Mexican companies are poorly rated on governance

By Palle Ellemann, Senior Consultant at GES

Within GES’ Emerging Markets Engagement program we are engaging with a range of companies in Mexico, some of which I recently met during an engagement tour in the country.

Common to most of these companies is that they are rather poorly rated on corporate governance, in particular because there is very limited disclosure of board and management compensation. The companies are dedicating this lack of disclosure to the security situation in Mexico, where organised crime is wide-spread and kidnappings, extortion, and killings of wealthy people is part of everyday life. It would simply make people a target of organised crime, if it was disclosed how much these people are actually making. Some companies do not even show photos of management or board members in the annual report!

GES is approaching this dilemma constructively in the engagement and work with the companies to make a disclosure that would satisfy investors’ need for information about how the structure of the compensation packages can influence the governance of the company. Without actually disclosing the figures, the companies can improve the governance disclosure by showing ratios of what the potential bonus, long term incentive awards, and severance arrangements are, expressed as a proportion of the annual salary. The point is to understand what the short term versus long term incentives are and how this could influence decision making in the company.

Besides the lack of governance disclosure, many of the leading Mexican companies are making good progress in the disclosure of ESG-related issues. One of the key drivers is the new Sustainability Index on the Mexican Stock Exchange, where 23 companies have been included in the first edition. The new opportunity to become recognised for good sustainability practices has motivated companies to improve ESG disclosure and some of these companies are even launching new Sustainability Reports on apps for iPad!

It is going to be interesting to see, where the new government taking office in November will take Mexican business. There is a relatively good foundation to build on, but the government need to address the crime situation that is hampering business development and negatively impacting people’s quality of life. From a sustainability perspective, the local investors need to get on board with responsible investing and the sustainability philosophy and practices need to be broaden out to small and medium-sized businesses.

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