Despite changes in corporate law and the introduction of the code, ownership of Mexican public firms is still heavily concentrated and this presents incentives that harm the three principals of good governance: transparency, balance of power, and accountability. Having said this, we also need to acknowledge the increasing importance of private equity and institutional investment among the newer public firms. The presence of this type of block holders should improve the quality of governance due to an increase in accountability and power balance. The caveat here is that the number of firms that go public in Mexico is low even for emerging markets; according to Rivas and Adamuz (2017), in a study using 63 developed and emerging countries Mexico ranks 48th in terms of IPOs/population during 2001 to 2014. Among the large emerging economies that fare better than Mexico are China, Chile, Croatia, Turkey, Brazil, Indonesia, Philippines, South Africa, India, and Russia.
The presence of women directors in our sampled firms is remarkably low (6 percent: Table 6.1) not only for social responsibility reasons but also for informed decision making at the board level; women take buying decisions of many kinds of products so firms need a minimum quota of gender representatives both at the board and TMTs. An average of 6 percent (Table 6.1) of international experience is low for a country with the size of trade that Mexico has. Diversity can have positive effects on board performance. A growing body of research suggests that board member diversity brings unique perspectives to boards and contributes to build social capital (e.g., Arfken, Bellar, and Helms 2004; Rivas 2012b). Diversity can also enhance a board’s independence of thought (Adams and Ferreira 2009). Other specific areas to improve include:
Overall, corporate governance practices in Mexico compare to those of OECD countries but fare below its average. Thus, we can conclude that Mexico needs to improve its governance practices if it truly aspires to become a developed economy or even a leader of emerging country practices.
A key regulatory issue that Mexico needs to address is the update of the Law of Mercantile Societies from 1934 so that it is consistent with the 2005 law of security markets. Most countries from the civil law tradition had this same problem but have managed to address it in recent years. Among those countries are Spain, Italy, Brazil, Colombia, and Chile. Until this matter is resolved, private firms in Mexico will not be required to have a board that follows global best practices. Hence, the regulatory framework in Mexico needs to be consistent in order for corporate governance best legal practices to permeate and contribute to improvements.
Because of the high level of ownership concentration, regulators should consider restricting pyramidal structures and the issuance of shares with restricted voting rights (currently at a threshold of 25 percent). Why? Because freely allowing this exacerbates the problem of control by few and ownership by many. Policy makers should consider that restricted voting rights create principal–agent problems where the principal (owner) is not able to exercise part of his/her rights and the agent (CEO) can distinguish between a “first” and “second” class of firm owners. A one share–one vote policy has been a practice consistent with sound corporate governance practices. Hence, regulators should reconsider the existing forms of equity issuance and decide if they enhance corporate governance practices.
Following the study of Machuga and Teitel (2009), policy makers should also consider redefining board independence to make it more rigorous and establishing a maximum number of directorships an individual board member can hold. Substitute board members is also a practice in Mexico that should be forbidden. Even if a substitute board member is as capable as the regular one, how can they follow pending issues that have been discussed in previous meetings? How can he/she earn minority shareholders’ trust?
Babatz-Torres (1997) argues that Mexican law protects minority shareholders on the surface but needs to be much more specific to serve their interests against potential lawsuits from majority owners. Chong and López-de-Silanes (2007) mention that the country has reformed its securities laws but also agrees with the low degree of shareholder protection diagnosis.
As mentioned earlier, professionalizing board members would also help. Director institutes can play a key role in expanding the pool of competent candidates from which to select directors. This has proved to be a valuable resource in Brazil with the Brazilian Institute of Corporate Governance (IBGC) that was formed as a nonprofit organization in 1995 to improve the quality of directors and governance practices.
Private dispute resolution procedures are currently being tested in the Sao Paulo Stock Exchange. These mechanism between firms and shareholders could be promoted by creating professional shareholder arbitration panels and persuading firms to include this resource in their by-laws.
Another potential best practice is to include a minimum of corporate governance standards for firms that wish to be eligible for pension fund/institutional investments. It requires that companies establish mechanisms to ensure the protection and equitable treatment of shareholders. This has been done in Colombia where it is probably too soon to find its results.
Mexican firms that aspire to improve their governance practices could also partner with institutional investors as evidence shows that their presence can be an effective remedy to principal–principal problems of expropriation in family-controlled firms, especially in the absence of a market for corporate control (Young et al. 2002; Agrawal and Knoeber 1996).
In our results from the Expansion 500 data, we show that the highest performing group in terms of ROE are multinational subsidiaries (18 percent) followed by state-owned entities (13 percent) and domestic firms (9 percent). Because most domestic firms are family firms, our results could be suggesting that most family firms would indeed benefit from limiting family interaction to ownership and board representation as argued by Bennedsen, Pérez-González, and Wolfenzon (2010). Successful family firms then need to become experts in corporate governance, fully assuming their ownership responsibilities. Family executives should be the exception and not the norm among family firms. Good corporate governance principles should clearly establish the requisites for family members to become executives in the firm.
Finally, we need to keep in mind that the quality of written law and regulation is only one side of the coin. Good corporate governance also relies on business practices, compliance, and enforcement. A key challenge for policy makers in Mexico is to improve the enforcement of the existing laws and—where necessary—improve laws and regulations.