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ABSTRACT.

This paper looks broadly at the theme


of corporate governance in Mexico. It begins with a
brief analysis of the historical corporate governance
model in Mexico, including the governance struc-
tures, the banking and financial systems, ownership
and control patterns, industrial policy, and industrial
relations. The paper then examines how and why
these various aspects of corporate governance have
been changing with processes of economic liberal-
ization currently under way. Finally, it analyzes the
consequences of changes in the model of corporate
governance for the countrys development (e.g.
increased consumer goods for middle class consumers,
increased disclosure by domestic corporations, less
support for corporate social programs, etc.).
KEY WORDS: corporate governance, economic
development, Mexico
Twenty years ago Mexicos development was tied
to a model of import substitution in which
Mexican industry would grow to meet the needs
of its own internal markets. As a result, its
markets were highly protected from foreign com-
petition and foreign ownership in Mexican com-
panies was usually restricted to a 49% share.
State-owned enterprises dominated many agri-
cultural and industrial sectors. Mexican compa-
nies were assured attractive margins in highly
oligopolistic markets and unsuccessful companies
could count on government bailouts. The moral
hazard problems created by such an environment
created an atmosphere in which political skills
were often more important to success than were
business skills (Austin, 1990). Consequently, cor-
porate governance was not on the agenda of
either business or government leaders.
Since that time, concern about corporate
governance has increased throughout the world
and Mexico is no exception. The forces behind
the current interest in good corporate gover-
nance are due in large part to the demands of
international investors, the pressures faced by
newly privatized companies, as well as processes
of mimetic isomorphism within Mexico, where
business people are responding to governance
movements in the United States, Japan, and the
European Union (DiMaggio and Powell, 1983).
Unfortunately, little is known about corporate
governance practice in Mexico. A few surveys
have yielded relatively little information on the
subject and have called for greater research into
corporate governance practices outside of the
United States (Shleifer and Vishny, 1997; La
Porta et al., 1999). This paper provides a brief
survey of what is known regarding corporate
governance in Mexico.
Corporate Governance
in Mexico

Journal of Business Ethics

37: 337348, 2002.
2002 Kluwer Academic Publishers. Printed in the Netherlands.
Bryan W. Husted is a professor of management at the
Instituto Tecnolgico y de Estudios Superiores de
Monterrey in Mexico and holds the Alumni Association
Chair of Business Ethics at the Instituto de Empresa
in Madrid. His work has appeared in the Journal of
International Business Studies, Business Ethics
Quarterly, and Journal of Business Ethics. His
current research focuses on corporate social strategy and
cross-cultural business ethics.
Carlos Serrano is a professor of finance at the Graduate
School of Business and Leadership of the Instituto
Tecnolgico y de Estudios Superiores de Monterrey in
Mexico. He is in his second year of Ph.D. studies and
his research focuses on corporate governance and corpo-
rate valuation issues. He has consulted extensively on
business valuation, financial planning and analysis, and
performance measurement systems.
Bryan W. Husted
Carlos Serrano
One of the greatest challenges of a study of
corporate governance in Mexico is the difficulty
of obtaining relevant information. The most
accessible source of information is the law.
Corporate governance is dealt with in two
principal bodies of law, the General Law of
Mercantile Societies (LGSM) and the Law of the
Stock Market (LMV). Very little information is
available with respect to the practice of corpo-
rate governance. As a result, we undertook a brief
review of the practices of the ninety largest cor-
porations in Mexico. Data was gathered from the
homepages of these companies as well as through
personal communications. Specifically, we deter-
mined the composition of the board of directors
based on board membership, positions on the
board, company affiliation, and role as insiders or
outsiders. This small study of the largest ninety
companies helps to provide some initial data to
understand corporate governance in Mexico.
The paper begins by looking at the traditional
corporate governance model in Mexico in terms
of governance structure, the financial and
banking systems, ownership and control patterns,
industrial policy, and industrial relations. It then
examines how and why different aspects of
corporate governance have been changing in
Mexico. Finally, it speculates on the effects of
changes in the model of corporate governance
for the countrys economic and social develop-
ment.
The traditional corporate governance
model
Governance structure
According to Mexican law, corporate governance
is the responsibility of one or more directors who
may or may not be executives of the corpora-
tion. Where there are two or more directors, a
board of directors is created (LGSM, 2001, Art.
142 and 143). Ownership of 25 percent or more
of voting stock gives a stockholder the right to
name one director to the board. This percentage
is reduced to 10 percent if the corporation is
publicly traded (LGSM, Art. 144). However,
since all Mexican companies are family-owned
(whether they are public or private companies),
appointing directors to the board is largely a
family matter (La Porta et al., 1999).
Our review found that fewer than 25 percent
of the chief executive officers (CEOs) of the 90
largest Mexican companies also serve as chairmen
of the board. Usually, the founder or senior
family member (generally an ex-CEO) is still tied
to the company and serves as chairman of the
board, while a younger family member acts as
CEO. The Mexican pattern contrasts with the
global pattern in which companies tend to
combine the functions of CEO and chairman of
the board (Stewart, 1993; Jensen, 1989).
Usually corporate boards around the world are
expected to be involved in the hiring, dismissal,
counseling and compensation of top management
(Stewart, 1992). Under Mexican Law, directors
are responsible for the hiring and dismissal of
corporate managers, but have no specific duties
with respect to the counseling and compensation
activities of the board (LGSM, Art. 145).
However, the Code of Best Corporate Practices,
developed by a group of leading Mexican
business people and supported by the Mexican
Stock Exchange (BMV), does mention that
boards should advise management with respect
to issues of strategic vision (Consejo Coordinador
Empresarial, 1999).
Ordinarily when corporate boards do not
perform these tasks (hiring, dismissal, counseling,
and compensation) efficiently, there are other
mechanisms to discipline the incumbent man-
agement such as the product market and
the market for corporate control. In Mexico,
however, the market for corporate control is
quite weak, if not non-existent. Thus, the
product market provides the main source of man-
agerial discipline when corporate boards fail.
Two kinds of governance systems exist among
major OECD countries: outsider systems (mainly
in the U.S. and the U.K.) and insider systems (the
rest of the world) (Nestor and Thompson, 2000).
The distinguishing features of the insider model
are (a) concentrated equity ownership, (b) de
facto subordination of shareholder interests to
managerial interests, (c) a weak emphasis on
minority interest protection in securities law and
regulation and (d) relatively weak requirements
338 Bryan W. Husted and Carlos Serrano
for disclosure. Insider systems have usually been
bank-centered (Germany and Japan are prime
examples) or family centered (as in Mexico).
Typically, members of the board are considered
internal or inside directors.
According to the Code of Best Corporate
Practices (Consejo Coordinador Empresarial,
1999), inside directors include company execu-
tives, shareholders with managerial responsibili-
ties in the firm, advisors or consultants of the
firm, customers, suppliers, creditors or debtors of
the firm, representatives of non-profit organiza-
tions that receive significant donations from the
firm, executives of companies with board inter-
locks with the firm, and blood relatives of any
of the prior people. They do not include polit-
ical relatives (those married to members of the
controlling family) or the ties of compadrazgo
that are so important in Mexico. Compradazgo
refers to the relation between the parents and
godparents of a child. Godparents are symboli-
cally adopted as members of the Mexican family.
Often compadres are closer than siblings.
Unfortunately, it is difficult to discover relations
of compadrazgo because of their informal nature.
A review of the publicly available information on
the 90 largest companies in Mexico reveals that
53% of directors are top executives of the firm,
the firms group, or relatives of such executives.
However, it is currently impossible to determine
the extent to which the other members of the
board belong to one of the other categories of
insiders mentioned by the Code, let alone the
existence of political or compadrazgo relations.
In some countries like Japan, the board of
directors seems to serve mainly ceremonial
purposes since they do not represent the share-
holders interests (Gerlach, 1992). In Mexico, we
cannot observe at this point whether corporate
boards are ceremonial in nature or effective
decision-making bodies (DiMaggio and Powell,
1983; Meyer and Rowan, 1977). Further research
needs to be conducted in this area.
The financial and banking system
The financial market. Mexicos financial market is
small and underdeveloped and the stock market
is clearly insignificant in size. The Mexican stock
market had a capitalization of US$ 133.7 billion
as of March 31, 2001 (Bolsa Mexicana de Valores,
2001) compared to the market capitalization of
the New York Stock Exchange of US$ 11.6
trillion (New York Stock Exchange, 2001).
Nonetheless, despite its relatively small size, the
Mexican stock market does provide a significant
signal to investors about the health of the
economy as a whole.
The money market (mainly CETES treasury
notes) accounted for almost 97% of the average
daily turnover of the Mexican Stock Exchange
(BMV) over the last four years (US$ 9.3 trillion),
while only 3% of the turnover was due to trading
in stock. An important reason for this situation
is the lack of strong institutional investors in the
Mexican financial markets. However, we expect
that the newly created pension-fund companies
(afores) will eventually help the financial
market grow in size and marketability. In
addition, Mexican companies are closely held and
thus few shares are actively traded.
There are 35 companies in the BMV index
(IPC), and Telfonos de Mxico (Telmex)
accounts for more than 26 percent of the market
capitalization value of the index (see Figure 1).
Almost 60 percent of the IPC market capitaliza-
tion value rests on the value of five companies:
Telmex, Banamex-Accival, Telecom, Wal Mart
de Mxico and Cementos Mexicanos (Cemex)
(Grupo Banamex-Accival, 2001).
The banking system. In 1982 a massive capital
flight occurred due to major devaluations of the
Mexican peso in February and August. At the
same time, bank credit was greatly restricted and
private parties were forced to borrow from
abroad (mainly from the U.S.). Consequently,
President Jos Lpez Portillo Pacheco announced
the nationalization of the banks on September
1st, 1982, justifying his decision by arguing that
it was vital to the economic interests of the
nation (Carvallo, 2000). In 1992, Mexican banks
were reprivatized in order to increase and
broaden the quality of the financial services avail-
able to the public, while letting the government
pursue issues related to the satisfaction of social
needs and improvement of the quality of life
Corporate Governance in Mexico 339
(Carvallo, 2000). The buyers of the banks and
other financial institutions were mainly stock
brokerage houses. Privatization and regulation
resulted in the creation of financial conglomer-
ates with banking, insurance, leasing, factoring,
money exchange, stock brokerage, mutual and
pension fund operations. The financial and mar-
keting synergies were rather high since the banks
acted as holding companies and were a sure
source of low-cost capital for the other financial
entities. The privatization of the pension fund
industry, following the Chilean model, motivated
Mexican financial institutions to develop strategic
alliances with their counterparts from all over the
world in order to acquire managerial expertise
and capital.
The privatization of the banking industry
brought mixed results for the Mexican economy.
The good news stemmed from the privatization
itself, returning private ownership and manage-
ment to the banking industry. Unfortunately,
very high prices were paid for the banks, which
inherited problems from uncollected loans.
Because of their high price, the banks needed
significant infusions of financial resources to cope
with their problems of bad debt and with the
financial crisis that took place during the second
half of the nineties. Once again, the federal
government intervened, but without renational-
izing the industry.
As a result of volatility in the Mexican
economy (e.g. debt crisis, devaluations, inflation)
over the last three decades, most Mexican com-
panies do not finance their assets with more than
50% debt (debt-equity ratio greater than or equal
to 1.00). One exception is the automotive
industry, which acquires assets with a debt ratio
of slightly over 80% (see Table I). It is impor-
tant to mention that the automotive companies
are foreign-controlled companies and this fact,
rather than industry characteristics, may explain
the difference in debt management.
Possibly as a consequence of the low level of
debt financing, banks do not play a significant
role in corporate governance, as evidenced by the
fact that few of the directors of the 90 largest
Mexican companies come from banks. In
fact, only four bankers sit on two or more cor-
porate boards: Ricardo Guajardo Touche (BBVA
Bancomer), Juan Carlos Braniff Hierro (BBVA
Bancomer), Antonio del Valle Ruiz (Bital), and
Carlos Gmez Gmez (Santander).
340 Bryan W. Husted and Carlos Serrano
Figure 1. Largest firms in the Mexican Stock Index (IPC).
Ownership and control patterns
Most traded stocks have limits regarding owner-
ship percentage and voting rights. Table II
summarizes the main classes of stock and their
voting rights. As a result of the structure of stock
classes and family ownership, the market for
corporate control is basically non-existent in
Mexico. Class A stock gives full voting rights to
the family owners, but most other classes of stock
provide only limited or no voting rights for
minority interests. Even though there are around
179 companies trading in the Mexican stock
market, in reality all companies are controlled
by families (La Porta et al., 1999). Furthermore,
publicly traded stock represents only a small
percentage of the firm ownership. Thus, control
resides with the families that own the controlling
interest in the voting classes of stock. In contrast,
eighteen percent of the largest 150 companies in
Mexico are foreign-controlled firms (Expansion,
2000). Almost all of these firms are publicly
owned firms with a high share of publicly traded
stock. Unlike the United States where institu-
tional investors hold over 50% of all corporate
equities, institutional investors do not hold con-
trolling positions in corporate ownership in
Mexico.
In Mexico, business groups consist of holding
companies that invest in other companies that
are characterized by vertical, horizontal, or
conglomerate integration. Usually the holding
company (el corporativo in Mexican Spanish)
makes decisions on financing, dividends, fixed
assets and hiring of top managers. The growth of
these groups was motivated by Mexican indus-
trial policy during the second half of the seven-
ties (Flores, 2000).
Business groups have played an important role
in the development of the Mexican economy.
Some of the major business groups and compa-
nies are listed in Table III.
Cross-holding of shares between firms gener-
ally takes place within business groups, so that
Corporate Governance in Mexico 341
TABLE I
Debt financing by industry in Mexico
Industry Debt equity ratio

* Operating cash flow**
Food 0.43 1,260,474
Beverage 0.35 11,665,540
Automotive and auto parts 5.01 242,816
Consumer goods 0.41 7237
Cement 0.62 17,368,470
Construction 1.52 11,545,100
Retail stores 0.26 7,360,266
Department stores 0.63 1,754,890
Specialty stores 1.11 0,2,695,367
Communications and transportation 0.54 028,973,540
Electronics and electric 1.02 0,0-18,113
Industrial groups 1.18 20,121,320
Hotels and restaurants 1.05 0,844,634
Metal mechanic 1.47 0,52,292
Mining 0.33 5,537,796
Paper and cellulose 0.54 3,438,776
Chemicals 1.28 0,627,404
Steel metallurgy 1.19 1,511,964
* (Total liabilities cash and marketable securities)/net worth.
** In thousands of Mexican pesos.
Source: Anlisis Financiero y Burstil, Banamex-Accival, 1999.
342 Bryan W. Husted and Carlos Serrano
TABLE II
Voting rights by stock class
Class Mexican/Foreign Maximum Voting Directors
ownership ownership rights
A Mexican only 100% Full Designate at least a majority of
the directors
B Mexican and 100% Full At least 1 director for each
foreign 10% if a minority or at least
a majority of directors if capital
is only composed of this class.
C Mexican and 025% No voting None
foreign rights
D Mexican and 025% Limited 1 for each 10%. Maximum
foreign voting rights of 2.
L Mexican and 025% Limited 1 for each 10%. Maximum
foreign voting rights of 2.
CPOs Mexican and Variable Can be full Depends on the rights granted
foreign from 1 to voting rights to the CPOs and underlying
100% for Mexicans, stock.
limited or no
voting rights.
O Mexican (financial Full 1 for each 10%. Maximum
groups only) of 2.
TABLE III
Ten largest Mexican business groups
Sales* Net income* Total assets*
Carso Global Telecom 97,449,299 23,051,990) 185,145,504
Telmex 96,320,586 25,126,643) 178,675,810
Cementos Mexicanos 45,913,946 09,785,010) 112,829,352
Grupo Carso 40,645,545 04,909,843) 063,494,800
Grupo Alfa 40,344,801 03,803,459) 067,641,656
Fomento Econmico Mexicano 38,627,000 03,907,767) 040,476,410
Grupo Bimbo 28,788,292 01,969,625) 022,854,690
Controladora Comercial Mexicana 27,162,430 01,255,665) 018,232,296
Cintra 26,047,477 01,103,175) 018,966,254
Vitro 25,878,694 (1,494,221) 031,282,730
Savia 25,349,707 (1,090,907) 059,581,325
* Thousands of pesos (As of May 11, 2001, 1 peso = US$ 0.1088).
Source: Expansin 2000.
the companies remain within the control of the
same family. Nevertheless, family control has
become more diffused as ownership passes to the
second or third generation.
Interlocking directorates are very common
both within companies of the same business
group (e.g. Carso, Alfa, Vitro) and across groups.
Only sixteen of the ninety largest companies have
no interlocks with other firms. These firms tend
to be independent companies that do not belong
to any group (e.g., Soriana or Casa Autrey).
Among the 90 largest companies in Mexico,
five directors sit on at least 10 different boards.
Figure 2 lists their names and company affilia-
tion. It is unclear whether the purpose of inter-
locks is to co-opt potentially destructive external
elements into the firms decision-making struc-
ture or to infiltrate the decision-making struc-
ture of other firms (Mizruchi and Stearns, 1986).
It is also important to mention that the pyra-
midal structure of ownership in Mexico fosters
participation in several boards. For example,
Dionisio Garza Medina, CEO of the Alfa Group,
sits on the boards of almost all of the groups
subsidiaries. He sits on the board of the
Alpha Group, on the board of one of its sub-
sidiaries, Hylsamex, and of Hylsa, a subsidiary
of Hylsamex. Only three of Garza Medinas 10
directorships do not come from the group he
leads: Cemex, Vitro and Cydsa. Another example
is Carlos Slim Helu of Telmex who sits on 9
boards, all but one of which is from the group
he controls.
The agency problem inherent in the separa-
tion of firm ownership and management con-
tinues to be a serious problem around the world.
Concentrated ownership through large share
holdings, takeovers and bank finance, is a nearly
universal method of control that helps investors
protect their interests (Shleifer and Vishny, 1997).
In Mexican family-owned businesses, family
members have multiple dimensions of exchange
with one another over a long period of time and
therefore have advantages in monitoring and dis-
ciplining that mitigate the agency problem. In
95% of family-owned firms in Mexico, the CEO
is a family member (LaPorta, et al., 1999). The
use of a family member reduces the agency
problem between the major shareholders and
management, but still leaves the problem with
respect to minority stockholders. Nevertheless,
agency problems may increase as control of
Mexican companies passes to the second or third
generation of the founding family. Conflicts of
interests often exist among children and grand-
children regarding such issues as the allocation of
corporate cash flows.
Corporate Governance in Mexico 343
Figure 2. Number of board seats for most popular directors in Mexico.
Industrial policy
The Mexican government has gradually reduced
its role in the management of the economy over
the last 15 years. The shift from a policy of
import substitution to export promotion has
been implemented through policies of trade
liberalization with the admission of Mexico to
the GATT as well as by signing the North
American Free Trade Agreement in 1993. Since
then, Mexico has also signed free trade agree-
ments with Central America, Chile, the
European Union, and Israel. In addition, the
government has pursued a policy of privatization,
selling off Telmex, the national telephone
company, the banks, steel companies, and
numerous other industrial and agricultural enter-
prises. Finally, Mexico has pursued a policy of
deregulation, reducing or eliminating bureau-
cratic red tape for numerous processes. All of
these changes have reduced state intervention in
the economy and increased the importance of
corporate governance and other self-regulatory
processes.
Industrial relations
Workers usually are not allowed to participate in
company management nor sit on the board of a
corporation. However, workers are entitled to
share in 10 percent of corporate profits (LFT,
Arts. 117 and 120). Although concrete data is not
available, experts believe that Mexican unions
have generally grown weaker over the last fifteen
years, except in the case of the unions for airline
pilots and stewardesses, which provide an impor-
tant exception to the general trend (Guerra,
2001). The pace of decline will probably accel-
erate now that the alliance between the former
ruling party (PRI), the government and the
official labor unions has disintegrated in the wake
of the election of Vicente Fox, the opposition
candidate, to the presidency (La Botz, 2001).
Workers have little ability to influence labor
policy in Mexico. They have no access to the
corporate decision-making process and therefore
only management is involved in strategic deci-
sions. Despite arguments for the necessity of
worker directors to represent worker interests
(Stern, 1988), such representation has not been
achieved in Mexico. Instead, the best firms have
traditionally had a paternalistic attitude towards
workers, providing housing, schools, health
clinics, and recreational facilities for employees
and their families (Saragoza, 1990). But due to
intense competitive pressures from a more liberal
trade regime, many companies have been forced
to terminate such programs.
Evolution and changes of corporate
governance in recent years
Globalization, trade liberalization, and deregula-
tion have created a more competitive environ-
ment and the need for better management
within Mexican companies. In addition, foreign
investors have demanded better corporate
governance, which has helped the evolution of
Mexican corporate governance over the last 15
years. In 1997, the National Banking and
Securities Commission (CNBV), the Mexican
equivalent of the U.S. Securities and Exchange
Commission, issued circular 1129 which
requires listed companies to disclose director
information attached to the prospectus for new
issues of securities. Some of the requirements
include disclosure of the names and number of
members of the board, their resums, and family
relationships with other members of the board.
These pressures culminated in 1999 with
the publication of the Code of Best Corporate
Practices by the Mexican Stock Exchange
(Consejo Coordinador Empresarial, 1999).
Among other things, the Code mentions the
importance of hiring independent directors (at
least 20 percent of board members), disclosing
the nature and current position of directors, and
sending information to directors in advance of
meetings. The Code also highlights the strategic
function of the board as one of its main respon-
sibilities. The Code encourages companies to
disclose the degree of adherence to such prac-
tices in their annual reports. As of January 1,
2001, the CNBV requires that all firms listed in
the stock market disclose their compliance with
the Code on an annual basis (CNBV, 1999).
344 Bryan W. Husted and Carlos Serrano
Globalization and deregulation around the
world is affecting the way companies perform
their governance activities. There is evidence that
corporate governance practices are converging
toward a set of ideal practices (Nestor and
Thompson, 2000). The fact that the 27 member
countries of the OECD have agreed on a
document that establishes desired corporate gov-
ernance practices and guidelines is remarkable
considering the wide array of interests and
economic differences among member countries
(OECD, 1999). Table IV compares Mexican law
and practice to the OECD recommendations and
finds considerable agreement.
Corporate Governance in Mexico 345
TABLE IV
Comparison of Mexican corporate governance with OECD principles
OECD principles Mexican law or practice*
Shareholders of the same Yes Yes (law)
class are treated equally
Insider trading prohibited Yes Yes (law)
Directors and managers are Yes Yes (law)
required to disclose any
material interests affecting
the corporation
Accurate, timely and Yes Yes (law)
relevant information
given to shareholders
External annual audit Yes Yes (law)
Accurate, timely and relevant Yes Not specified
information given to directors
Disclosed financial and Yes Partial (financial disclosure is required
corporate governance by law; governance disclosure is
information required of firms listed in the BMV)
Information prepared, audited Yes Yes (law)
and disclosed according to
Generally Accepted
Accounting Principles
Efficient and transparent Yes Underdeveloped
markets for corporate control
Employee representation Yes Not allowed (practice)
on boards
Role of the board Hiring, firing, compensation, Hiring and firing (law)
and counseling of top
management
Sufficient number of Yes 40% are outsiders (practice)
non-executive board members
* When not specified by Mexican law, we state the status of corporate practice.
Source: Principles of Corporate Governance, www.oecd.org; Ley General de Sociedades Mercantiles,
www.cddhcu.gob.mx/leyinfo/152/.
At least from the perspective of the law, it
appears that Mexico is converging toward world
standards of corporate governance. The Code of
Best Corporate Practices indicates that the
private sector is aware of world standards and is
encouraging adherence to those standards. The
presence of a minimum number of outside direc-
tors, requirements for information disclosure, the
strategic function of the board, and the separa-
tion of the CEO position from the board chair-
manship are a few examples of changes in
corporate governance practice that have taken
place since the late seventies to date. However,
the extent to which outside directors participate
and the effectiveness of other corporate gover-
nance reforms with respect to managerial disci-
pline are still not clear. One should not be easily
seduced into believing that laws and rules have
been translated into business practice. The dis-
closure requirements of the CNBV leaves imple-
mentation to the discretion of the company in
terms of interpreting which elements of the
Code are to be disclosed and how. Much remains
to be done, but clearly the disclosure of compli-
ance with the Code will provide a significant
incentive for firms to seriously examine and
improve their corporate governance practices.
Further research needs to be conducted on these
issues.
Impact of changes in corporate governance
on development in Mexico
The shift in reliance on state and family capital
to a reliance on foreign and institutional capital
is giving impetus to significant changes in cor-
porate governance in Mexico. State intervention
in corporate governance either directly through
ownership or indirectly through regulation will
continue to decrease. Although the role of family
capital is diminishing due to an increased reliance
on external capital, family control will remain
firmly in place for the foreseeable future. As a
result of the increased participation of institu-
tional investors and in light of continued family
control, the market for corporate control will
increase in importance, but will probably not
become the source of managerial discipline that
it is in the United States. Thus, the product
market will provide the primary source of man-
agerial discipline in Mexico. Unfortunately, as
Shleifer and Vishny (1997) argue, product market
competition is not enough to protect the inter-
ests of the suppliers of capital. So additional
forms of protection will be necessary.
A consequence of greater product market
competition and greater reliance on foreign
capital is that firms are moving from a traditional,
paternalistic style of management to a more pro-
fessional one (Kras, 1991). Consumers should be
the principal beneficiaries of these changes as
Mexican firms become more competitive and
oriented toward customer service. Minority
shareholders should also benefit as increased
opportunities to exit a poorly managed company
become available through an expansion of the
stock market. Shareholders generally will benefit
from increased disclosure requirements for com-
panies that seek to be listed in the BMV or issue
new securities. However, in view of generally
weaker labor unions and less paternalistic man-
agement, blue-collar workers will continue to
face a harsh work environment. Convergence
toward international standards will undoubtedly
increase emphasis on the maximization of share-
holder wealth that has been the focus of the
Anglo-American model of corporate governance
(Sison, 2000). This shift in focus will mean less
involvement in corporate social programs for
employees.
Perhaps the greatest consequence of improved
corporate governance practice lies in its impact
on foreign investment. In a study of corporate
governance from the perspective of institutional
investors, Coombes and Watson (2000) found
that for three-quarters of the investors, sound
corporate governance practices are at least as
important as corporate financial performance in
their investment decisions. Over eighty percent
of the institutional investors surveyed said that
they would pay more for a well-governed
company. Certainly, a few of the larger compa-
nies in Mexico do engage in some of these
desired governance practices (e.g., Alfa, Proeza),
but most firms clearly do not. Mexican compa-
nies that are listed in the New York Stock
Exchange are already required to comply with all
346 Bryan W. Husted and Carlos Serrano
of the requirements of the U.S. Securities and
Exchange Commission. These pressures will only
increase in the future as more companies seek
funding in foreign markets. Therefore, if
Mexican companies want to keep abreast of the
competitive dynamics of their respective indus-
tries, they will need to continue to rely on
foreign capital and comply with both the expec-
tations of international investors and legal
requirements regarding corporate governance.
Improved corporate governance is thus both a
cause and a consequence of increased foreign
investment.
There are several implications for public and
business policy. Mexico clearly needs more
regulation with respect to the disclosure of the
sources and uses of corporate cash flows. Such
disclosure is still relatively uncommon. In
addition, loopholes in the CNBV corporate gov-
ernance disclosure requirement need to be closed
by enumerating specific items of Code compli-
ance that should be disclosed.
The major threat to the Mexican corporate
governance model in the future arises from the
conflicts that will occur among families that
desire to retain control in the face of increased
needs for external financing. To some extent the
dilemma has been softened by raising funds
through stock classes that do not enjoy full voting
rights. However, as foreign investors find oppor-
tunities to invest in firms with better corporate
governance practices and greater protection for
their interests, Mexican companies will come
under increasing pressure to actually adopt the
measures advocated in documents such as the
Code of Best Corporate Practices. As voting
rights open to non-family members, a true
market for corporate control will emerge, which
will completely change the face of Mexican cap-
italism and corporate governance.
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Bryan W. Husted
Instituto Tecnolgico y de Estudios Superiores de
Monterrey and Instituto de Empresa,
ITESM/EGADE,
CETEC TN 4

piso,
Ave. Eugenio Garza Sada 2501 Sur,
Col. Tecnolgico,
C.P. 64849 Monterrey, N.L.,
Mexico
E-mail: bhusted@egade.sistema.itesm.mx
Carlos Serrano
Instituto Tecnolgico y de Estudios
Superiores de Monterrey
348 Bryan W. Husted and Carlos Serrano