Structure and Role of the Directors and How the Board Has Evolved in Mexico Research Paper

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Introduction

Most companies in Mexico are family businesses just like is the case in most of the developing world. Legally, companies in Mexico must have either a collegiate or a unitary board structure. The countries General Law of Commercial Companies states that a limited company must have either a board of managers or an official sole manager, and that a stock corporation must have either a board of directors of an official sole director (Morales-Barrón). The same law states that a publicly-traded firm has to have a CEO (chief executive officer) and a board of directors. The board functions primarily through committees of directors dealing with various corporate and audit functions. The head of the board is almost always a chairperson, and the board members are appointed by shareholders in special shareholder meetings. Boards often appoint a treasurer and a secretary. This work looks at the structure and role of directors and how boards have evolved with time in the state of Mexico.

History and explanation

Most large firms in Central and South America are structured in the form of business groups. Business groups are big companies that are majority-owned or fully-controlled by families or small groups of investors. Most business groups have several companies that have both horizontal and vertical links. They can, therefore, diversify risk, earn monopolistic profits, reduce operation costs, and take advantage of economies of scale (Ramos, 3). Some of the characteristic features in business groups include exchanging positions board positions and cross-shareholding between the member companies. Furthermore, it is regular to find financial institutions such as banks being members of business groups.

Business groups are particularly common in countries with poorly developed financial markets. They are also common in countries where public offerings are only a tiny fraction of total company capital. Many economists believe that business groups are products of underdeveloped legal systems in which small creditors and shareholders do not have a lot of protection. The big and powerful investors prevent capital markets from growing in such countries (Rocha, 291-306). The reason why this is the case is that the rent expropriation capabilities of the big and powerful shareholders decrease interest in minority shareholders participating.

Even the big Mexican companies have big shareholders not only because they are traditionally family-owned with families controlling large stakes but because they typically issue shares that have no voting rights (Ramos, 3-4). Such shares, alongside the utilization of pyramids, allow large shareholders to continue exercising full control of business groups while maximizing their investments. From the above, it is clear that Mexican business groups only give small shareholders and stakeholders monitoring rights while the big stakeholders retain most rights.

The institutional investors - organizations which invest in firms, e.g., endowment funds, mutual funds, investment companies, pension funds, depository institutions, and insurance companies – in Mexico include domestic and foreign pension funds, brokerage houses, banks, insurance firms, private equity firms, and mutual funds (Banco Mundial, 15). These investors tend to acquire minority stakes available in the market and become passive shareholders.

Structural Evolution of the Corporate Structure

In the preceding ten years, Mexico has tried to reform its corporate governance system through the following steps:

· Reforming federal laws that combat money laundering, tax evasion, and corruption.

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· Reforming the Federal Criminal Code and the National Code of Criminal Proceedings to introduce criminal liability for corporations.

· Reforming the Mexican private sector to formalize business.

· Creating an improved anti-corruption system coordinates government agencies in the detection, prevention, prosecution, and punishment of corruption (Machuga and Teitel, 1-13; Morales-Barrón).

The federal government has also, over the years, tried to use various means to minimize and eliminate the influence and participation of criminal organizations in the formal Mexican economy.

Perhaps one of the most significant acts to reform the Mexican corporate sector in recent years was enacting the General Law of Administrative Responsibilities in 2017. The law introduced a…

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…among shareholders, companies in Mexico are not required by any law to repurchase shares at ex-ante prices.

The Responsibilities of the Board

In the year 2003, the World Bank conducted a corporate governance system assessment for Mexico. The assessment found that Mexico observed the principle of access to information and largely ensured compliance with the rule of law. In other words, the report reveals that the evaluation met all the key criteria without considerable deficiencies. What the assessment revealed was that the Mexican government had the will and the intent to ensure compliance with corporate governance regulations and to improve further the country's corporate governance environment (Banco Mundial, 9). However, regarding "treating all shareholders fairly," the assessment found that this principle was only partially observed, revealed that while the law complied with the established regulations, the enforcement and the practice were different.

Mexico has a board structure that is single-tire. The country's corporate governance code of conduct was released in the year 2006. It especially focuses on the board functions and recommends boards to issue ethical codes and handle social responsibility (Rocha, 291-306). The 2006 LMV changed the liabilities and duties of the board. This included making Mexican regulations for matching international standards, including on the duty of care and duty of loyalty (Banco Mundial, 9). Mexican boards now have the responsibility of forming a committee that deals with corporate and audit practices. The committee has to have only independent directors.

Moreover, the statutory auditor (comisario) no longer has a role in companies as per the changes. Their role has been taken over by audit committees that must now be formed by boards. The audit committees can also appoint an external audit to conduct an audit on their behalf. According to the LMW, failure to exercise a duty of care includes failure to attend board meetings and failure to provide important information for making important decisions. These types of failure are now penalized. Failure to exercise a duty of loyalty is….....

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