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MONEY IS FLOWING into Latin America. Investment-grade, emerging market and high-yield investors are all looking to the region for assets and returns. Apart from a few weeks of outflows at the beginning of this year, the region’s equity and fixed-income markets have been flooded with money. So much so that currencies have risen, fears of currency wars have been voiced and governments have changed inward-investment policies.
The focus on Latin America has meant that companies have been able to generate interest from investors as never before. Roadshows for the lesser-known companies from the region generate audiences that the leading lights would have struggled to attract five years ago. Brazil’s Vale, is a good example. The iron-ore producer, again voted as the Latin American company with the second most convincing and coherent business strategy, announced its annual results on February 24 with simultaneous transmissions in Portuguese, Spanish and English broadcast via the company’s homepage. The spotlight shines brightly.
Perhaps Vale’s senior management could draw some comfort from the fact that reputations seem to be able to withstand a little criticism: Petrobras’s equity transaction in 2010 was far from universally popular with investors. Claims that the process was skewed against minority shareholders and that strategy was dictated by and in favour of the government (an accusation the company’s management strenuously rebuts) were widely reported and the transaction was certainly dilutative and damaged the performance of the share price. Petrobras’s capex for the next few years is $224 billion; the company just started the releveraging of its balance sheet with a $6 billion bond deal in January and already questions are being asked about whether it will need to issue more equity.
Lots of uncertainty and controversy. Still, this year the company ranked as the best managed is Petrobras. The company with the highest standards of corporate governance is also Petrobras. These results suggest Petrobras won the arguments, and perhaps that above all else investors love scale.
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“BBVA Group has always stuck to its principles, in terms of ethical values, transparency, corporate governance and risk policies” Angel Cano, BBVA |
Financial institutions are also being analysed more closely than before. As banks report strong performances backed by rapid consumer and corporate credit growth in the region, investors are looking more closely at the fundamentals. Angel Cano, president and COO of Banco Bilbao Vizcaya Argentaria (BBVA), whose Mexican bank Bancomer came second in the regional financial-sector rankings, says the analysts’ opinion is a welcome by-product of strong operational governance. Cano says: “Regardless of analysts’ opinion, being a well-managed company has benefits by itself, concerning performance indicators and prospects. BBVA Group has always stuck to its principles, in terms of ethical values, transparency, corporate governance and risk policies. And this has translated into adequate business practices, with anticipation and prudence as the main guiding principles. To give some examples: the intended developers’ market share loss in Spain in the pre-crisis period, the early adoption of evolved risk methodologies in Mexico based on expected loss, the nonexistence of toxic assets on our balance sheet or the optimization of our branch distribution network before the crisis outbreak.”
BBVA’s strategy is always evolving, responding to external and internal pressures: “The crisis has been a good stress test to demonstrate the strength of our governance and business model,” says Cano. “However, we constantly fine-tune and adapt our processes in the view of the current and future context. For instance, we are developing an enhanced asset allocation methodology or evolving our credit and structural risk methodologies and tools. The current and the new forthcoming regulation framework is only one of the key elements that condition our governance processes. But we consider many others, such as the macro environment, the competitive scenario, our asset allocation strategy or our risk policies. All of them must be embedded in the governance processes.”
Cano says his company’s strong performance in Latin America prompts new questions from analysts, with an emphasis that would not have been there in the recent past. “The questions in the past year have been focused on Spain, which only represents 33% of our total revenues. More specifically they were about the macro situation, financial system restructuring, developers’ exposure and risk indicators. Our response is that BBVA Spain has shown a much better performance than competitors in terms of net interest margin, costs and risks. And the group is also composed of other franchises with an excellent performance that are partially offsetting the impact of the crisis in Spain.”
Shortage of talent
As companies in Latin America grow they become increasingly internationalized and scrutinized. Cano says that one of his key challenges will be identifying the human resources needed for growth. Unemployment in the region is low and in some countries at structural levels. Also, the region’s companies are looking to expand internationally and are looking for senior managers with the skills and experience that can help drive this growth. Across the region, and across industries, companies are facing a shortage of talent. This means rising compensation levels, which in turn brings greater focus on remuneration from shareholders and analysts. Executive compensation consultants say the companies that are listed in this survey are typical of those facing this struggle to attract and retain key talent, and report that there is much greater interest in using their services.
Leonardo Salgado, director and leader of the practice for executive compensation for Latin America at Hay Group, says: “There has been an increase in interest on executive compensation in the region as a whole due to the growth of foreign investment in local companies through equity funds and venture capital and GDP growth rate in several countries such as Peru and Brazil. This leads to a higher demand for experienced professionals, therefore driving up compensation at these levels both in size, in terms of value, and in complexity of payment structures. In some countries, particularly in Brazil where the stock market is evolving at a fast rate and the number of listed companies increased significantly over the past five years, governance and compliance issues are being treated in a more structured way. The general concern within the region is about levels of compensation more than which methodology is used to set it.”
Executive recruitment firms throughout the region report a noticeable return of expatriates to the region. There are currently two main drivers of this trend: as the economy grows, so does the number of available management positions. Also an increasing number of companies are going international; therefore, executives with experience abroad might play an interesting role in this process. The chart also shows why there is an influx home – remuneration rates have rocketed and now base pay is higher in Brazil than in the UK, France, Italy or Russia. It is not far behind that paid in Germany and the US.
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The chart also shows that non-base pay remuneration in the region is often set more on short-term than long-term incentives. There are region-specific reasons why companies tend to favour short-term incentives (STIs). Some countries, such as Peru and Chile, have utilidad, a mandatory profit sharing that may represent up to 1.5 times the annual base salary. This has an impact, especially in some capital intensive industries such as metal and mining. In Brazil there is specific legislation that exempts profit sharing from social charges, which makes it cheap for companies to deliver compensation through these schemes. All of this drives up the STI element of the compensation schemes in comparison with Europe or the US.
Options
Latin America is not a mature market for long-term incentives, although it is common to find this kind of plan in subsidiaries of multinational companies where the HQ extends its remuneration strategies to local management. This kind of compensation is delivered mainly through stock-option programmes (over 60% of companies), followed by restricted stocks or phantom stock. Brazil is the exception in Latin America, as the stock market is growing fast and the number of listed companies has increased rapidly over the past five years, so the number of local companies offering long-term incentive programmes has increased rapidly over the past year.
“Five years ago, 35% of the companies in our database offered some kind of LTI for their local executives – these were mainly multinational companies,” says Salgado. “This number has increased to 60% and half of them are local companies.”
This trend has led to an increase in regulation. In Brazil, as from last year, all listed companies must disclose and explain their remuneration policies as well as disclose how much they are paying to senior management (similar to the disclosure process in the US). Other countries, such as Argentina, Chile and Colombia, are not at this level of disclosure, but it is likely to be just a matter of time. “As foreign investments increase and the number of companies going public increases in all markets, it is natural to assume that regulation increases,” says Salgado. “We may see these countries addressing executive compensation in a much more structured way.”
