1 The Code of Best Practices and the Board of Directors Professor Florencio Lopez-de-Silanes Yale University School of Management International Institute for Corporate Governance April 9 th, 2002.

2 Corporate Governance and the Code of Best Practices  Corporate governance is the system through which companies are directed and controlled.  Good corporate governance implies: Efficient Board of Directors. Adequate investors’ protection.  International experience has shown that improved transparency and disclosure of corporate practices increase investors’ trust in the companies.  Different countries have found that a way to improve the corporate governance of their companies is through the development of Codes of Best Practices (CBP).

3  Although the Codes have common factors, each one emphasizes the problems or characteristics of each country.  In general terms, the Codes establish basic principles, of voluntary adherence, to improve corporate governance.  The CBPs make recommendations in five areas: 1.Board of Directors 2.Auditing and Accounting 3.Board’s Compensation 4.Selection of the Members of the Board 5.Shareholder rights The Code of Best Practices

4 Code of Best Practices Total number of companies that answered the questionnaire: 239 The companies that requested a deferment have already submitted the requested information SUSPENDED 33Companies DEFERMEN T 15 Companie s SUBMITTED 178 Companies MISSING 13 Companie s

5 Composition of the Board of Directors 1)The number of directors is between 5 and 15 89% 2) There are not substitute Directors33% 3) At least 40 % of the directors are independent 83% 4) At least 20 % of the directors are independent 75% Total of companies that commented on best practices: 178

6 Structure of the Board of Directors 1)The Board performs functions of compensation and evaluation, audit, planning and financial management72% 2)The audit committee is chaired by an independent director 26% Total of companies that commented on best practices: 178

7 Committees and the Board’s Functions  It is considered important that the Board is properly informed and that the Directors participate in the discussion of the topics of relevance. Recommendations: oThe creation of intermediate entities, committees, to support the Board in the execution of its functions These committees are extensions of the Board  There are at least three functions in which the Board should be involved. These are: Evaluation and Compensation Audit Financial and Planning

8 Compensation and Evaluation Function 1) The evaluation and compensation committee revises the selection of the company’s executives58% 2) Information (structure and form) about compensation packages for directors and executives is disclosed33% Total of companies that commented on best practices: 178

9 Audit Function Total of companies that commented on best practices: 178 1)The external auditor’s fee is less than 20% of the audit firm’s revenue 83% 2)External auditor is different than the “comisario” 67% 3) The committee submits accounting policies to the approval of the board 41% 4)The board approves guidelines of the internal control system 57% 5) The committte verifies the compliance with applicable dispositions 54%

10 Financial and Planning Function Total of companies that commented on best practices: 178 The Financial and Planning Committee evaluates the viability of the investment and financing63%

11 Disclosure of Information to Shareholders Total of companies that commented on best practices: 178 1) Miscellaneus topics are omitted during the annual meeting 76% 2) Information needed for the annual meeting is available 15 days in advance 90% 3) Shareholders with enough information and voting alternatives can instruct their agents31% 4) Relevant aspects of the committees’ performance are included 22%

12 Benefits and Limits  Benefits of CBP Provides a guideline for shareholders for some reforms Gives investors more information to sort good from bad Market push to institutionalize and professionalize companies To improve the image of companies that uphold the principles recommended by the CBP  Limits Only guideline, not forcing anybody Some principles need more bite Big missing point: director’s responsibilities Need other forces (the press) to excersice some monitoring

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14 Board of Directors  The Board of Directors must be committed to its function, be functional and make informed decisions. The CBP suggests: oThe separation of the CEO and the President’s roles oTo define more concretely the functions of the Board oTo limit the Board’s size oThat substitutes are not included in the Board oPrinciples about the Directors’ duties  It is considered as an essential element for the good operation of the Board that it has plurality of ideas and that it acts with objectivity. The Code suggests: oThe appointment of independent Directors oMinimum percentages of representation of the different categories of directors

15 Evaluation and Compensation Function  It is necessary that the Board supervises the administration of the company, the execution of the goals, as well as to make sure that the Directors’ compensation is not disproportioned. The CBP recommends: oThat the board is informed about the policies on evaluation and to compensation of Directors oThat information is disclosed

16 Audit Function  The Board should guarantee that the financial information is revised and that external auditors participate in this process so that the information that is disclosed is accurate and has a high degree of transparency. Recommendations: oTo assure the objectivity in the selection of the auditors oThat the Chairman of the audit committee is independent oConsistency in the company’s accounting policies oTo have an internal control system oTo make sure that the company fulfills all the legal dispositions that are applicable

17 Financial and Planning Function  The Board should establish the company’s investment and financing policies, guaranteeing that these are consistent with the strategic planning of the company. It is recommended: oThat the Board approves the company’s investment and financing policies, as well as the annual budget oThat the strategic position of the company is periodically revised

18 Disclosure of Information to Shareholders  Shareholders, especially the minority shareholders, should have access to all the necessary information to be able to participate in the annual Shareholders meeting. The CBP recommends that: oThe topics that will be discussed during the annual meeting are well defined. oThe disclosure of all necessary information oThe existence of policies and mechanisms that facilitate the communication between the shareholders and the company