Following the global financial crisis, institutional investors have been under an increasingly intense spotlight concerning their role – or absence – as active and informed shareholders. The corporate governance failures of boards as well as shareholder oversight that helped contribute to the crisis have triggered a renewed focus not only on the role that institutional investors may play in supporting better governance practices, but also on the policy and regulatory framework that may facilitate or encourage such a role.
Strengthening Latin American Corporate Governance: the Role of Institutional Investors reflects the priority of the Latin American Roundtable on Corporate Governance to encourage the emergence of active and informed owners as an important lever for influencing better governance in the region. It draws upon both internationally recognized policy guidelines and best practices, starting with the OECD Principles of Corporate Governance, and region and country-specific work, including the Roundtable’s 2003 White Paper on Corporate Governance in Latin America and 2007 report, Institutional Investors and Corporate Governance in Latin America: Challenges, Promising Practices and Recommendations. It has been developed through a three-year process of Roundtable consultations and research in a range of Latin American countries, including Argentina, Brazil, Chile, Colombia, Mexico and Peru.
The importance of institutional investors in promoting good governance
Chapter 1 describes the importance of the role of institutional investors in promoting good corporate governance in the companies they invest in, particularly in the Latin American context of concentrated ownership and often illiquid markets. The chapter refers to leading international initiatives, conclusions and consensus recommendations that provide a starting point for Latin American consideration of this subject, such as those set out in the White Paper on Corporate Governance in Latin America (2003), OECD Principles of Corporate Governance (2004), the Corporate Governance Approach Statement by Development Finance Institutions (2007), the International Corporate Governance Network’s Statement of Principles on Institutional Shareholder Responsibilities (2007), and the OECD’s Corporate Governance and the Financial Crisis: Conclusions and Emerging Good Practices to Enhance Implementation of the Principles (2010).
The Latin American context
Chapter 2 reviews Latin American market and institutional investor (II) characteristics to establish the context for their role in corporate governance. It traces economic and capital market developments in Latin America over the last decade, describing the size, liquidity and growth of Latin America’s largest market economies, and their relatively low levels (with the exception of Brazil) in comparison to more developed OECD countries and many other emerging markets. The chapter also describes the dominant role played by pension funds among IIs in many Latin American countries, and the constraints and incentives they face in investing in listed companies. The chapter then describes specific legal and regulatory approaches taken in different Latin American countries to encourage and enable IIs to responsibly exercise their ownership rights and promote good corporate governance in the companies they invest in, along with market, regulatory and cultural barriers for IIs to play that role.
Recommendations to strengthen policy and good practices
Chapter 3 sets out policy and good practice recommendations and annotations for policy-makers and regulators (in bold) and for the private sector (in italics) across 11 sub-topics: 1) Encouraging more active involvement of institutional investors (IIs); 2) Distinguishing better governed companies for investment purposes; 3) Formalizing and disclosing II policies related to corporate governance of investee companies; 4) Exercising ownership rights in portfolio companies; 5) Voting at general meetings of shareholders; 6) Encouraging communication between IIs and investee companies; 7) Encouraging communication among various IIs; 8) Improving the functioning of boards of directors; 9) Strengthening the accountability of management; and 10) Addressing II internal corporate governance issues; 11) Exiting from the investment.
Additional steps: strengthening market forces
Chapter 4 sets out policy and good practice recommendations and annotations for policymakers and regulators (in bold) and for the private sector (in italics) on steps to strengthen market forces that would encourage or enable an effective institutional investor role in corporate governance. Recommendations address the role of direct regulation versus selfregulation, the media, credit rating agencies, corporate governance and proxy advisory services, the benefits of establishing II associations, and of supporting effective dispute resolution mechanisms.
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