In his opening remarks at the September 8, 2009 book launch for the new Practical Guide to Corporate Governance: Experiences from the Latin American Companies Circle, held at the Council of the Americas’ Manhattan location, Ira Millstein, of the Yale School of Management, commented that “the statistics show that in developing countries [corporate governance] makes a big difference, a significant difference” and explained that such an in depth project on corporate governance had “never been done before” by a group of Latin American companies. He explained that “this is raw material that you will not get anyplace else.” Stephen Davis, of David Global Advisors, opened the discussion with representatives from the Companies Circle firms by telling the audience that the Guide “is important because it touches on the process of transformation” and helps explain how family owned firms can transition into global competitors with full access to capital markets.The book, published jointly by the International Finance Corporation, the OECD, and the Global Corporate Governance Forum, is the result of an ongoing project by the Companies Circle, a group of 14 Latin American companies, was founded in 2005 upon the recommendation of the Latin American Corporate Governance Roundtable. The Companies Circle includes 14 major firms, including Colombia's Cementos Argos (Bogota Stock Exchange: CEMARGOS) and Interconexion Electrica S.A. (Bogota Stock Exchange:ISA), Peru’s Compania de Minas Buenaventura S.A. (Lima Stock Exchange: BVN), Mexico’s Desarrolladora Homex S.A. de C.V. (BMV: HOMEX), and Brazilian firms Companhia de Concessoes Rodoviarias (BOVESPA: CCR) CPFL Energia S.A. (BOVESPA: CPFE3), Embraer - Empresa Brasileira de Aeronautica S.A. (BOVESPA: EMBR3), Natura Cosmeticos S.A. (BOVESPA: NATU3), Net Servicos de Communicacao S.A. (BOVESPA: NETC4), Suzano Papel E Celulose S.A. (BOVESPA: SUZB6), and Ultrapar Participacoes S.A. (BOVESPA: UGPA4).
The book summarizes and analyzes the experiences that member companies had when making improvements to their own governance policies, and highlights the unique challenges of applying globally recognized best practices within the Latin American context.
The Guide includes a chapter that highlights the tangible benefits of good governance. For example, quantitative studies by the group showed that in the short term, public announcements of governance improvements were followed by an immediate 8 percent average increase in share value. Further analyses of the Companies Circle participants to a broad basket of Latin American companies.
In recent years, numerous studies have identified links between improvements to corporate governance and higher shareholder returns and lower cost of capital. The book includes a comparison between the 14 Companies Circle members, who are generally regarded as Corporate Governance leaders, and a broad basket of 1,078 listed Latin American companies (LAC). The study found that the Companies Circle group had an average Return on Equity (ROE) of 21.7%, compared to 16.7% for the peer group of LAC companies. Furthermore, the study showed that “Companies Circle members destroyed less value when macroeconomic conditions in Latin America were more turbulent until 2004, [and] created more value when the region became a more stable economic and business environment during the boom period of 2005-2007.” The study also found that on average, shares of Companies Circle firms trade at 21 times earnings per share (EPS), compared to only 16 times EPS for the LAC peer group.
Perhaps the most interesting result of the study, however, was that positive changes to governance frameworks, the types of changes that tend to enhance long-term value, were associated with strong boosts to firm value. The study found that firms reporting a governance improvements experienced “abnormal” positive returns of about 8%.
The book can be downloaded, free of charge, here.
