Abstract
The board has been chosen as the center of this analysis. The core idea is to isolate the main factors (external and internal) that might explain the progress and limitations in raising the standard of corporate governance behaviors in Peru. In short, progress has been slow and is far from complete. Regulators have, to some degree, led the way, issuing specific rules and directives, including a Code of Good Governance. Companies have pushed back, with very a few playing any leadership role – so, there is plenty of room for improvement. Board independence, diversity, committee make-up, risk management, internal control policies, and independent evaluation, are all key areas that still fall short of their international peers. When anomalous situations arise, the immediate reaction has been self-imposed, local, corrective measures, rather than a push for legal reforms and, even less for pecuniary or jail sanctions from the supervisor. Improved legal investor protections might be the best way to raise governance standards, especially in light of Peru’s concentrated of ownership and reduced market liquidity.
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Notes
- 1.
Another relevant sector is that of state-owned companies; where the holding company, FONAFE (National Fund for the Financing of State Business Activity), has been Promoting different standards and initiatives to improve corporate governance, starting with ad hoc codes of good governance, issued in 2005 and then revised in 2013. The work of the Banking Superintendency (SBS in short for its acronym in Spanish. Extended name: Superintendencia de Bancos, Seguros y AFPs) has also been relevant, which has issued various measures on corporate governance for the different types of entities under its supervision, such as the Pension Funds Administrators (AFPs), Cajas Municipales (Municipal owned Financial Institutions), Cooperatives and Financial Institutions in general. We will mention the pertinent cases when it relates to our focus of analysis.
- 2.
For a thorough discussion on the concept of Corporate Governance, see Zingales, L. (1998).
- 3.
This contrast can be understood in terms of the definitions of Corporate Embeddedness and Corporate Agency proposed by Hyun Park, Sun; Zhang Yanlong and Keister Lisa (2020).
- 4.
Institutions are defined as “the humanly devised constraints that shape human interaction” (North, 1990).
- 5.
The interviews were carried out by the author on condition that the names of the directors will not be disclosed. The number of interviews was limited, but sufficient to gather valuable information on the configuration and performance of the boards on which they sit. Several qualitative insights that have been shared were gleaned from these interviews. The predetermined profile of the board member selected for interview is an individual with over 20 years of experience as a director; who is/or has been a member of several listed companies on the Lima Stock Exchange (LSE); and where the companies form(ed) part of the General Index of the LSE; and finally, where their appointments was as an independent board member.
- 6.
Our description is only a summary of the reforms carried out. The subject of reforms and liberalization of the Peruvian economy has been dealt with at length in other publications, such as World Bank Group (2015).
- 7.
As part of the strategy of incorporating competition policies and liberalizing the economy, the government had issued Legislative Decree No. 701, the Law for the Elimination of Monopolistic, Controlling and Restrictive Practices on Free Competition, at the end of 1991. The validity of said law was conditioned to the establishment of the National Commission of Free Competition. This Commission was not created, and that gap was filled with the creation of INDECOPI. See INDECOPI (2013).
- 8.
Acronym in Spanish for “Fondo Nacional de Financiamiento de la Actividad Empresarial del Estado”.
- 9.
AFP is acronym for “Administradora de Fondos de Pensiones”, the regulated pension fund management company investing members’ mandatory social security savings and reporting and administering their individual capitalization accounts.
- 10.
National Supervisory Commission of Companies and Securities (CONASEV), which will later become the Superintendency of Securities Market (SMV for its acronym in Spanish. Extended name: Superintedencia de Mercado de Valores).
- 11.
Superintendencia de Banca, Seguros y AFP – The Bank, Insurance and Pensions Superintendency.
- 12.
Organization for Economic Cooperation and Development (2019). “Equity Market Development in Latin America: Enhancing Access to Corporate Finance – Chapter Peru”.
- 13.
Statistically, for the study period, almost 100% of the IPOs correspond to the issuance of bonds or short-term debt instruments.
- 14.
- 15.
MILA (“Mercado Integrado Latinoamericano” for its acronym in Spanish) is the initiative of transnational stock market integration without merger or corporate integration, and that rather resorts to the use of technological tools and the adaptation and harmonization of the regulation for the negotiation of markets of capital and custody of titles. It is made up of the stock exchanges of Chile, Colombia, Mexico, and Peru.
- 16.
As noted by the World Bank Group (2019) in “Documento de Apoyo para el desarrollo de una Hoja de Ruta para fortalecer el rol el mercado de valores peruano de cara al financiamiento del sector corporativo”.
- 17.
MSCI prepares various international indices, among which there are some made up of portfolios of groups of countries such as “emerging” or “border”, which are classified according to different factors such as the number of listed companies that exceed a certain market capitalization, or the proportion of stock trading on behalf of foreign investors, etc. See https://www.msci.com/index-methodology.
- 18.
It ranks 101 among 198 countries, according to the Corruption Perception Index (2019), published by Transparency International.
- 19.
It should be noted that since 2014, the Ministry of Justice has appointed work committees to propose changes to the Companies Law and collect the proposals that exist in this regard. The idea is to update the law to the new socioeconomic conditions, and improve competitiveness based on efficient business organization rules. This reform is pending approval.
- 20.
MEF, SBS, BVL, Procapitales, ASBANC, CONFIEP, and MCIF. Procapitales is a business association that brings together entities linked to the capital market. ASBANC is the association of private banks. CONFIEP is the union of business associations in the different economic sectors. MCIF is a consulting firm specialized in Corporate Governance issues.
- 21.
Since updated (OECD, 2015).
- 22.
See “Strengthening Corporate Governance Codes in Latin America”, OECD (2016).
- 23.
See Grupo Banco Mundial (2019), ibid.
- 24.
For the purposes of analysis, we focus on the times when the laws or regulations were originally issued. There is no expectation to monitor the details of all modifications or updates to these regulations.
- 25.
As an element of support, the historical evolution of about 35 companies (reference or short list) has been analyzed, corresponding mainly to the components of the General Index of the LSE. Also, the main banks were included as well as those companies that have been part of the CG Index over time. These companies represent 64% of the LSE market cap.
- 26.
For these other factors we have relied on the author's own long experience, as well as on interviews with experienced board members.
- 27.
The statistical data on the boards of the companies listed in the LSE that we will cite on several occasions are taken from the document “El Perfil de los Directorios en el Perú – Edición 2019”, published by Mercados de Capitales, Inversiones y Finanzas (2020).
- 28.
The concentration of ownership is not unique to Peru, as evidenced by the OECD in its publication “Owners of the World´s listed Companies” (2019a). Several Latin American countries exhibit high concentration indices such as Argentina, Brazil, Chile, or Mexico (the main 3 shareholders own more than 50% of the shareholding of listed companies).
- 29.
The process of offering a company's shares for sale on the stock market for the first time.
- 30.
Cadbury (2022) shares a reflection on the implications on corporate governance of these changes.
- 31.
In this case, the owner was already a foreign company and switched to another foreign investor.
- 32.
One of the concerns that the study of the Bolsa de Valores de Lima–EY (2017) picks up on among investors is that equal treatment is required for the minority shareholder, in view of the advantages that the controlling shareholders would have.
- 33.
For instance, the OECD (2019b) publication refers to Peruvian institutional investors consider that improvements in CG would allow them to expand their investments into local equities.
- 34.
According to the OECD (2019a) publication, average participation of institutional investors as shareholders of the listed companies represents 41%. In Peru, this participation was less than 10%. However, it was higher for specific cases. This likely reflects the scarcity of options in the stock market, as there are no large companies that allow them to host large investors, such as the AFPs in their shareholding.
- 35.
In certain circumstances, liquidity can have an adverse effect on corporate governance improvements. Institutional investors can influence the CG of issuers through their “voice” or their purchases or sales of shares (“exit”). The incentive to use the “voice” (greater activism) is reduced with the degree of liquidity of the market or of the action (better chance to exit). See Edmans (2017).
- 36.
As inspired by contributions such as the Carter & Lorsch, (2004).
- 37.
Precisely, the SMV, through its regulations, has sought to provide criteria to classify a director as independent; the most recent regulation being Resolution 016-2019-SMV/01, “Guidelines for the Qualification of Independent Directors”.
- 38.
Again, we refer to the LSE–EY survey, which revealed the requirement of a methodical and periodic evaluation of the board members in order to have directors that add value to the company.
- 39.
In the short list of companies, we have analyzed, it was not unusual to have boards with more than 10 members: reaching 16 members in some cases. Currently, only a few maintain large boards.
- 40.
- 41.
The LSE–EY survey (2017) also reaffirms these ideas by identifying that, for investors, the best ranked companies are those with securities that are listed on foreign exchanges or whose parent company is located abroad.
- 42.
The company has faced serious problems due to allegations of corruption and consequent legal problems.
- 43.
There is an additional group of Peruvian companies that issued bonds internationally. They are not listed on the LSE or that are not part of our short list for analysis.
- 44.
EPU tracks a market-cap-weighted index of Peruvian firms.
- 45.
This information is corroborated with the review of the self-assessment of compliance with the GC Code.
- 46.
These companies are Ferreycorp, Cementos Pacasmayo, Rimac Seguros, UNACEM, and Southern Copper.
- 47.
The Dow Jones Sustainability MILA Pacific Alliance Index is a float-adjusted market capitalization weighted index that measures the performance of Chilean, Colombian, Mexican, and Peruvian companies selected with ESG (Environmental, Social, and Governance) criteria using a best-in-class approach.
- 48.
Environment, Social and Governance.
- 49.
The SMV has already issued a regulation requiring companies to provide a simplified report on the adoption of ESG practices. Companies seem to be paying more attention to it, in particular because of the interest regarding the so-called “green financing”.
- 50.
The publication of “Semana Econòmica” (2017) also shows that the majority of the directors surveyed have remained in that position for 10 years or more.
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Díaz Ortega, E. (2023). Peru. In: Callund, J., Jiménez-Seminario, G., Pyper, N. (eds) Corporate Governing in Latin America. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-85780-6_11
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