This was meant to be the much-heralded ‘century of the Americas’. After all, for Latin America, the year 2000 was a time of hemispheric cooperation, free-trade agreements, investor-friendly legislation, burgeoning democracy, unprecedented freedom and bucket loads of optimism.
But alas, in the words of Napoleon Bonaparte, ‘From the sublime to the ridiculous there is only one step.’
The global market slump hit Latin America hard and the region’s exports-based economies are still reeling. To top it all off, Venezuela, Colombia and, to a lesser extent, Peru, careen along a path of political instability – and let’s not even talk about Argentina.
And yet, despite this litany of woes and the depressing state of crucial US investor confidence, IR practice in Latin America continues to evolve fast.
Swift response
A quick glance at the region’s current regulatory environment is encouraging. Latin American financial authorities, most notably in Argentina, Brazil, Chile and Mexico, have reacted to growing investor concerns by enacting legislation on disclosure, transparency, shareholder rights and corporate governance.
Not a moment too soon. According to a 2002 opinion survey by McKinsey & Co, some investors are willing to pay premiums of up to 25 percent for Latin American companies that have implemented good corporate governance practices.
‘There has definitely been a feeling that more attention needs to be paid to matters such as fair disclosure and regulation,’ says Yvonne Ochoa, head of IR at one of Mexico’s largest banks, BBVA-Bancomer. ‘It has changed local corporate perception, making companies pay more attention to their press, their conference calls, their web sites and how they’re conducting meetings with investors.’
According to Ochoa, the ripples from Enron, slumping US markets, the sell-side shake-up and new compliance issues have caused many listed Mexican companies to reevaluate their IR efforts. ‘It’s hard for them now that brokerages are cutting down coverage,’ she says. ‘There’s obviously greater competition for capital. Companies have begun to position themselves more directly with investors.’
Carlos Moctezuma, co-founder of Mexico’s IR association, Ameri, and IR director at Iusacell, a Mexico and US-listed mobile phone company, reflects on the challenge: ‘Coverage has fallen for everyone, not just Latin American markets,’ he says. ‘This is an excellent opportunity for companies to improve their IR efforts and make sure they’re on the radar screens of those sector analysts who remain.’
Over the last year, says Moctezuma, several Mexican companies with little IR experience have pulled together excellent IR teams while experienced companies have created more sophisticated programs.
But each Latin American country faces its own set of problems. In the case of Argentina, the recent bouts of currency devaluation and hyperinflation have been hugely damaging for IR. ‘In our own case the IR department hasn’t been cut, but I understand that in other companies, departments have been cut down or have disappeared altogether,’ says Moira Colombo, an analyst with the IR team at Telecom Argentina. ‘The situation is beginning to normalize, but for companies that lost their IR departments or have been bought out, I think it’s going to be difficult for IR teams to recover.’
Get your Sox on
But in a region where many firms are controlled by small, powerful stakeholder groups – often families – the Sarbanes-Oxley Act has made companies scramble, whether or not they have US exchange-listed ADRs. As in other parts of the world, Sox has been the guiding force behind much new corporate legislation in the region, as local regulators move to harmonize with US best practice.
‘All across Latin America, Sarbanes-Oxley has generated an enormous debate,’ says Geraldo Soares, general manager of IR at Brazil’s Banco Itaú, which has an NYSE-listed ADR. ‘Several larger corporations like ours have created special multitask forces to ensure greater compliance, or at least a deepening of local best practices.’
According to Soares, Sox has prompted a profound change in Brazil’s entrepreneurial culture, especially for ADR-listed firms like Itaú, which have had to comply more quickly than the rest. ‘We prepare our financial statements in US Gaap and have to provide our new ADR shareholders with the same information that we provide to our local shareholders,’ he describes. ‘That includes developing mechanisms to ensure that the material fact released arrives at the same time in both markets.’
Juan Hardessen, head of IR at Chilean telecoms company Entel, agrees. Even though Chile already enjoys good governance guidelines and a healthy reputation with foreign investors, he says, the Sox fallout is far from over: ‘In the long term we can expect to see efforts to bring in similar legislation in Chile.’
Likewise, Ameri’s Moctezuma describes Sox’s implications: ‘What we’re seeing is a change in ideology at management level. We were all forced to step on the accelerator in terms of improving corporate governance to adapt to SEC rules.’
This has been a difficult process for many Mexican companies, he adds, especially those family-owned firms that are unaccustomed to being questioned about internal matters. ‘The new committees and the role of independent directors represented an internal loss of power for many of these companies,’ Moctezuma says. ‘But for other companies it has been the perfect opportunity to consolidate their firms as true corporate entities, instead of family businesses, and elevate their levels of transparency.’
Equity culture?
But not all challenges are related to issues of compliance or cyclical financial slumps. Rather, there are structural problems that predate Enron.
‘There is a bit of a crisis in Latin American stock exchanges, and that is the lack of liquidity,’ says Entel’s Hardessen. ‘ In Chile, only one new company was listed last year. It’s been years since we’ve had many new companies listing and we need new shares on the market.’
While Hardessen recognizes efforts by the Chilean government to attract more portfolio capital, he feels that more needs to be done to help entrepreneurs find financing. ‘There we are still behind. We need to push. It would help more companies list. The problem is that companies are delisting and dynamism is lacking.’
This absence of consistent government support for equity market development, says Ameri’s Moctezuma, has until recently been one of the key problems. ‘The Mexican market is a good example of what has happened in several Latin American markets, except for Brazil, which has done a good job of promoting its market,’ he explains. ‘In Mexico we’ve lacked that kind of promotion by the authorities. And when it has been attempted, outside circumstances have stopped it, such as when the market collapsed in 1994 and 1997 – companies were no longer able to raise capital in the local market.’
It is only recently that many Latin American governments have come to acknowledge the wealth-generating virtues of financial markets and started providing the necessary mechanisms and incentives. Even so, it seems that the emergence of a healthy shareholder culture will take longer.
Spread out
‘In Chile, it’s easy for anyone to buy shares. The costs of transactions are low,’ says Entel’s Hardessen. ‘I would say there is certainly a culture of share ownership among middle and upper classes. It’s a question of education and income. But there is a growing interest overall.’
But Chile is the exception. Latin American shareholder culture is young – and for many that is the primary challenge. According to Banco Itaú’s Soares, the evolution of IR is linked to a healthy and more democratic market environment. ‘Here capital markets depend largely on institutional investors, because we have no tradition of individuals accessing capital markets. That has been the most common explanation for the lack of more concentrated efforts in IR in Brazil in the not-so-distant past. This reality is changing and some important advances are being made.’
Indeed, given the size of their populations, there are still precious few retail investors in the region, including Brazil and Mexico. ‘It’s not that companies aren’t taking care of the retail market,’ says BBVA-Bancomer’s Ochoa. ‘The fact is that demand isn’t out there yet. It’s not out of a lack of interest from companies.’
The main barrier is the cost of entry. Equity portfolios in the region have typically required large starter sums, far beyond the reach of most people. More recently however, the market has begun to open its doors to smaller investors, with banks and brokerages in the region offering more accessible options.
Great expectations
The future of IR in Latin America looks promising. It has evolved rapidly and adapted well to adverse circumstances. Furthermore, IR associations in Brazil and Mexico have been quick to take on the challenges and local regulators have responded well.
In Brazil, where companies are obliged by law to designate IROs, the local IR association, Ibri, has been extremely active in promoting better practice. Meanwhile, in Mexico Ameri is evolving rapidly, hosting major investor meetings and teaming up with local colleges to launch the nation’s first ever IR diploma.
‘In the next two years we’re going to see IR evolve even more. There are changes in legislation and the way the authorities view IR. This is creating company awareness,’ concludes Ameri’s Moctezuma. ‘We have an important challenge ahead. We need to raise IR awareness among local companies as soon as possible.’
