Structure and Role of the Directors and How the Board Has Evolved in Mexico

Introduction
Most companies in Mexico are family businesses just like is the case in most of the developing world. Legally, companies in Mexico must have either a collegiate or a unitary board structure. The countries General Law of Commercial Companies states that a limited company must have either a board of managers or an official sole manager, and that a stock corporation must have either a board of directors of an official sole director (Morales-Barrón). The same law states that a publicly-traded firm has to have a CEO (chief executive officer) and a board of directors. The board functions primarily through committees of directors dealing with various corporate and audit functions. The head of the board is almost always a chairperson, and the board members are appointed by shareholders in special shareholder meetings. Boards often appoint a treasurer and a secretary. This work looks at the structure and role of directors and how boards have evolved with time in the state of Mexico.
History and explanation
Most large firms in Central and South America are structured in the form of business groups. Business groups are big companies that are majority-owned or fully-controlled by families or small groups of investors. Most business groups have several companies that have both horizontal and vertical links. They can, therefore, diversify risk, earn monopolistic profits, reduce operation costs, and take advantage of economies of scale (Ramos, 3). Some of the characteristic features in business groups include exchanging positions board positions and cross-shareholding between the member companies. Furthermore, it is regular to find financial institutions such as banks being members of business groups.
Business groups are particularly common in countries with poorly developed financial markets. They are also common in countries where public offerings are only a tiny fraction of total company capital. Many economists believe that business groups are products of underdeveloped legal systems in which small creditors and shareholders do not have a lot of protection. The big and powerful investors prevent capital markets from growing in such countries (Rocha, 291-306). The reason why this is the case is that the rent expropriation capabilities of the big and powerful shareholders decrease interest in minority shareholders participating.
Even the big Mexican companies have big shareholders not only because they are traditionally family-owned with families controlling large stakes but because they typically issue shares that have no voting rights (Ramos, 3-4). Such shares, alongside the utilization of pyramids, allow large shareholders to continue exercising full control of business groups while maximizing their investments. From the above, it is clear that Mexican business groups only give small shareholders and stakeholders monitoring rights while the big stakeholders retain most rights.
The institutional investors - organizations which invest in firms, e.g., endowment funds, mutual funds, investment companies, pension funds, depository institutions, and insurance companies – in Mexico include domestic and foreign pension funds, brokerage houses, banks, insurance firms, private equity firms, and mutual funds (Banco Mundial, 15). These investors tend to acquire minority stakes available in the market and become passive shareholders.
Structural Evolution of the Corporate Structure
In the preceding ten years, Mexico has tried to reform its corporate governance system through the following steps:
· Reforming federal laws that combat money laundering, tax evasion, and corruption.
· Reforming the Federal Criminal Code and the National Code of Criminal Proceedings to introduce criminal liability for corporations.
· Reforming the Mexican private sector to formalize business.
· Creating an improved anti-corruption system coordinates government agencies in the detection, prevention, prosecution, and punishment of corruption (Machuga and Teitel, 1-13; Morales-Barrón).
The federal government has also, over the years, tried to use various means to minimize and eliminate the influence and participation of criminal organizations in the formal Mexican economy.
Perhaps one of the most significant acts to reform the Mexican corporate sector in recent years was enacting the General Law of Administrative Responsibilities in 2017. The law introduced a list of acts considered corruption. The list included collusion in public tenders, influence peddling, and bribery (Morales-Barrón). The law was amended in 2018 after the Financial Action Task Force – a multi-agency entity tasked with the drafting and promoting sound financial policies against terrorism financing and money laundering – evaluated it and found it wanting. The report noted that the country did not have a robust system that could allow authorities to quickly access and review accurate information about the ownership of firms and the real shareholders behind them. The amendment of the General Law of Administrative Responsibilities means that firms now have to put a notice on a Ministry of Economy website when they transfer or register:
· Limited company equity quotas (Morales-Barrón). An individual with a legitimate interest can check the registry book of partners that is maintained by administrators who are responsible for its accuracy.
· Stock corporation shares. The Economic Ministry has to protect the privacy of shareholders in all notices they publish. For this reason, they must only display the information that administrative and judicial authorities require and not the details that can be used to identify the shareholders (Article 129(3), General Law of Commercial Companies).
Legal framework
In Mexico, the General Law of Commercial Companies regulates nearly all matters related to corporate governance. Another law, the Securities Market Law, regulates the actions of some stick corporations. Several federal laws also control certain aspects of corporate governance in Mexico. For instance, the Mexico Income Tax Law requires every board of directors to prepare and publish a tax compliance statement for the annual general meeting of shareholders (Morales-Barrón). Companies that submit tenders for government contractors are also required by law to send a declaration of the country's Ministry of Public Function stating that neither their board, their officers, their shareholders, nor their affiliates have any relation or conflict of interest with the contracting authority.
In 2018, a new corporate governance code was also developed and published (Calvillo; Morales-Barrón). Compliance with the code and the overall corporate governance framework is closely monitored by lenders, credit rating agencies, external auditors, and shareholders (Morales-Barrón). Additionally, institutional investors have a role to play in monitoring the corporate governance of companies in Mexico. Pension Fund managers are particularly known for their strict monitoring of the firms they invest in
The legal rights for investors and the institutional environment in Mexico
The Mexican legal system does not provide sufficient legal protection for small stakeholders and shareholders. However, this does not mean that there are no laws protecting investors in the country. Examples of laws protecting investors include the Law of Mercantile Societies of 1934. This law regulates the formation of limited liability companies (Husted and Serrano, 337-348). The law also regulates the oversight entities in corporations, including shareholder meetings, the commissioner, and the board of directors. It also establishes the rights of investors. The Law of Securities Markets of 1975 established special regulations for public corporations. The public corporations are also controlled by the National Commission of Banks and Securities (CNBV) (Husted and Serrano, 337-348).
One of the key issues with boards of directors in Mexico is that no regulations guide their composition. This is considered a major flaw in the Mexican corporate governance system. The small number of external auditors who are independent in the country also reduces and limits the level of monitoring that can assure minority shareholders of protecting their interests. Moreover, small stakeholders also have little to no ways to influence decision-making in corporate firms in the country. For example, they cannot even call a shareholder meeting unless they get at least a third of the total voting rights (McGee, 251-254). Moreover, the plan for meetings that are called by significant shareholders is usually vague and only released days to the meeting.
While commissioners are not company employees, they are recruited by significant shareholders and boards in Mexico. This indirectly makes them company officials and does their work as independent auditors difficult and not very easy to trust. Therefore, they cannot be relied upon by small shareholders to be accurate and truthful. Moreover, small shareholders cannot use law courts to protect their interests because of how the laws are structured in the country. For example, only minorities with significant shareholding (at least a third of the voting right) can delay a decision and ask a court of law to intervene if it believes company regulations have been violated (Husted and Serrano, 337-348).
Moreover, it is difficult to prove fraud or the breaking of the law in the corporate environment in Mexico because of the lack of transparency and the relaxed regulations in the country. Only minority shareholders are allowed to sue in the event of wrongdoing. This, in addition to the inefficiency and corruption of the Mexican Judiciary System, has made it difficult to protect small shareholders and investors in the country. Even firms listed on the Mexican Stock Exchange are not very transparent in their dealings. They do not publish all the information typically published by listed firms in countries with robust financial markets (Husted and Serrano, 337-348; Creel and Garcia-Mingo, 43). Lastly, even in the case of disagreements among shareholders, companies in Mexico are not required by any law to repurchase shares at ex-ante prices.
The Responsibilities of the Board
In the year 2003, the World Bank conducted a corporate governance system assessment for Mexico. The assessment found that Mexico observed the principle of access to information and largely ensured compliance with the rule of law. In other words, the report reveals that the evaluation met all the key criteria without considerable deficiencies. What the assessment revealed was that the Mexican government had the will and the intent to ensure compliance with corporate governance regulations and to improve further the country's corporate governance environment (Banco Mundial, 9). However, regarding "treating all shareholders fairly," the assessment found that this principle was only partially observed, revealed that while the law complied with the established regulations, the enforcement and the practice were different.
Mexico has a board structure that is single-tire. The country's corporate governance code of conduct was released in the year 2006. It especially focuses on the board functions and recommends boards to issue ethical codes and handle social responsibility (Rocha, 291-306). The 2006 LMV changed the liabilities and duties of the board. This included making Mexican regulations for matching international standards, including on the duty of care and duty of loyalty (Banco Mundial, 9). Mexican boards now have the responsibility of forming a committee that deals with corporate and audit practices. The committee has to have only independent directors.
Moreover, the statutory auditor (comisario) no longer has a role in companies as per the changes. Their role has been taken over by audit committees that must now be formed by boards. The audit committees can also appoint an external audit to conduct an audit on their behalf. According to the LMW, failure to exercise a duty of care includes failure to attend board meetings and failure to provide important information for making important decisions. These types of failure are now penalized. Failure to exercise a duty of loyalty is punishable by jail time. This failure is described as a conflict of interest, misuse of relevant information, or bad practices to disadvantage some shareholders for the benefit of others.
Works cited
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Creel, Carlos, and Alfonso Garcia-Mingo. "Corporate governance under Mexican law." International Financial Law Review (2001): 43.
Husted, Bryan W., and Carlos Serrano. "Corporate governance in Mexico." Journal of Business Ethics 37.3 (2002): 337-348.
Machuga, Susan, and Karen Teitel. "Board of director characteristics and earnings quality surrounding implementation of a corporate governance code in Mexico." Journal of International Accounting, Auditing and Taxation 18.1 (2009): 1-13.
McGee, Robert W. "An Overview of Corporate Governance Practices in Mexico." Corporate Governance in Developing Economies. Springer, Boston, MA, 2009. 251-254.
Morales-Barrón, Humberto, Oscar A Quiroz-Chavez, Magda Karina Reza Villarreal, and Sánchez-Devanny Eseverri. “Corporate governance and directors' duties in Mexico: overview.” Thomson Reuters (2020).
Ramos, Gonzalo Castaneda. "Corporate governance in Mexico." Latin America Corporate Governance Roundtable in São Paulo Stock Exchange, April (2000): 26-8.
Reyna, Juan Manuel San Martín, Rocío Durán Vázquez, and Arturo Lorenzo Valdés. "Corporate governance, ownership structure and performance in Mexico." International Business Research 5.11 (2012): 12.
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