Latin American Board of Directors and the Expropriation of Minority Shareholders’ Rights
Abstract
This paper examines the link between corporate governance structures and the potential for expropriation of minority
shareholders’ rights. Analysis of 97 firms from Brazil, Chile and Mexico that traded ADR shares in the United States
between 2000 and 2002, indicates that increasing the size of the board by inclusion of additional independent outside
directors lowers the potential for expropriation of minority shareholders’ rights. Also, increases in the tenure of independent
outside directors, decreases in CEOs’ shareholders and more interlocking directors on a board all serve to lower the potential
for expropriation of minority shareholders’ rights.
Introduction
Latin American (LA) equity markets are significantly underdeveloped in comparison with emerging economies in
Asia or Eastern Europe. LA exchanges lack retail, institutional, and international investors. Moreover, these markets cannot
attract sufficient domestic companies willing to list their shares to create an efficient market environment. Overall, LA
exchanges are characterized by low volume, decreasing market capitalization, low liquidity, and little Initial Public Offering
(IPO) activity (La Porta et al., 1997). Minority ownership in LA equity markets is substantially lower than elsewhere. For
example, Porta, et al. (1997) report that the ratio of stock market capitalization held by minority shareholders to gross
national product (GNP) averages 24 percent, less than half that of the United States (U.S.) (58%) as well as the average of the
English-origin countries (60%). LA countries average seven listed firms per one million people, compared to 11 for French-
origin countries, 30 for the U.S. and 36 for English-origin countries. Finally, for the period July 1995 through June 1996, LA
countries averaged 0.09 new offerings (IPOs) per million people, well below the level seen elsewhere. These statistics
provide evidence of the difficulty LA firms face accessing equity financing as well as the difficulty for investors in equity
markets.
LA equity markets may have less trading since the majority of companies’ shares are in the control of wealthy
families who may not wish to surrender their power. These wealthy families possibly use corporate resources for their own
interests while the minority shareholders bear the costs. For example, in January 2000, a British mobile phone operator
bought a minority stake in Iusacell, the Mexican mobile company, excluding small shareholders from the deal. The buyer
acquired a 34.5% share directly from the controlling family, rather than offering to buy shares at the same price from
minority investors.
However, the LA business culture may enable some shareholders of LA firms to have significant control rights, in
excess of their cash flows rights, through the use of pyramids
1
and by management participation in more than one business.
These types of arrangements are known as grupos económicos (henceforth grupos) and are the dominant form of large private
business organizations throughout the region. Typically controlling shareholders run grupos, not professional managers with
little equity ownership.
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