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 . 2

OECD Principles of Corporate Governance a key reference for capital market development

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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 3

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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 4

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 5

Declining IPO numbers and volume Source: OECD calculations, based on data from Thomson Reuters, Datastream, stock exchanges + companies’ websites .

 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 6

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 7

Impact on shareholder monitoring and engagement

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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 8

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 9

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 2005 2007 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. 12

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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 15

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. 16

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 18

Thank you for your attention For more information, contact [email protected]

or consult http://www.oecd.org/daf/corporateaffairs 19