Executive summary

This review assesses Costa Rica’s corporate governance framework for both listed and state-owned enterprises and Costa Rica’s ability and willingness to implement the G20/OECD Principles, SOE Guidelines and the Guidelines on Anti-Corruption and Integrity (ACI) in SOEs. While challenges remain, Costa Rica has responded to most of the prioritised concerns raised by the OECD over the course of the accession review process.

Costa Rica has closely aligned its governance regulations for listed companies with the OECD/G20 Principles. However, its equities market lacks sufficient size and liquidity to attract active trading. The equities market is small both in nominal terms and as a percentage of GDP. Trading is concentrated mainly in a single company and, in most years, some of its 10 listed companies have no trading activity at all. Banks and financial intermediaries play a greater role in financial intermediation.

The securities supervisor (SUGEVAL) and listed companies have co-operated in developing proportional approaches to implementing Costa Rica’s new Corporate Governance Regulation, which is having a positive impact on governance practices. The regulation is modelled after OECD practice and is being implemented using a risk-based supervisory approach.

Costa Rica’s 28 SOEs play a far greater role in the economy than listed companies and pose greater governance challenges. Better governance practices are needed for SOEs to perform sustainably. Improvements in the governance of SOEs could yield an increase of as much as 1.1% of GDP per capita while the enhancement of competition and the creation of a level playing field could improve GDP per capita by 0.5%, according to one assessment.

Regarding the overall effectiveness of the corporate governance framework, Costa Rica is in line with the G20/OECD Principles, which call for a framework that promotes transparent and fair markets, and the efficient allocation of resources, and which is consistent with the rule of law and supports effective supervision and enforcement.

Regarding the enforcement of shareholder rights and the equitable treatment of shareholders, Costa Rica is aligned with the core OECD principle. Shareholders have the opportunity to participate effectively and vote in general shareholder meetings. The framework for the supervision of related party transactions is in place. There are norms regulating conflicts of interest, and both insider trading and market manipulation are prohibited. Some weakness was seen in minority shareholder protection, though recently improved.

While listed companies comply with International Financial Reporting Standards (IFRS), SOEs fall short. All listed non-financial companies must report according to IFRS. Listed financial firms must comply with current IFRS beginning in 2020, with certain exceptions phased in by 2024. The same deadline applies to financial SOEs. Amongst non-financial SOEs, three SOEs prepared 2018 statements according to IFRS of which two received an unqualified (positive) opinion from their external auditors and one received a qualified (negative) opinion. The remaining non-financial SOEs report according to national standards. The significant number of negative audit opinions in SOEs is a concern.

With respect to the separation of the state’s role as owner versus regulator, there is no clear separation between commercial and policy objectives within SOEs. The separation of the roles of owner versus regulator is more apparent with respect to market regulation of the telecommunications and financial sectors. However, in SOEs, policy objectives often take primacy over commercial objectives. A stronger shareholder perspective is expected to emerge with the establishment of Costa Rica’s Presidential Advisory Unit for SOE oversight in 2018. The unit issued an ownership policy in 2019, which expressed Costa Rica’s commitment to bringing SOE governance in line with good practice. The unit issued a first aggregate report on the SOE sector and plans to develop further guidance on governance policies and practices.

Regarding ensuring a level playing field between state-owned and private enterprises, there are many distortions in the competitive landscape in particular in the financial sector. The recent adoption of a bill on deposit insurance for banks represents a step towards levelling the playing field. Furthermore, the government has submitted draft legislation to reform the Procurement Law to achieve greater efficiency and competition in public procurement. However, significant differences remain.

Regarding the recognition of stakeholder rights, Costa Rica is largely aligned with this core principle. The rights of corporate stakeholders are set down in labour, insolvency, shareholder, consumer and environmental protection laws, and banking legislation. Stakeholders may seek recourse through the courts though a significant weakness is the slowness of the judicial system. Legislation has been proposed to modernise the insolvency framework.

Regarding the duties, rights and responsibilities of boards, laws and regulations for listed companies are consistent with the G20/OECD Principles, while SOE boards’ performance has been variable and has potential to improve. Scandals and recent fiscal reforms generated greater awareness of the importance of SOE governance, which increased the government’s commitment to strengthening their boards, including through initiatives to strengthen SOE board composition and practices.

Costa Rica reports that its policy framework is aligned with the recommendations of the ACI Guidelines and that it is committed to improving anti-corruption and integrity standards in its SOEs. The “Cementazo” scandal emerged in mid-2017, featuring allegations of corruption in the Bank of Costa Rica, abetted by weak governance practices. It revealed the vulnerability of SOEs to corruption and the importance of strengthening boards and their capacity to oversee internal controls, and raised awareness of anti-corruption and integrity issues.

While challenges for listed companies remain, far greater attention is warranted in the SOE sector given its relative size. Despite establishing many remedial laws and institutional structures, this report recommends that Costa Rica take further steps to reduce risks and unlock the potential of stronger SOE performance. Priorities include fully implementing IFRS, establishing and monitoring financial and non-financial performance objectives, developing a consistently applied policy concerning information confidentiality, enacting pending legislation related to public procurement and a number of measures to further strengthen the composition and functioning of boards. Additional recommendations include corporatising and streamlining SOE legal and corporate reforms, and defining, assessing and reporting the costs of achieving public service objectives for each SOE

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