CHAPTER 3

The Mexican Governance Model: A Comparative Perspective

Understanding how well investors/shareholders are protected from expropriation by insiders—managers and controlling shareholders—is crucial to understand corporate governance in a given country. Legal frameworks influence the intensity of principal–principal problems within stakeholders and the effectiveness of internal corporate governance mechanisms in safeguarding them (Kumar and Zattoni 2016). Legal protection contributes to explain important differences among countries; ownership concentration, dividend policy, and access to finance, for example, are all influenced by legal protection. Because investors finance firms but do not run them, they face the risk of not seeing their returns materialized in the absence of this protection. Corporate governance is, to a large extent, a set of mechanisms that protect investors/shareholders against expropriation by large shareholders and managers (La Porta et al. 2000). Hard and soft (code best practices) mechanisms of law represent a country’s combination of formal and informal institutions that guide firms and boards in taking decisions in uncertain environments (North 1990). When corporate governance mechanisms function properly, the contribution of corporations to national income and economic wealth grows, and the corporate governance system is perceived as positive and legitimate (Judge, Douglas, and Kutan 2008). Conversely, when the corporate governance system is dysfunctional, the contribution of firms to wealth creation stagnates. Hence, in order to understand the influence of institutions on corporate governance, we believe it is important to provide the reader with data from the World Competitiveness Yearbook survey for the period 2004 to 2014. Our focus will be in analyzing country-level indexes for Mexico and its major trading partners. In Table 3.1 we can see a definition of the studied variables.

Table 3.1 Variables

Note: Factors are quantified in intervals from 0 to 10 where 0 refers to total disagreement with the attribute and 10 total agreement.

Source: World Competitiveness Yearbook Data. 2004-2014. IMD. Geneva; Rivas, J.L., and Rubio J. 2017. “Institutions and Corporate Governance Legitimacy: A Cross Country Study.” Academy of Management Proceedings 2017, no. 1.

Corporate governance systems can show the convergence of macro-institutions in different countries (De Kluyver 2009). Variables within our sample capture the stage of development for property rights, the strength and applicability of audit and accounting practices, and, finally, the perception of socially responsible practices. Overall, we expect high scores on the above-mentioned factors to be related with corporate governance legitimacy. Country scores for each variable are listed in Table 3.2.

Table 3.2 Country results (World Competitiveness Yearbook 2004-14; Rivas & Rubio 2017)

The major weakness for Mexico seems to be in both property rights and audit and accounting. This is probably related to the country’s ever-lasting institutional deficit: the establishment of a solid rule of law and law-abiding mechanisms in both criminal and civil justice procedures.

Recent academic studies have reported a high incidence of businesses engaging in illegal acts and corruption. For example, the second edition of the study “Mexico: Anatomy of Corruption” published by Instituto Mexicano para la Competititivdad (IMCO) and Centro de Investigación y Docencia Económica (CIDE), released in 2016, revealed that 43 percent of established enterprises have paid bribes in order to speed up administrative procedures, gain market share from rivals, or getting concessions and permits to start or maintain its operations (Casar 2016). The report also found that around 82 percent of business executives in Mexico agreed with the notion that illegal acts are carried out extensively when doing business in the country, calling attention to the fact that only 48 percent of economic wrongdoings are ever detected or filled by anticorruption bodies. Mexico is also at the top of the list in terms of sanctions by the Foreign Corrupt Practices Act in Latin America. The unfinished “National System against Corruption” increases transparency and accountability of public servants and will apply sanctions to individuals from both the private and public sectors (PricewaterhouseCoopers 2018). This environment has been detrimental to business development and entrepreneurship by raising the costs of doing business. For example, according to estimates from economic think tank Mèxico, ¿Como Vamos? the country loses 2 percent of GDP per annum or around MXN 340 billion due to corruption (Franco 2015). Overall, Mexico’s formal regulatory reform toward higher quality in governance mechanisms and competitiveness has not been met with a corruption decrease, and this could very likely be the reason for its low scores in corporate governance legitimacy.

By illustrating how institutions can influence country-level corporate governance, readers can have a better understanding of how policy makers can contribute to improve corporate governance perceptions within a country.