of corporate governance in Mexico. It begins with a brief analysis of the historical corporate governance model in Mexico, including the governance struc- tures, the banking and financial systems, ownership and control patterns, industrial policy, and industrial relations. The paper then examines how and why these various aspects of corporate governance have been changing with processes of economic liberal- ization currently under way. Finally, it analyzes the consequences of changes in the model of corporate governance for the countrys development (e.g. increased consumer goods for middle class consumers, increased disclosure by domestic corporations, less support for corporate social programs, etc.). KEY WORDS: corporate governance, economic development, Mexico Twenty years ago Mexicos development was tied to a model of import substitution in which Mexican industry would grow to meet the needs of its own internal markets. As a result, its markets were highly protected from foreign com- petition and foreign ownership in Mexican com- panies was usually restricted to a 49% share. State-owned enterprises dominated many agri- cultural and industrial sectors. Mexican compa- nies were assured attractive margins in highly oligopolistic markets and unsuccessful companies could count on government bailouts. The moral hazard problems created by such an environment created an atmosphere in which political skills were often more important to success than were business skills (Austin, 1990). Consequently, cor- porate governance was not on the agenda of either business or government leaders. Since that time, concern about corporate governance has increased throughout the world and Mexico is no exception. The forces behind the current interest in good corporate gover- nance are due in large part to the demands of international investors, the pressures faced by newly privatized companies, as well as processes of mimetic isomorphism within Mexico, where business people are responding to governance movements in the United States, Japan, and the European Union (DiMaggio and Powell, 1983). Unfortunately, little is known about corporate governance practice in Mexico. A few surveys have yielded relatively little information on the subject and have called for greater research into corporate governance practices outside of the United States (Shleifer and Vishny, 1997; La Porta et al., 1999). This paper provides a brief survey of what is known regarding corporate governance in Mexico. Corporate Governance in Mexico
Journal of Business Ethics
37: 337348, 2002. 2002 Kluwer Academic Publishers. Printed in the Netherlands. Bryan W. Husted is a professor of management at the Instituto Tecnolgico y de Estudios Superiores de Monterrey in Mexico and holds the Alumni Association Chair of Business Ethics at the Instituto de Empresa in Madrid. His work has appeared in the Journal of International Business Studies, Business Ethics Quarterly, and Journal of Business Ethics. His current research focuses on corporate social strategy and cross-cultural business ethics. Carlos Serrano is a professor of finance at the Graduate School of Business and Leadership of the Instituto Tecnolgico y de Estudios Superiores de Monterrey in Mexico. He is in his second year of Ph.D. studies and his research focuses on corporate governance and corpo- rate valuation issues. He has consulted extensively on business valuation, financial planning and analysis, and performance measurement systems. Bryan W. Husted Carlos Serrano One of the greatest challenges of a study of corporate governance in Mexico is the difficulty of obtaining relevant information. The most accessible source of information is the law. Corporate governance is dealt with in two principal bodies of law, the General Law of Mercantile Societies (LGSM) and the Law of the Stock Market (LMV). Very little information is available with respect to the practice of corpo- rate governance. As a result, we undertook a brief review of the practices of the ninety largest cor- porations in Mexico. Data was gathered from the homepages of these companies as well as through personal communications. Specifically, we deter- mined the composition of the board of directors based on board membership, positions on the board, company affiliation, and role as insiders or outsiders. This small study of the largest ninety companies helps to provide some initial data to understand corporate governance in Mexico. The paper begins by looking at the traditional corporate governance model in Mexico in terms of governance structure, the financial and banking systems, ownership and control patterns, industrial policy, and industrial relations. It then examines how and why different aspects of corporate governance have been changing in Mexico. Finally, it speculates on the effects of changes in the model of corporate governance for the countrys economic and social develop- ment. The traditional corporate governance model Governance structure According to Mexican law, corporate governance is the responsibility of one or more directors who may or may not be executives of the corpora- tion. Where there are two or more directors, a board of directors is created (LGSM, 2001, Art. 142 and 143). Ownership of 25 percent or more of voting stock gives a stockholder the right to name one director to the board. This percentage is reduced to 10 percent if the corporation is publicly traded (LGSM, Art. 144). However, since all Mexican companies are family-owned (whether they are public or private companies), appointing directors to the board is largely a family matter (La Porta et al., 1999). Our review found that fewer than 25 percent of the chief executive officers (CEOs) of the 90 largest Mexican companies also serve as chairmen of the board. Usually, the founder or senior family member (generally an ex-CEO) is still tied to the company and serves as chairman of the board, while a younger family member acts as CEO. The Mexican pattern contrasts with the global pattern in which companies tend to combine the functions of CEO and chairman of the board (Stewart, 1993; Jensen, 1989). Usually corporate boards around the world are expected to be involved in the hiring, dismissal, counseling and compensation of top management (Stewart, 1992). Under Mexican Law, directors are responsible for the hiring and dismissal of corporate managers, but have no specific duties with respect to the counseling and compensation activities of the board (LGSM, Art. 145). However, the Code of Best Corporate Practices, developed by a group of leading Mexican business people and supported by the Mexican Stock Exchange (BMV), does mention that boards should advise management with respect to issues of strategic vision (Consejo Coordinador Empresarial, 1999). Ordinarily when corporate boards do not perform these tasks (hiring, dismissal, counseling, and compensation) efficiently, there are other mechanisms to discipline the incumbent man- agement such as the product market and the market for corporate control. In Mexico, however, the market for corporate control is quite weak, if not non-existent. Thus, the product market provides the main source of man- agerial discipline when corporate boards fail. Two kinds of governance systems exist among major OECD countries: outsider systems (mainly in the U.S. and the U.K.) and insider systems (the rest of the world) (Nestor and Thompson, 2000). The distinguishing features of the insider model are (a) concentrated equity ownership, (b) de facto subordination of shareholder interests to managerial interests, (c) a weak emphasis on minority interest protection in securities law and regulation and (d) relatively weak requirements 338 Bryan W. Husted and Carlos Serrano for disclosure. Insider systems have usually been bank-centered (Germany and Japan are prime examples) or family centered (as in Mexico). Typically, members of the board are considered internal or inside directors. According to the Code of Best Corporate Practices (Consejo Coordinador Empresarial, 1999), inside directors include company execu- tives, shareholders with managerial responsibili- ties in the firm, advisors or consultants of the firm, customers, suppliers, creditors or debtors of the firm, representatives of non-profit organiza- tions that receive significant donations from the firm, executives of companies with board inter- locks with the firm, and blood relatives of any of the prior people. They do not include polit- ical relatives (those married to members of the controlling family) or the ties of compadrazgo that are so important in Mexico. Compradazgo refers to the relation between the parents and godparents of a child. Godparents are symboli- cally adopted as members of the Mexican family. Often compadres are closer than siblings. Unfortunately, it is difficult to discover relations of compadrazgo because of their informal nature. A review of the publicly available information on the 90 largest companies in Mexico reveals that 53% of directors are top executives of the firm, the firms group, or relatives of such executives. However, it is currently impossible to determine the extent to which the other members of the board belong to one of the other categories of insiders mentioned by the Code, let alone the existence of political or compadrazgo relations. In some countries like Japan, the board of directors seems to serve mainly ceremonial purposes since they do not represent the share- holders interests (Gerlach, 1992). In Mexico, we cannot observe at this point whether corporate boards are ceremonial in nature or effective decision-making bodies (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). Further research needs to be conducted in this area. The financial and banking system The financial market. Mexicos financial market is small and underdeveloped and the stock market is clearly insignificant in size. The Mexican stock market had a capitalization of US$ 133.7 billion as of March 31, 2001 (Bolsa Mexicana de Valores, 2001) compared to the market capitalization of the New York Stock Exchange of US$ 11.6 trillion (New York Stock Exchange, 2001). Nonetheless, despite its relatively small size, the Mexican stock market does provide a significant signal to investors about the health of the economy as a whole. The money market (mainly CETES treasury notes) accounted for almost 97% of the average daily turnover of the Mexican Stock Exchange (BMV) over the last four years (US$ 9.3 trillion), while only 3% of the turnover was due to trading in stock. An important reason for this situation is the lack of strong institutional investors in the Mexican financial markets. However, we expect that the newly created pension-fund companies (afores) will eventually help the financial market grow in size and marketability. In addition, Mexican companies are closely held and thus few shares are actively traded. There are 35 companies in the BMV index (IPC), and Telfonos de Mxico (Telmex) accounts for more than 26 percent of the market capitalization value of the index (see Figure 1). Almost 60 percent of the IPC market capitaliza- tion value rests on the value of five companies: Telmex, Banamex-Accival, Telecom, Wal Mart de Mxico and Cementos Mexicanos (Cemex) (Grupo Banamex-Accival, 2001). The banking system. In 1982 a massive capital flight occurred due to major devaluations of the Mexican peso in February and August. At the same time, bank credit was greatly restricted and private parties were forced to borrow from abroad (mainly from the U.S.). Consequently, President Jos Lpez Portillo Pacheco announced the nationalization of the banks on September 1st, 1982, justifying his decision by arguing that it was vital to the economic interests of the nation (Carvallo, 2000). In 1992, Mexican banks were reprivatized in order to increase and broaden the quality of the financial services avail- able to the public, while letting the government pursue issues related to the satisfaction of social needs and improvement of the quality of life Corporate Governance in Mexico 339 (Carvallo, 2000). The buyers of the banks and other financial institutions were mainly stock brokerage houses. Privatization and regulation resulted in the creation of financial conglomer- ates with banking, insurance, leasing, factoring, money exchange, stock brokerage, mutual and pension fund operations. The financial and mar- keting synergies were rather high since the banks acted as holding companies and were a sure source of low-cost capital for the other financial entities. The privatization of the pension fund industry, following the Chilean model, motivated Mexican financial institutions to develop strategic alliances with their counterparts from all over the world in order to acquire managerial expertise and capital. The privatization of the banking industry brought mixed results for the Mexican economy. The good news stemmed from the privatization itself, returning private ownership and manage- ment to the banking industry. Unfortunately, very high prices were paid for the banks, which inherited problems from uncollected loans. Because of their high price, the banks needed significant infusions of financial resources to cope with their problems of bad debt and with the financial crisis that took place during the second half of the nineties. Once again, the federal government intervened, but without renational- izing the industry. As a result of volatility in the Mexican economy (e.g. debt crisis, devaluations, inflation) over the last three decades, most Mexican com- panies do not finance their assets with more than 50% debt (debt-equity ratio greater than or equal to 1.00). One exception is the automotive industry, which acquires assets with a debt ratio of slightly over 80% (see Table I). It is impor- tant to mention that the automotive companies are foreign-controlled companies and this fact, rather than industry characteristics, may explain the difference in debt management. Possibly as a consequence of the low level of debt financing, banks do not play a significant role in corporate governance, as evidenced by the fact that few of the directors of the 90 largest Mexican companies come from banks. In fact, only four bankers sit on two or more cor- porate boards: Ricardo Guajardo Touche (BBVA Bancomer), Juan Carlos Braniff Hierro (BBVA Bancomer), Antonio del Valle Ruiz (Bital), and Carlos Gmez Gmez (Santander). 340 Bryan W. Husted and Carlos Serrano Figure 1. Largest firms in the Mexican Stock Index (IPC). Ownership and control patterns Most traded stocks have limits regarding owner- ship percentage and voting rights. Table II summarizes the main classes of stock and their voting rights. As a result of the structure of stock classes and family ownership, the market for corporate control is basically non-existent in Mexico. Class A stock gives full voting rights to the family owners, but most other classes of stock provide only limited or no voting rights for minority interests. Even though there are around 179 companies trading in the Mexican stock market, in reality all companies are controlled by families (La Porta et al., 1999). Furthermore, publicly traded stock represents only a small percentage of the firm ownership. Thus, control resides with the families that own the controlling interest in the voting classes of stock. In contrast, eighteen percent of the largest 150 companies in Mexico are foreign-controlled firms (Expansion, 2000). Almost all of these firms are publicly owned firms with a high share of publicly traded stock. Unlike the United States where institu- tional investors hold over 50% of all corporate equities, institutional investors do not hold con- trolling positions in corporate ownership in Mexico. In Mexico, business groups consist of holding companies that invest in other companies that are characterized by vertical, horizontal, or conglomerate integration. Usually the holding company (el corporativo in Mexican Spanish) makes decisions on financing, dividends, fixed assets and hiring of top managers. The growth of these groups was motivated by Mexican indus- trial policy during the second half of the seven- ties (Flores, 2000). Business groups have played an important role in the development of the Mexican economy. Some of the major business groups and compa- nies are listed in Table III. Cross-holding of shares between firms gener- ally takes place within business groups, so that Corporate Governance in Mexico 341 TABLE I Debt financing by industry in Mexico Industry Debt equity ratio
* Operating cash flow** Food 0.43 1,260,474 Beverage 0.35 11,665,540 Automotive and auto parts 5.01 242,816 Consumer goods 0.41 7237 Cement 0.62 17,368,470 Construction 1.52 11,545,100 Retail stores 0.26 7,360,266 Department stores 0.63 1,754,890 Specialty stores 1.11 0,2,695,367 Communications and transportation 0.54 028,973,540 Electronics and electric 1.02 0,0-18,113 Industrial groups 1.18 20,121,320 Hotels and restaurants 1.05 0,844,634 Metal mechanic 1.47 0,52,292 Mining 0.33 5,537,796 Paper and cellulose 0.54 3,438,776 Chemicals 1.28 0,627,404 Steel metallurgy 1.19 1,511,964 * (Total liabilities cash and marketable securities)/net worth. ** In thousands of Mexican pesos. Source: Anlisis Financiero y Burstil, Banamex-Accival, 1999. 342 Bryan W. Husted and Carlos Serrano TABLE II Voting rights by stock class Class Mexican/Foreign Maximum Voting Directors ownership ownership rights A Mexican only 100% Full Designate at least a majority of the directors B Mexican and 100% Full At least 1 director for each foreign 10% if a minority or at least a majority of directors if capital is only composed of this class. C Mexican and 025% No voting None foreign rights D Mexican and 025% Limited 1 for each 10%. Maximum foreign voting rights of 2. L Mexican and 025% Limited 1 for each 10%. Maximum foreign voting rights of 2. CPOs Mexican and Variable Can be full Depends on the rights granted foreign from 1 to voting rights to the CPOs and underlying 100% for Mexicans, stock. limited or no voting rights. O Mexican (financial Full 1 for each 10%. Maximum groups only) of 2. TABLE III Ten largest Mexican business groups Sales* Net income* Total assets* Carso Global Telecom 97,449,299 23,051,990) 185,145,504 Telmex 96,320,586 25,126,643) 178,675,810 Cementos Mexicanos 45,913,946 09,785,010) 112,829,352 Grupo Carso 40,645,545 04,909,843) 063,494,800 Grupo Alfa 40,344,801 03,803,459) 067,641,656 Fomento Econmico Mexicano 38,627,000 03,907,767) 040,476,410 Grupo Bimbo 28,788,292 01,969,625) 022,854,690 Controladora Comercial Mexicana 27,162,430 01,255,665) 018,232,296 Cintra 26,047,477 01,103,175) 018,966,254 Vitro 25,878,694 (1,494,221) 031,282,730 Savia 25,349,707 (1,090,907) 059,581,325 * Thousands of pesos (As of May 11, 2001, 1 peso = US$ 0.1088). Source: Expansin 2000. the companies remain within the control of the same family. Nevertheless, family control has become more diffused as ownership passes to the second or third generation. Interlocking directorates are very common both within companies of the same business group (e.g. Carso, Alfa, Vitro) and across groups. Only sixteen of the ninety largest companies have no interlocks with other firms. These firms tend to be independent companies that do not belong to any group (e.g., Soriana or Casa Autrey). Among the 90 largest companies in Mexico, five directors sit on at least 10 different boards. Figure 2 lists their names and company affilia- tion. It is unclear whether the purpose of inter- locks is to co-opt potentially destructive external elements into the firms decision-making struc- ture or to infiltrate the decision-making struc- ture of other firms (Mizruchi and Stearns, 1986). It is also important to mention that the pyra- midal structure of ownership in Mexico fosters participation in several boards. For example, Dionisio Garza Medina, CEO of the Alfa Group, sits on the boards of almost all of the groups subsidiaries. He sits on the board of the Alpha Group, on the board of one of its sub- sidiaries, Hylsamex, and of Hylsa, a subsidiary of Hylsamex. Only three of Garza Medinas 10 directorships do not come from the group he leads: Cemex, Vitro and Cydsa. Another example is Carlos Slim Helu of Telmex who sits on 9 boards, all but one of which is from the group he controls. The agency problem inherent in the separa- tion of firm ownership and management con- tinues to be a serious problem around the world. Concentrated ownership through large share holdings, takeovers and bank finance, is a nearly universal method of control that helps investors protect their interests (Shleifer and Vishny, 1997). In Mexican family-owned businesses, family members have multiple dimensions of exchange with one another over a long period of time and therefore have advantages in monitoring and dis- ciplining that mitigate the agency problem. In 95% of family-owned firms in Mexico, the CEO is a family member (LaPorta, et al., 1999). The use of a family member reduces the agency problem between the major shareholders and management, but still leaves the problem with respect to minority stockholders. Nevertheless, agency problems may increase as control of Mexican companies passes to the second or third generation of the founding family. Conflicts of interests often exist among children and grand- children regarding such issues as the allocation of corporate cash flows. Corporate Governance in Mexico 343 Figure 2. Number of board seats for most popular directors in Mexico. Industrial policy The Mexican government has gradually reduced its role in the management of the economy over the last 15 years. The shift from a policy of import substitution to export promotion has been implemented through policies of trade liberalization with the admission of Mexico to the GATT as well as by signing the North American Free Trade Agreement in 1993. Since then, Mexico has also signed free trade agree- ments with Central America, Chile, the European Union, and Israel. In addition, the government has pursued a policy of privatization, selling off Telmex, the national telephone company, the banks, steel companies, and numerous other industrial and agricultural enter- prises. Finally, Mexico has pursued a policy of deregulation, reducing or eliminating bureau- cratic red tape for numerous processes. All of these changes have reduced state intervention in the economy and increased the importance of corporate governance and other self-regulatory processes. Industrial relations Workers usually are not allowed to participate in company management nor sit on the board of a corporation. However, workers are entitled to share in 10 percent of corporate profits (LFT, Arts. 117 and 120). Although concrete data is not available, experts believe that Mexican unions have generally grown weaker over the last fifteen years, except in the case of the unions for airline pilots and stewardesses, which provide an impor- tant exception to the general trend (Guerra, 2001). The pace of decline will probably accel- erate now that the alliance between the former ruling party (PRI), the government and the official labor unions has disintegrated in the wake of the election of Vicente Fox, the opposition candidate, to the presidency (La Botz, 2001). Workers have little ability to influence labor policy in Mexico. They have no access to the corporate decision-making process and therefore only management is involved in strategic deci- sions. Despite arguments for the necessity of worker directors to represent worker interests (Stern, 1988), such representation has not been achieved in Mexico. Instead, the best firms have traditionally had a paternalistic attitude towards workers, providing housing, schools, health clinics, and recreational facilities for employees and their families (Saragoza, 1990). But due to intense competitive pressures from a more liberal trade regime, many companies have been forced to terminate such programs. Evolution and changes of corporate governance in recent years Globalization, trade liberalization, and deregula- tion have created a more competitive environ- ment and the need for better management within Mexican companies. In addition, foreign investors have demanded better corporate governance, which has helped the evolution of Mexican corporate governance over the last 15 years. In 1997, the National Banking and Securities Commission (CNBV), the Mexican equivalent of the U.S. Securities and Exchange Commission, issued circular 1129 which requires listed companies to disclose director information attached to the prospectus for new issues of securities. Some of the requirements include disclosure of the names and number of members of the board, their resums, and family relationships with other members of the board. These pressures culminated in 1999 with the publication of the Code of Best Corporate Practices by the Mexican Stock Exchange (Consejo Coordinador Empresarial, 1999). Among other things, the Code mentions the importance of hiring independent directors (at least 20 percent of board members), disclosing the nature and current position of directors, and sending information to directors in advance of meetings. The Code also highlights the strategic function of the board as one of its main respon- sibilities. The Code encourages companies to disclose the degree of adherence to such prac- tices in their annual reports. As of January 1, 2001, the CNBV requires that all firms listed in the stock market disclose their compliance with the Code on an annual basis (CNBV, 1999). 344 Bryan W. Husted and Carlos Serrano Globalization and deregulation around the world is affecting the way companies perform their governance activities. There is evidence that corporate governance practices are converging toward a set of ideal practices (Nestor and Thompson, 2000). The fact that the 27 member countries of the OECD have agreed on a document that establishes desired corporate gov- ernance practices and guidelines is remarkable considering the wide array of interests and economic differences among member countries (OECD, 1999). Table IV compares Mexican law and practice to the OECD recommendations and finds considerable agreement. Corporate Governance in Mexico 345 TABLE IV Comparison of Mexican corporate governance with OECD principles OECD principles Mexican law or practice* Shareholders of the same Yes Yes (law) class are treated equally Insider trading prohibited Yes Yes (law) Directors and managers are Yes Yes (law) required to disclose any material interests affecting the corporation Accurate, timely and Yes Yes (law) relevant information given to shareholders External annual audit Yes Yes (law) Accurate, timely and relevant Yes Not specified information given to directors Disclosed financial and Yes Partial (financial disclosure is required corporate governance by law; governance disclosure is information required of firms listed in the BMV) Information prepared, audited Yes Yes (law) and disclosed according to Generally Accepted Accounting Principles Efficient and transparent Yes Underdeveloped markets for corporate control Employee representation Yes Not allowed (practice) on boards Role of the board Hiring, firing, compensation, Hiring and firing (law) and counseling of top management Sufficient number of Yes 40% are outsiders (practice) non-executive board members * When not specified by Mexican law, we state the status of corporate practice. Source: Principles of Corporate Governance, www.oecd.org; Ley General de Sociedades Mercantiles, www.cddhcu.gob.mx/leyinfo/152/. At least from the perspective of the law, it appears that Mexico is converging toward world standards of corporate governance. The Code of Best Corporate Practices indicates that the private sector is aware of world standards and is encouraging adherence to those standards. The presence of a minimum number of outside direc- tors, requirements for information disclosure, the strategic function of the board, and the separa- tion of the CEO position from the board chair- manship are a few examples of changes in corporate governance practice that have taken place since the late seventies to date. However, the extent to which outside directors participate and the effectiveness of other corporate gover- nance reforms with respect to managerial disci- pline are still not clear. One should not be easily seduced into believing that laws and rules have been translated into business practice. The dis- closure requirements of the CNBV leaves imple- mentation to the discretion of the company in terms of interpreting which elements of the Code are to be disclosed and how. Much remains to be done, but clearly the disclosure of compli- ance with the Code will provide a significant incentive for firms to seriously examine and improve their corporate governance practices. Further research needs to be conducted on these issues. Impact of changes in corporate governance on development in Mexico The shift in reliance on state and family capital to a reliance on foreign and institutional capital is giving impetus to significant changes in cor- porate governance in Mexico. State intervention in corporate governance either directly through ownership or indirectly through regulation will continue to decrease. Although the role of family capital is diminishing due to an increased reliance on external capital, family control will remain firmly in place for the foreseeable future. As a result of the increased participation of institu- tional investors and in light of continued family control, the market for corporate control will increase in importance, but will probably not become the source of managerial discipline that it is in the United States. Thus, the product market will provide the primary source of man- agerial discipline in Mexico. Unfortunately, as Shleifer and Vishny (1997) argue, product market competition is not enough to protect the inter- ests of the suppliers of capital. So additional forms of protection will be necessary. A consequence of greater product market competition and greater reliance on foreign capital is that firms are moving from a traditional, paternalistic style of management to a more pro- fessional one (Kras, 1991). Consumers should be the principal beneficiaries of these changes as Mexican firms become more competitive and oriented toward customer service. Minority shareholders should also benefit as increased opportunities to exit a poorly managed company become available through an expansion of the stock market. Shareholders generally will benefit from increased disclosure requirements for com- panies that seek to be listed in the BMV or issue new securities. However, in view of generally weaker labor unions and less paternalistic man- agement, blue-collar workers will continue to face a harsh work environment. Convergence toward international standards will undoubtedly increase emphasis on the maximization of share- holder wealth that has been the focus of the Anglo-American model of corporate governance (Sison, 2000). This shift in focus will mean less involvement in corporate social programs for employees. Perhaps the greatest consequence of improved corporate governance practice lies in its impact on foreign investment. In a study of corporate governance from the perspective of institutional investors, Coombes and Watson (2000) found that for three-quarters of the investors, sound corporate governance practices are at least as important as corporate financial performance in their investment decisions. Over eighty percent of the institutional investors surveyed said that they would pay more for a well-governed company. Certainly, a few of the larger compa- nies in Mexico do engage in some of these desired governance practices (e.g., Alfa, Proeza), but most firms clearly do not. Mexican compa- nies that are listed in the New York Stock Exchange are already required to comply with all 346 Bryan W. Husted and Carlos Serrano of the requirements of the U.S. Securities and Exchange Commission. These pressures will only increase in the future as more companies seek funding in foreign markets. Therefore, if Mexican companies want to keep abreast of the competitive dynamics of their respective indus- tries, they will need to continue to rely on foreign capital and comply with both the expec- tations of international investors and legal requirements regarding corporate governance. Improved corporate governance is thus both a cause and a consequence of increased foreign investment. There are several implications for public and business policy. Mexico clearly needs more regulation with respect to the disclosure of the sources and uses of corporate cash flows. Such disclosure is still relatively uncommon. In addition, loopholes in the CNBV corporate gov- ernance disclosure requirement need to be closed by enumerating specific items of Code compli- ance that should be disclosed. 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Husted Instituto Tecnolgico y de Estudios Superiores de Monterrey and Instituto de Empresa, ITESM/EGADE, CETEC TN 4
piso, Ave. Eugenio Garza Sada 2501 Sur, Col. Tecnolgico, C.P. 64849 Monterrey, N.L., Mexico E-mail: bhusted@egade.sistema.itesm.mx Carlos Serrano Instituto Tecnolgico y de Estudios Superiores de Monterrey 348 Bryan W. Husted and Carlos Serrano