South America: A close look at governance in state-owned enterprises: Is something better than nothing?

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By Jeremy Daniels – Jeremy.Daniels@EthicalBoardroom.com

Corporate governance of state-owned enterprises brings with it an entire set of challenges of its own as compared with privately and publicly owned companies. Within the South American region the majority of corporations are state-owned or partially state-owned, and this makes corporate governance of this particular type of business a significant concern.

One initiative currently in place is the Latin American Network on Corporate Governance of State-Owned Enterprises (SOEs). The objective of this network is to improve the governance of State-Owned Enterprises (SOEs) in the South American region. Their aim is to create an ongoing and open exchange of experience and knowledge on SOE governance policies, practices and reforms using the OECD Guidelines on Corporate Governance of State-Owned Enterprises as the main conceptual framework for discussion. Participants in these discussions are taken from a variety of jurisdictions, industry sectors, corporate governance advisory groups and regulatory bodies to encourage a diverse and comprehensive sharing of ideas and improvements. This initiative alongside a number of others has been directing efforts towards providing an effective mechanism for governments and other relevant institutions to share and develop knowledge on policy and institutional frameworks. These meetings have been set up to help develop best practices to support well-governed SOEs across the South America region.

There are a number of further activities that are being implemented in order to foster a better corporate governance environment in South American-based businesses. Examples include giving regulatory bodies increased authority in the development and enforcement of corporate governance rules and providing an increased amount of corporate governance training to management within a number of larger companies. A significant challenge for proper corporate governance in South America is the very fact that within this market an overwhelming proportion of businesses are state owned.  This creates a whole host of political and power tensions tied to business and wider social issues when dealing, in particular when enforcing, corporate governance rules. In particular, conflicts of interest through political ties and allegations of corruption and bribery are overly high in frequency of occurrence across South America. Laws and regulations need to be further enhanced to control how companies manage to deal with powerful officials in these markets, where multinational companies are increasingly keen to set up new business ventures. The government still permeates the majority of what would be otherwise considered as the private sector within the countries of South America. Further to this, when doing business in South American countries it is not unusual to involve third parties – as a culturally accepted norm and also a product of the fact that so many businesses are in fact state-owned – introductions to prominent officials through middlemen can be key to doing business. Enterprises will commonly hire third-party intermediaries to make introductions. These third parties can also offer language translations and cultural interpretations and this leads to the facilitation of strong business relationships. However, in their very nature, the arrangements through these third parties pose a further level of risk of maintaining corporate governance integrity to a sufficiently high standard. Third parties may also act as sales agents, distributors or joint venture partners, and in their role they pose a high risk of collecting and passing bribes or improper information leading to corruption.

Although the economics and political systems are showing substantial development across South American State Owned Enterprises, caution should be applied by corporations attempting to do business in these countries as changes will take time, patience, effort and tolerance in combination with a strong ability to navigate the many challenges that lie ahead. Work on improving governance policy and the development of stronger corporate legislation is currently being undertaken on a region by region basis. Furthermore, a number of countries have put in place additional voluntary codes of best practice. Corporate governance is improving across the region but there is still much room for change at all levels of the economy and across all levels of industry for South American SOEs.