Download The OECD Principles as a reference point for good

The Context for Capital Market
Reform in Argentina:
Global and Latin American Trends
and Factors Impacting on Market
Development
2013 COLADE FELABAN Congress
20 September, 2013
Daniel Blume
Senior Policy Analyst, OECD Corporate Affairs
The OECD Perspective: the Relevance
of Corporate Governance
• OECD’s Corporate Governance Committee looks at
capital markets through corporate governance lens: what
are the necessary cg conditions for a healthy and thriving
capital market, to support access to finance for business
innovation and growth?
• Of course many other important factors related to
macroeconomic conditions (interest rates, global
liquidity), currency stability, tax incentives, etc. must
also be considered.
• And bank finance also a key pillar and the predominant
one in Latin America. But economies that rely on both
bank and capital market finance have been more
successful .
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OECD Principles of Corporate Governance a
key reference for capital market development
• The CG Principles are one of key standards
endorsed by all members of the Financial
Stability Board to support the stability and
sustainability of global financial markets.
• Includes chapters dealing with:
– Legal, regulatory and institutional framework
– Rights, responsibilities and treatment of
shareholders
– Disclosure
– Responsibilities of the board
– Treatment of stakeholders
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Important Timing to Take Stock of
Equity Market Developments
• Globally, there have been major transformations in
market characteristics and practices
• To better understand these developments and how to
address them, the OECD Corporate Governance
Committee launched “Corporate Governance, Value
Creation and Growth” with objective to:
– Facilitate meeting between savers and companies that need
equity capital for growth and job creation;
– Facilitate the allocation of equity capital to the best
investment opportunities;
– Provide incentives for informed and long-term ownership
• Important to understand both OECD and emerging
market trends before considering changing the
OECD Principles of Corporate Governance in 2014
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Not business as usual: changes and
challenges in OECD markets
• Stock markets have become fragmented (new trading
venues, dark pools)
• New trading techniques, such as high frequency and
algorithmic trading
• New instruments, such as exchange traded funds
(ETFs)
• Investment strategies have become more complex
and more short-term
• Increased importance of institutional investors
• The universe of investors has become more complex
and the way from savers to companies has become
longer
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Declining IPO numbers and volume
Source: OECD calculations, based on data from Thomson Reuters, Datastream, stock exchanges + companies’
websites.
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Both the number and $ volume of IPOs have been steadily declining
albeit with a small recent “recovery” fuelled by non-OECD companies.
2008-2011, 63 % of all equity raised by non-OECD companies.
Non-OECD markets have moved from serving 20% of all IPOs during
1995-2003 to 60 percent from 2008-2011
In OECD, average annual IPO volume decreased from USD 132.7
billion in 1993-2000 period to USD 69.6 billion in 2001-2011 period
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Impact on ownership structure
• In OECD, more than 40% of companies delisted
from the exchanges over the last 10 years.
• Globally, listed companies with a controlling
owner have become the norm.
• The US, UK, Ireland and Australia remain the
only countries with fully dispersed ownership
(average free float ratios of around 90%).
• But the share of global market capitalisation of
“dispersed” markets has decreased by some 30%
from 56% to 40% between 2000 and 2011
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Impact on shareholder monitoring
and engagement
• High turnout in shareholder meetings: US:
81%, Korea: 75%, Japan: 75% and UK:
68%
• The degree of dissent in shareholder
meetings is quite low; between 2-6%
• Increasing use of proxy advisory services
• Obstacles to shareholder co-operation and
cross-border voting
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What has gone wrong?
• Eroding investor confidence in stock markets
• Undermining the willingness of entrepreneurs and
growth companies to use equity markets
• Unlevel playing field among investors and crowding
out of long-term investment
• Weakness in price discovery (increasing use of dark
pools, less focus on business fundamentals)
• Less attention to small and growth companies
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How have these trends impacted on
Latin America?
• Latin America markets have shared in the emerging
market trend of growing market capitalization (28% in
late 90s to 52% of GDP in 2006-10), IPOs and increased
trading volume but still lag behind OECD averages.
• Ownership concentration and trading liquidity has
changed very little (slightly less concentrated in Brazil).
• Fragmentation not a problem in most countries.
• However, growing use of ETFs and high-frequency
trading risks to further concentrate trading in largest,
most liquid companies.
• This may negatively impact on incentives for smaller
issuers to list and for shareholders to monitor CG.
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Regional perspective: CG
Achievements
• Strong stock market capitalization growth: from
1.6% to 6% of global share 2000-2012.
• Consolidation and integration of trading
• Increased disclosure requirements in some
markets.
• Convergence of standards (IFRS, director
independence, audit committees, voluntary
codes).
• Requirements for pension funds, IIs to take CG
into account.
• Actions to facilitate shareholder participation.
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What are the country-level trends?
• Brazil: Largest and most liquid market, and many cg
reforms, but Novo Mercado-inspired IPO boom of 20052007 has stalled more recently. Some active and
engaged minority shareholders a positive feature, but
some concerns in terms of state intervention.
• Chile: Highest market capitalization as % of GDP and
number of listed companies as % of population. Its
active pension funds a strength, along with significant
reforms during OECD accession to protect minority
shareholder interests.
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What are the country-level trends?
(cont.)
• Colombia: fastest growth in market cap as % of GDP
(18% to 60%). Largest companies and highest market
concentration (large groups and SOEs dominate
market). Reforms have been ongoing and may continue
as part of new OECD accession process.
• Peru: Most rapid growth in stock returns but low trade
volumes and lowest number of IPOs. Peru has
similarities to Chile and Colombia but smaller; Peruvian
CG Principles under review.
• Mexico: Recent increase in equity market activity and
value (highest price/earnings ratio in region). Main
reforms in 2005; more recently established corporate
governance index.
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Argentina
• Lowest market capitalization in region (10% of
2011 GDP – down from an average of 53% in
2001-2005).
• Very low liquidity and trading: turnover ratio of
stocks traded in 2011 was 4.8%, well below Latin
American average of 46%, OECD members
143%.
• Argentinian companies also have smaller than
average capitalization (Argentina average
US$897,000/ 87,000 median versus Latam
average US$3.1 million/465,000 median).
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Challenges for Argentina’s capital
markets
• Corporate governance requirements in
place, but interest to list is low for many
reasons:
– Reluctance among family businesses to yield control
and become fully transparent
– Concerns about state intervention in the market place
(YPF, ANSES)
– Currency stability and value a concern
– Foreign investors reluctant considering these factors
and low liquidity in the market
– Costs of accessing equity capital can be high
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Argentina’s capital markets law can only
address some of these challenges
• Consolidating or integrating trading by different
exchanges can reduce costs and potential for
market abuse.
• Regulation of intermediaries can improve their
governance and price competitiveness (if
requirements are not too costly).
• Incorporating requirements of Decree 677 into
corporate law enhances its enforceability and
protection of minority investors.
• Wider issues about role and intervention of
state, macroeconomic conditions and efficient
functioning of markets remain concerns.
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Difficult to achieve balance between investor
protection and company access to markets
• Question of CNV presence on board or in board
meetings in case of shareholder complaints or
abuse of minority shareholders is sensitive one.
• Requirements for auditor rotation also appear to
be stricter than usual practice.
• Question is whether stricter requirements will
attract more investors to market due to
perceived greater protection, or backfire because
companies prefer to delist or seek other forms of
finance to avoid the requirements?
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Argentina not alone: shares many
challenges with Latin American region
• How to get mid-sized companies to list?
• How to ensure market conditions with concentrated
ownership for effective functioning of cg frameworks?
– Balance between regulatory requirements and
flexibility to adapt own practices
– How to improve board functioning
– How to address cg in conglomerate structures
– Strengthening frameworks to prevent abusive related
party transactions
– How to address global trading trends (ETFs,
algorithmic and HFT)
– The role of the state in equity markets
– Complementarity of bonds and alternative financing
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Thank you for your attention
For more information, contact [email protected]
or consult http://www.oecd.org/daf/corporateaffairs
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