The pressure on regulators, industry bodies, and managers to improve practices has increased. Dominic O’Neill reports.
THE FINANCIAL CRISIS has exposed severe shortcomings in risk management and corporate governance worldwide. At times like this, with employees being laid off in thousands, chief executives and finance heads at corporations do not receive the kind of media praise they enjoyed in the boom.
Having withstood the credit crunch and the recession better than other parts of the world, Latin America is one region where the reputation of managers at banks and corporations has held up relatively well. Corporate management standards are improving in the region, and the financial crisis around the world as well as in Latin America might have given extra impetus to this.
Sandra Guerra is the founding partner of Better Governance, a São Paolo-based consultancy dedicated to promoting improved corporate governance. She points to the losses some Latin American corporations made in derivatives during the months of currency volatility following the collapse of Lehman Brothers.
In Latin America the brunt of such losses since the crisis has been borne by corporations outside the financial sector. After the collapse of Lehman Brothers, corporations in Brazil suffered derivatives losses estimated at $25 billion. In Mexico, losses reached $15 billion. Such events, according to Guerra, have convinced more Latin American corporations of the need to do more to improve managerial processes and checks. “The market is more aware of the need to have a robust system of managing risk,” she says.
No theories
Guerra says the financial crisis impinged on revisions to corporate governance regulations and guidelines being designed across the region. Such changes were already being prepared in Brazil and Chile when the financial crisis broke. But as Guerra says, the effect of weak corporate governance and risk management had been dramatically demonstrated to regulators and industry bodies thanks to the crisis. “People don’t need to theorize about the dangers of bad governance practices anymore,” says Guerra.
In Brazil, corporations have had to comply with new requirements since January on the regularity of disclosure, and on the minimum extent to which information is freely available to shareholders. Some listed companies in Brazil might soon be required to increase the number of independent directors on their boards. The Mexican authorities also introduced new, more detailed guidelines for corporate disclosures following the default of supermarket chain Comerci, which had made big losses in the derivatives market.
As in other parts of the world, questions about executive remuneration and incentives have been raised in Latin America, specifically regarding the extent to which long-term rather than short-term success is rewarded. But Latin American economies and financial systems have sometimes proved more versatile than their western counterparts over the past few years. Management practices at some Latin American corporations also look far more advanced than at most corporations in more developed centres.
 |
|
|
“To us transparency is an investment, not a cost”
Jorge Londoño, Bancolombia |
A good example of this might be what is known as the ‘bonus bank’ at Colombia’s biggest lender. Employees at Bancolombia have bonuses paid into a bank account from which they can withdraw no more than one-sixth of their balance over a six-month period. According to Bancolombia’s president, Jorge Londoño, the bank can claw back bonuses from employees if their work proves negative to the bank’s business.
“The bonus system is based on the sustainable creation of value, not in a single business or at a single point of time,” says Londoño. Most of all, Londoño points out that the system was created in 2000 – many years before the notion that bankers might be being over-compensated for short-term success came to the fore in such financial centres as London and New York.
Bancolombia’s increasing efforts to develop its codes on corporate governance and transparency date from around the time it listed in New York, in 1995. But practices are constantly evolving, according to Londoño. Perhaps as a result, Bancolombia has stormed up the rankings in Euromoney’s poll of Latin America’s best-managed companies.
Last year analysts voted Bancolombia to have the third most useful and informative corporate website in the region. This year it retains that slot, as well as its top ranking among companies with the most convincing and coherent business strategies in Colombia, and in the region’s financial sector.
In 2010 Bancolombia enters the top five in the region for corporate governance standards and the transparency of its accounts. Bancolombia’s senior management are voted the most accessible in the region.
“To us transparency is an investment, not a cost,” says Londoño. “We do it out of conviction, and we have invested a lot in maintaining transparency. We provide as much information to the market as we can about our management, our strategy, and other important matters.”
Petrobras keeps top spot
There are other examples in Latin America of developments that have led to improvements in corporate management over the past few years – and that have better placed the region to withstand the crisis. São Paolo’s Novo Mercado is a case in point. Access to this section of Latin America’s biggest exchange, the Bovespa, is dependent on a firm voluntarily adopting higher standards of corporate governance than those required by law.
Although Novo Mercado was launched in 2000, entries to Novo Mercado started to come with more rapidity after 2004. With Novo Mercado often performing better than the rest of the index, the scheme has since been tangible proof to other corporations of the benefits of good corporate governance, according to Guerra. “Novo Mercado changed the environment of corporate governance in Brazil,” she says.
Even so, one of the requirements for access to Novo Mercado is that corporations cannot restrict or dilute shareholders’ voting rights (in other words they must have a one-share, one-vote policy). As it does not have such a policy, Petrobras, Latin America’s biggest company, is not included in Novo Mercado.
That the Brazilian state still has a controlling stake in Petrobras means that some observers still pick holes in the oil company’s corporate governance standards. Dilma Rousseff, Petrobras’s chairwoman, is also Brazilian president Lula da Silva’s chief of staff, as well as the presidential candidate for the ruling party at the next election. Some therefore question her ability to balance so many roles, and wonder whether her devotion to Petrobras might be compromised.
Still, Petrobras’ minority shareholders enjoy representation on the board. Respondents to Euromoney’s survey deem Petrobras good enough for it to overtake Vale, Brazil’s largest mining company, in the ranks of those corporations with the highest standards of corporate governance in Latin America (Brazil’s largest lender, Itaú Unibanco, followed Vale to take the third spot for best corporate governance). Indeed, Petrobras won the top spot for the second year in a row for companies that analysts thought had improved most in terms of corporate management (Brazilian lenders Alfa and Banco do Brasil were respectively second and third most improved in the region).
Respondents to Euromoney’s survey think Petrobras has the most convincing and coherent business strategy for the second year running. Vale worked its way up from fourth to second in the rank of companies with the best strategy. Itaú Unibanco fell from second to third. Steel producer Gerdau and retailer Wal-Mart de México came equal third in this category.
The vote of confidence in Petrobras’s strategy is especially important given the company’s capital expenditure costs of about $100 million a day. Its strategic focus on organic growth through exploration around Brazil rather than through acquisitions, says Almir Barbassa, Petrobras’s chief financial officer and head of investor relations, has been validated by the size of its oil discoveries. “We know the geology in Brazil better,” says Barbassa.
He adds: “Being successful in exploration is the key thing for an oil company,” Since 2003 the company has discovered more than $10 billion-worth of oil in Brazil. This might be partly a matter of luck, but this is also a well-run company, with a good strategy. Another strong point of Petrobras’s business strategy, according to Barbassa, is its increasing diversification into renewable energy sources.
Barbassa says projects at Petrobras often start at operational level. So employees who notice opportunities for business improvement are encouraged to present their ideas to their supervisors, from where the idea can work its way up the ranks in a standardized approval process. Moreover, while many oil firms hunt around desperately for engineers, Petrobras’s in-house training operation educates tens of thousands of people every year.
The firm is creative in the ways it searches for finance too, looking at many different avenues, including, for example, China; it attracted $10 billion last year from China Development Bank.
The firm avoids losses from hedging derivatives against commodity-price volatility, according to Barbassa, by using simpler methods of risk management. Most importantly, he says, it keeps a close watch on its clients, and keeps down its production costs. It works on a level where profits are gained if the price of oil is between $35 and $40, he says.
