Equity listings in Uruguay are minimal. Although it has two stock markets, only 14 companies have registered securities with the Central Bank (BCU), 3 of which are not traded on either exchange. In 2005, the World Bank published a Report on Observance of Standards and Codes (ROSC) on Corporate Governance in Uruguay. The report notes that poor corporate governance in Uruguay has been one of the contributors to the instability and poor functioning of markets during the 2002 financial crisis, due to a general lack of confidence in the proper functioning of corporate control, especially regarding the banking sector. Overall, corporate governance falters due to a lack of transparency; no institute or code governing corporate governance; overlap and duplication amongst regulatory authorities; and the inability of the Capital Markets and AFAP Control Division of the Central Bank (AMV) and courts to enforce compliance. Since the 2002 financial crisis, Uruguay has experienced reasonable financial and economic stability, providing an adequate foundation for the deepening and growth of capital markets. To restore and further strengthen capital markets, Uruguay requires a strong set of corporate governance and investor protection measures. Efforts to advance the governance and efficiency of the state-owned and financial sectors will also contribute to the development of financial and securities markets.

General Overview

In 2005, the World Bank conducted a Report on Observance of Standards and Codes (ROSC) on Corporate Governance in Uruguay. The main conclusion of the report is that poor corporate governance is a cause of the instability and weak performance of the capital markets. The 2002 financial crisis was, in part, caused by the insufficient internal controls of banks and lack of transparency, allowing the occurrence of self-dealing by controlling shareholders. As a result of decreased confidence in the private sector, equity listings are minimal. Although Uruguay has two stock markets, only 14 companies have registered securities with the Central Bank (BCU), 3 of which are not traded on either exchange. In addition, 27 companies offer bonds and 28 offer certificates of deposit. Listed securities receive tax exemptions. Before 2002, Uruguay experienced a relatively active market of fixed income securities, but after "exchange rate instability and a massive default on payments reduced the value of bonds from $505 million to $185 million" (p. 8) the private sector confidence decreased. The World Bank's key recommendations are to improve disclosure and transparency, financial intermediation and raising awareness on the costs and advantages of corporate governance and capital market issues. The International Monetary Fund (IMF) reported in 2006 that improved corporate governance and disclosure practices would encourage local capital market development; and that the new draft law on capital markets would improve the legal framework. The World Bank/IMF joint Financial Sector Assessment published in 2006 observes that the draft law aims at improving the autonomy and accountability of the BCU by focusing on price stability and regulation and supervision of the payments and financial systems.

According to the 2005 World Bank report, recent improvements in Uruguay's financial and economic stability provide for an adequate basis for capital markets deepening and growth. A solid set of corporate governance and investor protection measures are now essential to recovering and furthering capital market development, private sector progress, state-owned enterprise (SOE) efficiency improvements, financial sector sophistication, and increased access to external capital. "Improving corporate information, strengthening institutions, and training for boards of directors and corporate executives are the key challenges to improving corporate governance and developing capital markets" (p.1). The report further notes that disclosure standards, particularly for listed companies and financial firms, are strong; however improvement is required in ownership transparency and related party transaction reporting. Although international accounting and auditing standards have been introduced, compliance is unreliable. "In the past couple of years, BCU has forged a significant improvement in the availability of audited financials for issuers and banks, though other financial intermediaries and market operators (e.g. brokers) are lagging behind" (p.2).

The World Bank observes in its 2005 report that in Uruguay "boards play a secondary role in governance because there is a clear dominance of the majority or controlling shareholder over the appointment of the board, the management of the company and all relevant corporate decisions" (p. 2). In addition, the same report noted that "there is no mechanism such as cumulative voting or proportional representation that allows minority shareholders to have a voice and representation in the governance of the corporation" (p. 6). Approval of decisions on modifications of the bylaws, mergers and changes in capital occurs at extraordinary general shareholder meetings (EGMs). Although international best practices suggest that sales of major corporate assets be Annual General Meeting (AGM)approved, in Uruguay they are the responsibility of the board. Poor organizational structure prevents the boards from effectively controlling conflicts of interest and ensuring that deals occur at arm's length. Shareholders may even fail to play a role in authorizing very large deals.

The AMV's greatest accomplishments include the improvement of disclosure and the progress made in broker reporting notes the World Bank. However, the World Bank also reports that the AMV is limited by weak jurisdiction and lack of resources and training. Meanwhile, the two stock markets are self-regulating which creates a conflict of interest. Consequently, the quality of issuers and financial intermediaries is low. The BCU is autonomous and has greatly improved banking supervision with the passage of Law No. 17.613 on the protection of bank savings. Although the Companies Law No. 16.060 provides for the existence of a company supervisory board, in practice, the body has little agency power. Court decisions are unpredictable due to the lengthy legal process and the limited training of judges (2005).

Regarding the legal framework for corporate governance, the primary statute that regulates companies is the Companies Law (Ley de Sociedades Comerciales) No. 16,060 of 1989. Other laws include the Law on Banking Secrecy, the Bankruptcy Law, a new tender offers regulation (OPAs), tax regulations, the Competition Law and a law on firing employees (Ley de Fuero Sindical). Companies must register with the BCU to issue securities and are governed by the Securities Market Act (Ley de Mercado de Valores) No. 16,749 of 1996 and BCU norms. Listed firms are regulated by the rules of the stock exchanges, essentially equivelant to the BCU registration rules.the World Bank 2005 assessment reports that "detailed regulations have been issued on AFAPs (pension funds), but not on trust funds, investment funds and especially brokers, who remain in need of further and tighter regulations. Certain regulations curtail general conflicts in securities markets, such as the ban on pension funds to manage bank funds directly, as well as the ban on banks and insurance companies to invest in equity. However, there are insufficient conflict of interest provisions for funds, asset managers, analysts, and brokers; e.g. the law does not regulate how banks should carry out brokerage or asset management activities. There is no rule on disclosure of voting policies by institutional investors. Market participants note the negative effect of the lack of broker regulation, supervision and reporting, in terms of the confidence in the market by potential investors. By law, broker transactions are reported on a monthly basis, on paper, to the respective stock exchange only. Such limited observability of broker activity also prevents insider trading control, as well as control over brokers 'churning' deals" (p. 4).

The World Bank recommendations for future development are "(1) creation of a strong securities regulator as a basis for a dynamic capital market; (2) continued improvement of the disclosure regime for financial market participants; (3) amendment of the Corporate Law 16.060 to enhance company access to finance and protect shareholders; (4) improvement of the functioning of corporate boards; (5) strengthening the company registration and reporting systems; and (6) re-vamping the securities framework to spur capital markets development" (2005, p. 5).

The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investment Protection Index 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 indexes vary 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. Uruguay scores 3 in the Disclosure Index, against a regional average of 4.3 and an OECD average of 6.3. It scores 4 in the Director Liability Index, against a regional average of 5.1 and an OECD average of 5.0 and 8 in the Shareholder Suits Index against a regional average of 5.8 and an OECD average of 6.6.

The Principles

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

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In its 2005 assessment, the World Bank rated the sub-principles of Principle I concerning the impact on overall economic performance, market integrity and the incentives it creates and the legal and regulatory requirements as "partially observed" and the sub-principles concerning the division of responsibilities and authorities as "materially not observed". The same report noted that "corporate governance is not widespread" (p. 8). Overall, corporate governance falters due to a lack of transparency; no institute or code governing corporate governance; overlap and duplication amongst regulatory authorities; and the inability of the AMV and courts to enforce compliance.

The same assessment observes that poor corporate governance is caused by the instability and weak performance of the capital markets. The 2002 financial crisis was, in part, caused by the insufficient internal controls of banks and lack of transparency, allowing the occurrence of self-dealing by controlling shareholders. As a result of decreased confidence in the private sector, equity listings are minimal. A few of the World Bank's key recommendations are improving disclosure and transparency, financial intermediation and raising awareness on the costs and advantages of corporate governance and capital market issues.

Principle II: The Rights of Shareholders and Key Ownership Function

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The World Bank 2005 assessment rated the four sub-principles pertaining to basic shareholder rights, participation in fundamental corporate changes, shareholders being informed of shareholder meetings rules and shareholders consulting with each other as "partially observed." The sub-principles concerning the degree of shareholders control over capital structures and arrangements, the efficient and transparent function of capital structures and arrangements and the efficient and transparent function of corporate control are ranked as "materially not observed." The same report also noted that "There is no mechanism such as cumulative voting or proportional representation that allows minority shareholders to have a voice and representation in the governance of the corporation" (p. 6). The World Bank recommendations, in order to protect shareholders rights, are the introduction of proportional representation rules for election of directors and the reformation of a variety of AGM processes to ensure the inclusion of all shareholders in the decision-making process.

Principle III: The Equitable Treatment of Shareholders

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In its 2005 report, the World Bank rates the sub-principles of Principle III concerning the equal treatment of all shareholders as "partially observed." The sub-principle dealing with the prohibition of insider trading was rated as "materially not observed." Consequently, one of the Bank's recommendations was to "regulate insider trading, including blackout periods, the definition of an insider, disclosure, and sufficient fines. Eliminate current penalties on companies, for the transgression of their insiders, e.g. insider trading penalties include suspension or cancellation of the issuer rights to make public offerings" (p. 7).

Principle IV: The Role of Stakeholders in Corporate Governance

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The 2005 World Bank report rates the sub-principle concerning stakeholder's opportunity to obtain effective redress as "largely observed," the two other sub-principles regarding respecting stakeholders' rights as "partially observed," the sub-principle concerning access to information as "materially not observed" and the sub-principle pertaining to the insolvency framework and creditor rights as "non observed." The World Bank suggests that although the law protects employees, a greater effort is needed to raise awareness of corporate responsibility and stakeholder issues. Creditors are protected under the law; however, prolonged judicial proceedings limit their effectiveness.

Principle V: Disclosure and Transparency

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In the 2005 World Bank assessment, the sub-principles of Principle V concerning quality of standards of accounting, independent annual audit and channels for disseminating information are ranked as "partially observed" and the assessment ranked the sub-principles concerning disclosure information, accountability of auditors and an effective approach that addresses and promotes the provision of analysis as "materially not observed." There have been large improvements in the disclosure regime; however, ownership transparency and related party transaction reporting require strengthening. The World Bank recommendations include the availability of ownership disclosure for issuers, financial intermediaries and economically important entities, up to the ultimate owner level. Suggestions to improve non-financial reporting, the timely availability of disclosure and ease of access include to mandate the presence of an external auditor at AGMs, mandate the inclusion of company objectives and a management discussion in the annual report, assure quality financial statements on its website and publish annual reports online.

Principle VI: The Responsibilities of the Board

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The 2005 World Bank assessment ranked the sub-principles of Principle VI concerning board members behavior and access to information as "partially observed." The sub-principles dealing with the fair treatment of shareholders, ethical standards, fulfilling certain key standards and exercising objective independent judgment ranked "materially not observed." The same assessment also noted that in Uruguay, "boards play a secondary role in governance" (p. 2) because the majority or controlling shareholder dominates board appointments, the management of the company and all relevant corporate decisions. Besides the-executive directors, members tend to be uninformed. The World Bank recommends capacitation and training for directors and executive management to raise awareness of corporate governance issues and encourage more board activity. New laws require auditing committees for banks and that issuers maintain internal control bodies.