Governance south of the border

Mexican homebuilder Homex has set a benchmark in corporate governance standards for its peers by becoming the first Mexican company to be elected to membership of the Companies Circle of the Latin American Corporate Governance Roundtable (LACGR), an organization sponsored by the International Finance Corporation and the organization for Economic Cooperation and Development (OECD). The Companies Circle has gained international recognition for bringing together Latin American companies and industry leaders who have adopted good corporate governance practices, whose experiences and input can constitute a reference and example for corporates around the world. 

Homex claims to be a leader in setting corporate governance standards of excellence in the Mexican market. The Mexican group is a vertically integrated home development company focused on affordable, entry-level and middle-income housing. It is the largest house builder in Mexico based on the number of homes sold and net income. The company has also earned a reputation for being highly active in social development programs in the community. The company was twice given the award of the Mexican company with the highest level of social responsibility by the country’s Centre for Philanthropy and Corporate Social Responsibility. Homex defines its mission statement as follows: ‘To improve the quality of life of our community through superior quality real estate developments.’

Homex has a strong family holding through the De Nicolás family, which owns 34.8 percent of the group’s capital, while EIP Investment Holdings controls a further 8.5 percent of the company’s common stock. The free float remains above the 56.6 percent level. The homebuilder has been a publicly listed company since 2004 and is currently the only Mexican homebuilder fully listed on the NYSE, a strong incentive for its corporate governance practices to comply with the stricter rules set for non-US issuers on the exchange. The company board of directors is comprised of ten members, seven of whom are defined as independent.

Sharing the wealth of knowledge
‘The Board has four committees,’ says Monica Lafaire, Homex’s vice president for corporate responsibility. ‘We have audit, compensation, executive and corporate governance committees, each with two to three independent directors. These committees make vital recommendations in their areas of expertise for the board’s decision making.’

Lafaire said the invitation to join the Companies Circle represented an opportunity to learn from the experiences of other Latin American countries. ‘This was an important step for us since as a leader in good corporate governance, we can also pass on our own experiences to fellow members of the Companies Circle,’ she says. ‘In this way it becomes a mutually beneficial enterprise.’

Homex could arguably be considered the natural choice for the first Mexican company to be invited to join the Companies Circle. The group has previously received recognition for its good corporate governance practices. The company was recently granted an award by Affinitas, an international alliance of Latin American law firms, as well as the independent firm Garrigues, for having the highest corporate governance standards in Latin America. 

The company prides itself on its adherence to principles of ethical business practices, says Lafaire. ‘This is what distinguishes us from many other companies,’ she adds. ‘We have brought together all our stakeholders, from suppliers to shareholders to employees, to develop a code of business ethics and transparency. Our ethics committee makes certain that these standards are met at all levels within the group, from top executive management down to the lowest levels. We are regularly audited to ensure that our operations comply with Sarbanes-Oxley.’

Path to good governance
The LACGR’s first meeting was held in São Paolo in 2000. The organization was set up after the first version of the OECD principles came out, with the idea of engaging the non-OECD countries in a dialogue around them and finding ways to test the principles in non-OECD member countries and obtain feedback to the revision of the principles in 2003. The new version of the principles came out in 2004 and that included inputs from the Roundtables. Five of these organizations have so far been put together by the OECD and IFC. These are the Asian, Eurasian, Russian and South East Europe Corporate Governance Roundtables. Latin America is the only region whose Roundtable includes a Companies Circle.

‘The IFC was excited to work on these Roundtables because that is where our investments are,’ says Mike Lubrano, manager for corporate governance at the IFC.

‘It has been an excellent partnership between the two institutions. What the OECD brings to the table are the policymakers and international accounting, legal and practical experts. We, on the other hand, can deliver the companies and the investors. Now we’re focusing on the development of the second and third rounds of corporate governance codes in the region, and we’re working as well on the role of institutional investors.’

In effect, different policymakers and regulators, stock exchanges and people who are active in corporate governance issues had been getting together every year and eventually put together a white paper on corporate governance in Latin America with recommendations for policy improvement and good practices for the region. Following that there was some discussion around how to do more to develop implementation and involve more companies.

It was at the fourth meeting of the Companies Circle that one of the members, Carlos Yepes from Argos, part of the Antioqueño Group of Colombia, highlighted the fact that these meetings could always count on the presence of securities regulators, representatives of ministries of finance and international and domestic investors. The one group that was not consistent in its presence was the companies. ‘There was no continuity of company participation, so from that idea we launched the Companies Circle,’ says Lubrano. The member companies feel they benefit from being members of a small group that has gained recognition for its high standards of corporate governance. They are able to display a logo on their reports and potential candidates have to be admitted to membership according to strict criteria.

The guiding principle of the Companies Circle’s mission statement is that members share among themselves, in a confidential way, their technology and experiences to improve their corporate governance. That is the first of three parts of the statement, and it is the one that underscores the mutual trust shared by these companies. The second is to be a voice for the benefits of good corporate governance to the broader business community of Latin America, while the third part is to be the consistent voice of the corporate sector in the work of the Roundtable.

The Roundtable members are determined to maintain an elite inner core of companies, though they are keen to expand the membership to more countries. Brazil comprises about half the membership, which the organizers believe is a fair balance as this country represents about half the region’s economy. ‘We now have five countries represented,’ says Lubrano. ‘We would like to see Chile and Argentina represented and maybe a few more companies in Mexico.’

As the other sponsor organization, the OECD has been in involved in Latin America working on corporate governance issues ever since it issued the OECD Principles of Corporate Governance in 1999. 

Spreading the word
‘At that point we established a Latin American Roundtable on Corporate Governance, which brought the principles to the region,’ says Daniel Blume, manager of the Latin American Roundtable at the OECD. ‘We started with a couple companies that had already been included in the Roundtable, whose corporate governance we could vouch for.’ The founder corporates were Peruvian mining group Buenaventura and cement producer Argos in Colombia. ‘We then approached several other companies that had committed to the highest levels of Bovespa’s Novo Mercado in Brazil. We started with eight companies, six from Brazil, as well as the two from Peru and Colombia. We put together case studies and used this as a platform for selling to companies the ideas that good corporate governance pays off, in terms of good performance, financial results and the value of these companies.’

The case studies were aimed at showing that these companies had performed well under practices of good corporate governance, demonstrating at the same time that this works in the Latin American context as well as in OECD countries. ‘Over time we’ve tried to expand that membership and it’s been easiest to do it with the countries where the Companies Circle is getting good publicity, that is, those of the founding countries,’ says Blume. ‘So we had additional members joining from Peru, Colombia and Brazil.’

At the same time, the Companies Circle started to approach other countries. There was an awareness-raising meeting in early 2007 in Mexico, to which a number of Mexican companies were invited. ‘That was where we became acquainted with Homex,’ says Blume. ‘They expressed an interest in joining, and after carrying out a review, the members of the Companies Circle made the decision at our meeting in Colombia in October to invite Homex to become the 14th member and the first Mexican company in the Circle.’

This was considered a significant step forward in widening the Circle to other countries and for promoting the implementation of good corporate governance practice in Latin America. ‘The companies we have in the Companies Circle have as good a level of corporate governance as those in other regions,’ says Blume. ‘There are still a lot of difficulties and problems with corporate governance in Latin America and we’re working to try to promote an improvement in standards. The overall level of awareness has improved over the years so we’ve had a lot of changes and progress in the region.’

Blume says he can envisage further expansion of the Circle. The promoters are particularly interested in bringing in members from the other larger markets, and Chile is one of them. There is discussion now about holding the next Roundtable meeting in Chile, which would provide an opportunity to have closer contact with Chilean companies.

The members have developed case studies, and there are various institutions that meet and hold workshops, in which they invite Circle members to come and talk about their cases. They’re currently working on a practical guide to company implementation of corporate governance in Latin America, which will draw on the experiences of the Companies Circle member companies. There have been expressions of interest from other companies in Mexico, but the main focus now is on bringing out the guide. ‘I think within the next year we will be in a position to further expand the membership and take on a few new companies, probably to include one or two from Mexico,’ says Blume.
 
Lafaire is confident that other Mexican companies could meet the requirements set for joining the Companies Circle. ‘There are many other companies with good corporate governance standards,’ she says. ‘The important thing is that they are willing to learn and share their experiences with others, and also that they are determined to eliminate problems caused by corruption and unethical practices.’