nonetheless, the information does not directly address Ecuador's compliance with this principle.

Principle VI: The Responsibilities of the Board

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There is insufficient publicly available information as to Ecuador's compliance with this principle.