The 2006 release of the new Securities Market Law and the revised version of the Mexican Corporate Governance Code, incorporating lessons learned from implementation of the original 1999 Code as well as international developments, bring Mexico a step closer to a well-developed corporate governance framework. Back in 2003, a Report on Standards and Codes by the World Bank benchmarked Mexico's observance of corporate governance against the Organization for Economic Co-operation and Development's Principles for Corporate Governance. According to the report and a report by the Institute of International Finance released the same year, major progress had been achieved in establishing a successful structure and culture for good corporate governance. However, both reports cautioned that real progress in Mexican corporate governance has to account for the concentrated ownership and control structure of many Mexican firms. The 2006 Securities Market Law strengthens the responsibilities of directors and boards for publicly traded companies. It addresses minority rights protections and emphasizes the independence of boards vis-a-vis the controlling shareholders. Its successful implementation will be crucial to lift Mexican corporate governance to a new level and broaden its investor base.
General Overview
There have been a number of reforms in the Mexican corporate governance framework in the last decade. They have been most comprehensively documented by a 2003 Report on Standards and Codes (ROSC) by the World Bank, which benchmarked Mexico's observance of corporate governance against the Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance, and by a report by the Institute of International Finance (IIF) in the same year. The IIF noted that "Mexico is at the forefront of efforts to improve corporate governance practices among emerging market countries" (p. 2) and complimented Mexican authorities, most notably the capital market regulator, the National Banking and Securities Commission (Comision Nacional Banacaria y de Valores, or CNBV), for working diligently to improve the corporate governance framework. In doing so the authorities cooperated with the Mexican Stock Exchange (Bolsa Mexicana de Valores, BMV) and leading Mexican business organizations to produce the first Corporate Governance Code for Mexico (Código de Mejores Practicas Corporativas) in 1999. A revised version of the Code, incorporating lessons learned from implementation of the original code and international developments, was released in November 2006. It particularly emphasizes the functions of the board and it includes a recommendation for company board's to issue codes of ethics and social responsibility.
Nonetheless, both the World Bank and the IIF assessments note that progress in establishing a successful structure and culture for good corporate governance has to account for the concentrated ownership and control structure of many Mexican firms, and, at least at the time of the assessments, weak enforcement of shareholder rights. As the IIF notes, traditionally, most large companies have been organized as business groups, which are conglomerates owned and controlled by families and/or consist of holding companies that invest in other companies characterized by vertical or horizontal integration. The resulting cross-shareholding between firms and the exchange of positions in boards of directors result in various interlocking directorates. Consequently, while members of the board may come from outside the corporate structure of the firm, they are not necessarily independent. The IIF cited several studies that indicated that adherence to the principles of the Corporate Governance Code was not commonly observed in the areas of board composition, independence of the audit committee, existence of a committee of compensation and evaluation, and disclosure of compensation schemes for executives. However, especially in the area of director independence, progress in promoting the inclusion of independent board members and establishing audit committees as part of firms' control functions was already under way at the time of the 2003 assessments, and has been further advanced since. This is especially due to the passage of the new 2006 Securities Market Law, which gives many corporate governance provisions the statute of law.
The Mexican legal framework is based on civil law. The two key laws affecting corporate governance are the Company Law (Ley General de Sociedades Mercantiles, or LGSM), and the Securities Market Law (Ley del Mercado de Valores, or LMV). The LGSM, enacted in 1934 and most recently amended in 1996, establishes basic company forms and shareholder rights. The LMV, which regulates public companies, was introduced in 1975, but major amendments went into effect in 2001. The new Securities Markets Law was enacted in 2006. According to the 2007 Financial Sector Assessment Program (FSAP) Update by the International Monetary Fund (IMF), the law changed the securities market framework in three broad areas. It expanded the CNBV's authority, it introduced significant changes in the corporate governance of publicly listed companies; and it created "two new corporate vehicles, designed to facilitate the ability of small and medium-sized companies to raise capital and transition to public listed company status" (p. 12).
More specifically, the new LMV intends to improve the regulation of information disclosure and minority shareholder rights. It also reorganizes and clarifies the duties and liabilities of the board of directors and the relevant officers. In doing so, according to Stolper, writing for the International Financial Law 2007 Global Report, "it incorporates standards that are more compatible to international practices, such as a duty of loyalty and a duty of care." Under the previous LMV Mexican public companies had to adopt specific amendments to their corporate structure, but they are now only required to amend their bylaws regarding their name, as all other changes applied by virtue of the LMV and do not need to be included in a company's bylaws. Also, Mexican committees now need to create at least one committee which acts as an audit and corporate practices committee. The committees have to consist of only independent directors (with the exception of controlled companies, which may have a corporate practices committee comprised of a majority of independent directors). The Board has to be comprised of, at least, 25% independent directors. Further, as Stolper notes, the role of the statutory auditor (comisario) has been taken over by the board of directors through the audit committee, the new corporate practices committee, or an external auditor.
Another area where progress has been made concerns the foundation of a director training organization. The 2003 World Bank ROSC had noted the absence of such an institution as a key missing ingredient in Mexico's corporate governance reforms. The Centre for Excellence in Corporate Governance (Centro de Excelencia en Gobierno Corporativo, or CEGC) was founded in March 2004. Its objectives are to provide board members and executives with information, methodologies and best corporate governance practices that will increase efficiency and transparency levels, facilitate compliance with existing regulations, and generate greater investor confidence to enhance their economic and social value. Since its foundation, according to the CEGC website, 3050 executives and directors have participated in 49 seminars in twelve cities.
The BMV is a member-owned, for-profit institution. The 2007 IMF update on its original FSAP notes that between 1995 and 2001, trading activity as well as the number of listed companies on the BMV declined. As the IMF notes, Mexico's equity market remains relatively small and illiquid, and is not a major source of financing for most companies. Among the eight largest economies in the Americas, relative to GDP, Mexico nonetheless has the second smallest stock market. After a number of compulsory delistings by the CNBV, the number of listings declined to 132 (155 listed stocks). The daily trading volume on the BMV is highly concentrated in a very small number of issuers. Four stocks (Telmex, AMX, Walmex, and Cemex) comprise approximately 50 percent of the primary equity market index (Indice de Precios y Cotizaciones, or IPC). Overall, the IMF notes, market capitalization of the BMV has grown from US$104 billion in December 2002 to US$236 billion at the end of 2005. Free float is limited and trading volumes are also low.
In its 2008 Doing Business report, the World Bank calculates investor protection in Mexico in 2007 as being equal to the OECD and above the regional average. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and 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). 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 better investor protection. Mexico scores 8.0 in the disclosure index against an OECD average of 6.4. It scores 5.0 in the Director Liability Index against an OECD average of 5.1 and 5.0 in the Shareholder Suits Index against an OECD average of 6.5.
The Principles
Principle I: Ensuring the Basis for an Effective Corporate Governance Framework
The capital market regulator is the CNBV. It is a supervisory arm of the Secretariat of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or -SHCP) and supervises banks and the securities market and enforces shareholders rights. The CNBV is headed by a 10-member Board of Governors. Five members, including the President of the Commission, are appointed by the SHCP, three members are appointed by the Central Bank, and the pension regulator and the insurance regulator each appoint one member. According to the 2007 IMF FSAP update, the CNBV has certain operational independence but the SHCP has broad supervisory responsibility over the CNBV, such as setting its annual budget, and the final authority over legal interpretations of the relevant laws.
The Mexican legal framework is based on civil law. The two key laws affecting corporate governance are the LGSM, and the LMV. The LGSM, enacted in 1934 and most recently amended in 1996, establishes basic company forms and shareholder rights. The LMV, which regulates public companies, was introduced in 1975, but major amendments went into effect in 2001. The new Securities Markets Law was enacted in 2006. According to the IMF's 2007 FSAP Update, the law expanded the CNBV's authority and introduced significant changes in the corporate governance of publicly listed companies.
Nonetheless, as both the 2003 World Bank and the IIF assessments note, progress in establishing a successful structure and culture for good corporate governance must account for the concentrated ownership and control structure of many Mexican firms, and, at least at the time of the assessments, weak enforcement of shareholder rights. As the IIF notes, traditionally, most large companies have been organized as business groups, which are conglomerates owned and controlled by families and/or consist of holding companies that invest in other companies characterized by vertical or horizontal integration. However, none of the available reports explicitly addresses Mexico's compliance with this principle.
Principle II: The Rights of Shareholders and Key Ownership Function
In its 2003 ROSC, the World Bank rated Mexico's observance with the sub-principles of Principle II as follows: "Basic Shareholder rights" and "Control Arrangements should be allowed to function" were rated as "Largely Observed," indicating that only minor shortcomings are noted, and that these do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Rights to participate in fundamental decisions," "Shareholder's Annual General Meeting rights," and "Disproportionate Control Disclosure," were rated as "partially observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. Finally, the sub-principle labeled "Cost/benefit to voting" was rated "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
The 2003 World Bank report made a number of recommendations. Rules blocking shares should be clarified. Voting procedures for all kind of investors should be made as simple as possible. Large transactions should require shareholder approval. To strengthen the rights of small shareholders, a small number of shareholders should be able to force resolutions onto the agenda and request a formal poll. A minimum interval should be established between first and second meetings. Legal provisions that define share types and rights should be simplified.
The 2006 Securities Market Law provisions give shareholders greater rights than previously. With 10% of shares, shareholders can appoint one director to the board, and call for extraordinary general meetings. With 5% of shares, civil lawsuits can be presented against directors and executives, and with 20% judicial opposition can be presented against annual general meeting (AGM) resolutions. At AGMs, shareholders must define the policies for the use of company assets in favor of related executives or directors as well as operations with related parties or amounts, the nomination of directors, and policies for internal auditing systems.
Principle III: The Equitable Treatment of Shareholders
In its 2003 Corporate Governance Country Assessment of Mexico, the World Bank rated Mexico's observance with the sub-principles of Principle III as follows: "Prohibit insider trading" was rated as "largely observed," indicating that only minor shortcomings are observed which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Equitable treatment of shareholders" and "Board/management disclose interests" were rated as "partially observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge.
The World Bank further explains that companies can issue multiple series of shares with different rights. However, all classes may participate in corporate profits. The report made a number of recommendations. In order to strengthen minority shareholder rights, the World Bank assessment team proposed the harmonization of existing thresholds at a level sufficient to allow minority shareholders to effectively exercise their rights. With regard to insider trading, it suggested that an exemplary insider trading conviction might reduce this practice in Mexico. The CNBV should develop disclosure of ownership and related party transactions as priorities in its monitoring of companies. At the same time the World Bank report complained that "although recent reforms are having an impact, investors cannot rely on the court system, as the legal process remains inefficient, slow, and sometimes corrupt. Arbitration is in its early stages" (p. 7).
Principle IV: The Role of Stakeholders in Corporate Governance
In its 2003 ROSC, the World Bank rated Mexico's observance with Principle IV as follows: "Access to Information" was rated as "Observed," indicating that the country has fully implemented the principle. "Legal Rights of stakeholder are respected," "Stakeholder Redress for violation of rights," and "Performance-enhancing mechanisms" were rated as "Largely Observed," indicating that only minor shortcomings exist, and these do not raise questions about the authorities' ability and intent to achieve full observance in the short term.
The World Bank explains that Mexican workers do not typically participate in management or sit on boards. The Federal Labor Law (LFT) created institutions to resolve conflicts between employees and companies. These are called Juntas de Conciliación y Arbitraje. The LFT also regulates environmental matters. Mexican Generally Accepted Accounting Principles (GAAP) require disclosures of environmental damage, and disclosures of environmental policy must be made in the annual report. Creditors are protected under the commercial bankruptcy law of 2000 (Ley de Concursos Mercantiles), which according to the World Bank "represents a significant improvement over the old bankruptcy code" (p. 8). The LFT entitles workers to 10 percent of corporate profits. Issuers may create benefit/compensation plans for employees through shares or share options, but these are not very common.
In its 2003 ROSC, the World Bank rated Mexico's observance with Principle V as follows: "Fair and timely dissemination" was rated as "Observed," indicating that the country has fully implemented the principle. "Disclosure standards" was rated as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Standards of accounting and audit" and "Independent audit annually" were rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the principle, practices and enforcement diverge.
The annual report must contain a section that includes a summary of the issuer's history, development, and description of its core business. The 2003 World Bank report notes that a "company must disclose details of its ownership structure, dividend policy, material risk factors, voting rights attached to different share classes and the process for changing voting rights, audit fees, information on retirement/pension plans, share distribution plans, and policies on risk management, including internal controls and going concern risks" (p. 10) In addition, it has to disclose the level of adherence to the Mexican Code of Best Practices in Corporate Governance.
In Mexico, basic accounting requirements are stipulated in the LGSM. Under the Securities Market Law, listed companies are required to prepare consolidated financial statements following the standards approved by the CNBV, which, in turn, requires application of the accounting standards approved by the national standard-setter. The CNBV has established procedures to review financial statements of the regulated entities in order to enforce compliance with accounting and auditing requirements. Under the Securities Exchange Law, the CNBV is empowered to impose sanctions for the violation of the reporting requirements. The 2003 World Bank assessment recommends that the CNBV increase its enforcement capability with regard to disclosure content, and continue its zero-tolerance policy toward late filings.
In its 2003 Corporate Governance Country Assessment of Mexico, the World Bank rated Mexico's observance with the sub-principles of Principle VI as follows: "Access to information" was rated as "Observed," indicating that all essential criteria are met without significant deficiencies. "Ensure compliance with law" was rated as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The sub principles "Acts with due diligence and care," "Treat all shareholders fairly," "The board should fulfill certain key functions," and "The board should be able to exercise objective judgment" were rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge.
Mexico has a single-tier board structure. An updated Mexican Code of Best Practices in Corporate Governance was released in November 2006. It particularly emphasizes the functions of the board and it includes a recommendation for company board's to issue codes of ethics and social responsibility. The 2006 LMV reorganizes and clarifies the duties and liabilities of the board of directors and the relevant officers. In doing so, according to Stolper's 2007 report, "it incorporates standards that are more compatible to international practices, such as a duty of loyalty and a duty of care." Mexican committees now need to create at least one committee which acts as an audit and corporate practices committee. The committees need to consist entirely of independent directors (with the exception of controlled companies, which may have a corporate practices committee comprised of a majority of independent directors). Further, as Stolper notes, the role of the statutory auditor (comisario) has been eliminated and been taken over by the board of directors through the audit committee, the new corporate practices committee, or an external auditor. The LMV states that failure to fulfilling the Duty of Care includes unjustified nonattendance to board meetings and failure to provide information relevant to decision making. Failure to comply with the duty of loyalty is penalized with jail time of 3 to 12 years if directors knowingly benefit one shareholder to the detriment of others, vote if they have a conflict of interest, or misuse confidential and relevant information.
Institute of International Finance, "Corporate Governance in Mexico: An Investor Perspective," May 2003. Available from The Institute of International Finance website. Accessed on March 21, 2008. (IIF 2003)
Organization for Economic Co-operation and Development, "White paper on Corporate Governance in Latin America," Paris, France: OECD, 2003. Available from the Organization for Economic Co-operation and Development website. Accessed on March 21, 2008. (OECD 2003)
International Monetary Fund, "Mexico: Financial Sector Assessment Program Update -- Detailed Assessment on the Implementation of the IOSCO Objectives and Principles of Securities Regulation," Country Report No. 07/168, Washington, D.C.: IMF, May 2007. Available from International Monetary Fund website. Accessed on March 21, 2008. (IMF 2007)
World Bank, "Report on the Observance of Standards and Codes: Corporate Governance Country Assessment Mexico" September 2003. Available from the World Bank website. Accessed on March 21, 2008. (WB 2003)
National Banking and Securities Commission´s Law, 1995 -- Ley de la Comision Nacional Bancaria y de Valores, 1995 (last published reforms as of 2007) (in Spanish only)
Lara, G., "Estado actual del Gobierno Corporativo en México [Current State of Corporate Governance in Mexico]," Instituto Iberoamericano de Mercados de Valores, 2006. Available from Rubio Villegas law firm website. Accessed on March 24, 2008. (Lara 2006)
Stolper, A., "The Latin Approach," International Financial Law Review Global Report Supplement, 2007. Available from IFLR website. Accessed on March 21, 2008. (Stolper 2007)
World Bank, "Report on the Observance of Standards and Codes: Accounting and Auditing - Mexico," March 2004. Available from the World Bank website. Accessed on March 21, 2008. (WB 2004)
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