Corporate Governance in Latin America: A Functional Analysis

Lack of a significant separation between ownership and control in Latin American companies imposes a necessary departure from applicable principles of corporate governance designed for market systems. Therefore, it may prove difficult, for instance, to adopt US norms, in the region due to well-known systemic differences. Corporate governance principles that deal with tensions arising from opportunistic behavior of directors and officers vis-a-vis shareholders may be less important in this region than those principles relating to potential expropriation of minority shareholders or other forms of oppression and reaping of private benefits by block-holders. It is acknowledged that systems in which block holding prevails allow minority stockholders to free ride on controlling shareholders' efforts to monitor management. The emphasis on corporate governance principles in Latin America should be placed not only on directors' duties, but also on the effective protection of minority shareholders and other stakeholders against the undue appropriation of corporate assets by block-holders. Above all, a determining factor for poor corporate governance in this region relates to the prevailing weakness of the legal infrastructure and, specifically, the comparative lack of enforceability. A comprehensive legal catalogue of minority shareholders' rights may be of little value without efficient remedies and procedures ensuring their effective application. This problem can be partially dealt with by the appropriate reallocation of judicial or quasi-judicial powers to specialized administrative agencies. Nevertheless, the effectiveness of legal reform will be limited, in general, by local culture, politics, equity ownership structures and rule of law considerations.