Latin firms continue to trail the global pack in corporate governance. Of late, Brazilian firms, incentivized by a proliferation of market initiatives and support from vigorous associations have progressed furthest and fastest while Chilean companies continue to have the strongest legislative framework. Mexico, Peru and Colombia are all moving forward, but firms from Argentina are tending to tread water, while Venezuela and its allies are moving full steam, only astern.
The mixed pattern makes it all the more impressive that some companies are really raising the barrier in Latin America. What marks them out? A sophisticated approach that combines consistency and fair timing with an ability to tailor information to the needs of funds with different strategies; regular, open road shows; constantly-improving technology; professionalization of the IR function; and, crucially, creation of a two-way street with the ability not just to inform but to listen.
Cultural barriers for Latin companies in investor relations and corporate governance are daunting. The tradition of patriarchal, family-owned companies, concentrated ownership structures and an expectation of family succession tend to be inimical to minority shareholderism. Families that have built up a business and are market leaders often resent outside investors as meddlesome and inexperienced. This is not a very conducive environment for listening to minority shareholders. Only a handful of companies are doing it well in Latin America, says São Paulo-based Sandra Guerra, coordinator of the company circle Latin America, a group that promotes governance in the region through intra-company dialogue.
Investor Diversity Complicates Strategies
Ted Helms, the head of investor relations at Brazilian oil firm Petrobras, which has moved up the survey rankings in Coherence and Access to Senior Management this year, emphasizes that one of the challenges is the rapidly growing diversity of investors. Geographically, the investor base is tilting away from Latin American and emerging market funds to a broader base of investors throughout the world. To meet the challenge of geography, communication strategy needs to take into account logistics to ensure that funds all get the same information with the same level of detail at the same time. Petrobras has had to up its game. It no longer can act like a Latin or emerging markets-based company, but must have a global outlook.
But its not just location. The types of fund and strategy are changing, Helms says. In the past, most Petrobras shares were held by a handful of big funds. That concentration has been diluted both with the discovery of Petrobras by a wider range of fund managers and as large asset management allocate Petrobras among funds with different strategies and risk/return profiles.
That fragmentation means there has been a marked shift as well in the kinds of information that investors want. Investors used to focus more on country risk and basic questions about the business. Now were fielding much more technical queries on expectations for individual projects and costs in individual business lines, he says.
Moreover, investors are focusing more on long-term strategy and senior management. Big funds with deep resources have burrowed particularly deep into the psyche of the company. They really understand us: both our weaknesses and strong points. The questions they need answered are about our strategy and the future of our industry, not just modeling for the next 12 months, says Helms. The payback is huge: The more knowledgeable investors are, the more they support us through the good times and the bad times. We want them to know why theyre buying our shares, says Helms.
Many of these themes are echoed by another firm that has moved up the survey rankings this year in areas including transparency of accounts and most accessible senior management, Chilean airline LAN. Providing consistent and precise information is a constant challenge, especially given the growing demands and globalization of the international financial community, says LANs CFO Alejandro de la Fuente. We are dealing with more seasoned investors with access to increasingly rapid information flows and more access to information in general. That makes it essential to draw up and adhere to clear reporting guidelines, with transparency and the highest level of controls, he says.
Intelligent spending on technology and putting together an easy-to-navigate website, email list that reaches potential as well as existing clients, and targeted alerts may seem easy, but few firms have mastered these basics either, notes Guerra.
Hitting the Road
The greater emphasis on long-term strategy, a more fragmented investor base and the need to constantly woo new investors has made it essential to make senior management regularly available or at least have a professional investor relations function that is able to act as a real and credible mouthpiece for them. Either approach calls for a regular circuit of road shows.
That is a fundamental part of LANs strategy. We try to make ourselves available as much and as often as possible to the financial community both in Chile and abroad, to analysts and investors in various locations throughout the world. We make a point of attending about eight to 10 conferences and/or road shows a year outside of Chile, says de la Fuente, ensuring its presence is balanced between the major financial centres. The firm also scouts for potential investors by keeping in touch with market sources and by targeting individual potential investors.
For giant Petrobras, its more a question of the IR function reflecting the way management thinks and ensuring management time is maximized with investors. Sometimes it can feel like were over-exposed. As one of the most widely held stocks in the region, our managers have more investors and analysts than most in our peer group and we need to organize in a way that is profitable for both sides, says Helms.
Road shows and regular analyst calls open up the opportunity for companies not just to disseminate information and answer questions but to clear up misunderstandings. Thats crucial because mispricing so often happens because new information is not correctly absorbed or its implications not well understood, says Guerra.
More importantly, these events allow the company to listen to criticism. Meetings should not be a one-way street, says Guerra. This is one of the most difficult areas for the IR function, but potentially one of the most rewarding, she says. The crucial part to listening is establishing a culture where criticism is not seen as an attack but a way of learning. When a company understands that, the relationship with investors becomes much more enriching.
Unfortunately, too often management in Latin America take the attitude: what do my investors want now? Why are they always complaining? says Guerra. They are missing out on a fundamental opportunity to gain a keen pair of eyes on their business model and see their shares fully valued.
In the last couple of years, changes to the IR function in Latin America have been accelerating fast. Theyre being driven in large part by asset managers, who have implemented global corporate governance policies. Mike Lubrano, managing director for corporate governance at new firm Cartica Capital, which was set up by senior managers from the International Finance Corp. to invest in firms that have a good business model but lack good corporate governance, is at the cutting edge. For others, corporate governance ratings agents allow them to outsource the task. Demand for Latin rankings, even in small- and mid-sized enterprises, has skyrocketed.
Last year, the speed with which companies were coming to market in Brazil was putting pressure on all the agents involved, from companies and bankers through regulators and the exchange, says Guerra. There was less scrutiny of deals and big financial incentives to flatter earnings forecasts to command a higher share price. That put at risk years of work to build Bovespas reputation for probity. Lubrano adds that many family companies coming to market take the attitude: We dont need corporate governance. Only when we expand will we implement policies. With regional companies centralized decision making, there are always lots of reasons to procrastinate, he adds.
Building new practices in corporate governance overnight is not possible, believes Guerra. You need to work hard to change the dominant culture and get use to the idea of living with strangers on your board. Then you need to build the processes and technology to support your investor relations strategy. The Brazilian market was so over-heated and the number of IPOs so high that it had become nigh on impossible to find investor relations staff.
Concerns about short-termism have subsided along with the markets. Bovespa had seen just one IPO by mid-February this year compared to six by the same time last year. Todays choppier market conditions means investors are far more picky, says Guerra.
In these more difficult market conditions, the main challenge is to make sure that investors understand the story and fundamentals, and that they are making decisions based on those, as opposed to short term market cycles and volatility, says de la Fuente. In LANs case, that means conveying that it is much less affected today than a decade ago by downturns in the US.
The downturn is also starting to focus minds on how to manage the dissemination of bad news, says Guerra. There are an increasing number of educational programs with outsourced providers giving training to company management, but this is at a very nascent stage, she hastens to add.
The Regulatory Hand
Its not only company-to-company that standards vary enormously but market-to-market.
Brazil is seen as the stand-out through a combination of regulation, particularly at the level of the stock market regulator; the development of a new market segment, the Novo Mercado, with strong and transparent rules; and the development of voluntary codes alongside a proliferation of associations to devise rules and train on implementation.
Mexico has implemented recent change in its corporate law to stimulate new kinds of companies to come to market by creating segments with differing levels of corporate governance, Chile has a long-standing, regulatory-based approach and Peru and Colombia have been tightening up practices and codes.
So far, so good. But its not all moving forward. Argentina has been dragging its feet until recently with little attention to either investor relations or corporate governance. It remains to be seen how effective a new code announced at the end of last year will be.
Other countries, particularly Venezuela, have been pedaling backwards. Renationalisation and re-writing of contracts have done their very best to scare investors off Venezuelan shares, a sad fact exacerbated as the economy outside the oil sector stagnates. Ecuador and Bolivia have been hampered by loud government noises about equity in the private economy as well.