A Primer on Corporate

Governance
A Primer on Corporate
Governance
Mexico

Jose Luis Rivas

A Primer on Corporate Governance: Mexico
Copyright © Business Expert Press, LLC, 2020.

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 Dedication
To my father who showed me the value of persistence…
 Abstract
Mexico is a land inhabited by several indigenous civilizations and was
conquered by Spain in 1521. The country is mostly a racial mix between
the Spanish and native cultures. It is a traditionalist society where fam-
ily, religion, and culture play a key role. The role of the marketplace is
constrained by the government and local interest groups such as unions,
political parties, commerce chambers, and private firms. The market for
corporate control is scarce. Corporate governance codes are voluntary.
Corporate ownership is concentrated with few institutional investors.
Shareholder activism is uncommon. Corporate boards are single tier in
nature. CEO duality is common practice. Boards are made mostly of in-
siders and shareholder representatives. Independent board members hold
minority stakes.
This book starts by describing the macro context in which Mexico
is embedded. We then focus on its corporate governance system: laws,
regulatory bodies, code of good governance, stock market and the pecu-
liarities of local business groups. The central part of the book summarizes
key characteristics of board structure and networks in the country. The
book ends with interviews of two well-known directors and suggestions
to move the governance field forward in Mexico.

Keywords
Corporate governance; boards; Mexico; emerging country; institutions;
business groups; family business; ownership structure; Latin America
 Contents
Foreword................................................................................................xi
Acknowledgments..................................................................................xiii
Introduction.......................................................................................... xv

Chapter 1 The Emerging Market Context: Why Does It Matter?........1

Chapter 2 The Mexican Context.........................................................5
Chapter 3 The Mexican Governance Model: A Comparative
Perspective.......................................................................13
Chapter 4 Corporate Governance in Mexico.....................................17
Chapter 5 Family Involvement.........................................................35
Chapter 6 Board Composition in Mexico.........................................57
Chapter 7 Corporate Networks in Mexico........................................77
Chapter 8 An Interview with Jaime Serra-Puche...............................81
Chapter 9 An Interview with Claudio X Gonzalez............................85
Chapter 10 Suggestions to Move Forward...........................................87

Epilogue................................................................................................93
References..............................................................................................95
About the Author.................................................................................109
Index..................................................................................................111
 Foreword
Jose Luis Rivas’s book on Mexican corporate governance represents an
outstanding contribution to knowledge about corporate governance not
only in Mexico, but also in developing countries more generally. This
book represents an excellent starting place for anyone interested in re-
searching corporate governance in contexts outside the United States or
the United Kingdom. Most research on corporate governance is dom-
inated by theory and evidence from the two large developed countries,
and our understanding of corporate governance more generally is perhaps
harmed by an overreliance on these two countries. Jose’s book starts with
a deep understanding that context matters in corporate governance, and
that context involves institutions that extend to political and legal systems
as well as social and cultural mores.
Starting from the perspective that institutions are critical to good
corporate governance, the book describes the state of many of the in-
stitutions that are relevant to governance in Mexico. Factors that make
Mexican corporate governance substantially different from that in the
United States and the United Kingdom are highlighted. Factors like ex-
propriation of investor wealth by controlling shareholders, challenges in
setting up businesses in Mexico, difficulties in contract enforcement and
the seeking of legal remedies, and the very dominant role that families
and political influence have on publicly traded corporations in Mexico
are all described both qualitatively and with statistical evidence.
The author is well steeped in the Mexican context. He was born and
raised in Mexico, and aside for a few brief stints (MBA at Northwestern, a
PhD at IE Business School, and a year-long visit to Arizona State Univer-
sity), he has spent his life there. At the same time, he is a close observer of
corporate governance in the US context and has ongoing research projects
focused on the United States as well as Latin America.
One of the great gems in the book is Jose’s interview with Jaime
Serra-Puche—an executive with wide experience as a director in both
Mexican and US firms. The interview highlights in rather stark terms
xii FOREWORD

the differences in how boards function in Mexico relative to the United

States. It also illustrates how deeply culturally embedded the corporate
governance differences are, highlighting the challenges for policy makers
who want to make corporate governance in Mexico more efficient and
effective. The interview is brief, but the subject is honest and forthright
about his own experiences and observations, and the reader walks away
with a much deeper understanding of the issues at hand.
The book also provides an absolute wealth of hand-collected data,
conveyed through figures and tables. All of this data is used to both illus-
trate assertions made by the author and provide empirical evidence to
support the conclusions drawn by the author. Importantly, the data can
also be used by readers not only for quick tests of intuitive predictions,
but also as a starting point for much deeper and richer data collection ef-
forts. Jose’s suggestions for issues to study moving forward serve as a good
guide for those interested in taking the next steps to better understand
corporate governance in developing countries.

Albert Cannella, Jr.

Endowed Chair
Texas A&M University
 Acknowledgments
I would like to thank the editor of the corporate governance series, Jack
Pearce, who guided me through the complicated path of improving this
book. To Bert Canella for the continuous support of this project. Special
thanks also to Guillermo de Alva and Eliel Garcia Soto for their help with
data collection. Finally, I would like to thank Bill Judge, who introduced
me to Rob Zwettler and the BEP team.
The completion of this book was partially supported by Asociación
­Mexicana de Cultura AC.
 Introduction
The corporate governance scandals in the United States and Europe as
well as the financial crises of 2008 to 2009 have made corporate gover-
nance (CG) a widely debated topic. A significant number of countries
have revised their CG codes and regulations in order to increase the levels
of CG efficacy.
This book is about corporate governance in Mexico. It is intended to
provide an understanding of the characteristics and peculiarities of cor-
porate governance of large Mexican firms. We have attempted to build
on knowledge accumulated in the academic and professional empirical
research. Our approach has the advantage of being grounded in factual
evidence rather than being merely based on opinion. Hence, we believe
this book can provide insights for practitioners and academics to make
better judgments when confronted with CG issues in Mexico.
The book is divided in six parts. Part 1 looks at corporate governance
from a macro perspective. It starts by explaining the peculiarities of cor-
porate governance in emerging countries. It also summarizes the main
contextual issues in Mexico and ends with a CG score comparison of
Mexico and its main trading partners: the United States, Canada, Spain,
South Korea, China, and the United Kingdom.
Part 2 of the book focuses on the Mexican CG system: its laws and
regulatory bodies, the Mexican code of good governance, the historical
evolution of the stock market and the peculiarities of local business groups
that have been part of its corporate history since the 19th century. We
finish part 2 by summarizing findings of the most recent academic arti-
cles (1998 to 2018) dealing with CG in Mexico.
Part 3 introduces the reader to a central piece of the Mexican governance
equation: families. Because a significant majority of the largest firms are
owned by families, we thought it would be worthwhile to review how dif-
ferent types of family involvement—ownership, management, and boards—
might have different consequences for firm performance.
Part 4 is a central part of this book since it summarizes key character-
istics of board structure and networks in the country.
xvi INTRODUCTION

Part 5 presents interviews with two of the most central directors in

Mexico: Jaime Serra-Puche and Claudio X Gonzalez. Jaime is a leading
independent director who was the chief negotiator of the North American
Free Trade Agreement (NAFTA). Don Claudio is chairman of Kimberly
Clark Mexico and former president of the Mexican Business Roundtable
(CMN-Consejo Mexicano de Negocios).
Finally, part 6 presents suggestions to move the field forward in Mexico.
 CHAPTER 1

The Emerging Market

Context: Why Does
It Matter?

Corporate governance is the “set of mechanisms used to manage the re-

lationship among stakeholders that is used to determine and control the
strategic direction and performance of organizations” (Lynall, Golden,
and Hillman 2003). Corporate governance helps ensure that a firm’s stra-
tegic decisions are made effectively and in line with shareholders’ inter-
ests. It aligns owners’ and managers’ decisions. It is also a reflection of the
firm’s values and beliefs. Efficient corporate governance mechanisms can
be a competitive advantage for a firm.
Until recently, the need for corporate governance laid on the idea
that when separation exists between firm ownership and its management,
self-interested managers can take actions to benefit themselves, with firm
stakeholders bearing the cost for this action. This scenario is typically
referred to as the agency problem. Costs associated with the agency prob-
lem can include:

A) Financial restatement
B) Fraud related to bankruptcies
C) Stock option backdating
D) Earnings manipulation

Corporate governance is then implemented to decrease the risk of

incurring agency costs.
According to a McKinsey study (Newell and Wilson 2002), insti-
tutional investors are willing to pay premiums for well-governed firms.
2 A PRIMER ON CORPORATE GOVERNANCE

Premiums go from a low of 11 percent in Canada to a high of 40 per-

cent in Egypt. Foreigners invest less money in firms that insiders control
and that are domiciled in countries with weak investor protection (Leuz,
Lins, and Warnock 2009). Because institutional weakness makes law en-
forcement costly and more difficult to achieve, the quality of country-
level institutions influences corporate governance at the firm level. High
ownership concentration is a response to the lack of legal protection.
Weak corporate governance, ownership concentration, and limited
protection of investors—all of them emerging market characteristics—in-
tensify principal–agent problems and create unique agency problems
where majority owners take advantage of minority ones. This has been
labeled the “principal–principal” problem (Young et al. 2008).
In emerging countries, laws and regulations on accounting require-
ments, information transparency, and stock market transactions are ab-
sent or deficient. Hence, standard structures of corporate governance
have little institutional support. Therefore, diversified business groups,
family connections, and government contacts play a larger role in a firm’s
governance activities and conflicts between majority and minority share-
holders are the norm.
The expropriation from minority shareholders can take place in
several ways:

A) Designating nonqualified individuals to key corporate roles.

B) Buying and selling at nonmarket prices from organizations related to
majority shareholders.
C) Pursuing strategies that advance personal, family, or political agendas
in detriment of firm performance objectives.

Hostile takeovers or a market for corporate control is the ultimate

solution for this problem, but this mechanism does not exist in most
emerging countries.
Institutional weakness also inhibits majority owners from sharing
sensitive information with potential investors; building trust is difficult
and this probably inclines controlling shareholders to prefer loyalty over
aptitude when choosing among potential directors and top managers. A
negative family dynamic in a context of low legal protection will probably
 The Emerging Market Context 3

increase the risk of expropriation for minority shareholders even if they

are members of the founding family (González et al. 2015).
Research evidence has shown that principal–principal problems in
emerging countries can be decreased by having multiple block hold-
ers (i.e., banks or private equity funds) that help monitor the firm and
stronger legal institutions. On the other hand, expropriation of minority
shareholders tends to increase with a family chief executive officer (CEO)
and the political involvement of owners (Azoury and Bouri 2015; Jiang
and Peng 2011).
Within emerging countries, most public firms are family owned, and
the identity of large owners often determines the control structure of the
firm. Family owners are more reluctant to draw equity from the stock mar-
ket, fearing loss of control and family cohesiveness (Thomsen and Pedersen
2000). When families appoint an owner CEO, they have an information
advantage over minority shareholders (Anderson and Reeb 2003a). In
family-owned and -managed firms, the sharing of sensitive information
with outside managers and investors is unlikely because of the weak insti-
tutional environment. Hence, the controlling family and its members serv-
ing in top management roles have information advantage over minority
shareholders. Corporate governance practices designed to protect minority
shareholders in Latin America are minimal (Castro, Brown, and Baez-Diaz
2009); more than 40 percent of the firms in this study did not have in-
dependent directors, and eight out of nine board members were insiders
(they reclassified gray/affiliated directors—those with a business or family re-
lationship to key shareholders—as insiders). These numbers probably reflect
the degree of control that families still have on Latin American firms. In
this same study, 79 percent of Mexican firms had a family as its main share-
holder. That same figure was 48 and 43 percent for Brazil and Chile, re-
spectively. Finally, these authors find that in Mexico 48 percent of sampled
firms have a dual share structure. For Brazil it is 14 percent and for Chile
7 percent. A dual share structure means that there are two types of stock
per firm: one with voting and the other without voting rights. This strat-
egy is often used when controlling shareholders want to maintain control
and can exacerbate conflicts between majority and minority shareholders.
Weak institutions contribute to the intervention of politicians in busi-
ness activities (Hellman, Jones, and Kauffman 2000). Politically connected
4 A PRIMER ON CORPORATE GOVERNANCE

managers and owners can use their influence to reduce regulatory pressures
or to gain preferential access to government contracts. On the other hand,
politically connected managers and owners could also use the firm and its
resources to serve political objectives to the detriment of minority share-
holders. Controlling shareholders with political ties in Indonesia prefer the
private benefits of control over external financing opportunities, although
the latter would be beneficial to all shareholders (Leuz and Oberholzer-
Gee 2006). Political connections in family firms can also result in excessive
employment or in favoring employees with political connections rather
than those that have the necessary skills.
Expropriation of minority shareholders is not easily observed in good
times. But, during economic downturns, controlling shareholders may
feel tempted to extract firm resources to protect their own wealth (Young
et al. 2008). During the 1997 Asian financial crisis, even firms with a good
reputation exploited their minority shareholders (Johnson et al. 2000).
Resolving principal–principal conflicts in emerging economies requires
creative solutions. An institution-based view of corporate governance sug-
gests that individual countries will need to work out answers appropriate
to their own institutional conditions (Peng and Jiang 2010). Eliminating
concentrated ownership structures in emerging markets is probably not
­realistic because of the scarcity in supporting institutions—takeover mar-
kets, effective boards of directors, and rule of law.
 Index
Access to Firm Credit, 20 Corporate governance
Audit and Accounting Practices, 14 in Mexico, 17–18
business groups, 25–31
Big linkers, 77 code of good governance, 20–23
Board composition corporate law, 18–20
in Mexico, 57–58 equity market, 23–25
age, 60–61 improve, 82–84, 86
board evaluation, 72 obstacles for improving, 82,
board meetings, 72–73 85–86
duality, 62 recent studies on, 31–33
education, 65–66 Corporate Governance Legitimacy
firm age, 68 Index, 14
firm internationalization, 73–74 Corporate Governance Manual, 89
foreigners, 58–59 Corporate law, 18–20
functional background, 66–68 Corporate networks in Mexico, 77–80
government experience, 64–65 Corporate ownership, 17
independence, 62–64 Corruption, 7
industry, 68–69
international experience, 64 Diversified business groups,
listed foreign exchanges, 74–75 advantages of, 25
number of committees, 70–72 Doing Business 2015 report, 24
reputation, 70
tenure, 61–62 East Asian crisis of 1997 to 1998, 21
women, 59–60 Education, positive effect of, 65–66
Board evaluation, 72 Emerging market context
Board meetings, 72–73 agency problem, 1
Boards of family firms, 38–56 corporate governance, 1–2
Bonding, 74 expropriation from minority
Brazilian Institute of Corporate shareholders, 2, 4
Governance (IBGC), 91 institutional weakness, 2–3
Breach of loyalty, 19 politically connected managers, 4
Buffet, Warren, 36 principal–principal problems, 3, 4
Business groups, 25–31 Equity market, 23–25
External auditors, 19
Calderon, Felipe, 6
Carlo’s Slim group, 31 Family involvement
Centro de Investigación y Docencia in boards, 38–56
Económica (CIDE), 14 family firms, 35–36
Claudio, Don, interview with, 85–86 in management, 37
Contract Enforceability, 20 in ownership, 38
112 INDEX

Family-led capitalism, 8 North American Industry

Firm reputation, 70 Classification System
Foreign Corrupt Practices Act, 15 (NAICS), 68
Foreigners, board composition in
Mexico, 58–59 128/214 on government
43/214 on political stability and effectiveness, 7
absence of violence, 7 138/214 on regulatory quality, 7
49/214 on corruption, 7 Organisation for Economic­
Functional background diversity, Co-operation and
66–68 Development (OECD), 6
better life index of 2016, 10–11
Gender diversity, 59 Output functions, 67
General Agreement on Tariffs and Ownership, family in, 38
Trade (GATT), 18
Global Competitiveness Index, 20 Peripheral functions, 67
Globalization, 74 Personal Security and Private Property
Rights, 14
Initial public offering (IPO), 23–24 Public responsibility, 71
Instituto Mexicano para la
Competititivdad (IMCO), 14 Reputation, idea of, 70
International membership, 58
Internationalization, 73–74 Sarbanes–Oxley Act, 71
Serra-Puche, Jaime, 79
Law of Mercantile Societies, 18–19 interview with, 81–84
Law of Securities Markets, 18–19 71/214 on rule of law, 7
Shareholder activism, 17
Management, family in, 37 Social Responsibility, 14
Mexican context Socioemotional wealth, 36
culture, 11–12 concept of, 36
demographics, 8–10 Succession, 37
economy, 5–6
education, 10–11 Tax reform, 6
institutions, 6–8 Taxonomy of institutional systems, 8
Mexican financial crisis of 1994, 20–21 Tecnológico de Monterrey
Mexican governance model, 13–16 (ITESM), 11
Mexican Stock Exchange, 17–18 Throughput functions, 67
Minority ownership, 17 Times Higher Education World
Minority Shareholders Rights University Rankings, 11
Protection, 20 Transnational, 73
Tunneling, 38
NAFTA, 5
National Banking and Stock Market UN World Tourism Organization, 8
Commission, 17–18 Universidad Nacional Autónoma de
National System against Corruption, 15 México (UNAM), 11
Nationality, 58
New York Stock Exchange (NYSE), 71 Walmex, 26
94/214 on voice and accountability, 7 Worldwide governance indicators, 6
 OTHER TITLES IN THE CORPORATE GOVERNANCE
COLLECTION
John A. Pearce II and Kenneth A. Merchant, University of Southern
California, Editors
• A Primer on Corporate Governance: China by Jean Jinghan Chen
• Managerial Forensics by J. Mark Munoz and Diana Heeb Bivona
• A Primer on Corporate Governance: Turkey by Sibel Yamak and Bengi Ertuna
• A Primer on Corporate Governance: Italy by Andrea Melis and Alessandro Zattoni

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