Latin American Capital Markets

438 MIKE LUBRANOMuch of the international debate (and academic literature) on corporategovernance began in the United Kingdom and the United States, where, in the main,the central challenge of corporate governance is managing the principal/agent conflictbetween atomized owners and a cadre of professional managers. By contrast, the corporategovernance problem in most emerging markets (and in particular in LatinAmerica) revolves around the divergence of interests and power between majorityand minority shareholders, with the associated risk of expropriation by the former Ofcourse, to the extent that the controlling shareholders place themselves in managementpositions for which they are not ideally qualified, the viability of the company'soperations are also put at risk, with negative consequences for controllers, minorityshareholders, and all other stakeholders in the enterprise.The strength of minority rights and their ability to limit the scope for expropriationby controlling shareholders thus play an important role in investor confidencein such markets.Therein lies a key link between the development of good corporategovernance and capital market development in emerging economies. Recent researchsupports the proposition that a better environment for corporate governance facilitatescapital market development. It has been demonstrated across countries that capitalmarket development correlates positively with the degree of shareholder protection,but there is undoubtedly more to this than simple linear causality (Beck, Levine,and Loayza 2000; La Porta and others 2000). Furthermore, although it is difficult toquantify with precision, markets with perceived shortcomings in minority shareholderprotections do suffer from a "corporate governance discount" (McKinsey & Company2002). And across firms, equity market values are higher in environments where shareholderprotection is stronger (La Porta and others 2002).In spite of the increasing awareness of these issues and interrelationships,and notwithstanding the reforms implemented by advanced industrial and emergingmarkets in their legal and regulatory frameworks in the past decade, corporategovernance systems remain weak in many countries (including in Latin America).Each market presents a unique combination of factors (legal framework, incentives,and institutional development), and progress toward improvement will therefore requirea different mix of responses. The objective of this chapter is to review recentdevelopments at the nexus of capital markets and corporate governance in LatinAmerica and draw some conclusions about what sorts of reform efforts are likelyto be successful under what sorts of conditions, recognizing that the regionaland indeed worldwide experiences thus far require that conclusions be treated aspreliminary.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub