After taking over as CEO in 1985, Lorenzo H. Zambrano laid the foundation of a business model and culture that helped Cemex S.A.B. de C.V. (BMV: CEMEXCPO) build itself up and move beyond Mexico’s borders with a string of successful acquisitions.
One of the first companies to effectively harness the value-adding power of information technology and centrally coordinated management, Cemex quickly became one of the world’s most profitable companies and cemented its place as a global leader in the construction materials industry. Recent financial troubles indicate, however, that the company may have placed itself at risk by failing to shed many of the weak governance policies that are common in the Mexican market.
Although members of Mr. H. Zambrano’s family, which founded Cemex in 1906, no longer hold a controlling stake, they continue to dominate the company’s board. For example, only one of Cemex's 13 directors is free of any conflicts of interest or ties to the Zambrano family. The company has not split the positions of chairman and CEO and has not appointed an independent lead director. The company’s board includes six members of the Zambrano family, two of whom serve on both the audit and the nominating/remuneration committees. (The company's CFO, Rodrigo Trevino, is also a cousin of the CEO.)
Six of the company's other directors are considered to be non-independent because they are relatives of company executives, have been involved in related party transactions with the company, or have other business relationships with Mr. H. Zambrano.
Only one of the company’s five audit committee members is independent from management and the controlling family. The fact that 80% of the committee’s members are non-independent and two of them are members of the Zambrano family effectively compromises the committee’s ability to provide independent oversight of risk-management policies. The fact that the company’s CFO is also related to the company’s founding family further complicates this issue.
Although very strong in other areas of risk-management disclosure, Cemex has never disclosed information on risks relating to its insider-controlled board structure. The lack of independent board oversight may have prevented doubts from being raised over the potential downside to Mr. H. Zambrano’s strategy of borrowing heavily to finance acquisitions in mid-2007 even as warnings were being issued about the failing health of the housing and construction sectors.
After moving to acquire Australian rival Rinker for US$14.2B in 2007, Cemex is now saddled with a debt load of US$16B. Cemex is in particular trouble because it has only $560M in cash and a poorly planned debt structure that will force it to refinance $8B, half of its outstanding debt, by mid 2010.
On December 11, 2008 Cemex's share prices tumbled after the company failed to swap US$418M of short-term commercial paper for longer-term notes. In the midst of a global slowdown, Cemex is now faced with a formidable challenge to restructure its debt and is currently in talks with creditor companies. Cemex is a company built on a solid foundation. Once it regains its footing, investors should hope that the company protects itself by updating its governance policies to bring them in line with the other world-class aspects of its business.
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