Outline of the Evolution of Corporate Governance in Latin America ( ) Mike Lubrano Cartica Capital January 26, 2010 Santiago de Chile

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” OECD Corporate Governance Principles,

Shareholder Rights and Treatment For Whose Benefit is the Company Run? Boards of Directors Role, Composition, Organization and Quality Accountability and Incentives Control Environment Identifying, Quantifying and Addressing Risk Internal and External Checks and Balances Transparency and Disclosure Accounting and Audit Standards Supervision and Enforcement Public and Private Mechanisms

The Decade Started off Pretty Well… Privatizations after the lost decade Pension reforms New Issuances in domestic markets American Depositary Receipt Boom CTC breaks the ice in July 1990 Chile, Brazil, Mexico, Argentina …but it Ended in Tears Tequila Crisis (‘94 – ’95) Asian Crisis (‘97) Drop-off in listings / volumes

Investors’ experience left a bitter aftertaste: Poor equity returns on a risk-adjusted basis e.g., IFC portfolio review Inequitable treatment in changes of control “Low-ball” bids in delistings Suspicious related-party transactions Mispricing of sales Tunneling Rich controllers, poor companies

What did policy makers and investors learn? Macro measures and Market reforms/regulatory framework are not enough The proper functioning of the corporation cannot be assumed Corporate Governance failures can contribute to economic crisis (Korea ‘ 97) Company success does not necessarily translate into profits for minority shareholders

1997 – “Chispas” case (Enersis/Endesa España) Treatment of minorities in Changes of Control 1999 – COSRA/IOSCO Governance Initiatives 1999 – OECD Principles 2000 – Proposals to revise Brazilian Company Law Rights and treatment of non-voting shares 2001 – Latin America CG Roundtable

Forum for Research, Discussion and Debate among all Participants in Corporate Governance Regional and international Public and Private Sector Develop Consensus on Problems to be Tackled, Priorities and Policy Responses White Papers Revision of OECD Principle Sharing of Experience Assists Policymakers and Private Sector Agents to Adapt Solutions to Local Circumstances

Stereotypical US/UK Public Co. “The Modern Corporation and Private Property” (1932) – Berle & Means Dispersed Ownership/Control in the Market Principal / Agent Problem Separation of Ownership and Control Conflict: Managers vs. Dispersed Shareholders Discipline: Market for Corporate Control / Civil Litigation European / Emerging Markets Concentrated Ownership Minority of Voting Shares in the Market Concentrated Business Elites Management Selected by or are Controlling Shareholders Personal/Family Identification Conflict: Controlling Shareholders vs. Minority Shareholders Discipline: Minority Shareholder Rights / Regulation / Governance Discount

Dispersed Ownership Empire building by CEOs Excessive remuneration (stock options; nest feathering) Insider trading Defense mechanisms (poison pills, staggered boards) Non-disclosure of information (manipulation of financial statements) Internal control problems (independence of auditor) Concentrated Ownership Ineffective Boards Poor Capacity Passive Approach Low independence Conflicts of Interest; RPTs Minority Shareholder mistreatment, especially in changes of control Succession / Family Business Issues Transparency / Internal Controls / Audit Function

Director pool (independence, qualification, training, D&O insurance) Internal Controls Accounting and Audit standards and practices Compliance culture Regulatory oversight and enforcement Market discipline / Informational Infrastructure Civil litigation

Legislation (e.g., Chile, Sarbanes Oxley) Voluntary Standards (Code Movement) “Private Governance Infrastructure” Proxy Advisors / Information Services Rating Agencies (Credit and Governance) Opt-in Regimes (Novo Mercado – Brazil) Shareholder Activism / Relational Investors

1997 – Chispas Scandal (Chile) 1999 – OECD Principles Issued 2000 – Ley de OPAS (Chile) 2000 – 1st Meeting of Latin America CG Roundtable (São Paulo) 2001 – Brazilian Legal Reform 2001 – Enron Scandal

2002 – Bovespa Novo Mercado / IGC Index 2002 – Peruvian Code (Conasev) 2002 – Sarbanes-Oxley 2003 – Roundtable White Paper on Corporate Governance 2004 – OECD Principles Revised

– IPO Boom in Brazil 2006 – Ley de SAPIs (Mexico) 2007 – Colombia Código País 2007 – Poison Pills in Brazil 2009 – Ley de Gobiernos Corporativos (Chile)

Limited Legal Reform Limits on PN shares, but “Grandfathering” for existing firms Partial tag along rights Delisting rules Regulator’s (CVM) powers increased Voluntary Codes CVM –“ Comply or Explain” IBGC – Aspirational Opt-in System (Novo Mercado)

Amendment Process Closed hearing with the NM’s companies Not rejected by more than 1/3 listed companies Approval of securities regulator Revision (main topics) Independent director requirement (20%) Directors’ unified term at most 2 years Arbitration applied for all shareholders Definition of diffuse control

Listed Cos.Equity Offerings Mkt. Cap. US$ mm MC/GDP % Brazil =58 1,369, Russia ,104, Bombay ,819, Shanghai ,694, Mexico ,72539 Turkey , data

Enersis / Endesa Scandal (Chispas) Ley de OPAs Equal Treatment of Shareholders in Change of Control Responsibility of Directors 2008 – Centro de Gobierno Corporativo y Mercados de Valores 2009 – Ley de Gobiernos Corporativo

Thanks! Mike Lubrano Managing Director, Corporate Governance Cartica Capital