Marlon Brando was a far more convincing Mexican revolutionary in the Oscar-winning Viva Zapata! than he was a mad scientist in the recent remake of The Island of Dr Moreau. Rivaling Brando’s Zapata is Ricardo Salinas Pliego’s very convincing performance as leader of a new Mexican revolution – a corporate governance revolution.
This fall the Salinas family-controlled Grupo Elektra and TV Azteca announced they were rejigging their boards of directors in a bid to regain investor confidence. Both stocks have been battered since mid-1998 amid concerns over potential investment in Salinas’ struggling Unefon wireless telecoms venture – fears that were justified when Azteca, in which Elektra has a major stake, invested heavily to revive Unefon in May. Minority investors in Azteca and Elektra, which both have NYSE-listed ADRs, felt Ricardo Salinas was putting ‘the family’s’ interests above their own, and the stocks ‘totally fell out of bed,’ says one fund manager.
‘He’s a visionary, but he’s also controversial,’ admits CFO Luis Echarte, the main architect of the Elektra governance overhaul. ‘If we want people to invest in our country, we must give some assurances. That is our reto, our challenge: to give investors confidence.’
In response, Elektra and soon TV Azteca are reducing their boards and hiring more independent directors, while creating majority
-independent committees. The plan was created with the help of activist UK pension fund Hermes and the Mexican Business Coordinating Council.
Elektra’s new look – voted in at a shareholders’ meeting at the end of October – is among Hermes’ corporate governance forays into emerging markets. Salinas doesn’t think it will be the last. ‘It’s something that needs to be done, not only by our company but by many other companies around the world,’ states the suave entrepreneur over a coffee at the Four Seasons hotel in New York before whisking off to Bloomberg and a day of media interviews. ‘There’s a clear demand by the markets for better information. Even though we think our information is top-notch, this addition of independent directors will give investors much more confidence in the information.’
Richard Fairgrieve, director of global emerging markets at Hermes, reports the pension fund’s enthusiastic endorsement of the governance plan: ‘Great. A real step forward. It’s everything we’d like to see.’ He’s also keen to see similar changes at other family-controlled companies. ‘I think the template that they’ve adopted is good not only for Elektra but for companies elsewhere in Latin America and emerging markets that are family dominated.’
Spreading the word
Helping spread the word is Alan Stoga, principal of Zemi Communications in New York, Elektra’s new IR counsel which has replaced Anne McBride Company. Stoga is an old Mexico hand. A columnist for Mexico’s leading newspapers, Reforma and El Norte, he is the former managing director of Kissinger Associates, Henry Kissinger’s international consulting firm, and was a Reagan advisor on Latin America.
Stoga points to the special governance problems faced by Mexico, and indeed many ’emerging markets’ (a term he winces at). ‘Many of the investment scale companies have the majority of shares owned by a tightly knit family holding. One man, one vote in Mexico would be meaningless because in most of these companies the public shareholding is 10-30 percent of the total, and the control group is always going to dominate,’ he notes.
Indeed, a major investment attraction of TV Azteca, Televisa, Alpha or Telmex is the acumen of their controlling shareholders. Elektra, for example, is 70 percent owned by the Salinas family. ‘The investment motivation is driven differently, hence corporate governance must be driven differently. Both Elektra and TV Azteca – and almost everyone else on the Bolsa – have this problem of persuading their investors that their corporate governance structures are designed to align shareholders’ interests. There’s a lot to be done in the two dimensions of process and people.’
Thick & thin
Fairgrieve, who manages a $1.5 bn global emerging markets fund and has held onto his Elektra stake throughout the turmoil, believes it to be a fundamentally good company. Minority shareholders ‘got screwed’, says the plainspoken fund manager, and ‘weren’t getting any respect.’ They felt that every time a deal came up they would need to fund it – and suffer. But at the same time, it’s a ‘great business’ and a ‘good management team.’
Echarte, too, is plainspoken in his assessment of investor sentiment. ‘We made some noise in the market because we’re quite revolutionary in the way we do things,’ he explains. ‘We go after mass markets with different companies, and there are inter-company transactions that are always questioned by investors.’ Basically Elektra’s stores sell what TV Azteca promotes heavily. It’s a strategy that has made Elektra the world’s largest Western Union agent, transferring close to $700 mn a year, and it contributed to the success of Biper, a Salinas-controlled beeper company. That goes to show ‘the power of TV’, Echarte says. But that kind of ‘related party transaction’ troubles investors. ‘They feel iffy about it.’
‘The Salinas group is composed of very different businesses, different aspects,’ Salinas continues. ‘Part of what gets performance is working together – synergy. Of course that requires related party transactions. There’s nothing wrong with it – if you do them right. What we’re missing is an independent, outside opinion that says, Yes, this is exactly the way it should be, confirming that what we’re doing is in everybody’s best interests.’
If Salinas doesn’t sound very repentant over any past transgressions against minority shareholders, that’s because he isn’t. In May he balked at investor skepticism, announcing, ‘I’m a businessman because I see a good investment and take it. If I didn’t, I’d be an analyst.’
Addressing concerns
That doesn’t mean to say he isn’t aware of the pressure, though. ‘It seems that there’s this concern about aligning the interests of majority shareholders and minority shareholders,’ Salinas muses. ‘We don’t think it’s a real problem, because the way we conduct our business is the same. But in order to address these concerns, we thought the best way was just to change the way our governance is conducted.’
Elektra, exclaims Echarte, has very open disclosure – ‘It’s amazing the information we give out,’ he says. ‘But the perception of the market is strange. Maybe we just haven’t done it right. Basically it’s a very exciting concept – how things work together.’
Fairgrieve concedes that related party transactions are not all bad. ‘But they should be carefully evaluated by the board and shareholders should have input too. This is a great board reform, and it can serve as a really useful model. But they’ve got to follow through.’
The main reto of raising sagging valuation still lies ahead for Salinas and Echarte, who now have to find the independent directors they have pledged. Most investors are waiting on the sidelines to see how they progress. No wonder, according to one anonymous fund manager. Investor confidence, he concludes, is a lot like one’s virginity: it’s much easier to lose than to regain.
