Main Board Issues in Chile Ricardo Escobar C. Carey Cía. Ltda.

Recent Changes Corporations Law Securities Law Pension Funds Law Tender offers Related party transactions Procedures to demand compensations Election of directors Audit committee

Board Issues I. Management of the corporation II. Directors Committee (audit committee) III. New circumstances, conclusions and predictions

I. Management Powers Management and representation of the company Based on: –Appointment and removal of directors by shareholders –Directors act for the sole interest of the company

Appointment and Removal Concentrated ownership Number of Board members The role of Pension Funds (AFPs) –Share value –Voting power

AFPs Investment Restrictions No single shareholder owns more than 65% Minority shareholders must own 10% at least 15% of voting shares must be owned by at least 100 unrelated shareholders, with a US $ 2500 investment each

AFPs Voting Restrictions AFPs cannot vote for candidates to the Board who: Are controlling shareholders or related to the controlling shareholder Are shareholders (or related to) owning 10% or more of the company Directors of the AFP or related to the AFP Group

Acting Only for the Company Majority of the Board is related to the controlling shareholder Areas of risk: related party transactions and insider trading Solution: Strengthening of legal procedures to demand compensation for shareholders and the company itself

II. Directors Committee Mandatory in companies worth at least US $ 38 MN (30 to 40 corporations in 2001) Seven members Board Three Directors, two must be “independent” Supervise: executive management, the Board, auditors, rating agencies, etc.

Committee’s Practical Issues Shortage of independent directors –Elected without controlling shareholder votes –Unrelated to the controller Budget and remuneration –Approved at the annual shareholders meeting –Examples: CCU US$ annual budget Telefonica US$ 770 monthly fee

Practical Effects No public denounces in 2001 Enactment effect The “AFPs Director” Monthly meeting, minutes, public access So, it may be working

III. What can be Expected? Professional independent directors Fewer cases of controlling shareholders and related party abuses The “Enron effect” –Auditors selection –Audit procedures –Larger budget for the Directors Committee

Chile, a corporate paradise? Not quite, yet.

Some Negative Elements Still a too small capital market –More listed corporations –More investors The Code of Sound Corporate Practices –Nice start –Cold present