This review of corporate governance in Chile describes the corporate governance setting including the structure and ownership concentration of listed companies and the structure and operation of the state-owned sector. It then examines the legal and regulatory framework and company practices to assess the degree to which the recommendations of the OECD Principles of Corporate Governance and the OECD Guidelines on Corporate Governance of State-Owned Enterprises have been implemented.
Corporate Governance Corporate Governance in Chile Corporate Governance in Chile This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. Please cite this publication as: OECD (2011), Corporate Governance in Chile, Corporate Governance, OECD Publishing. http://dx.doi.org/10.1787/9789264095953-en ISBN 978-92-64-09594-6 (print) ISBN 978-92-64-09595-3 (PDF) Series: Corporate Governance ISSN 2077-6527 (print) ISSN 2077-6535 (online) Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda. © OECD 2011 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to firstname.lastname@example.org. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at email@example.com or the Centre français d’exploitation du droit de copie (CFC) at firstname.lastname@example.org. FOREWORD Foreword T his Review of Corporate Governance in Chile is part of a series of reviews of national policies undertaken for the OECD Corporate Governance Committee. It was prepared as part of the process of Chile’s accession to OECD membership. The OECD Council decided to open accession discussions with Chile on 16 May 2007 and an Accession Roadmap, setting out the terms, conditions and process for accession, was adopted on 30 November 2007. In the Roadmap, the Council requested a number of OECD Committees to provide it with a formal opinion. In light of the formal opinions received from OECD Committees and other relevant information, the OECD Council decided to invite Chile to become a Member of the Organisation on 15 December 2009. After completion of its internal procedures, Chile became an OECD Member on 7 May 2010. The Corporate Governance Committee (the “Committee”) was requested to examine Chile’s position with respect to core corporate governance features and to provide Council with a formal opinion on Chile’s willingness and ability to implement the recommendations laid down in the OECD Principles of Corporate Governance (the “Principles”) and the OECD Guidelines on Corporate Governance of State-Owned Enterprises (the “SOE Guidelines”). This report, prepared as part of the Committee’s accession review, highlights some of the key corporate governance challenges facing Chile. A major feature of Chile’s corporate governance landscape is the concentrated ownership structure and limited liquidity that characterises its capital market, with most firms controlled by conglomerates or business groups. As in other jurisdictions with similar corporate structures, concerns arise that minority shareholders may be vulnerable to irregular practices by controlling shareholders to extract private benefits at their expense through practices such as abusive related party transactions or self-dealing. Chile has made considerable progress in improving its corporate governance framework, first through laws adopted in 2000 on Public Tender Offers and on Corporate Governance, and more recently through a significant Corporate Governance law approved by Congress in September 2009, just prior to the conclusion of this review. The law established new protection for minority shareholders through enhanced transparency standards and mechanisms to address use of privileged information, related party transactions and conflicts of interest, and provisions to improve the definition of independent directors and to strengthen their role in reviewing sensitive issues. In addition, the new law approved by Congress in October 2009 to strengthen governance of Chile’s largest state-owned enterprise, the copper mining company Codelco, is an important reform that may give momentum to further reforms of other Chilean SOEs. The review also found that Chile should continue to pursue corporate governance improvements in a number of areas. For example, concerns were raised about the need for additional checks and balances to strengthen the independence of the Superintendency of Securities and Insurance and protect against the risk of political intervention in enforcement decisions. While Chile has taken positive steps to improve the governance of its pension funds and to guard against conflicts of CORPORATE GOVERNANCE IN CHILE © OECD 2011 3 FOREWORD interest in their investment decisions, further improvements are desirable in relation to other institutional investors such as mutual funds and insurance companies. In addition, further SOE governance improvements, not yet addressed by the Codelco reforms, remain on the reform agenda. This review of corporate governance in Chile was conducted on the basis of a comprehensive self-assessment by the Chilean authorities and Chile’s answers to a detailed questionnaire on state-owned enterprises, supplemented by information gathered from Secretariat fact-finding missions, interviews with public officials, market participants, academics and relevant literature. Successive drafts of the report were discussed with Chilean representatives at joint meetings of the Corporate Governance Committee and its Working Party on State Ownership and Privatisation Practices in November 2008 and April and November 2009. This final version of the report reflects the situation as of November 2009. It is released on the responsibility of the Secretary General of the OECD. The review was prepared by Daniel Blume and Cuauhtemoc Lopez-Bassols under the overall supervision of Mats Isaksson, Grant Kirkpatrick and Robert Ley of the Directorate for Enterprise and Financial Affairs. The analytical framework is explained in Annex A and detailed information on Chile’s state-owned enterprises is provided in Annex B. 4 CORPORATE GOVERNANCE IN CHILE © OECD 2011 TABLE OF CONTENTS Table of Contents Chapter 1. Assessment and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1. Corporate Governance Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2. Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Chapter 2. Corporate Governance Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1. Chile’s Corporate Governance Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2. Ensuring a consistent regulatory framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3. Disclosure of Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4. Separation of Ownership and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5. Ensuring a Level Playing Field. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 6. Stakeholder Rights and Boards of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Annex A. Analytical Framework for the Accession Review . . . . . . . . . . . . . . . . . . . . . . . 63 Annex B. Key Characteristics of Chile’s State-Owned Enterprises . . . . . . . . . . . . . . . . . 67 Tables 2.1. SVS Censorships, Suspensions and Sanctions Record, 2005-07 . . . . . . . . . . . . . 26 2.2. Chilean SOEs with less than 100% State Ownership . . . . . . . . . . . . . . . . . . . . . . 36 Figures 2.1. SSE trading volume breakdown by participants . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.2. Sanctions for use of privileged information and personnel assigned to investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 CORPORATE GOVERNANCE IN CHILE © OECD 2011 5 Corporate Governance in Chile © OECD 2011 Chapter 1 Assessment and Recommendations 7 1. ASSESSMENT AND RECOMMENDATIONS 1. Corporate Governance Framework Chile’s Santiago Stock Exchange constitutes the third largest equity market in Latin America, behind the stock exchanges of Brazil and Mexico, with a relatively high market capitalisation of USD 213 billion for 238 listed firms at the end of 2007 – equivalent to 124 percent of GDP. The market is characterised by low liquidity and quite high ownership concentration of individual firms, usually in the hands of conglomerates or business groups that are also concentrated in number. As of 2002, some 50 major conglomerates had ownership control of more than 70 percent of non-financial listed companies, and 91 percent of total equity in the Santiago Stock Exchange. While liquidity is low, it has been improving, with annual trading volume rising from about 10 percent of GDP in 2002 to about 30 percent by 2007. The free float within the 138 largest and most actively traded firms was estimated at 36 percent in 2007, with virtually all companies having a controlling owner or group. The predominance of company groups, high ownership concentration and low liquidity in Chilean markets are characteristics that may weaken the effectiveness of market mechanisms, leading to the Chilean authorities’ self-review conclusion that “the central corporate governance challenge in Chile is the risk of minority shareholder expropriation at the hands of controlling shareholders”. A particular characteristic of the Chilean market is the importance of pension funds as minority shareholders, whose transactions accounted for 52 percent of trading volume in the Chilean stock exchange in 2007. Chile’s five privately-owned pension funds held equity in 113 listed companies as of 2007, with sufficient ownership to elect independent directors to many of these firms. Pension governance reforms enacted in 2007 require them to report on how they address conflicts of interest and to establish Directors’ Committees with independent members to review investments and conflicts of interest. The Corporations Law and Securities Market Law, both enacted in 1981 and amended several times since, are the principal pieces of legislation bearing on corporate governance in Chile. Key amendments have included laws enacted in 2000 on Public Tender Offers and on Corporate Governance, which moved to strengthen minority shareholder rights by, among other things, enhancing disclosure and establishing Directors’ Committees which serve a role similar to Audit Committees. Chile’s Superintendency of Securities and Insurance (SVS) is responsible for overseeing the securities and insurance markets, while separate regulators oversee pension funds and banks. In the course of the review, Chile has taken major steps to improve its corporate governance legal framework through passage of two key laws – one to reform the governance of its largest SOE, Codelco, and the second addressing listed companies. The new Corporate Governance law, passed by Congress in September 2009 and signed into law on 13 October 2009, strengthens protection for minority shareholders through enhanced 8 CORPORATE GOVERNANCE IN CHILE © OECD 2011 1. ASSESSMENT AND RECOMMENDATIONS transparency standards and mechanisms for addressing use of privileged information, related party transactions and conflicts of interest, and through provisions to improve the definition of independent directors and to strengthen their role in reviewing sensitive issues relevant to minority shareholder protection through the Directors’ Committees. The SOE sector is small in comparison to the overall economy, representing a book value of USD 3.3 billion or just 1.5% of market capitalisation, but it includes several that play a major and strategic role in the economy. Among its most visible SOEs are Codelco, the world’s largest copper producer and a major source of government revenue; ENAP, which is active in oil exploration, refining and more recently the production of natural gas, playing a key role in ensuring Chile’s energy security and stability; ENAMI, a minerals processor with an economic development mission aimed at supporting small and medium-sized mining companies in the country’s mining regions, and its state-owned bank, Banco Estado. Twenty-six of the 32 SOEs are entirely state-owned, while six have some private shareholders. The Public Enterprise System (SEP) is the main state institution responsible for exercising the state’s ownership function for most SOEs (23 out of 32), but separate legal and institutional arrangements are in place for many of the larger or more prominent SOEs. Chile has been taking important steps to make these supervisory arrangements more uniform by establishing a new SEP Code of Conduct and new procedures for appointing independent directors in the 23 SOEs under its supervision. Legislation was proposed in 2008 that would establish these discretionary measures under law and increase the number of SOEs under SEP supervision from 23 to 28, while strengthening requirements related to disclosure and the role, qualifications and independence of board members. This bill did not advance in Congress which gave higher priority to the October, 2009 passage of the bill to strengthen the governance of Codelco and to remove ministers from its board. This represents an important, precedent-setting reform that may give momentum to further reforms to other SOEs. 2. Assessment The following section assesses Chile’s corporate governance in terms of five core corporate governance features: ● Ensuring a consistent regulatory framework that provides for the existence and effective enforcement of shareholder rights and the equitable treatment of shareholders, including minority and foreign shareholders. ● Requiring timely and reliable disclosure of corporate information in accordance with internationally recognised standards of accounting, auditing and non-financial reporting. ● Establishing effective separation of the government’s role as an owner of state-owned companies and the government’s role as regulator, particularly with regard to market regulation. ● Ensuring a level playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions. ● Recognising stakeholder rights as established by law or through mutual agreements, and the duties, rights and responsibilities of corporate boards of directors. CORPORATE GOVERNANCE IN CHILE © OECD 2011 9 1. ASSESSMENT AND RECOMMENDATIONS Ensuring the Enforcement of Shareholder Rights and Equitable Treatment. Overall, Chile has a framework in place that broadly provides for the existence and enforcement of shareholder rights and the equitable treatment of shareholders. But the Chilean authorities have also recognised weaknesses that they have attempted to address through their recent corporate governance legislation. The new law includes significant measures to require disclosure of material information to the market aimed at combating insider trading and mis-use of privileged information. Certain additional steps discussed below should also be considered to further address these weaknesses. While Chile’s new Corporate Governance law strengthens ex-ante review mechanisms at board level, questions remain as to whether these mechanisms can be fully effective in companies with weak minority shareholders and consequent weak functioning of market incentives. Strong ex post review by the regulator may be equally important in this context. Chile’s proposal to create a Securities Commission with a two-board structure aimed at strengthening its independence may be an important step in this regard. Chile could also enhance its enforcement capacities on cross-border cases by taking the steps necessary to become a full signatory to the Multilateral Memorandum of Understanding of the International Organization of Securities Commissions (IOSCO) concerning consultation and co-operation on exchange of information. Chile has taken some steps to minimise the impact of mechanisms that allow certain shareholders to maintain disproportionate control, and in cases where such disproportionate control exists, to ensure their transparency and safeguard against abuse. Nevertheless, further steps should be considered, such as requiring disclosure of all governance-related requirements of shareholder agreements, and requiring a clearer explanation of how different companies in a group are related that is easily available to market participants, rather than merely listing their various components. Chile’s corporate governance framework has established a set of standards to facilitate exercise of shareholder rights, to encourage disclosure of voting policies and to address conflicts of interest among the largest class of institutional investors – the pension funds. But it has not applied such requirements to less important investors in the Chilean market. Disclosure of voting policies would be addressed for domestic mutual and investment funds through Chile’s proposed capital market reform legislation, known as MKIII, submitted to Congress in September 2009, but these proposed reforms do not address conflicts of interest, nor insurance funds. Timely and Reliable Disclosure In Accordance with Internationally Recognised Standards. Chile has taken significant steps over the last several years to strengthen the quality of its financial and non-financial disclosure, notably in adopting and implementing International Financial Reporting Standards (IFRS). Its new Corporate Governance law achieves significant additional improvements by strengthening auditor independence requirements, requiring them to attend shareholder meetings to respond to questions raised by shareholders, strengthening SVS oversight of the auditing profession, refining the definition of related party transactions in accordance with IFRS standards and enhancing the role and independence of Directors’ Committees in reviewing such transactions. Similarly, the SOE corporate governance legislative proposal to expand the number of SOEs subject to SEP and SVS supervision would extend the application of international accounting and audit standards to nearly all SOEs. One of the issues that Chile has considered during the review period is the recommendations of the 2004 Accounting and Auditing Report on Observance of Standards 10 CORPORATE GOVERNANCE IN CHILE © OECD 2011 1. ASSESSMENT AND RECOMMENDATIONS and Codes (ROSC) carried out by the World Bank. Chile has taken action on several of these recommendations. Questions were raised during the review concerning the clarity of the division of responsibilities between Chile’s Institute of Auditors, which self-regulates the implementation of auditing technical standards consistent with international norms, and the role of SVS, which in turn ensures that minimum standards are respected. However, the Chilean authorities maintained that SVS should continue to play an active role, which would be strengthened further by the new corporate governance law, in light of the fact that Chile’s Institute of Auditors has only recently begun playing a more active role and that regulatory safeguards are needed to ensure that both play their roles as required. Review of disclosure, auditing and accounting provisions applying to SOEs show that Chile is making an effort to harmonise standards applying to most SOEs, with further progress achieved in April 2009 through the enactment of the Transparency Act, requiring all SOEs to disclose the same information as corporations are required to provide to the SVS. There may be scope to clarify the division of responsibilities between different auditing functions for SOEs in Chile, with a view towards reducing the degree of overlapping external auditing responsibilities between external auditors, the Comptroller, and in exceptional cases such as in the mining sector, specialised review bodies. Effective Separation of the Government’s Role as Owner and its Regulatory Role, and Ensuring a Level Playing Field. Chile’s recent actions to establish an SOE code that draws substantially on the OECD SOE Guidelines and to begin appointing board members following certain criteria aimed at promoting their independence represent significant improvements in their SOE governance framework. Proposed legislative reforms would enhance these initiatives and increase their application from 23 to 28 of Chile’s 32 SOEs. The SOE legislation would also subject all SOEs co-ordinated by the SEP ownership entity to SVS regulatory oversight, and strengthen the appointment of independent directors and their role in reviewing related party transactions and conflicts of interest. The Codelco legislative reform adopted by Congress in October 2009 has established an important precedent for further SOE reforms by eliminating Ministers from Codelco’s board, increasing the number of independent directors to be elected through competitive and open processes, providing the board with increased authority in relation to the CEO, establishing professional qualification requirements for board members, and stipulating that Codelco and its board are subject to the same requirements as private sector companies. Chile is encouraged to continue in this direction by enacting its SOE bill and by ensuring, as soon as possible, that similar requirements will apply to all SOEs. It is especially important to address the case of Ministers serving on the boards of the oil company ENAP and mining company ENAMI, because of the risk this poses to the separation of ownership and regulatory roles, and to political interference in day-to-day management of these SOEs. Chile should build on the Codelco precedent to adopt similar reforms for ENAP and ENAMI, and by ensuring that all SOEs are subject to similar oversight and regulatory requirements. Chile has taken several important steps to ensure that SOEs do not receive preferential treatment that would undermine the maintenance of a level playing field. Company law applies equally to SOEs, and Chile is gradually moving to harmonise its regulatory and institutional structure for enforcement to ensure that the law is applied in an even-handed manner to both SOEs and private companies. In the cases of state guarantees or budget transfers to cover losses, government support is transparently justified and approved in terms of achieving non-commercial public policy objectives related to “net social CORPORATE GOVERNANCE IN CHILE © OECD 2011 11 1. ASSESSMENT AND RECOMMENDATIONS profitability”. Market observers have not raised significant concerns about SOEs receiving unfair advantages vis-à-vis competitors. However, further progress could be achieved in this regard through passage of the proposed SOE corporate governance reforms and their application to all SOEs, as noted above. Recognising Stakeholder Rights and the Duties, Rights and Responsibilities of Boards. Stakeholder rights are established by law or through mutual agreement through a range of legal provisions and enforcement mechanisms. However, some potential weaknesses were identified in the course of the review. For example, explicit requirements or mechanisms to provide safeguards to “whistle-blowing” employees who wish to complain at company level may be lacking, but employees do have an outlet to register complaints anonymously with SVS. In addition, lengthy court processes may not facilitate stakeholder redress when they feel that their rights are not respected. However, the review did not encounter complaints concerning violations of such rights, and several market observers suggested that awareness and recognition of such rights have improved. The same framework for addressing stakeholder rights is applied to SOEs through company law, and in addition through explicit provisions in the new SEP Code. The issue of how effectively the rights, duties and responsibilities of board members are implemented is complex. Independent reviews and surveys of Chilean board practices and perceptions suggest weaknesses in the functioning of boards, particularly in smaller companies, but some progress in awareness and professionalism of board members as well. Pension funds and other institutional investors’ election of independent board members, and their role in reviewing sensitive transactions at Directors’ Committee level, provides an important safeguard in relation to the protection of minority shareholder rights. SVS enforcement, however, is largely limited to reviewing meeting minutes to ensure that various provisions are formally respected. The new Corporate Governance law includes important measures to enhance the effectiveness of board practices through its emphasis on independent and ex ante scrutiny at board level to prevent abusive related party transactions and ensure protection of all shareholder interests. The law reinforces the role of the Directors’ Committee and adds important improvements, including strengthening the role of independent directors and more clearly defining the economic and relational criteria that such directors must meet, and expanding their responsibilities to review, recommend and report on a range of sensitive issues. However, the Directors’ Committee structure will only be applied to companies with at least 12.5 percent free float and a minimum of USD 58 million in market capitalisation, focusing such requirements on those companies that are most actively traded. 3. Recommendations While Chile has made positive progress in its implementation of the Principles and the Guidelines, the Committee identified a number of areas where further improvements are recommended: ● Currently, the Superintendent of Insurance and Securities is directly appointed and removable by the President without cause. Chile is encouraged to provide adequate checks and balances to protect against the risk of political intervention in enforcement decisions. The need for independence will take on added importance if, as proposed, SVS is put in charge of regulatory oversight and enforcement of SOEs. 12 CORPORATE GOVERNANCE IN CHILE © OECD 2011 1. ASSESSMENT AND RECOMMENDATIONS ● Chile is called upon to use its regulatory and enforcement structure to give ongoing attention to the question of corporate groups, and to ensure that the nature of the relationships among companies within conglomerates is well understood by the market. ● Building on its pension fund governance reforms, Chile should take further steps to enact governance reforms for mutual and insurance funds to address conflicts of interest and disclose voting policies. Furthermore, requirements for disclosure of shareholder agreements should be extended to cover provisions not strictly related to control of the company, for example including the agreements whose object is the exercise of voting rights, the election of board members, block voting and right of first refusal. ● Chile should build on the precedent of Codelco governance reforms to work towards further SOE reforms, including expanding the number of SOEs subject to the SEP Code of Conduct and to SVS regulatory oversight and requirements, along with reforms to strengthen the appointment of independent directors and their role in reviewing related party transactions and conflicts of interest. It is especially important to address the case of ministers serving on SOE boards (i.e. ENAP and ENAMI), because of the risk this poses to the separation of ownership and regulatory roles, and to political interference in day-to-day management of these SOEs. CORPORATE GOVERNANCE IN CHILE © OECD 2011 13 Corporate Governance in Chile © OECD 2011 Chapter 2 Corporate Governance Review 15 2. CORPORATE GOVERNANCE REVIEW 1. Chile’s Corporate Governance Framework Chile, with one of the highest market capitalisation levels in Latin America and a relatively small but visible state-owned sector, has seen increasing attention devoted to corporate governance in recent years. The government submitted three important legislative proposals to the Congress to improve private sector and public sector governance during the last two years, two of which were approved by Congress in the second half of 2009. A fourth, related proposal on capital market reform was submitted to Congress in September 2009. Chile’s Santiago Stock Exchange constitutes the third largest equity market in Latin America, behind the stock exchanges of Brazil and Mexico, with market capitalisation of USD 213 billion at the end of 2007 – equivalent to 124 percent of GDP. This compares well to Brazil’s 106 percent and the US’s 127 percent market capitalisation as share of GDP. However, average daily trading volume of USD 196 million is relatively low, at less than 10% of total market capitalisation, and new listings are rare, with just 10 IPOs occurring from 2005-07.1 Overall, Chile’s 238 listed companies (as of 2007) can be considered as a relatively high number in relation to population, constituting about 15 firms per million inhabitants, according to Chile’s self-review. Most of Chile’s largest firms are listed in the local markets, with the proportion of equity of Chilean firms cross-listed on US exchanges falling in the range of 8-10 percent of Chile’s market capitalization since 2003. Chile’s listed firms are also relatively diversified. Chile’s IGPA index, which tracks the 138 most significant and actively traded listed firms, comprises 28 percent of firms from the utilities sector, 20 percent from commodities, 20 percent industrial, 9 percent financial, 9 percent retail, 7 percent in consumer goods, and 6 percent in communications and technology. The market is also characterised by quite high ownership concentration, major conglomerate ownership of many of its listed companies, and relatively low free float (among companies in Chile’s two main indexes, an average of 36% of shares are not owned by controlling parties, with pension funds holding and not actively trading a significant proportion of the free float). Chile’s current corporate governance landscape reflects historical influences over the last four decades. Chile’s economy featured heavy state control and nationalisation of the copper sector and other important industries under the Allende government, which culminated with a severe economic crisis before the military coup in 1973. A period of market-oriented reforms and massive privatisations followed. By 1990, about 550 enterprises under public-sector control, including most of Chile’s largest corporations, had been privatised. By the end of 1991, fewer than 50 firms remained in the public sector. The overall privatisation programme undertaken in the late 1980s has been criticised by some Chileans and international economists who have suggested that banks and manufacturing firms were sold too rapidly and at “very low prices”, (Lüders, 1991) contributing to the current landscape of concentrated ownership and conglomerate dominance. Reform of the banking sector, following a banking sector crisis in the early 80s, and privatisation of the Chilean pension system also took place during this period. 16 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW The various coalitions that have held government majorities since 1990 have reaffirmed the overall framework and market orientation of Chile’s economy, but with greater emphasis on addressing economic disparities. While the 32 SOEs that currently remain in the State’s hands are small in comparison to the overall economy, representing a book value of USD 3.3 billion or just 1.5% of market capitalisation2, they play a quite visible role in both the economic and political spheres. Among these are: ● Codelco, the world’s largest copper producer and a major source of government revenue. ● ENAP, Chile’s only oil company, which plays a key role in ensuring Chile’s energy security and stability primarily through its oil refining activities, but also through some oil exploration and the more recent development of capacity to produce natural gas. ● Banco Estado, while ranked only fourth overall among Chilean banks, reaches more Chileans than any other bank due to its extensive savings account network. ● ENAMI, a minerals processor with an economic development mission aimed at supporting small and medium-sized mining companies in the country’s mining regions. ● EFE, the state railway company and sole provider of rail transport for passengers and freight. ● Among other highly visible state-run companies are a major television station, TVN; La Nación newspaper; the mail service; the state-run lottery; the Santiago Metro; several defence manufacturing companies; and 10 port authorities. Annex B provides a breakdown of key ownership and governance characteristics of Chile’s 32 SOEs. Twenty-six of these are entirely state-owned, including all of the major SOEs mentioned above. Of the six SOEs with private shareholders, three SOEs have quite small private stakes (less than 3 percent), while three others have more significant (27 percent – 31 percent) minority shareholdings. In addition, the state has minority shares (29 percent to 45 percent) of four water and sewage utilities with golden share rights to veto the disposal of water rights and water and sewage concessions. In the context of the above history, there was no serious consideration at the time of this review of further privatisation or listing of any of the remaining SOEs, but rather a focus on improving their governance and performance. However, many voices from the business community criticized SOE economic performance, expressing scepticism that proposed governance reforms would make a significant difference as long as they remain in state hands and with strong trade union influence. 1.1. The Structure of Ownership and Control 1.1.1. Ownership As noted above, one of the main features of Chile’s corporate sector is the very high concentration of ownership of individual firms, usually in the hands of conglomerates or business groups that are also few in number. These business groups function as holdings, having majority stakes in a large number of firms, and minority stakes in others. As of 2002, some 50 major conglomerates had ownership control of more than 70% of non-financial listed companies, and 91% of total equity in the Santiago Stock Exchange (Lefort andWalker, 2007). Conglomerates in Chile are not structured around banks, although a few have a bank within their company group, because they were forbidden from owning equity in non-financial companies in 1986. The 1986 banking law imposed strict controls on related lending due to its role in the 1982-83 banking sector collapse (credit to related parties amounted to 19 percent of total loans in 1982). CORPORATE GOVERNANCE IN CHILE © OECD 2011 17 2. CORPORATE GOVERNANCE REVIEW While cross shareholding is prohibited in Chile, and dual class shares are seldom used (since 2000, these shares have a restricted validity of five years and can be found in less than 10 percent of listed companies), business groups exert their control either directly or through pyramidal ownership structures. According to the Chilean self-review submission, the average conglomerate is composed of 2.5 layers of listed companies, meaning that 18% of overall equity is sufficient to control 50% of voting rights in all the group companies in the pyramid, while 36% is sufficient to control ? of the voting rights, sufficient for certain decisions requiring a super-majority.3 Despite the existence of such pyramid structures, controlling owners in Chile typically own far more equity than is necessary for effective control. Indications of how much these control groups may be used to exert disproportionate control and minority expropriation can be discerned from the size of the control premium found in changes of corporate control. One study by Lefort and Walker analysing 12 major acquisitions involving changes of control between 1996 and 1999 found an average control premium of 70 percent. However, the abnormal return for the stock after control was transferred was 5 percent, suggesting that the transfer also added value in the eyes of minority shareholders. They used these results to estimate the total private benefits of control at approximately 25 percent of the value of the stock of common shares (Lefort and Walker, 2000). A comparative study using data from 393 control block transactions in 39 countries (including 7 such transactions in Chile in the 1990s) found a control block premium of 18% of the share price – better than most other Latin American countries in the study, but significantly higher than most OECD countries and somewhat higher than the average of 14% (Dyck and Zingales, 2004). A second review of 1997 data of 661 firms with dual class shares in 18 countries estimated the control block premium for Chile at 23 percent of the share price (Nenova, 2003). However, these analyses are drawn from the period prior to major corporate governance legal reforms enacted in 2000, Chile’s so-called “OPA” or takeover law, which largely eliminated dual class shares and which limited the control premium to a maximum of 10 percent.4 The law, which was established with reference to US regulations, requires that a higher offer price automatically generates a public tender offer to ensure that the control premium is shared with minority shareholders. This review did not identify comparable, more recent studies of share block prices taking into account these important changes. However, a 2007 analysis by Lefort and Walker found that the closer the relationship between cash and control rights, the less the scope for minority expropriation as measured by share prices. The value of firms with the cash flow/control ratio a standard deviation higher than the average were valued at 10 percent more than average (Lefort and Walker, 2007). Thus, there continues to be some evidence to support the hypothesis that shareholders consider minority expropriation a higher risk when firms belong to conglomerates in Chile. Chile’s self-review suggests that the risk directly attributable to being part of a conglomerate is somewhat lessened by the fact that most firms already have more equity than is necessary for control even without any disproportionate influence exerted through pyramid structures. As of September 2007, the free float (defined as shares not owned by controlling parties) was estimated at 36% of equity in the IPSA and IGPA indexes. The IPSA index is made up of the 40 most traded firms with greater than USD 200 million in market 18 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW capitalisation, reflecting 74% of overall market capitalisation, while the IGPA index tracks the 138 most significant and actively traded stocks among the 238 companies listed on the market. Of the 40 most traded firms, only four had a free float larger than ? of equity, which implies that the remaining 36 were subject to significant control, since Chile’s company law requires a super-majority of two thirds of voting capital for certain major board decisions, giving a controlling shareholder at least blocking power in such cases. Similarly, only 16 of the 138 firms in the IGPA index as of September 2007 needed to obtain the votes of minority shareholders for such decisions.5 Taking into account less traded stocks, owner concentration is much higher, approximately 86% overall. The lack of liquidity is further exacerbated by the fact that domestic pension funds hold about one-fourth of the free float, and tend to hold onto their shares. By comparison, 12 Chilean corporations listed abroad through ADRs account for another USD50 million in daily trading, approximately 25% of the Santiago Stock Exchange’s daily turnover (Lefort and Walker, 2007). While overall liquidity is low, it has been improving, with annual trading volume rising from about 10% of GDP in 2002 to about 30% by 2007. Turnover – defined as total annual trading volume divided by market capitalisation – has increased from 7% to 24% during the same period.6 Chile’s self-review report advanced a number of hypotheses as to why they experience such high ownership concentration, low liquidity and relatively few IPOs. First, they may have less need of equity capital, because the company tax rate is low (17%) both in absolute terms and relative to the individual income tax rate (maximum marginal rate of 40%), so listed firms have an incentive to re-invest company profits (after providing the legally required minimum of 30 percent of after tax profits as dividends), and thus to use internal, self generated funds to finance firm expansion. Second, business conglomerates may provide an “internal capital market” by reassigning funds from more mature enterprises to those in the group that need funds for expansion. A 2003 study by Agosin and Pasten suggests that Chilean corporations tend to finance their investments either through debt or with retained earnings and transfers of funds between member companies of the same group. In heavily-indebted companies (with a debt equity ratio higher than 100 percent), intra group debt is also the highest. This provides some evidence that an important rationale for the existence of groups is to internalise imperfect and incomplete capital markets (Agosin and Pasten, 2003). Also, such transfers of funds are facilitated by the fact that inter-corporate dividends are not taxable in Chile. Third, there is evidence that “since 1997 debt has been the preferred financing method of Chilean firms” (Lefort and Walker, 2003). Some commentators suggest that this is because the banking sector is focused on lending to large listed firms as opposed to SMEs, while others cite the demand from local pension funds and insurance companies to fund local, long maturity assets which make bond financing a relatively cheap alternative.7 In addition, a recent study commissioned by SVS relating liquidity to corporate governance has suggested that there is a link between the takeover law and ownership concentration in Chile. The study suggested that the requirement of a tender offer when a controlling party reaches two-thirds or more of the company ownership, while achieving its objective to provide additional protection to minority shareholders during takeover bids, has also induced more ownership concentration in the companies analysed (Morales, 2009). CORPORATE GOVERNANCE IN CHILE © OECD 2011 19 2. CORPORATE GOVERNANCE REVIEW In view of the dominance of control groups and high ownership concentration, it is not surprising that Chile’s self-assessment suggests that “the central corporate governance challenge in Chile is the risk of minority shareholder expropriation at the hands of controlling shareholders”. 1.1.2. Pension Funds and other Institutional Investors The Chilean capital market is characterised by the prominence of pension funds as the largest institutional investors in the market, followed by foreign investors and mutual funds. Figure 2.1. SSE trading volume breakdown by participants 2007 (total USD 200 million) Mutual funds, 6% Foreigners, 21% Pension funds, 52% Individuals, 21% Source: Deutsche Bank, SVS, Chilean Central Bank and Bloomberg. The early development of Chilean capital markets was partly propelled by the reform to Chile’s privately-owned pension system. Chile has a mandatory contribution scheme. Pension fund managers (AFPs under their Spanish acronym) have been allowed to invest in equities since 1985. As of April 2008, Chile’s five AFPs hold more than USD 121 billion in assets, approximately 74% of 2007 GDP.8 AFPs currently have USD 18.2 billion in local equity, representing 8.5% of the total Santiago Stock Exchange capitalisation. While this percentage may appear relatively small, pension funds’ influence is enhanced by the existence of cumulative voting provisions applying to minority shareholders, and the practice among pension funds and other institutional investors to co-ordinate their votes to elect “independent directors”9. These directors play an important role within Chile’s “Directors’ Committees”, with responsibilities similar to an audit committee in making recommendations to the Board on related party transactions, appointment of auditors, etc. Mutual funds and insurance companies had about USD 29 billion each in assets under management, but almost entirely invested in fixed income instruments. In other words, among the key institutional investor groups involved in the market, pension funds are clearly the dominant players. However, as indicated above, pension funds face limited liquidity in the Chilean domestic market, constraining the choice of actively traded stocks in which they can invest. Thus, they have an interest in exercising voice rather than exit, and tend to invest in and hold stocks. This problem has started to ease with pension law reforms that have relaxed limits on how much these pension funds can invest overseas. Restrictions of investment by AFPs outside Chile have been gradually lifted, from 6-12% in 1999 to a global 20 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW maximum of 45% in October 2008. With the new pension law reform enacted in 2007, the global maximum was 60% until 1 September 2009, and 80% from thereon. Recent reforms also gave contributors a wider spectrum of choices, each fund corresponding to a different degree of risk (as of September 2009 there were five risk-differentiated funds with proportions devoted to equity ranging from 5 percent in the lowest risk fund, to as high as 80 percent in the highest risk)10. This has had implications for corporate governance, as higher concentrations of equity investments allow for greater voting power. AFPs have a ceiling of 7% of any individual issuer’s equity. While such limits significantly constrain pension funds’ potential impact on governance by eliminating the possibility of becoming controlling shareholders, pension funds are permitted to co-ordinate their votes and to use cumulative voting in order to attain the 12.5% of votes necessary to secure the election of a director.11 Many commentators have highlighted the benefits of pension fund administrators for local corporate governance. These pension funds have significant shares in most of the most actively traded Chilean companies, holding equity in 113 companies in early 2007, with their votes serving to appoint 42 “independent directors”, or 13% of directors overall. Lefort and Walker (2007) reviewed the impact of the presence of pension fund investments in Chilean companies and found that they increased market value, suggesting that their monitoring role tends to mitigate agency problems between controlling and minority shareholders and improves governance outcomes. As reported by the Chilean self assessment, AFPs are now “self-regulating their votes for directors in firms where they hold equity”. Pension fund administrators are prohibited from voting for a candidate related to the controlling shareholder, and must disclose their voting intentions and proposed candidate(s). With the Pension Fund Reform of 2007, AFPs can only vote for independent directors and must propose directors from a register held at the Superintendency of Pensions. The 2007 reforms also instituted a number of governance reforms for the pension funds themselves, an important step in view of the potential for conflicts of interest involving banks (e.g. BBVA, Bank of New York and Citigroup) and other economic groups that are listed among Chile’s main shareholders of pension funds. Thus, Chile’s five pension funds are required to report on how they address conflicts of interest related to their private ownership and administration. Further reforms require the appointment of a minimum number of two independent directors to pension fund boards, and the establishment of a Directors’ Committee to review investments and conflicts of interest that must include among its members all of its independent directors, similar to the Directors’ Committee structure in place for large, listed companies. By contrast, the regulatory framework for oversight of mutual funds and insurance funds is not as comprehensive about establishing such governance-related requirements, including no current requirements to report on voting policies or conflicts of interest. Proposed legislation for the capital markets (the so-called MKIII package) would impose similar restrictions on mutual and investment funds. However, governance requirements for investment and insurance funds have been a lower public policy priority so far in Chile due to their smaller size and impact on the equity markets, and the perspective that pension funds have a higher regulatory threshold to meet not only because of their greater impact on the market, but also due to their mandatory nature and role in providing for all Chileans’ retirement. CORPORATE GOVERNANCE IN CHILE © OECD 2011 21 2. CORPORATE GOVERNANCE REVIEW A final important investor group in Chile is represented by foreign investors. Exact information on how much foreign investors hold in Chilean equity was not available, but the Chilean self-assessment estimated as a “lower floor” a total of USD 3.8 billion, while the Central Bank estimated foreign investors’ net portfolio of investment in Chile, with equity not separated out, at USD 9.3 billion. Moreover, foreign multinationals control several prominent local companies, including its two largest banks, Banco Santander and Banco de Chile, as well as Endesa and Enersis (the largest electricity generator and its holding company, respectively), Telefónica-CTC and IANSA (sugar). 1.1.3. Boards of directors The Corporation Law establishes the role of the board of directors, elected by the shareholders’ meeting, as the main body responsible for managing the company.12 It also states that listed companies’ boards should be formed by no less than five directors and seven if shareholders’ equity is equal or greater than USD 61.5 million.13 Directors owe a duty of care and loyalty to all shareholders. Due to the high concentration of ownership in Chile, controlling shareholders tend to dominate boards, and the Chilean self-assessment notes that “the functioning of boards of directors is an area of concern”.14 A McKinsey survey (2007) of Chilean directors found that 38% of directors reported that some decisions were made outside the boardroom (presumably by the controlling shareholder, Chairman and/or management). However, the study was not clear as to whether this represented informal decisions ratified by the board, or whether formal and legally required board approvals were entirely bypassed. Thirty per cent of directors saw boards as adding little or no value, and almost 80% lacked board self-evaluation mechanisms. Despite this, only 14% of the survey directors reported dissatisfaction with the way boards take decisions. Of those reporting dissatisfaction, 30% cited lack of analysis, and 25% cited concerns about decisions being taken outside the boardroom. The study concluded that boards lacked strategic vision.15 Moreover, a 2004 ICARE survey of directors found that 70% were directors of more than 4 corporations, with the same individuals serving as directors of several companies in the same group, suggesting that their independence from the controlling shareholder is limited.16 However, the number of “independent” directors has been increasing, largely propelled by pension fund votes. One survey of 64 listed companies in Chile (representing 86% of the total capitalisation of the Chilean market), found that boards in these Chilean corporations included an average of two minority-elected directors (CIPE- and Spencer Stuart, 2007). These independent directors play an important role in Chilean boards, being automatically assigned to the 3-person Directors’ Committee, which was required in companies with market capitalisation of above USD 61.5 million (approximately 125 of 238 listed companies)17. The Directors’ Committee is responsible for, among other things, reviewing external auditors’ reports, preventing abuse of related party transactions, and if the transaction involves substantial amounts, verifying whether it meets market conditions. Given the important role of the Directors’ Committee in preventing shareholder abuse and ensuring attention to key corporate governance issues, the Chilean government has devoted considerable attention in its Corporate Governance law to strengthening both the role and the definition of independent directors, and the functioning of this key committee as a major priority, to be discussed later in this report. 22 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW 1.2. The Corporate Governance Framework 1.2.1. The legal framework The legal landscape in Chile has been evolving since the early 1980s. Between 1975 and 1981, the Chilean financial system experienced a considerable expansion, as a result of the liberalisation process. In 1981 the Corporations Law (CL) and the Securities Market Law (SML), the backbone of Chile’s legal framework governing listed companies, were enacted. In 1989 and again in 1994, both texts were amended. In 2000, Chilean capital markets witnessed a significant overhaul with the amendment of both of these laws by the Public Tender Offers (known in Spanish as OPA law)18 and Corporate Governance laws. The OPA and Corporate Governance Laws of 2000 aimed at regulating corporate governance in a number of ways: by establishing better quality of information disclosure, creating directors’ committees (which serve a similar function to Audit Committees) for large listed firms with a majority of members unrelated to the controlling shareholders, and regulating public tender offers. Many of these modifications were a direct response to the “Chispas case”, a scandal which highlighted the need to strengthen minority shareholders’ rights.19 Recently, Chile has taken further important steps to improve its corporate governance legal framework, with the approval of two bills affecting corporate governance. The private sector Corporate Governance law approved by Congress in September 2009 aimed to boost transparency and prevent minority expropriation by emphasising ex-ante mechanisms rather than ex post compensation of damages. While its various provisions will be discussed in greater detail below, key improvements include: ● disclosure of material information to the market and combating the misuse of insider information; ● the conditions and criteria that independent directors must fulfil, to be related mainly to economic criteria (i.e. incentives) rather than the previous definition which depended on who elected the director; ● the composition and responsibilities of directors’ (audit) committees, to ensure that independent directors are involved at director committee level; ● regulation of related-party transactions to more fully address related companies within pyramid structures of company groups, and conflicts of interest; ● stricter requirements for external auditors according to international standards. The corporate governance legislation may be seen as an implicit recognition that Chile is aiming to do better in terms of Principle I.A, as one of its explicit purposes is to use corporate governance improvements to enhance the functioning of transparent and efficient markets in order to contribute to better economic performance overall. The strengthening of minority shareholder rights through its various improved safeguards, improvements to the definition of independent directors and their strengthened role in Directors’ Committees are all aimed at making investments in the stock market more attractive for minority shareholders. The second corporate governance law, approved by Congress in October 2009, reformed certain governance requirements for Chile’s largest SOE, Codelco (the State copper mining corporation), including strengthening its board of directors and increasing transparency and supervision. The Codelco law includes amendments to increase the number of independent directors from two to four, and to eliminate the presence of Ministers from the board of directors. CORPORATE GOVERNANCE IN CHILE © OECD 2011 23 2. CORPORATE GOVERNANCE REVIEW A third corporate governance bill dealing with most of Chile’s remaining SOEs, submitted to the Congress in 2007, had not advanced at the time of writing due to the higher priority given to first approving the private sector Corporate Governance law, and then the Codelco law and other pending legislation. The SOE bill would enhance the governance of Chile’s main ownership entity, the Public Enterprise System (SEP), by redesigning its council, and would strengthen requirements related to the boards of SOEs. 1.2.2. Regulatory and Institutional Framework Chile’s regulatory framework relies on three main supervisory bodies, which regulate Chilean markets: the Superintendency of Securities and Insurance (SVS), the Superintendency of Banks and Financial Institutions (SBIF), and the Superintendency of Pensions (SP)20. The Central Bank also has a regulatory role, especially in regard to the banking system, international transactions and foreign market participants. Significant attention is paid to ensuring a clear division of responsibilities, as called for in Principle I.C, through a range of co-ordinating mechanisms. The Ministry of Finance plays a policy co- ordinating role, including hosting monthly co-ordinating meetings with all four of these institutions. A Committee of Superintendents was also established in 2003, with the Chilean Central Bank joining as an observer in 2006, to address links between these institutions concerning regulatory and enforcement matters. Working groups of staff from these bodies are established periodically to address specific matters, which sometimes leads to the adoption of joint rules, for example in relation to implementation of pension law reforms. This review focuses particularly on the role of SVS in the regulatory and institutional framework due to its responsibilities to supervise nearly all activities and entities involved in Chilean securities and insurance markets – not only listed companies, joint stock companies and insurance companies and intermediaries, but also stock brokers, stock exchanges, mutual and investment fund managers, risk rating agencies, securities and depository companies, and independent external auditors among others. While the SVS does not supervise the pension funds itself, its responsibility for enforcing minority shareholder rights is crucial to the pension funds’ role in the corporate governance of companies. SVS’s role is to enforce all laws, regulations, by-laws, and other provisions related to the operation of these markets. The SVS was established in its current form in 1980 as an autonomous public organisation under the co-ordination of the Ministry of Finance. One sensitive question for this review is how well SVS follows Principle I.D, addressing whether the regulatory and enforcement authorities have the authority, integrity and resources to fulfil their duties in a professional and objective manner. Based on interviews with a cross-section of market participants, it would appear that Superintendents have been generally perceived as impartial and professional in their decisions, but SVS’s independence remains a sensitive issue. SVS’s budget (USD 18.2 million in 2007) is subject to the annual approval of Congress, and thus dependent on political support. The budget has gradually been increasing, and has roughly doubled since 2004 in USD terms (not adjusted for inflation or currency fluctuations), with the number of staff increasing from 246 to 283 over that period. An enforcement department, established in 2001, has recently been expanded from 7 to 11 officials in order to increase enforcement and sanctions activity. While the budget does provide sub-categories for different types of work, such as surveillance vs. market development vs. enforcement, the Superintendent has full discretion to allocate the budget according to his priorities within these sub-categories. In addition, the Superintendent is appointed for an indefinite term, but can be removed 24 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW directly by the President at any time, without cause. In practice, incoming Presidents generally appoint a new Superintendent and have also used their power to change Superintendents in mid-course. While not questioning the professional judgement and independence of the current SVS operations, some market participants nevertheless have pointed to the appointment and removal process as having the potential to allow for excessive political influence. As part of the MKIII package of reforms to capital markets (announced in early August 2008), a White Paper was circulated for public consultation proposing to establish a Commission of Securities and Insurance composed of two independent bodies. The Council of Directors (Consejo Directivo) would be responsible for norms, investigation and supervision of insurance and securities. It would comprise four members: a president (with tie-breaking voting rights) appointed to a 3-year renewable term, and three other members appointed to staggered six-year terms, aimed at reducing the influence of the political cycle. The second body would be a separate “Securities and Insurance Court (Audiencia)” with three members: the president with a 3-year renewable term; and two other members with a fixed 6-year term. Currently all of these activities are handled by the Superintendency directly, with review of sanctions handled by an internal Superintendency staff enforcement committee (though sanctions can also be appealed through the regular judicial process). The President of Chile would make appointments to both the bodies of the Insurance and Securities Commission from lists of three candidates proposed by an independent Civil Service Commission, and would maintain power to remove members of these bodies through a decree explaining reasons with prior approval by the Comptroller General. Initial public reaction to the proposal has been positive, according to the SVS, although Congress may wish to play a greater role in the appointment process. But the government did not include these reform proposals in the MKIII legislation submitted to Congress in September 2009, citing the need for further analysis on what regulatory oversight structures may be most effective in light of the global financial crisis. This legislation was still pending as of October 2009. Although interviewed market participants did not criticise the professionalism or conduct of the securities regulator, they did cite the potential lack of independence as a concern, both in relation to self-regulatory initiatives as well as to the idea of providing the regulator with too much discretion to selectively enforce the law. According to past discussions at the OECD Latin American Roundtable on Corporate Governance, businesses in Chile tend to favour compliance with minimum legal standards, and suggest that there is little room within the regulatory framework to create self-regulatory bodies that might be more flexible in encouraging the pursuit of best practice standards. Regulations follow a Civil Law tradition prescribed by the authorities; the sentiment among some market participants is that the comprehensive nature of the regulatory framework does not encourage self-regulation although it was also argued that the private sector has not made serious attempts at self-regulation either. The new Corporate Governance law also seeks to promote self-regulation in a few areas. Chile was one of the last countries among Latin America’s most active capital markets to have developed a voluntary corporate governance code, issued in 2007 by Chile’s business-sponsored Corporate Governance Centre. However, the code has no legal or regulatory status, and while seminars have publicised it, there are no reporting requirements or other measures to promote its implementation. One of the pension funds, meanwhile, has issued its own corporate governance recommendations, rather than relying on the code put together by business interests. Without consensus in the market, companies tend to fall back on legal standards as their guide. CORPORATE GOVERNANCE IN CHILE © OECD 2011 25 2. CORPORATE GOVERNANCE REVIEW Chile has seen the beginnings of some self-regulatory development with the recent creation of a Self-Regulation Committee in the main stock exchanges (Santiago and Electronic Stock Exchanges). The committee’s main role is to inform and solve disputes between brokers or banks and their clients, or between brokers and other market players, arising from infringement of statutes, to either Stock Exchange regulations, or laws/norms dictated by SVS. Despite the important function it plays, several market observers suggested that it has not had a big impact so far, due to its limited funding of three part-time members, and the absence of any imposed sanctions (as of September 2008). Nevertheless, it had carried out some tasks, conducted six investigations of complaints related to broker conduct, and issued some recommendations to the Stock Exchange’s board regarding ways to improve its enforcement functions. A member of the self-regulatory committee suggested that the presence of and investigations by the self-regulatory committee have had an impact on brokers’ conduct, as a mechanism is now in place for clients to complain if they feel they are not treated correctly. SVS’ sanctions activity has been relatively steady over the past few years (see Table 2.1). Table 2.1. SVS Censorships, Suspensions and Sanctions Record, 2005-07 Total Amount Average Year 2005 2006 2007 Total USD Amount Censorships 3 102 79 184 X X Suspensions 0 1 0 1 X X Sanctions by Amount (USD) (0-3 000) 23 18 40 81 88 575.33 1 093.52 (3 000-15 000) 12 27 10 49 248 212.46 5 065.56 (15 000-30 000) 4 1 3 8 214 838.00 26 854.75 (30 000 and more) 3 9 1 13 3 848 139.59 296 010.74 Total fines 42 55 54 151 X X Average Amount USD 25 412.80 42 568.19 18 355.13 Source: SVS (Superintendencia de Valores y Seguros). Of the above sanctions and censorships, most are of a relatively minor nature, for example related to late or incomplete filing of information, whereas there has been an average of 12-15 more significant cases involving market abuse per year since 2006. The highest profile of these cases, involving the largest fines, have focused on the use of privileged information, with some cases also related to the conduct of broker dealers and mutual funds. A few of these cases received widespread media coverage, increasing the profile of the issues of insider trading and use of privileged information, and the importance of tackling information asymmetries in the Chilean market.21 As a step towards enhancing enforcement of cross-border cases, Chile committed in 2004 to seek the legal authority necessary to comply with the requirements of IOSCO’s Multilateral MOU on Consultation and Co-operation on Exchange of Information. Its intentions are noted as one of the jurisdictions listed in Annex B of the MOU. But it had not been accepted as a full signatory due to not meeting certain requirements for exchange of information related to bank accounts, according to the SVS.22 However, the SVS actively co- operates with other jurisdictions and has 19 bilateral information exchange agreements with jurisdictions on several continents. 26 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Concerning Principle I.B on whether the legal and regulatory requirements that affect corporate governance practices are consistent with the rule of law, transparent and enforceable, Chile appears to have a positive overall record in this regard, with some weaknesses in terms of the length and costliness of court processes. While the most significant sanctions are often appealed, Chile’s SVS has a good record of having its decisions upheld by the courts. Market abuse cases are often appealed in court, and judicial proceedings can be quite lengthy, generally taking at least two years to resolve in the first instance, another two to three years if the first decision is appealed, and as long as 8 to 10 years if the decision is appealed to the Supreme Court. In the last three years, 82 out of 151 fines have been paid, and 27 cases have been appealed in courts. While the court process was described in the 2003 World Bank ROSC as “long, cumbersome and uncertain”, more recent statistics show some predictability in the sense that only one of the 27 SVS enforcement actions that have been appealed has been overturned by the courts, while 12 sanctions have been confirmed, and the remaining 14 are pending in the initial court or appeals court. Perhaps because of the length and cost of court processes, shareholders do not normally use the courts to pursue private rights of action, but tend to use the SVS as the vehicle for submitting complaints when they believe their rights have been violated. Such complaints are quite rare in relation to the conduct of shareholder meetings, the exercise of voting rights or operations of the board, but many of SVS’ investigations of market abuse are initiated in response to investor complaints. While private arbitration is legally an option to ensure quicker resolution of disputes, it is not typically used. The new Corporate Governance law seeks to change this by requiring large shareholders, directors, senior executives and others involved in disputes above a minimum threshold to go to arbitration rather than the courts. 1.3. The legal and regulatory framework for SOEs The majority of SOEs fall under the supervision of the Public Enterprise System (SEP), which serves as the main entity of the Government for overseeing Chile’s ownership interests in companies where the state owns a stake. Annex B provides a list of these 32 SOEs and the differing supervisory, ownership and governance arrangements that apply to them. Nine of the State’s 32 SOEs are not currently under SEP ownership oversight, including amongst others all defence companies, the Chilean Copper Mining Corporation (Codelco), the National Petroleum Company (ENAP), the State Bank (BECH), the State television channel (TVN) and the state-owned newspaper (la Nación). The exceptions each have their own supervisory structures defined by independent pieces of legislation. While some general requirements on transparency and accountability apply to all SOEs, it is difficult to make uniform generalisations about Chile’s SOE governance legal framework, given the exceptional structures set up for the nine companies mentioned above. It also would be unrealistic to undertake a comprehensive review of all SOEs and to take full account of all of the variations in approach. It is clear that Chile’s government is trying to move toward a more uniform approach to SOE governance by introducing an SEP Code for SOEs to follow that includes substantial reference to the OECD Guidelines, and by increasing the emphasis on appointment of professional, independent directors; by proposing in its SOE corporate governance bill to increase the number of SOEs subject to SEP ownership oversight from 23 to 28 and to subject all of these SOEs to regulatory supervision by the SVS regardless of whether they are listed on the Stock Exchange; and through the new Codelco law that goes in a similar direction of increased emphasis on transparency and appointment of professional, independent directors. However, even if CORPORATE GOVERNANCE IN CHILE © OECD 2011 27 2. CORPORATE GOVERNANCE REVIEW the SOE legislation is also approved, there will be important exceptions to SEP oversight approach for the mining and petroleum SOEs, the state-owned television station and state-owned bank. These cases will be discussed in greater detail later in this report. 1.4. Conclusions on the corporate governance landscape The predominance of company groups, high ownership concentration and low liquidity in Chilean markets are characteristics that may weaken the effectiveness of market mechanisms, leading the Chilean authorities’ to conclude that “the central corporate governance challenge in Chile is the risk of minority shareholder expropriation at the hands of controlling shareholders”. Based on this analysis, Chile’s new Corporate Governance law is focused on strengthening protection for minority shareholders through enhanced transparency standards and mechanisms for addressing use of privileged information, related party transactions and conflicts of interest, and provisions to improve the definition of independent directors and to strengthen their role in reviewing issues related to minority shareholders through Directors’ Committees. While Chile’s new law strengthens ex-ante review mechanisms at board level, questions remain as to whether these mechanisms can be fully effective in companies with weak minority shareholders and consequent weak functioning of market incentives. Strong ex post review by the regulator may be equally important in this context. Chile’s proposal to create a Securities Commission with a two-board structure aimed at strengthening its independence may be an important step in this regard. Chile could also enhance its enforcement capacities on cross-border cases by taking the steps necessary to become a full signatory to the IOSCO MOU on information exchange. Chile has also taken significant steps to strengthen the governance of SOEs through its recent initiatives to establish an SEP Code that draws substantially on the OECD SOE Guidelines, to begin appointing board members following certain criteria aimed at promoting their independence, and to propose SOE corporate governance legislative reforms that would enhance these initiatives and increase their application from 23 to 28 of Chile’s 32 SOEs. The nature and importance of remaining exceptions are addressed in greater detail later in this report. 2. Ensuring a consistent regulatory framework The first core corporate governance feature for the review calls for Chile to ensure a consistent regulatory framework that provides for the existence and effective enforcement of shareholder rights and the equitable treatment of shareholders, including minority and foreign shareholders. 2.1. The regulatory framework for corporations Considering Chapters II and III of the Corporate Governance Principles dealing with the rights and equitable treatment of shareholders, the Chilean authorities asserted that Chile has either broadly implemented or fully implemented all sub-principles in these two chapters. The World Bank 2003 Corporate Governance ROSC, which was based on the 1999 version of the OECD Principles, found that the chapters and sub-sections of the Principles dealing with these topics were either “observed” or “largely observed” in most cases, with greatest weaknesses pinpointed in relation to the disclosure of control disproportionate to equity ownership (Principle II.D in the 2004 Principles), and Principle III.B on insider trading, both designated as only “partially observed”. 28 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Principle II.D states that “Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.” Chile’s self-review noted that its Corporations Law prohibits cross-shareholdings, and that the vast majority of shares are issued on the basis of “one share, one vote”. In a limited number of cases, dual class shares with restrictive or preferential rights are allowed. The preferred shares must be approved by two-thirds of the voting shares and permitted by the company’s by-laws. Of Chile’s 238 listed companies, 21 companies are currently using such shares with restricted rights, which normally have a maximum validity of five years, unless they are explicitly renewed by a new, two-thirds majority vote of shareholders. The use of pyramids and the consequent need for transparency of company group ownership structures and intra-group transactions are more significant factors in the Chilean context, potentially influencing the exercise of control disproportionate to equity ownership. Concern about this issue was pinpointed in the 2003 World Bank ROSC, which recommended that Chile improve its capacities to track the influence of such control structures. While the Chilean self-review suggests that these pyramid structures are not particularly complex, conglomerates are nevertheless widespread in Chile, and company groups average 2.5 layers of control. Chile’s corporate governance framework does require a certain level of disclosure that can assist the market in understanding the influence of such groups. First, the 12 largest shareholders of each company are disclosed and posted on the SVS web site, and this list must be electronically updated on a quarterly basis. This information includes the name of the shareholders (whether individuals or entities), their tax identification number, the number of votes, the name of the controllers and the way in which control is exercised (directly or indirectly). Because of the high ownership concentration found in the Chilean market, describing the 12 largest shareholders generally depicts the entire relevant ownership structure. Second, companies must disclose their control structures, including companies or individuals “behind” the controlling shareholders, i.e. the beneficial owners, in their annual reports. Beneficial ownership information must be updated biannually. For listed companies operating within pyramid structures, intermediate, non-listed layers are generally subject to the same rules as the listed parent or subsidiary under the Corporations Law, while special requirements applying to listed companies are also extended to the non-listed subsidiaries in some cases, notably in relation to related party transactions and takeover law requirements. Third, groups that include listed firms must periodically disclose information to the SVS, as well as to the bank regulator in certain cases. The information must identify the individual and consolidated information of the firm and the other members of the group. Administrative regulation No. 1246 of the SVS also requires the group or firm to disclose if it is the controller, a member of the controller, has a common controller with another firm, or any reason to consider such firm as part of a business group. It must also disclose if it can be identified as a controller on the basis that it either i) assures the majority of the votes of its ordinary shareholder meetings and can nominate the majority of the board’s directors; or ii) decisively influences the management of the company. Moreover, this information is publicly available through the SVS web site, which maintains a list of all company groups, including stock corporations, pension funds, banks and all kinds of companies that are under its supervision and the different companies that are a part of the CORPORATE GOVERNANCE IN CHILE © OECD 2011 29 2. CORPORATE GOVERNANCE REVIEW group. However, companies not under SVS jurisdiction, such as non-listed or foreign corporations not operating in Chilean markets do not have to be disclosed. To counter the potential for abuse, SVS has assigned analysts from its corporate finance division to track each company group and SVS can request additional information as needed to ensure full understanding of the ownership structure and its influence. SVS has also suggested that it has enhanced its enforcement capacities in this regard through increased sophistication of its electronic databases and the ability to carry out statistical analysis and cross-check company activities against different databases. Besides the SVS’ role in promoting transparency of the structure of company groups, Directors’ Committees, with strong influence of independent directors, play an important role in reviewing related party transactions that take into account the controlling shareholders’ company group structure. The Directors’ Committee review of these transactions is reported to the annual shareholders’ meetings. However, these Directors Committees are only required in listed companies with at least USD 61.5 million in market capitalisation. Under the newly passed legislation, there may be some reduction in the number of companies required to have Directors Committees, due to a new provision exempting listed companies with less than 12.5 percent minority shareholders (i.e. those companies that are less actively traded and where minority shareholders do not have enough votes to elect a director). Another element pertinent to the transparency of Chilean companies’ control structures is the transparency of agreements between shareholders. SVS requires issuers to disclose shareholder agreements in annual reports, but companies are not required to disclose the content of such agreements except in cases where it relates to control of the company, when the way in which the agreement impacts on control, such as on voting decisions or tender offer requirements, must be explained. However, if the shareholders expect to enforce the restrictions contained in the agreement, it has to be registered with the company and available for other shareholders and third parties. Principle II.E states that “Markets for corporate control should be allowed to function in an efficient and transparent manner: 1) The rules and procedures governing the acquisitions of corporate control in the capital markets, and extraordinary transactions such as mergers and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. 2) Anti-takeover devices should not be used to shield management from accountability.” Following a wave of takeovers in the 1990s, Chile adopted a takeover law in 2000, the OPA law as it is known in Spanish. The law established that share transactions that result in an individual or group acquisition of control of a listed corporation must be conducted through a tender offer, allocating the control premium to all shareholders on an equal basis. The acquirer must disclose his or her takeover intentions and the conditions offered to all shareholders. It also requires shareholders to disclose ownership exceeding, directly or indirectly, 10, 33, 50 and 66 percent. The law was triggered in part as a reaction to a highly publicised 1997 takeover attempt of a major power generation company, known as the Enersis “Chispas” case, in which the offer for shares required to take control of the company was 840 times higher than the offered price for non-voting shares. Pension funds that had the non-voting shares protested, and the offer eventually was voided by SVS, and following years of appeals all the way to the Supreme Court, SVS’ actions were upheld. However, the scandal associated 30 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW with the case led to support for the 2000 takeover law reforms, which established a single class of voting shares in the vast majority of cases, with the control premium limited to a maximum of 10 percent relative to the market price over the preceding six months. Under the 2000 law, tender offers can be made voluntarily at any time for any number of shares. Alternatively, mandatory tender offers are triggered by three conditions: a) an investor purchases 50 percent plus one share of the voting capital over the previous 12 months and must therefore make a mandatory tender offer, not necessarily for all shares, but distributed proportionally among all interested shareholders; b) an investor’s stake surpasses ? of the voting capital, in which case the tender offer must be for the entire free float; or c) an investor acquires control of a holding company whose publicly traded subsidiary represents 75 percent or more of the holding company’s consolidated assets, in which case the tender offer size has to be at least 50 percent plus one share minus its current stake. These requirements are also applied to non-listed affiliates of the companies. An exception to the mandatory offer requirement is allowed if the purchase price is less than 10 percent above the current fair market value, paid in cash. However, the control premium cannot exceed 10 percent without requiring the launch of a tender offer giving all shareholders a chance to sell their shares, pro rata, at the same price. Since the law was enacted in 2000, it has been used in 28 cases related to change of control, and 72 cases overall which also relate to disclosure requirements when shareholders cross certain trigger thresholds. The law appears to be functioning well, with no challenges by observers contesting its implementation. Principle II.F states that “The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated: 1) Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights. 2) Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may affect the exercise of key ownership rights regarding their investments.” The review of this Principle also encompasses a judgement of how well Chile is implementing some elements of Principles II.A, II.B and II.C Chile’s self-assessment and reports from the SVS indicate that shareholders generally consider that procedural requirements are respected relating to timely disclosure of information concerning their participation in general and extraordinary shareholder meetings. No obstacles to exercise of voting rights were identified in this review, though reforms introduced by the corporate governance law to allow distance voting by electronic means provide a welcome additional facilitation of the exercise of shareholder voting rights, notably among foreign shareholders. SVS staff have the discretion to attend shareholder meetings and do so at the request of shareholders, but shareholder requests or complaints regarding respect for their rights in relation to procedural requirements are extremely rare, and SVS staff are only requested to attend shareholder meetings two or three times per year. They suggested that this is because shareholders in general are satisfied that their procedural rights are respected. As mentioned in the landscape section of this report, Chile’s framework for institutional investors has focused much more heavily on pension funds than on other classes of investors, such as mutual funds or insurance funds, because the size of pension fund investments in the equity markets is so much larger proportionally, with USD 18.2 billion invested by pension funds in equities, compared to just 1.9 billion by mutual funds and 1.1 billion by insurance funds. CORPORATE GOVERNANCE IN CHILE © OECD 2011 31 2. CORPORATE GOVERNANCE REVIEW Pension funds have strongly influenced corporate governance in Chile by defending minority shareholder rights in the case of takeover attempts to ensure that fair prices are offered; by pressing for more disclosure requirements; and by strongly influencing boards. Pension funds generally elect at least one board member in large listed corporations, and in recent years pension funds have engaged headhunting firms to select board member candidates and co-ordinate their efforts in support of minority shareholder-elected board members. Existing regulations require pension funds to disclose their overall corporate governance voting policies. They are obliged to attend shareholder meetings and exercise their voting rights in cases where they hold more than one per cent of a corporation’s equity. They must announce their votes publicly at the shareholders’ meeting, as well as report their votes to the Pension Fund Superintendency. Other types of funds do not have this type of requirement, but the proposed MKIII package of capital market reforms does include a proposal to address these issues for domestic mutual and investment funds. Concerning conflicts of interest, 2007 pension fund reforms required pension funds to adopt investment policies and mechanisms to deal with conflicts of interest, to be approved by the pension fund board, and to be disclosed on the fund’s web site and to the Superintendency and a Commission of Users of the System. The funds are also now required to establish Directors’ Committees, similar in function and responsibilities to the Directors’ Committees of private corporations, with at least one of them an autonomous director.23 The Directors’ Committee is specifically responsible for reviewing investments and resolution of conflicts of interest. Provisions requiring mutual funds and insurance funds to report on how they address conflicts of interest were considered under the proposed MKIII set of capital markets reforms but not included in the government’s September 2009 legislative proposal. Currently, these funds are subject to voluntary standards. Principle II.G states that “Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.” The Corporations Law does not promote or prevent co-ordination among shareholders, but such co-ordination does take place. In practice, the pension funds are the dominant institutional investor class, and they actively work with other pension funds and other minority shareholders, particularly in relation to voting for independent directors and attempts to increase the number of independent directors. Cases have also been documented of minority shareholders co-ordinating their position in relation to appointment of external auditors, and in relation to the level of pay for board members or executives. As pension funds are not allowed by Chilean law to take majority control of a corporation, there is little risk of abuse in relation to their collaboration with others. Rather, in the case of takeovers, they are more likely to co-ordinate with other pension funds in the negotiation of what constitutes a fair price for a tender offer in relation to their minority shares. Principle III.A (1) states that “All shareholders of the same class should be treated equally. 1) Within any series of class, all shares should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. Any changes in voting rights should be subject to approval by those classes of shares which are negatively affected.” Chile’s Corporations Law as a general rule calls for voting shares only, and preferred shares with more limited rights only exist in 21 out of 238 listed Chilean companies, and of 32 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW these, only six companies have shares with a limited right to vote that restrict the number of directors that the shareholders can appoint in exchange for higher dividends. Of these six companies, only one has shares that lack the right to vote for directors, who receive, in return, 10 percent more dividends than common shares receive. These preferred shares and the conditions applying to them must be established in the company by-laws and disclosed in the share certificates. Shares of a same class must carry all the same rights. These preferred shares are normally limited to five years before they revert to full voting shares, unless approved by two-thirds majority of voting shares, although in certain cases not involving restrictions on voting rights, validity terms for preferred shares may last for up to 50 years. However, even if a minority shareholder is over-ruled by a controlling shareholder two-thirds majority vote, the creation of or changes in the preferences assigned to a particular class of shares gives him/her the right to withdraw from the affected series and sell his/her shares to the corporation at market price, based on the average price of the shares during the 60 days prior to the date the change was enacted. Compensation for damages can be claimed before the civil courts if harm is caused, with board members and the manager considered severally and jointly liable. Principle III.A (2) states that “Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress.” Chile’s self-review notes that a shareholder’s opposition to the transformation of the corporation, a merger, or the disposal of 50 percent or more of assets, gives the shareholder the right to sell his/her shares to the corporation at market price. Shareholders representing at least five per cent of capital who deem that their rights have been violated in a change of control can file suit against the directors and/or the corporation for compensation on behalf of the corporation. As noted above, however, shareholders do not normally make use of Chile’s slow court system, and tend to prefer to rely on the regulator to handle complaints. The takeover law introduced an arbitration mechanism to settle such disputes, but this has not so far been used, given the absence of any major challenges to the application of the takeover law. The new corporate governance law sets requirements to encourage use of arbitration to settle disputes, eliminating the option of directors, main executives and large shareholders to change their minds and take a dispute to civil court, if they have committed beforehand to arbitration. Principle III.A (3) states that “Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares.” The takeover law grants beneficial owners of depositary receipts the same rights to information and voting as any other shareholder. Their rights are exercised through a custodian, who must vote according to beneficial owner instructions. Foreign market disclosure requirements must be disclosed in Chile as well. Domestic information requirements must be translated into English. Procedures for proxy voting existing in the law are widely used, according to Chile’s self-review. The new Corporate Governance law requires that shares held in “street name” may only be voted by agents when instructions have been received. It also allows corporations to adopt e-voting mechanisms that should be approved by the SVS. Principle III.A (4) states that “Impediments to cross border voting should be eliminated.” Proxy voting procedures contained in the Corporations Law and associated regulations are widely used in practice. Meeting agendas and invitations must be mailed at least 15 days before the meeting, and published three times in major newspapers during the 20 days prior to CORPORATE GOVERNANCE IN CHILE © OECD 2011 33 2. CORPORATE GOVERNANCE REVIEW the meeting. The new Corporate Governance law requires publication on company web sites of background information on the issues to be decided, and allows corporations to adopt e-voting mechanisms to be approved by the SVS through administrative regulations (e-mail as well as other technologies), provided that the rights of the shareholders are duly guaranteed. Principle III.A (5) states that “Processes and procedures for general shareholders meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.” The law describes the procedures according to which the meeting must be conducted, and they provide for equitable treatment of all shareholders, including the right of the SVS to attend all meetings. If the rights of the shareholders are violated, they can file a claim before the SVS and if damages are caused, claim for compensation before the civil courts. As noted previously, SVS has indicated that complaints or requests to attend meetings have become increasingly rare because requirements and procedures related to shareholder information and participation tend to be well understood and respected. Principle III.B, calling for the prohibition of insider trading and self-dealing, is one of the more sensitive and high-profile issues to be considered in this review. The 2003 World Bank ROSC found that this provision was only “partially observed”. At the time, it noted that while insider trading is designated as a criminal offense, over the previous five years, SVS had pursued about 20 cases, five of which resulted in prosecution of about 12 people. However, there had been no convictions, and most cases were still on trial. SVS’ administrative sanctions had been suspended pending resolution in the courts. The ROSC found that SVS had insufficient tools to detect insider dealings, lacking an electronic surveillance system and access to investor phone records. The World Bank suggested that anecdotal evidence indicated that insider trading in Chile was more prevalent than the level of enforcement activity would indicate. In addition, the Stock Exchange has a monitoring role and may suspend trading for up to five days if it suspects that relevant information is unknown to the market, but has not suspended trading for this reason. Over the last few years, SVS has given higher priority to this issue. The majority of cases have been pursued as administrative, rather than criminal, actions because they are considered easier to prove, not requiring proof of intent to profit from the inside information. In fact, most cases have prosecuted individuals for failing to abstain from trading shares during a period in which they had access to financial statements or other privileged information before it was released. In 2006, four fines were imposed related to use of privileged information, while in 2008 eight fines were issued in relation to violating confidentiality or failing to abstain from trading activity, prior to the public announcement of a merger between Falabella and D&S (This merger was later blocked by the Chilean competition authority). It is worth noting that several market observers have suggested that insider trading, at least until quite recently, has been too often considered culturally acceptable as a case of friends helping other friends with stock tips, rather than as doing something illegal. As can be seen below in Figure 2.2, the SVS has become more active in its enforcement activity and has prosecuted several cases of insider trading to try to communicate that these attitudes and practices will no longer be acceptable. In the last three years, there have been 18 sanctions for use of privileged information, a threefold increase with respect to the previous three years, but the SVS acknowledges that “the empirical evidence suggests that it is not that the problem has increased in the last few years but that SVS has adopted a more decisive strategy than in the past” (SVS, 2008). 34 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Figure 2.2. Sanctions for use of privileged information and personnel assigned to investigations Sanctions for use of privileged information Personnel in investigations division 14 12 10 8 8 6 6 5 4 4 4 2 2 2 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 19 19 19 19 19 20 20 19 19 19 19 19 19 19 19 19 20 20 20 19 20 19 19 19 20 19 20 19 20 Source: SVS. Consultation paper 2008, p. 29, own translation. At the same time, the SVS has added new electronic surveillance tools, including connections to other databases and the ability to cross-check this data with new programmes created for investigation, and to obtain aggregate information which they say allows for a better analysis of the cases under investigation. The SVS has also created a specialised unit for monitoring stock exchange transactions in real time to detect significant changes in prices. The new Corporate Governance law includes additional clarifications regarding disclosure of information to the market and use of privileged information. It also calls for boards to adopt an internal policy providing restrictions on the trading of corporation shares and related securities (such as a total ban on trading by insiders, trading black-out periods, or others). The law does not prescribe specific measures, but requires that the board establish a clear and transparent policy regarding how to handle privileged information and its impact on trading of securities, and that the board be liable for the rules that they pass. SVS has already established a similar, self-regulatory policy in companies, who have been required to post information on their Web sites explaining what their policies are to address use of privileged information. Principle III.C states that “Members of the board and managers should be required to disclose any material interests in transactions or matters affecting the corporation.” While Chilean boards, particularly the largest and most actively traded companies with Directors’ Committees, have a structure in place to scrutinise related party transactions above a certain size, one of the more significant reforms of the new corporate governance legislation is to broaden the definition of transactions to be reviewed, and to strengthen the Directors’ Committees for this purpose. Board members and main executives must disclose their dealings in shares of listed corporations to the SVS. A transaction between the corporation and a director, manager or controller, either direct or indirect, is deemed a related party transaction. This definition includes loans to directors and consulting contracts. The related party must disclose her/his interest to the board and the SVS. However, the World Bank 2003 ROSC criticised Chile’s enforcement against inappropriate related party transactions, suggesting that misuse of corporate CORPORATE GOVERNANCE IN CHILE © OECD 2011 35 2. CORPORATE GOVERNANCE REVIEW assets and abuse of such transactions is a “recurrent problem” in Chile, because of the difficulty of identifying related parties in light of the complicated ownership and control structure of most conglomerates, as well as the difficulty of assessing the fairness of a transfer price. The new Corporate Governance law broadens the definition of related party transactions in order to include dealings with entities controlled either directly or indirectly by insiders, as well as improving the procedural rules to address conflicts of interest. It also addresses related companies within pyramid structures as operations involving the controller and its related parties, which are deemed to be related party transactions. In relation to listed corporations and their affiliates, the law establishes that such transactions shall be immediately disclosed to the board in order to launch a related party transaction approval process. Such a process is not to be applied for operations involving irrelevant amounts, operations that are ordinary according to general policies of regularity and for operations between parent companies and their affiliates, controlled by 95% or more of the shares.24, 25 For non-listed corporations, the new Corporate Governance legislation addresses transactions involving relevant amounts26 to be expressly approved by the board, excluding the vote of those board members having an interest in the deal. In addition, the transaction shall be approved considering fair market values prevailing in the market. If such values cannot be determined, the board is entitled to approve or reject the transaction, but it shall inform the shareholders’ meeting of such circumstances. 2.2. Equitable treatment of shareholders by state-owned enterprises The majority of Chilean SOEs are fully owned by the state, in which case equitable treatment of minority shareholders is not an issue. Chile has, however, six cases out of 32 state-owned enterprises in which there are minority non-state shareholders. In an additional four cases involving water and sewage utilities, the state owns a minority share (29% to 45%), but has “golden share rights”. These rights allow state-elected board members to veto the transfer of ownership of water rights and the drinking water and sewage concessions of these companies. This safeguard was implemented at the time of their privatisation in the late 1990s to ensure that the companies would continue to provide drinking water services. The six companies with minority non-state ownership are the following: Table 2.2. Chilean SOEs with less than 100% State Ownership Corporation* % State Ownership Enacar (coal) 99.97% Zofri (duty free area in Iquique) 72.68% Cotrisa (wheat commercialisation) 97.24% Peñuelas (water/sewage) 98.67% La Nacion (newspaper) 69.3% Puerto Madero (printing) 69.3% * CORFO is a state agency. Ownership as of December 2007. 36 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Two of the above SOEs, Enacar and Zofri, are listed on the Chilean Stock Exchange and fully subject to SVS enforcement and oversight. In the case of Zofri, minority shareholders have a sufficient percentage of votes to appoint a member of the board, and these shares are frequently traded. Of the other four, one, the Peñuelas water and sewage treatment company, is defined as an open, publicly-traded company, which means that it is also registered with and regulated by SVS. The other three are defined as publicly-traded companies that are designated as “closed” in the sense that they are not registered with or regulated by SVS. In this case, agreements are approved by majority at shareholders’ meetings, where shareholders have voting rights in proportion to their capital (one share one vote). Stock company law applies equally to open and closed publicly-traded companies and contains norms to protect minority shareholders that are fully applicable in both cases (such as directors’ fiduciary duty of loyalty and care to the company rather than the shareholders who selected him/her, norms to deal with conflicts of interest and related parties transactions, shareholders’ right to sue directors, the latter being accountable with their personal estate when causing damages to shareholders, and dissident shareholders’ right to withdraw from the company, after being paid by the company the value of his/her shares in case of the meeting’s adopting certain resolutions they do not agree with). Thus, minority shareholders in publicly-traded companies not registered in the SVS are protected by law and protection of their rights can be obtained through the courts. As noted in the landscape section of this report, Chile’s ownership entity, the SEP, is responsible for representing the state’s ownership interest in most SOEs (23 of 32, plus the four corporations in which it has minority shares). SEP is responsible for the oversight of four out of the six SOEs that have non-state minority shareholders, and would assume oversight of the two remaining, La Nacion newspaper and Puerto Madero printing company, under the proposed SOE corporate governance bill. It handles this oversight through decisions of an SEP Council, which appoints and can remove board members, and which adopted an SEP Code that took effect in April 2008 to guide SOE conduct. Among the provisions of the SEP Code is one establishing a norm for SOE equitable treatment of shareholders and respect for minority shareholders. The Code states that directors and managers of SEP companies with private or minority partners of shareholders must recognise the rights of all owners and ensure equitable treatment and identical access to corporate information by applying a high level of transparency towards all owners or shareholders. More specific provisions on transparency requirements, including for example treatment of related party transactions, are addressed under later sections of this report. 2.3. Conclusions regarding the rights and equitable treatment of shareholders Overall, Chile has a framework in place that broadly provides for the existence and enforcement of shareholder rights and the equitable treatment of shareholders. But the Chilean authorities have also identified weaknesses that its recent corporate governance legislation takes significant steps to address, including requirements for disclosure of material information to the market aimed at combating insider trading and mis-use of privileged information. Certain additional steps discussed below could also be considered to further address these weaknesses. Concerning Principle II.D, Chile has taken some steps to minimise the impact of mechanisms that allow for certain shareholders to maintain disproportionate control, and in cases where such disproportionate control exists, to ensure their transparency and to CORPORATE GOVERNANCE IN CHILE © OECD 2011 37 2. CORPORATE GOVERNANCE REVIEW safeguard against abuse of such control. Nevertheless, further steps could be considered, such as requiring disclosure of all governance-related requirements of shareholder agreements, and requiring a clearer explanation of how different companies in a group are related that is easily available to market participants, rather than merely listing their various components. Concerning Principle II.F, Chile’s corporate governance framework has established a set of standards to facilitate exercise of shareholder rights, to encourage disclosure of voting policies and to address conflicts of interest among the largest class of institutional investors – the pension funds. But it has not applied such requirements to less important investors in the Chilean market. The Chilean government would address some of these requirements for domestic mutual and investment funds through its proposed MKIII legislation, but these proposals do not address conflicts of interest, nor insurance funds. Regarding Principle III.B on insider trading, Chile’s SVS appears to have been giving substantially higher priority to investigating and prosecuting cases in the time since the World Bank’s relatively critical assessment, and further improvements in the legal framework will be achieved through the new Corporate Governance legislation. The Law also includes important reforms to protect against abusive related party transactions (Principle III.C). Chile appears to have a range of measures in place to ensure equitable treatment of shareholders in the case of SOEs with private, minority shareholders. While four water and sewage companies maintain “golden share” rights in where the state has minority shares, these special rights were enacted as a safeguard to ensure a minimum level of public service and are clearly communicated to the market since the time that the shares were listed in the 1990s. 3. Disclosure of Corporate Information The second core corporate governance feature for the review calls for requiring timely and reliable disclosure of corporate information in accordance with internationally recognised standards of accounting, auditing and non-financial reporting. 3.1. The regulatory framework covering disclosure The Chilean authorities suggested that all of the sub-Principles on transparency and disclosure (Chapter V of the Corporate Governance Principles) are “broadly implemented”. The World Bank corporate governance ROSC (against the 1999 Principles) found a more mixed record, suggesting that Chile had only “partially observed” three out of four sub-principles dealing mainly with reporting of material information and auditing and accounting standards. Five years later, however, Chile had addressed many of the weaknesses cited by the ROSC, including through its recently passed Corporate Governance reform law. More detailed explanations regarding some of these steps are provided in the discussion of various sub-Principles below. Principle V.B calls for information to “be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure.” Chile’s listed corporations prepare financial statements according to Chilean GAAP, which differs somewhat from international accounting standards. This was cited as a weakness in the 2003 World Bank ROSC, noting in particular that disclosure standards for related party transactions did not comply fully with IAS 24, and that Chilean auditor 38 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW standards did not comply fully with International Standards on Auditing. Furthermore, a June 2004 Accounting and Auditing ROSC provided detailed recommendations on the need for Chile to adopt IFRS standards and also to establish a Chilean Accounting Standards Board and a Public Oversight Board for external auditors. Chile has since adopted a policy to require full adoption of IFRS for all companies registered with SVS, beginning with the largest listed companies in January 2009, with other entities overseen by SVS scheduled for adoption in 2010 and the beginning of 2011. However, Chile has not fully adopted the recommendations of the Accounting and Auditing ROSC, notably in terms of the governance and oversight of the profession, suggesting that its efforts in relation to the Auditing and Accounting ROSC have focused on adoption of IFRS. Chile’s Institute of Auditors, an accounting professional association, is entitled by law to issue rules on auditing, which are not supervised or regulated by the SVS. However, SVS has the power to issue norms regarding auditors and, in case of conflict between a SVS norm and a norm by the Institute of Auditors, the SVS norm prevails. Chilean authorities maintain that this mechanism ensures that in practice, the Institute of Auditors and SVS collaborate informally to ensure that auditing standards are maintained at an acceptable level. Currently, Chilean auditors are not legally required to follow IFAC “best practice” standards, but the Association of Auditors states that all of its members, including the 13 largest audit firms in Chile responsible for 92 percent of listed company audits, comply with IFAC standards. SVS also maintains a registry of more than 400 qualified auditors, who must have a degree in accounting and a minimum of 3-5 years of professional experience. In addition, the new Corporate Governance law establishes a series of new criteria for registration of auditors, requiring them to submit information on their policies for auditing procedures, for confidentiality, use of privileged information, and resolution of conflicts of interest, for ensuring independent judgement and technical competence. The SVS now regulates the essential content of such policies, minimum standards of competence, and accreditation methods, and can suspend those auditors who do not comply for up to one year. Principle V.C focuses on the need for an annual audit to “be conducted by an independent, competent and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.” Chile’s Corporations Law stipulates that external auditors must be independent from the firms that they audit, and that revenues from one client cannot exceed 15 percent of total revenue. The World Bank’s Corporate Governance ROSC, which found that Chile “partially observed” this Principle, noted that auditors could own up to three per cent of the audited firm’s equity. However, the Chilean authorities state that this exception has been eliminated, so that auditors cannot invest either directly or indirectly in the audited firm’s equity. Auditors are also liable for any damage their reports, opinions and omissions cause shareholders. The World Bank also recommended that Chile consider barring auditors from performing certain consulting tasks. Chile’s new Corporate Governance law establishes several steps to strengthen implementation of the annual audit, which also respond to the World Bank’s recommendations: The CG law raises the standards for auditing firms to the best practices promoted by IFAC and IOSCO by strengthening independence requirements and preventing conflicts of CORPORATE GOVERNANCE IN CHILE © OECD 2011 39 2. CORPORATE GOVERNANCE REVIEW interest that may affect their duties. The new definition of independence requires partners that sign the audit reports and all members comprising the audit team to have independence of judgement and encompassing rules that assume lack of independence in certain circumstances. Companies’ Directors’ Committees have increased responsibility to examine the audit reports and the financial statements and to submit their opinion to the shareholders, and to inform the board of any deviation from accounting criteria used in the financial statements and the prevailing standards in their respective industries. Auditing firms face restrictions on rendering non-auditing services to the listed firms they audit,27 either ruling them out or, in the case of certain services like legal or tax advice, requiring the approval of the board with the previous favourable opinion of the Directors’ Committee. Non-financial disclosure standards in Chile focus mainly on continuous disclosure requirements to disclose material information on a timely basis, defined as all information “that a reasonable man would consider important for his investment decisions”. Such information cannot be publicly disclosed to any person or group unless it is at the same time disclosed to stock exchanges and the SVS, where it is instantly made public on the SVS web site through an electronic data transfer mechanism known as SEIL. Principle V.A, which sets out eight sub-categories of material information to be disclosed, some of them of a non-financial nature, is more specific than Chilean law and regulation, which does not, for example, explicitly require reporting on V.A.7 on issues relevant to employees and other stakeholders, or V.A.8 on governance structures and policies.28 However, the new Corporate Governance law requires Directors’ Committees to report annually to shareholder meetings with its recommendations which may include company governance structures. The original bill included specific reference to governance structures but the bill was amended to delete the specific reference in order to keep the scope of recommendations open to any issues. Other important elements associated with the second core governance feature includes disclosure of: i) the ownership and voting structure of the company (Explicit requirements related to reporting on share ownership and voting rights have already been noted above in relation to Principle II.D); ii) related party transactions in accordance with Principle V.A.5 and Guideline V.E.5. Improvements in this area are discussed in relation to Principle III.C, covered in the section dealing with equitable treatment of shareholders. Chile’s SOE questionnaire response noted that the definition of related entity is the same for SOEs as for private companies, and that the SOE corporate governance bill would subject SOEs to stock company regulations with respect to related party transactions, including use of Directors’ Committees with the determining vote of independent directors for this purpose. 3.2. SOE Disclosure and Transparency As in other areas, listed SOEs are required to follow the same accounting and auditing standards and requirements as private companies (Guideline V.D). SOEs will be subject to IFRS standards on the same schedule as private companies’ scheduled transition, to be phased in starting with listed SOEs in 2009, SOEs issuing bonds (like Codelco) in 2010, and other companies registered with SVS beginning in 2011 (that is, most Chilean SOEs). Under 40 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW the Transparency Act, enacted in April 2009, all SOEs29 are now required to submit their quarterly financial statements in the so-called “FECU” format (Uniform Codified Statistical Form) used by all SVS-registered companies. Prior to this reform, only the 23 SOEs currently under SEP oversight were required to file such statements, while the other SOEs with special legal status filed slightly different reports that were “considered equivalent”, according to the Chilean questionnaire responses, because they had similar characteristics, and also used Chilean Generally Accepted Accounting Principles (GAAP). The SEP plays a strong role in promoting SOE transparency by ensuring that quarterly and annual report information is available to the public through the SOEs’ web sites, and also through SEP’s annual, consolidated report, providing financial information and key non-financial information on all of the SOEs under its oversight. The SEP Yearly Report is submitted to the President of the Republic, the Senate and the House. Other key SOEs such as Codelco, ENAP and Banco Estado that are not under SEP management disclose information on their activities separately. The SEP Code also plays a role in ensuring transparency, as each SOE under SEP supervision is required to submit an annual report at the end of the year, signed off by the board, describing in detail how it implemented the recommendations of the SEP Code. Guideline V.C, calling for SOEs, especially large ones, to be “subject to an annual independent audit based on international standards”, is clearly followed by the majority of SOEs registered with SVS. The few that are not currently subject to SVS registration also have to have their internal accounts audited as provided in their own organic law, or the transparency norm established in each year’s budget law. The SOE corporate governance bill, which would expand the number of SEP-supervised companies from 23 to 28, would require such audits for all SEP-supervised companies, and to have their financial statements advertised in national newspapers. SEP’s Code sets out procedures for selection of external auditing firms registered either with SVS or through the US Public Company Accounting Oversight Board. These audits must apply the ISA 240 standard regarding the auditor’s responsibility to consider fraud when auditing financial statements. The code also sets out requirements to ensure auditor independence. SOEs not under SEP oversight are also audited by international auditing firms (Deloitte in the case of Codelco, and PWC for ENAP, Banco Estado and TVN). In addition, the Office of the Comptroller, which is the government entity in charge of audits, is entitled to supervise the performance of all SOEs in relation to principles of honesty and correctness of administrative actions, and does so selectively and not necessarily annually. Nevertheless, the Comptroller also has some overlapping supervisory responsibility for the correct application of government resources transferred to government enterprises. In the case of Codelco and COCHILCO, the Chilean Copper Commission can also conduct audits, as well as Congress and the Comptroller. Codelco’s representatives suggested that the Codelco corporate governance law can be useful in harmonising Codelco’s oversight requirements with SVS, as it eliminates the need for the Comptroller to conduct separate audits and reduce audit overlap. 3.3. Conclusions regarding transparency and disclosure Chile has taken significant steps over the last several years to strengthen the quality of its financial and non-financial disclosure, notably in implementing IFRS. Its new Corporate Governance law achieves significant additional improvements by strengthening auditor independence requirements, requiring them to attend shareholder meetings to CORPORATE GOVERNANCE IN CHILE © OECD 2011 41 2. CORPORATE GOVERNANCE REVIEW respond to questions raised by shareholders, strengthening SVS oversight of the auditing profession, refining the definition of related party transactions in accordance with IFRS standards and enhancing the role and independence of Directors’ Committees in reviewing such transactions. Similarly, the SOE corporate governance legislative proposals to expand the number of SOEs subject to SEP and SVS supervision would extend the application of international accounting and audit standards to nearly all SOEs. One of the issues that Chile has considered during this review period is how to address the recommendations of the 2004 Accounting and Auditing ROSC carried out by the World Bank. Chile has taken action on several of these, as cited above. Questions were raised during the review concerning the clarity of the division of responsibilities between Chile’s Institute of Auditors, which self-regulates the implementation of auditing technical standards consistent with international norms, and the role of SVS, which in turn ensures that minimum standards are respected. However, the Chilean authorities maintained that SVS should continue to play an active role, strengthened further by the new corporate governance law, in light of the fact that Chile’s Institute of Auditors has only recently begun playing a more active role, and that regulatory safeguards are needed to ensure that both play their roles as required. The review of disclosure, auditing and accounting provisions applying to SOEs show that Chile is making an effort to harmonise standards applying to most SOEs, with further progress achieved in April 2009 through the enactment of the Transparency Act, requiring all SOEs to disclose the same information as corporations are required to provide to the SVS. There may be scope to clarify the division of responsibilities between different auditing functions for SOEs in Chile with a view towards reducing the degree of overlapping external auditing responsibilities between external auditors, the Comptroller, and in exceptional cases such as in the mining sector, specialised review bodies. 4. Separation of Ownership and Regulation The third core corporate governance feature to be reviewed concerns establishing effective separation of the government’s role as an owner of state-owned companies and the government’s role as regulator, particularly with regard to market regulation. 4.1. Exercising ownership rights over SOE An overall view of how effectively Chile is separating ownership from regulation has been partially addressed by the OECD’s 2003 Economic Survey of Chile (the more recent 2007 Economic Survey did not address these issues). The report noted the important role of the Antitrust Commission in ensuring application of regulations on tariffs where monopoly conditions exist. In reviewing sectors with SOE presence such as sewage, water, and mining, the report did not raise any specific concerns about possible uneven application of competition laws and related regulatory policy. It noted, for example when the first natural gas pipeline between Chile and Argentina was created during the 1990s, the Antitrust Commission played a role in ensuring that the transportation and distribution was conducted under competitive conditions. Natural gas prices may be set freely, but the sectoral regulator may ask the Antitrust Commission to declare that competitive conditions do not exist when the regulator finds that a firm’s rate of return exceeds certain guidelines. Chile’s constitution provides that the state is the sole owner of all underground resources, including oil and minerals, regardless of who owns the surface land. The survey suggested, however, that this ownership does not create monopoly problems, because a system of concessions provides mining rights to a variety of firms. 42 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Besides the Codelco and ENAMI SOEs, there were some 20 private Chilean mining companies, half of which accounted for 90 percent of private production. In the oil sector, Chile’s ENAP and private firms are both involved in importing oil supplies from abroad. Considering the legal framework, SEP oversight of most Chilean SOEs is based on a structure in which there is a separation of the ownership function from other policy and regulatory functions. The SEP appoints board members, oversees the enforcement of its SEP Code of Conduct mainly through the board members that it appoints, and helps to ensure an overall coherence and transparency to the state’s exercise of its ownership rights, including through preparation of an annual, consolidated report on the SOEs under its responsibility. Its Code, as noted in the landscape section of this report, draws substantially from the OECD Guidelines. These SOEs are also subject to the oversight of the Office of the Comptroller (State Audit Office) and Congress. For SOEs that are listed or registered with the SVS (including Codelco, which is subject to SVS authority due to its issuance of bonds), SVS regulatory oversight also applies. The SOE governance legislative proposal30 of 2008 would establish that all of these SOEs become subject to SVS regulatory oversight and requirements. It would also confirm the status of the SEP Council in law, add independent members to the SEP Council, and require appointments of at least two independent board members on each SOE board, who in turn would serve on Directors’ Committees responsible for sensitive tasks such as review of related party transactions and conflicts of interest. SOEs, which already generally follow competitive and open public procurement processes, would also gain access to the government’s more widely used electronic public procurement system, Chilecompra, which ensures open and competitive bidding. This oversight structure is relatively well insulated from sectoral regulatory policy and the development/industrial functions of the state. However, as noted previously, SEP and SVS oversight does not apply in all cases. The SOE corporate governance bill would expand the number from 23 to 28 out of the state’s 32 SOEs, although a few of these would remain subject to SEP appointment of board members only, without other SEP oversight responsibilities. The exceptions, including three SOEs with Minister-level participation on their boards, are worth reviewing in greater depth, first to understand why they are maintained as exceptions and second, to understand how Chile’s framework seeks to ensure that oversight of all SOEs is not politically driven but has adequate regulatory checks and balances. The four SOEs that would remain entirely outside of the SEP’s oversight scope are Codelco, the state’s huge copper mining company; Banco Estado, the state-owned bank; ENAP, the state-owned petroleum company; and TVN, the state-owned television station. An additional important exception is ENAMI, which is responsible for promoting the production of copper by small and mid-size mining companies, and which is only subject to SEP appointment of some of its board members. Each of these exceptional SOEs has separate legal and governance structures. Codelco, as the largest copper producer in the world, is the highest-profile SOE in Chile, and is subject to constant attention through legislative oversight committees and the press. It is a huge revenue-producer for the state, required by law to provide 10 percent of its sales to the state military budget (USD 1.39 billion in 2007), with additional income and mining taxes generating another USD 4.1 billion in 2007. Even after these taxes, Codelco generated a net profit of USD 2.982 billion, higher than any other company operating in Chile. By comparison, the net profits from Chile’s other 31 SOEs combined was just USD 236 million.31 CORPORATE GOVERNANCE IN CHILE © OECD 2011 43 2. CORPORATE GOVERNANCE REVIEW Until enactment of the new Codelco corporate governance law, Codelco had been required by law to have two ministers to serve on its board – the Minister of Mining and Minister of Finance – as well three presidentially-appointed representatives, including one representative of the Ministry of Defence and the armed forces, leaving room for two “independent” representatives. It also had two workers’ representatives. Its CEO is formally and legally appointed by the Board, but as a practical matter the President has traditionally designated the person who becomes CEO before the Board takes formal action. The Codelco corporate governance law strengthens the role of the board by giving it greater authority in relation to the CEO, and enhancing professionalisation and i n d ep en d en c e re q u i re m e n t s f o r b o a rd a p p o i n t e es . A s a d ire c t re s po ns e t o recommendations of the Committee, the Codelco law includes an amendment to exclude Ministers from serving on the board (as well as Undersecretaries, chief executives and other Government higher officials). The law requires the President to appoint at least four “independent” directors out of nine from a list of candidates nominated by an independent Civil Services Commission, which can also make use of head-hunting companies to identify well-trained and prepared directors. All four independent members are required to serve on the Directors’ Committee. Board members are also required to have a university degree and at least five years of professional experience in high positions of private or public companies and services. The President also appoints the other members, none of which are required to represent the armed forces/defence. Board members have the same duties, responsibilities and prohibitions as directors from listed companies. SVS, which already was overseeing some aspects of Codelco’s operations due to Codelco’s issuance of bonds, has become the legal supervisory body for Codelco. Codelco now faces the same reporting requirements as private sector companies, including provision of financial statements and other material information to SVS. Two other SOEs, the ENAP petroleum company and ENAMI, the consolidator of copper production for small and medium-sized miners, have the Minister of Mining on their boards. This would not change under the proposed SOE legislative reforms. In developing the draft legislation, the government took the view that it remains important to maintain exceptions allowing Ministerial presence on their boards due to the special strategic roles that these two SOEs play. The government also took the view that ENAMI is the only SOE with a direct development function: promoting the production of copper by small mining producers by buying, processing and selling the copper. When copper prices are high, it is able to do so at a profit, whereas when prices drop, it plays a role in ensuring a minimum level of return for miners, which maintains employment levels in rural areas in northern Chile with few other job opportunities. In cases where ENAMI performs such social functions at a loss, it is compensated by contributions made by the State, as provided under the budget law of the appropriate year, and approved by Congress. ENAP is engaged in exploring, refining and marketing hydrocarbons and their by-products. It has mainly focused on refining due to the absence of domestic oil reserves and its role as the only domestic refiner in Chile. Its role has become increasingly important during the last few years due to Argentina’s 2004 decision to cut off natural gas supplies to Chile, stemming from its own capacity difficulties. This led to a domestic energy crisis due to Chile’s dependence on natural gas for the generation of electricity and the need for ENAP to work to replace this energy source with other, more polluting fuel 44 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW sources such as diesel fuel to meet electricity demands. The shortage has led ENAP to begin construction of a natural gas project and exploration of geo-thermal energy, as well as exploration for oil in partnership with other countries abroad. Government officials have argued that ENAP’s highly strategic role in ensuring a stable environment for Chile’s energy requirements justifies board provisions ensuring close political oversight; at least until the energy crisis is resolved. The natural gas plant was due to come on line in 2009. Banco Estado is subject to the supervision of the Banking Superintendency, which applies its regulatory oversight to Banco Estado as it would to any other bank. Six of its board members are appointed by the President, and the seventh is a representative of the workers. Its CEO is also appointed by the President (the only SOE where the President has formal authority to appoint the CEO), and serves as part of an Executive Committee functioning under the supervision of the board for most operational and investment decisions. The Chilean government indicated that it decided not to include Banco Estado in the proposed SOE legislative reforms because of its different board structure, including an Executive Committee, and a view that more time would be needed to consider whether a new board structure is necessary to ensure effective governance of the bank. Interviews with bank officials, market participants and Ministry of Finance officials, however, did not reveal any particular governance concerns in relation to the Bank. Indications are that its board members are professionally qualified and the Bank is allowed to operate at arm’s length without political interference. While the bank clearly has a state-oriented “social” mission of ensuring access throughout Chile to banking services such as microfinance and use of debit cards for all citizens, its overall mission remains commercially driven toward achieving profits and maximizing its economic value as the fourth largest bank in Chile. The bank is not permitted to provide loans to any state-owned institutions, further reinforcing the separation of political and commercial objectives. TVN, the state-run television station, is authorised under separate legislation that provides for Senate appointment of six of its seven board members (a workers representative is also appointed without voting rights). It was excluded from the legislation because this would have required scaling back of the Senate role in board appointments, and TVN is perceived to have a well-balanced and diverse board that is well-run under its current structure. Other exceptions to SEP supervision – La Nación and Puerto Madero – would come under SEP supervision under the proposed corporate governance legislation, while the three defence SOEs dealing with aeronautics, ship construction and repair for the navy, and armaments, would become subject to SEP board appointments. According to interviews, the originally submitted version of the SOE corporate governance bill also included ENAP, ENAMI and TVN as subject to SEP supervision and board appointments, but a decision was made within days to re-submit the bill without their inclusion due to political opposition to restructuring these boards. Having introduced the overall SOE framework and exceptions to that framework above, it is worth briefly reviewing some of the more specific aspects of its implementation as set out in other relevant Guidelines. Guideline I.B calls for governments to “strive to simplify and streamline the operational practices and the legal form under which SOEs operate. Their legal form should allow creditors to press their claims and to initiate insolvency procedures.” SOEs may be found under three legal forms: SOE stock corporations which are subject to the same laws as private companies; limited liability companies subject to the same CORPORATE GOVERNANCE IN CHILE © OECD 2011 45 2. CORPORATE GOVERNANCE REVIEW laws that regulate public and private partnerships; and companies created by law. The exceptions mentioned above are subject to separate laws, which generally are similar in structure to stock company laws, but may require different board compositions and structures, including in some cases worker representatives. However, in all cases, the Constitution provides that every company in Chile must be ruled by private law. Along these lines, all SOEs are subject to the same financial and accounting norms as publicly listed companies, including publication of audited financial statements. SOEs do not face any specific protection against bankruptcy. In rare cases (the Santiago METRO mass transit system and EFE, the state-owned railway), the state has provided its guarantee on repayment of debt, but this is done through a transparent budgetary process requiring Ministry of Finance approval after evaluation by the Office of the Budget. The authorisation requires the signature of management commitments overviewed by the SEP. Guideline I.C states that “Any obligations and responsibilities that an SOE is required to undertake in terms of public services beyond the generally accepted norm should be clearly mandated by laws and regulations… and … should also be disclosed to the general public and related costs should be covered in a transparent manner.” The Chilean approach to SOEs places as an overarching objective the private profitability of each project, but they do allow for exceptions for projects deemed to have “high social profitability”, to be financed through government contributions, allocated by the administration through budget transfers. Exceptional cases have included ENAMI, which has received budgetary transfers to enhance its role in promoting the small mining industry; METRO, which received capital transfers to enhance its infrastructure (e.g. purchase of new trains and expansion of lines); and EFE, which has been operating with annual losses due to the unprofitability of its passenger transport services. In all cases, Ministry of Finance approval of the budget is required, and cost-benefit analyses are required to reach conclusions on the “social profitability” of each project. EFE’s chief executive noted that he now commissions two cost-benefit analyses of social profitability for each new project, which can take into account externalities such as the reduction in car traffic and pollution that rail passenger services can influence, and that both analyses must find net social profitability before a project may go forward. The Ministry of Finance’s budget approval process takes into account such analyses, and its allocations are approved through the annual Budget Law, available on the Office of the Budget web site. Guideline I.D states that “SOEs should not be exempt from the application of general laws and regulations. Stakeholders, including competitors, should have access to efficient redress and an even-handed ruling when they consider that their rights have been violated.” As noted above, the Constitution maintains that SOEs cannot have privileges over private companies and are subject to the same laws. Any exceptions must be justified and established by a qualified quorum law. Members of SOE boards have no privileges or immunities, even if they are ministers or other public officials, and are fully accountable according to the law. This responsibility may be legally demanded by the company, the State or by private parties that have been damaged. The Office of the Comptroller may only signal the situation but cannot take any actions; the State’s role in such a case must be channelled through the Ministries. Public scrutiny through the media also functions as a deterrent against board member wrongdoing. 46 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Guideline I.F stipulates that “SOEs should face competitive conditions regarding access to finance”, with relations to state-owned financial institutions and other SOEs based on purely commercial grounds. As noted above, Banco Estado is prohibited from providing loans to SOEs. The only cases in Chile where SOEs receive access to finance other than on purely commercial grounds are the cases of the State guarantees on debt previously mentioned in relation to EFE and METRO, which have been justified on the basis of “high social profitability”, and transparently approved in the Budget Law. SOEs in Chile generally operate in different sectors and do not do business with each other. One exception is that the Puerto Madero printing SOE handles printing functions for state-owned La Nacion newspaper. However, the review was not in a position to be able to determine whether either SOE receives favourable terms in relation to the other. 4.2. Conclusions regarding separation of ownership and regulation It would appear that Chile is taking substantial but not comprehensive steps to move toward increased separation of the ownership function from other functions that may influence the conditions for state-owned enterprises. While SEP serves both an ownership and enforcement role in terms of ensuring compliance with its governance policies as set out in its code, SOEs remain fully subject to other, separate regulatory oversight structures applying to specific sectors or situations, as is the case for listed companies and banks. The proposed SOE governance bill would further reinforce this separation by assigning regulatory oversight responsibilities to SVS for all SOEs under the SEP structure. Chile took a significant step forward by enacting the Codelco law, eliminating Ministers from its board. This establishes an important precedent for the two other Chilean SOEs with Ministers on boards, ENAP and ENAMI. Ministerial involvement in boards may undermine attempts to effectively separate the ownership and regulatory functions, while also increasing the potential for political intervention in the day-to-day management of SOE business. Although the Guidelines do not explicitly recommend against the inclusion of Ministers on boards, having the Minister of Mining responsible for serving as Chair of ENAP and ENAMI may pose important risks to even-handed treatment of the industries the Ministry is involved in overseeing. Other legal and institutional mechanisms, such as Ministry of Finance review of budgets, Antitrust Authority review of competition laws and SVS regulatory oversight provide some checks and balances on the system. Chile’s authorities responded to these concerns by amending the Codelco legislation, which originally permitted but did not require certain Ministers to serve on the Board, to instead fully prohibit Ministers and certain other public officials from serving on the board. Ministry of Finance authorities have suggested that “all board members should have the preparation and the dedication necessary to perform their duties professionally. That is not compatible, in our view, with the many duties and responsibilities of a Minister or of many other public officials and authorities. Thus, the Codelco law is a first step in this process to replace them with more suitable candidates”. They have suggested that the Codelco legislation will provide a useful precedent for obtaining approval of further SOE governance reforms, including in SOEs such as ENAP, ENAMI and Banco Estado not currently addressed in the SOE governance reform bill. CORPORATE GOVERNANCE IN CHILE © OECD 2011 47 2. CORPORATE GOVERNANCE REVIEW 5. Ensuring a Level Playing Field The fourth core corporate governance feature concerns ensuring a level playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions. 5.1. The role of the regulatory framework While a comprehensive review of every sector in which Chilean SOEs operate was not possible within the scope of this exercise, the pragmatic approach taken was to examine overall conditions within Chile’s legal and institutional framework that may reinforce or undermine the achievement of a level playing field; and to focus on some of the most important sectors in which SOEs operate, or where anecdotal evidence may point to potential concerns. Many of the overall conditions pertaining to SOEs that reinforce level playing field conditions have already been cited in previous sections of this report. ● Neither Chile’s state-owned bank nor its government provide privileged access to finance as a general rule, and in the cases where state guarantees or subsidies have been provided to SOEs, such as for the state railway and Santiago Metro system, there are no competitors in the same industry that have been disadvantaged by this access. Moreover, these budget guarantees and transfers have been provided under transparent conditions with explicit budget decisions setting out why the transfers or guarantees are necessary to achieve social objectives and “net social profitability”. ● All SOEs are subject to anti-trust law and Chile has an active Competition Authority whose performance was the subject to a separate accession review by the OECD Competition Committee in 2009. ● SOEs operate in a number of sectors, notably in mining and agriculture, where they are price-takers and all competitors receive the same prices established by global markets. In other sectors, they are the only provider of the service in the market, such as the state-run lottery and water and sewage utilities. In others, notably port authorities, there are 11 SOEs which compete with each other and private port authorities for business. SEP officials noted that at times, state-owned port authorities will withhold commercially sensitive information from the SEP, citing the interest in keeping this information out of the hands of other state-owned competitors. Interviews with representatives of business associations, investors and other market participants and observers did not elicit any concerns about an uneven playing field between the private sector and SOEs in Chile. If anything, they suggested that some SOEs were at a competitive disadvantage versus their private sector counterparts because of restrictions on the level of executive pay (which cannot be higher than the salary paid to the head of the Central Bank) that make it more difficult for some SOEs to compete with their private sector counterparts for top-level talent. At the same time, some SOEs, notably cited in the case of Codelco, face higher payroll costs for less skilled workers than their private sector counterparts, due to the strength of union contracts that have been negotiated for higher wages. However, these differences relate more to companies’ operational costs and performance, rather than legal or regulatory barriers to a level playing field. It is worth recalling that copper mining is carried out not only by private sector competitors to Codelco, but also by small miners who make use of the state-owned ENAMI to process and market their copper and other minerals to ensure that they can participate 48 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW in the market even without their own processing capacities. However, all participants in the industry operate on the basis of the same global market price for copper. The one question raised among market observers about possible preferential treatment for an SOE involved the case of La Nación, the state-owned newspaper. The Chilean government has a policy of maintaining a state-owned newspaper (and also state-owned television station) “to guarantee information plurality”. It was suggested that La Nación may obtain an unfair advantage through an exclusive concession to edit the Official Gazette, which contains all legally required official notices to the public, for example in relation to annual shareholder meetings. This function was established by law in 1932, and La Nación has maintained its editing and publication of the Official Gazette since that time, printed by the Puerto Madero SOE. However, the Chilean government has noted that the revenues associated with the printing of the Official Gazette only represent 1.14 percent of La Nación’s and Puerto Madero’s combined income, and that La Nación has a very small market share, representing 1.3 percent of the newspapers distributed during the week and 1.1 percent of the readership in Chile (including government subscribers), according to data from the Chilean press association. In addition, Puerto Madero provides printing services for a range of foreign and domestic newspapers, journals and publications from the private sector without special preference for its business with La Nación. An additional, potentially sensitive SOE for level-playing field considerations is ENAP, which maintains all of Chile’s domestic refining capacity, and whose board is chaired by the Minister of Mining. According to Chile’s questionnaire response, ENAP meets 80 percent of local demand for fuel that it has refined, while the other 20 percent is directly imported from outside Chile by private companies. ENAP’s practices were recently challenged by a company (MICOM) involved in the commercialisation of liquid fuels that wanted to buy fuel from ENAP. The deal did not go through and MICOM accused ENAP of monopolistic practices, which were reviewed and determined as unfounded, according to the Antitrust Prosecutor Reports and 2008 Antitrust decision. The report noted that ENAP, like any other Chilean SOE, is not exempt from competition law, and that there are no legal barriers to enter the Chilean oil market, either at the upstream level or at the distribution or retail level. To date ENAP is the only company in the fuel market having the logistical means required to efficiently transport and store fuel at the levels that the country requires. In the shorter term, this has led to ENAP operating at a loss while it invests to expand its storage and liquid natural gas processing capacity to compensate for the 2004 cut-off of liquid natural gas supplies from Argentina. ENAP produces 70% of the fuel that it provides to the market, while it imports the other 30 percent. In order not to close the fuel market to private direct imports, ENAP’s pricing policy is based on what it terms “the import price parity criterion”, meaning that the price at which ENAP sells its product is equivalent to that charged for the same product in the relevant market, plus transportation and other related costs which would be incurred by any private company wishing to import. Chile’s response also notes that while ENAP is not legally prevented from selling at a retail level, the State has not expressly authorised ENAP to do so, since the private sector may carry out this function efficiently. 5.2. Conclusions regarding a level playing field Chile has taken several important steps to ensure that SOEs do not receive preferential treatment that would undermine the maintenance of a level playing field. Private company law applies equally to SOEs. Chile is gradually moving to harmonise its regulatory and CORPORATE GOVERNANCE IN CHILE © OECD 2011 49 2. CORPORATE GOVERNANCE REVIEW institutional structure for enforcement to ensure that the law is applied in an even-handed manner to both SOEs and private companies. In the rare cases of state guarantees or budget transfers to cover losses, government support is transparently justified and approved in terms of achieving non-commercial public policy objectives related to “net social profitability”. Market observers have not raised significant concerns about SOEs receiving unfair advantages vis-à-vis competitors, and the one concern mentioned in relation to La Nación does not appear to have had a significant impact on the market. 6. Stakeholder Rights and Boards of Directors The fifth core corporate governance feature to be reviewed calls for recognising stakeholder rights as established by law or through mutual agreements, and the duties, rights and responsibilities of corporate boards of directors. 6.1. Stakeholder rights Chile’s self-review suggests that it has “broadly implemented” all of the Chapter IV Principles related to stakeholders. The 2003 World Bank Corporate Governance ROSC suggested that the corporate governance framework in relation to stakeholder rights (now IV.A) was “largely observed”, citing a “fairly well developed” legal framework, but suggesting that “corporations still too often relate to their stakeholders in a confrontational manner, perpetrating the idea that entrepreneurs and stakeholders are rent-seeking rivals”. It recommended that Chile organise a seminar on corporate social responsibility, and that it undergo a ROSC on insolvency and creditor rights, which was completed in 2004. The Creditor ROSC made numerous recommendations, to which the Superintendency responsible for insolvency and creditor rights has responded with several steps. The ROSC suggested that stakeholders’ effective redress for violation of their rights (now IV.B) was only “partially observed”, citing the “long, cumbersome and uncertain process” involved in seeking redress through the courts, but provided no recommendations in this regard. Other elements reviewed by the ROSC were designated as largely observed or observed. However, the ROSC did not review Principle IV.E regarding the necessity for stakeholders to be able to freely communicate concerns about illegal or unethical practices, which was not established until the 2004 version of the Principles. Consistent with the World Bank ROSC conclusions, Chile’s self-review in respect to Principle IV.A focuses largely on the legal framework and measures in place to ensure that the rights of stakeholders established by law or through mutual agreement are respected, noting how employees, consumers and the environment are protected under different Chilean laws. But contrary to the ROSC, they suggest that effective redress, as called for in Principle IV.B, is available not only through the courts, but also, in the case of employees, through the Labor Inspection Office, and in the case of consumers, through the Consumer Protection Service. CONAMA, the regulator for the environment, takes actions to enforce the Environmental Law. The Antitrust Court and the National Economic Prosecutor have secured redress in favour of stakeholders in recent corporate disputes involving mergers and acquisitions. Chile’s self-review states that it has broadly implemented the recommendation of Principle IV.E that “stakeholders, including individual employees and their representative bodies, should be able to freely communicate concerns about illegal or unethical practices to the board, and their rights should not be compromised for doing this”. There are no specific provisions set up in law or regulation to provide channels within the company for whistle-blowers to report to 50 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW an ombudsman or Directors’ Committee, for example, but some general legal protection is provided in relation to criminal prosecutions, for example through witness protection programmes. For administrative violations, the SVS can accept anonymous claims and start an investigation on that basis, and provides an option to allow witnesses to testify anonymously on videotape with their identity disguised. However, the Chilean authorities were not able to provide any data on actual incidents of whistle-blowing cases in Chile. Interviews with a cross-section of market participants suggested that stakeholder involvement in corporate governance is not strongly engrained in the Chilean culture, particularly within private sector companies. As noted in the landscape section, Chile has a fairly legalistic culture, with volunteer non-profit associations not as well developed and active as in some OECD countries. However, the Chilean authorities suggested that stakeholders are becoming increasingly conscious of their rights or possibilities, better organised and better at promoting their interests through the press, the different controllers or supervisors, as well as through judicial channels. In the case of SOEs, there is a stronger, formalised role for stakeholders in some cases. Worker representatives serve on the boards of many SOEs, including most of the largest ones (notably Codelco, ENAP, ENAMI, Banco Estado, the state railway (EFE), and the various port authorities). However, only in the cases of Codelco and Banco Estado do worker representatives have voting rights, whereas in other cases the workers have the right only to speak. An unusual case is ENAMI, the development enterprise aimed at helping small mining companies, as its board includes two representatives of the National Mining Association, which represents the companies that benefit from ENAMI’s role in supporting their mining operations. Chilean authorities suggested that this is a way to ensure the building of consensus for directions taken by ENAMI impacting on local miners. The legal framework for SOEs’ consideration of stakeholder rights (Guideline IV.A) is similar to that described for the private sector above, providing the same consultation and complaint mechanisms for SOEs as for all other companies. In addition, the SEP Code applying to most SOEs requires companies to acknowledge and respect the legal or contractual rights of those stakeholder groups related to their activity, guaranteeing their timely and regular access to relevant information of the company so that they may correctly exercise their rights. The Code calls for SOEs to be guided by ethical principles and existing regulations as per their relationships with customers, suppliers and the community within which they operate. The SEP Code also reinforces provisions requiring timely reporting of material information. A Code Section on Openness and Transparency requires companies under the SEP umbrella to publicly inform, in an immediate and easily accessible way, all relevant non-confidential information. Code “Norms on Transparency” call for more specific and complete disclosure on their websites of a wide range of information related to the companies organic and capital structure, shareholding, financial statements, external audit reports, transfers or capital increases received from the state, composition of the board and remuneration, etc. While the SEP Code and legal framework do not require reports on stakeholder relations, some of the larger SOEs do so on a voluntary basis, such as Codelco and ENAP, which prepare reports on the social or environmental impacts of their performance. Concerning Guideline IV.C, requiring SOEs to develop, implement and communicate compliance programmes for internal ethics codes, the SEP Code establishes a Code of Ethics that must be applied to the 23 SOEs currently under the SEP umbrella (proposed to CORPORATE GOVERNANCE IN CHILE © OECD 2011 51 2. CORPORATE GOVERNANCE REVIEW grow to 28 under the SOE corporate governance bill). The SEP Ethics Code, which individual SOEs can adapt to their particular characteristics and regulations, includes principles related to corporate governance, creation of value, probity and confidence, openness and transparency, respect for the Constitution and the laws, respect for human rights, for workers and their associations, for the environment and corporate social responsibility. The Code, which was developed with specific reference to the SOE Guidelines, was circulated for consultation and widely commented before being adopted by the SEP Council earlier this year. 6.2. The rights, duties and responsibilities of Boards of Directors As noted in the landscape section of this report, the Chileans in their self-review have pointed to board practices as “an area of concern”, and therefore proposed several legal reforms to board responsibilities and functions approved in the new Corporate Governance law. Most importantly, this legislation provides strengthened power to independent directors through their important role in the Directors’ Committee, which is responsible for reviewing and making recommendations to the full board on a range of sensitive issues such as review of related party transactions, hiring of the external auditors and director and executive remuneration. Officially, Chile’s self-review suggests that it has already “broadly implemented” all provisions of Chapter VI of the Principles related to the responsibilities of board members. It points particularly to the role of pension funds and other institutional investors as working proactively to ensure election of qualified independent board members, including through use of headhunting firms. These directors play an important role in reviewing and calling attention to any corporate governance weaknesses, particularly through their role in Directors’ Committees. However, pension funds are not active in all listed companies, and about half of Chilean listed companies with market capitalisation of less than USD 65 million are not required to have Directors’ Committees. Many of these smaller companies have higher ownership concentrations (more than 87.5% controlling shares) that do not enable minority shareholders to elect independent directors. Moreover, the landscape section of the self-assessment points to significant weaknesses in the functioning of boards, notably referring to a 2007 McKinsey survey of board members that suggested that almost 40% of decisions were made outside the boardroom (presumably by the controlling shareholder), 30% of directors saw boards as adding little or no value, and almost 80% lacked board self-evaluation mechanisms. The 2003 Corporate Governance ROSC found that several aspects of the Principles were only partially observed. In relation to what is now Principle VI.A, it found no fault with the legal framework, but suggested that “there is market concern that directors in small to mid-sized firms do not always fully grasp their duties and obligations”. A survey of listed firm directors taken in 2000 found that 12 percent had no college degree (Spencer Stuart, 2000). Concerning Principle VI.B, the ROSC suggested that directors often represent the interests of those electing them, and do not always represent shareholders equally. Concerning the key functions set out in Principle VI.D, it was noted that not all are defined in law, although the ROSC found that in practice most large listed company boards tended to perform these key functions. Weaknesses were also cited in relation to Principle VI.E relating to the provision of objective, independent judgement and Chile’s definition of independent directors. 52 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW The ROSC included three main recommendations concerning boards: i) create an institute of directors; ii) define more precisely the concept of independent director; and iii) impose penalties of varying severity for violations of the duties of care and loyalty. Chile has made significant progress on the first two recommendations, but has suggested that the third recommendation is not necessary, because the SVS has some discretion to adjust sanctions depending on other criteria in the law, including the seriousness of the infraction, its recurrence and the economic capacity of the violator. In the last few years, three corporate governance centres have been established. The first was founded in 2005 with the support of Pontificia Universidad Católica de Chile, the main business association SOFOFA, the Pension Fund Managers Association, the Santiago Stock Exchange, the Santiago Chamber of Commerce and the American Chamber of Commerce. It issued a voluntary corporate governance code in 2007 and has regularly scheduled seminars involving directors, businesses, academics and other bodies interested in understanding and promoting good corporate governance in Chile. A second business-sponsored Corporate Governance Centre associated with the University of Chile was launched in 2008, and has also organised several seminars and plans to target director education. Interviews with market participants suggested that awareness among board members of their duties and responsibilities has increased substantially over the past several years, thanks not only to the corporate governance centres’ events but wider coverage in the media as well as academic interest in the subject. A third “Centre for Corporate Governance and Strategy” was launched by the University Alfonso Ibañez and Ernst Young in August 2009. Chile’s new Corporate Governance law responds to the ROSC’s second recommendation regarding the definition of independent directors. Previously, independent directors were defined as those elected by minority shareholders through cumulative voting practices. Controlling shareholders were not able to cast votes for such directors, and no economic or relational criteria was taken into account. The new law no longer requires that independent directors be elected solely through the votes of minority shareholders, due to the establishment of additional detailed economic and relational criteria to determine the eligibility of candidates to be designated as independent. The law establishes that an independent director “has no relationship with the company, with the other companies comprising the group it belongs to, or with its controller or with the main executives of any of them, that might deprive any sensible person of a reasonable degree of autonomy, interfere with his/her possibilities to carry out an objective and effective job, bring him/her a potential conflict of interest or obstruct his/her independent judgement”. A person cannot be an independent director when there has been over the previous 18 months a series of links with the company including economic, professional, credit or commercial dependency, as well as any kinship relationship. Both within the previous structure and under the new Corporate Governance law, these independent directors have important responsibilities. The law strengthens the role of independent directors on such committees, providing them with majority voting control in cases where at least two independent directors have been elected at Director Committee level. The three-person Directors’ Committees would include all of the board’s independent directors (or if there are more than three independent directors, those receiving most votes would serve on the Directors’ Committee). As originally proposed, in cases where there is only one member, the independent member would have been the only voting member of the Committee in order to maintain independent control of this CORPORATE GOVERNANCE IN CHILE © OECD 2011 53 2. CORPORATE GOVERNANCE REVIEW committee. However, in the law this voting control was eliminated and replaced by providing the independent director with the right to Chair the Directors’ Committee and to choose the remaining board members to serve on the Committee. Among the functions of the Directors’ Committee are to: ● Check external audit reports, the balance sheet and other financial statements, and take a position on these prior to their submission to the shareholders. ● Propose to the board the external auditors and private risk rating agencies to be proposed to the shareholders meeting. If the board disagrees, both proposals would be submitted to the shareholders. ● Review and report to the board chairman prior to board approval or rejection of related party transactions according to new criteria established in the legislation. ● Review compensation of directors, managers and senior executives. ● Prepare an annual report to shareholders with their recommendations on any issues. ● The original bill gave the Directors’ Committee authority to decide on the renewal of the external auditing firm which has rendered services for five or more years, and consider demanding rotation of the partners and work teams. However, this provision was eliminated during the Finance Committee consideration of the bill in the lower chamber of Congress. The amendment requires rotation of the audit team after five years, rather than the firm. The bill also calls for the Directors’ Committee to provide an opinion for board decision on the hiring of the external auditor for services that are not part of the external audit when these services are not otherwise prohibited. Proposals related to Directors’ Committee powers and responsibilities proved to be the most controversial aspect of the Corporate Governance bill, which otherwise appeared to have support among most market participants. Some market participants suggested that provisions giving majority control of the Directors’ Committee to independent directors went too far in giving the minority shareholders disproportionate power, and expressed fears that there could be perverse consequences. Instead of the intended strengthening of minority shareholder rights, controlling shareholders could decide to increase their ownership concentration above the 87.5% threshold over which Directors’ Committees are no longer required, thereby reducing the power of minority shareholders and reducing the liquidity of Chilean capital markets. However, the Ministry of Finance’s representatives strongly defended the proposal, noting that the full Board remains the final decision-making body in all cases, with the Directors’ Committee only in a position to “raise a flag” when it identifies a concern. The Directors’ Committee provides a way of grouping minority shareholder-supported interests to give them a voice on issues where minority shareholders may be most vulnerable, but one that is not disproportionate to their shareholdings within the overall decision-making structure. With the elimination of the provision to give the Directors’ Committee the main responsibility for deciding on rotation of external auditors, their power will be even more limited, so that in no case would independent directors have disproportionate decision-making power. Moreover, several other provisions that would have established specific responsibilities and rights for Directors’ Committees were eliminated in the legislative process, including rights to issue reports on remuneration issues directly to shareholders even in cases where the full Board of Directors’ disagrees with their report; and responsibilities to report on performance assessment criteria for board members and corporate governance recommendations. In addition, as noted above, 54 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW the previous law limiting election of independent directors to the votes of non-controlling shareholders was repealed, and criteria for independent directors more clearly defined so that all shareholders may now vote for independent directors. The combined impact of these amendments may reduce or eliminate concerns expressed by some market participants that the Directors’ Committee went too far in the powers it gave to minority-elected directors. It is important to note that cumulative voting mechanisms may still result in elections of boards divided into controlling- and minority-elected (independent) members. Legally all directors are required to represent the firm’s and all shareholders’ best interests. The Corporations Law establishes that directors may not adopt decisions against corporate interests that benefit them or any related party. The Corporate Governance law eliminates the preceding reference to self or related party interests, increasing the emphasis on representing the corporate interest, and preventing directors from deviating from the corporate interest even when they do not receive any benefit, direct or indirect. 6.3. SOE Boards The Codelco corporate governance law and proposed SOE bill give similarly strong emphasis to improving the functioning of SOE boards and assurance of some independent members. The SEP Council, whose board members would be appointed by the President, would have two “independent” board members who would also require Congressional approval. These “independent counsellors” would become part of the three-person Selection Committee of the Council, also including the Council’s president, which would be responsible for nominating two independent board members to each of the SOEs under the SEP umbrella. In addition, the legislation would set out a number of required qualifications and restrictions applying to all board members. Appointments of independent directors could rely on head-hunting companies or Chile’s “Civil Service committee for recruitment of higher officials”, to draft a three-candidate list of nominees that fulfil the academic, ethical and professional requirements before the SEP Council’s Selection Committee makes its nominations, and the SEP Council approves the selection. State employees, currently allowed on some boards, would no longer be permitted except in the case of specially designated SOE workers’ representatives, and in the case of Ministers that are allowed on the boards of ENAMI and ENAP under their founding legislation (these exceptions have been previously discussed under the review of Criterion 3 dealing with the separation of the government’s role as owner and as regulator). The bill proposes that SOE board members may not be elected officials, political party officials, or candidates for elective office; and all board members must have certain professional and educational qualifications, no history of insolvency or tax and credit problems, no record of having been accused of or sentenced in relation to certain crimes, and no direct or indirect economic relations with the enterprise other than his or her directors’ compensation. Chile’s President, in submitting the SOE corporate governance bill in March 2008, already directed the SEP to begin appointing at least one independent director to each SOE based on the technical qualifications and exclusions cited above, but without yet establishing the appointment process involving SEP Council independent advisors. As of July 2008, 12 such independent directors had been appointed. This emphasis on the appointment of independent and qualified directors may be seen as one way that Chile seeks to ensure conformance with Guideline II.B, calling for the government to “not be involved in the day-to-day management of SOEs and allow them full CORPORATE GOVERNANCE IN CHILE © OECD 2011 55 2. CORPORATE GOVERNANCE REVIEW operational autonomy to achieve their defined objectives”. The SEP as the ownership entity is entitled to submit recommendations to the companies it owns, but they must be submitted to the board and not to the CEO. Its Code also states that the SEP “must prevent duplicity of functions among the boards of the enterprises and the SEP Board. This must not interfere with the day-to-day management or administration of the enterprises, notwithstanding the full exercise of any rights held in its capacity of shareholder or representative of the State or of the owner, as the case may be…” 6.4. Conclusions regarding stakeholders and boards Stakeholder rights are established by law or through mutual agreement by a range of legal provisions and enforcement mechanisms. However, some potential weaknesses were identified in the course of the review. For example, explicit requirements or mechanisms to provide safeguards to “whistle-blowing” employees who wish to complain at company level may be lacking, but such employees do have an outlet to register complaints anonymously with SVS. In addition, lengthy court processes may not facilitate stakeholder redress when they feel that their rights are not respected. However, this review did not encounter complaints concerning violations of such rights, and several market observers suggested that awareness and recognition of such rights have improved. The same framework for addressing stakeholder rights is applied to SOEs through the application of company law, and in addition through explicit provisions in the new SEP Code. The issue of how effectively the rights, duties and responsibilities of board members are implemented is complex. Independent reviews and surveys of Chilean board practices and perceptions suggest weaknesses in the functioning of boards, particularly in smaller companies, but some progress in awareness and professionalism of board members as well. Pension funds and other institutional investors’ election of independent board members, and their role in reviewing sensitive transactions at Directors’ Committee level, provides an important safeguard in relation to the protection of minority shareholder rights. SVS enforcement, however, is largely limited to reviewing meeting minutes to ensure that various provisions are formally respected. The new Corporate Governance law includes important measures to enhance the effectiveness of board practices through its emphasis on independent and ex ante scrutiny at board level. It is suggested that this is a more effective approach than ex post enforcement for preventing abusive related party transactions and ensuring protection of all shareholder interests. The law reinforces the role of the Directors’ Committee and adds important improvements, including strengthening the role of independent directors and more clearly defining the economic and relational criteria that such directors must meet, and expanding their responsibilities to review, recommend and report on a range of sensitive issues. However, the Directors’ Committee structure is only applied to companies with at least 12.5 percent free float and a minimum of USD 61.5 million in market capitalisation. This may be seen as an attempt to balance the costs and benefits of regulatory requirements, and to focus such requirements on those companies that are most actively traded. 7. Conclusions This report has reviewed Chile’s corporate governance landscape and formulated conclusions regarding each of five core corporate governance features. While reaching positive conclusions in relation to many aspects of these core features and of the 56 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW recommendations in both the Principles and Guidelines, the report also identified a number of weaknesses in the Chilean corporate governance framework: ● Chile’s corporate governance landscape: Chile has devoted considerable attention to improving its corporate governance framework in recent years, notably through adoption of its 2000 takeover law and other corporate governance improvements that enable pension funds to play an important role through minority shareholder-elected board members who serve on Directors’ Committees that review sensitive issues. Its private sector Corporate Governance reform law approved by Congress in September 2009 represents a significant additional step in addressing risks identified in relation to minority shareholder expropriation. This includes important provisions to strengthen the role and definition of independent board members serving on the Directors’ Committee to oversee the integrity of the corporation’s accounting and financial reporting systems and to address situations involving conflicts of interest, including review of related party transactions and other matters most vulnerable to controlling shareholder abuse. A key issue requiring ongoing attention relates to the risks associated with the predominance of company groups and high ownership concentration, necessitating strong regulatory enforcement, particularly considering survey evidence that the functioning of boards is an area of “concern”, and that a relatively slow and expensive court system may discourage pursuit of private remedies. Chile’s authorities have developed a proposal to enhance the independence of the securities regulator, whose head is appointed by and may be removed by the President without cause. Chile is encouraged to pursue this or alternative proposals that would provide adequate checks and balances to protect against the risk of political intervention in enforcement decisions. The need for independence will take on added importance if, as proposed, SVS is put in charge of regulatory oversight and enforcement of SOEs. ● Enforcement of shareholder rights and equitable treatment: Chile’s framework to ensure equitable treatment of shareholders and recognition of their rights is broadly responsive to recommendations of Chapters II and III of the Principles. Enforcement activity aimed at ensuring respect for minority shareholder rights has increased, for example, in relation to insider trading. Chile has also moved to address risks associated with high ownership concentration and the predominance of conglomerates through its recent legislation to ensure that reviews of related party transactions take account of the controlling owner and related companies within company groups. Further steps would be desirable to ensure that the nature of the relationships among companies within conglomerates is well understood by the market, that requirements for disclosure of shareholder agreements are extended to also cover provisions not strictly related to control of the company, for example including arrangements whose object is the exercise of voting rights, the election of board members, block voting and right of first refusal, and to require other institutional investors besides pension funds to address conflicts of interest and to disclose voting policies. ● Requiring timely and reliable disclosure in accordance with internationally recognised standards: Chile has taken significant steps to strengthen the quality of its financial and non-financial disclosure, notably through its transition to IFRS beginning in 2009, and its recent legislation containing stricter auditor independence requirements, SVS (securities regulator) oversight of the auditing profession, refining the definition of related party transactions in accordance with IFRS requirements, and strengthening board oversight of these transactions. The recently enacted Transparency Act provides further improvements CORPORATE GOVERNANCE IN CHILE © OECD 2011 57 2. CORPORATE GOVERNANCE REVIEW by applying the same disclosure requirements for SOEs as for private sector corporations that report to SVS. While Chile’s regulations on non-financial reporting are broadly in line with the OECD Principles, they lack specific requirements on matters pertaining to employee and stakeholder issues and governance structures and policies. ● Establishing effective separation of the government’s role as owner and its regulatory role, and ensuring a level playing field: Chile established an important precedent with the October 2009 Congressional approval for reform of its largest SOE, Codelco, including key provisions to: eliminate Ministers from its board; increase the number of independent directors to be elected through competitive and open processes; provide the board with increased authority in relation to the CEO; establish professional qualification requirements for board members and; stipulate that Codelco and its board are subject to the same requirements as private sector companies. Chile’s other recent initiatives to establish a SOE code that draws substantially on the OECD SOE Guidelines, to begin appointing board members following certain criteria aimed at promoting their independence, and to propose legislative reforms that would enhance these initiatives and increase their application from 23 to 28 of Chile’s 32 SOEs are all aimed at providing a more coherent and consistent framework for oversight of SOEs. The SOE legislation would also subject all SOEs co- ordinated by the SEP ownership entity to SVS regulatory oversight, and strengthen the appointment of independent directors and their role in reviewing related party transactions and conflicts of interest. Chile is encouraged to continue in this direction by enacting its SOE bill and applying its provisions to other SOEs as well. A specific concern in this context is the case of Ministers serving on the boards of the oil company ENAP and mining company ENAMI, and the risk this poses to the separation of ownership and regulatory roles, and to political interference in day-to-day management of these SOEs. Chile should address these concerns by adopting reforms for ENAP and ENAMI similar to the Codelco law, and by ensuring that these and other SOEs not covered under the SOE bill are subject to similar oversight and regulatory requirements as proposed in the bill. ● Recognising stakeholder rights and the duties, rights and responsibilities of boards: Legal provisions appear to broadly respect recommendations of the stakeholders and boards chapters in the Principles and the Guidelines, but practical implementation is more complex to evaluate. Chile’s self review and independent surveys of Chilean board practices clearly point to weaknesses in the functioning of boards as “a concern”, particularly with respect to smaller companies. Chile’s Corporate Governance law is a positive step towards improving the functioning of boards by strengthening the definition of independent directors and their role and responsibilities within the Directors’ Committee, where they will play an important role in reviewing related party transactions, the work of external auditors and a range of other sensitive governance issues. Notes 1. The Santiago Stock Exchange is the largest of the three stock exchanges, responsible for approximately 86% of transactions, while the Electronic Stock Exchange accounts for 13%, and Valparaíso Stock Exchange less than 1% (See Guillermo Larrain and Vicente Lazen, “Financial Markets in Latin America: Convergence and Integration – The Case of Chile”, Center for Financial Stability Working Paper No. 25, July 2008.). 2. The SOEs reviewed are at national level, as the government does not have records of SOEs created at local level or by public universities or public services. 58 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW 3. According the Chilean self-review. 4. The takeover law provisions are discussed in greater detail in pars. 71-73, but essentially it requires shareholders to disclose ownership exceeding thresholds of 10, 33, 50 and 66 percent, and to make a mandatory tender offer when an investor purchases more than 50 percent of shares in the previous 12 months or the stake surpasses two-thirds of all voting capital. 5. According the Chilean self-review. 6. According the Chilean self-review. 7. The Chilean self-review sets out these three explanations, and cites Braun and Briones (2007) as the source for the third argument. 8. According the Chilean self-review. 9. Under the 2009 Corporate Governance law, independent directors who previously could be elected only by minority shareholder votes are now defined in relation to economic and relational criteria, and may be elected by the votes of all shareholders. 10. As of 1 September 2009. 11. The 12.5% share necessary to elect a board member applies to boards with seven directors, the minimum number required. Some corporations voluntarily have larger boards, in which case a smaller percentage of votes is required (for example, 9-member boards require a 10% share to elect an independent director). 12. Law No. 18.046. The board may also delegate parts of its responsibilities to corporation managers, lawyers and board committees. 13. The conversion is based on 1.5 million “unidades de fomento” (an inflation-linked currency unit). UF 1 = CLP 21 016.79, and USD 1 = CLP 512.85 (exchange rate as of 7/04/2010). 14. According the Chilean self-review. 15. ibid. 16. ibid. 17. The new Corporate Governance law has added a second threshold of 12.5% free float for companies to be required to establish a directors’ committee. 18. Ofertas Públicas de Adquisición. 19. This case and its impact are described in greater detail in the section of the report dealing with equitable treatment of shareholders. 20. Previously Superintendency of Pension Fund Managers. 21. Issues related to use of privileged information and insider trading are also addressed in greater detail in section III below. 22. At the time of this writing, the Chilean authorities were reviewing the prospects for achieving full signatory status in response to questions from the OECD on this subject. 23. Autonomous pension fund directors are defined in relation to economic criteria. Their independence is also reinforced by requirements that board members cannot serve in the legislature or as Ministers or deputy chiefs of public services during the 12 months following departure from their board position. 24. The law established that a listed corporation can only execute related party transactions when they contribute to the best social interest and they adjust to the terms and conditions that prevail in the market at the time of approval, and fulfill the following requirements: i) the operation shall be approved by absolute majority of the board, excluding the directors involved, who nevertheless will make public their opinions; ii) resolutions adopted by the board to approve a related party transaction will be reported in the next shareholders’ meeting; iii) if the absolute majority of the board members should abstain in the voting of the operation, it shall be unanimously approved by the board members that are not involved or a special shareholders’ meeting by two thirds of the voting shares; iv) if a special shareholders’ meeting is summoned to approve the operation, the board will appoint at least one independent appraiser to inform the shareholders of the operation and its potential impact on the company. The company’s Directors’ Committee or, if the company does not have one, the not involved directors, may appoint an additional appraiser, in case they do not agree with the selection made by the board; v) the independent appraisers’ reports will be made available for the shareholders; vi) the directors shall individually issue an opinion to the CORPORATE GOVERNANCE IN CHILE © OECD 2011 59 2. CORPORATE GOVERNANCE REVIEW shareholders regarding the convenience of the operation for the corporate interest, specifying the relationship they have with counterpart of the operation or their ownership interest. They shall also refer to the remarks or objections expressed by the directors’ committee, as well as the conclusions of the appraisers’ reports. 25. The World Bank ROSC recommended that full compliance with IAS 24 would help in this regard, and the Chilean self-review suggests that these standards will be met through the procedures in the new Corporate Governance law. 26. A transaction of a relevant amount is such that involved the equivalent to 1% of the equity of the company, provided that the transaction exceeds USD 40 000 approximately, as well as any transaction involving an amount that exceeds USD 400 000. 27. Among the services that external auditors cannot perform in the listed companies they audit are: internal audit; development or implementation of accounting and financial statement systems; bookkeeping; certain appraisals, valuations and actuarial services; consulting services for the sale and trading of securities; consulting services for recruiting and managing personnel; and sponsoring or representation of the audited entity in any administrative proceedings, legal procedures or arbitrations if the valuation of the issues in dispute are regarded as material according to generally accepted auditing standards. 28. SVS Regulation No. 30 of 1989 does require the annual report to disclose at least the following non-financial information: i) Ownership and company’s control: disclosure of the 12 major shareholders as well as the identity of the controlling shareholder; ii) Management: the internal organisation of the company, identifying, among others, directors, higher executives (CEO, CFO) and directors’ committees, together with a list of all the company’s higher executives; iii) Remuneration: the salary and any other kind of remuneration that directors and higher executives received during the last year (shown comparatively with other periods), as well as full information regarding any compensation plan (such as bonds, stock options) available for directors or higher executives; iv) Business and risk factors: the company’s background as well as detailed description of the markets where the company operates, including the main risk factors that, in opinion of the management, the company is currently facing; v) Shareholder opinions and proposals from shareholder meetings; and vi) Related party transactions: information regarding all relevant related or interested party transactions. 29. Article 10 of the Transparency Act No. 20.085 provides that SOEs and companies for which the State has more than 50% of stock or majority in the Board of Directors are obliged to deliver the same information that corporations are required to disclose under the Corporation Law to the SVS or, if necessary, to the Superintendent to whose control they are subject. 30. The SOE corporate governance legislation, submitted to Congress in March, 2008, had not advanced through Congressional subcommittee review as of October 2009. Priority was given to approving the Codelco law, passed by both chambers of Congress in October 2009. 31. These net profits can either be taken by the State as revenue or approved for capital investments. Bibliography Agosin and Pasten (2003), “Corporate Governance in Chile”, Central Bank of Chile Working Paper Number 209. Braun, Matías and Ignacio Briones (2007), Chapter 6 “Development of the Chilean Corporate Bond Market”, On the Verge of a Big Bang? Bond Markets in Latin America. MIT Press, Cambridge, Massachusetts. Carbo, Vittorio and Klaus Schmidt-Hebbel (2003), Macroeconomic Effects of Pension Reform in Chile, www.fiap.cl. Dyke, Alexander and Luigi Zingales (2004), “Private Benefits of Control: An International Comparison”, Journal of Finance, Vol. LIX. Klapper, Leonora and Inessa Love (2002), “Corporate Governance, Investor Protection, and Performance in Emerging Markets”, World Bank Policy Research Working Paper Number 2818. La Port, R., F. López-de-Silanes and G. Zamarrita (2002), “Related Lending”, NBER Working Paper No. 8848. La Port, R., F. López-de-Silanes and A. Shleifer (1999), “Corporate Ownership Around the World”, NBER Working Paper No. W6625. 60 CORPORATE GOVERNANCE IN CHILE © OECD 2011 2. CORPORATE GOVERNANCE REVIEW Lefort, Fernando (2007), “La Contribución de las Administradoras de Fondos de Pensiones al Gobierno Societario de las Empresas Chilenas”, www.afp-ag.cl/estudios/EstudioFL.pdf, accessed in September 2008. Lefort, Fernando (2003), “Gobierno Corporativo: ¿qué es? y ¿cómo andamos por casa?”, Latin American Journal of Economics No. 120. Lefort, Fernando, and Francisco Urzúa (2008), “Board independence, Firm Performance and Ownership Concentration: Evidence from Chile”, Journal of Business Research, Vol. 61, Issue 6, pp. 615-622. Lefort, Fernando, and Eduardo Walker (2000), “Ownership and Capital Structure of Chilean Conglomerates: Facts and Hypotheses for Governance”, Abante, Vol. 3 No. 1. pp. 3-27. Lefort, Fernando, and Eduardo Walker (2000b), “Gobierno corporativo, protección a accionistas minoritarios y tomas de control”, Documentos de discusión, Superintendencia de Valores y Seguros de Chile. Santiago, Mayo de 2001. Lefort, Fernando, and Eduardo Walker (2002), “Pension Reform and Capital Markets: Are There Any Hard Links?”, Social Protection Discussion Paper Number 0201, World Bank. Lefort, Fernando and Eduardo Walker (2003), “Chilean Financial markets and Corporate Structure”, www.bcra.gov.ar/pdfs/eventos/Walker1.pdf, accessed in September 2007. Lefort, Fernando, and Eduardo Walker (2007), “Do Markets Penalize Agency Conflicts Between Controlling and Minority Shareholders?” Evidence from Chile, The developing economies, Vol. 45, pp. 283-314. Morales, Marco (2009) “Determinants of Ownership Concentration and Tender Offer Law in the Chilean Stock Market”Superintendencia de Valores y Seguros Serie de Documentos de Trabajo, No. 1. www.svs.cl/sitio/publicaciones/doc/Serie%20de%20documentos/morales.pdf , accessed May 2009. Nenova, Tatiana (2003), “The Value of Corporate Voting Rights and Control: A Cross Country Analysis”, Journal of Finance Economics No. 68, pp. 325-351. ROSC (Reports on the Observance of Standards and Codes) (2003), “Corporate Governance Country Assessment: Chile”, World Bank and International Monetary Fund. Rüders, Ralph J. (1991), “Massive Divestiture and Privatisation: Lessons from Chile”, Contemporary Policy Issues, Vol. 9. Superintendencia de Pensiones (SAFP) (2007), “Informe de asistencia y participación de las administradoras de fondos de pensiones en juntas de accionistas, juntas de tenedores de bonos y asambleas de aportantes de fondos de inversión, nacionales, año 2007”, www.safp.cl. Superintendencia de Valores y Seguros (SVS) (2008), “Comisión de Valores y Seguros Una reforma para impulsar el crecimiento, la transparencia y el mejor gobierno del mercado de capitales” (SVS Consultation on the Reform to its Institutional Structure), www.svs.cl/sitio/legislacion_normativa/doc/ cvs_final.pdf , accessed in August 2008. Santiago Stock Exchange (Bolsa de Comercio de Santiago) (2007), “Reseña 2007” (2007 Annual Report), www.bolsadesantiago.com/c/document_library/get_file?folderId=26915&name=DLFE-92316.pdf, accessed in September 2008. Spencer Stuart and Business School, Pontificia Universidad de Católica de Chile Business School (2000), “Chile 2000: Indice de Directorios”. Wigodski, Teodoro (2008), “Caso Chispas: lealtad debida en el directorio de una sociedad”, http:// tere.r-t.cl/ei/2007_08/Paper_6.pdf, accessed in 2007. CORPORATE GOVERNANCE IN CHILE © OECD 2011 61 ANNEX A ANNEX A Analytical Framework for the Accession Review As noted in the Foreword, the Corporate Governance Committee (then known as the Steering Group on Corporate Governance) was requested to examine Chile’s position with respect to core corporate governance features and to provide the OECD Council with a formal opinion on Chile’s willingness and ability to implement the recommendations laid down in the Principles of Corporate Governance and Guidelines on Corporate Governance of State-Owned Enterprises. At the same time, Council requested the Committee to carry out accession reviews on the same basis for four other countries – Estonia, Israel, the Russian Federation and Slovenia. The OECD Council identified five core corporate governance features to guide the Committee’s accession reviews: ● Ensuring a consistent regulatory framework that provides for the existence and effective enforcement of shareholder rights and the equitable treatment of shareholders, including minority and foreign shareholders. ● Requiring timely and reliable disclosure of corporate information in accordance with internationally recognised standards of accounting, auditing and non-financial reporting. ● Establishing effective separation of the government’s role as an owner of state-owned companies and the government’s role as regulator, particularly with regard to market regulation. ● Ensuring a level playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions. ● Recognising stakeholder rights as established by law or through mutual agreements, and the duties, rights and responsibilities of corporate boards of directors. In November 2007, the Committee adopted an analytical framework for the conduct of these country accession reviews. The analytical framework addresses each of the five core corporate governance features in turn, integrating both general issues of corporate governance and those concerned specifically with state-owned enterprises (SOEs). The analytical framework was designed to structure the accession reviews to ensure even-handed treatment among the five accession countries while giving necessary emphasis to issues of particular concern in each country. CORPORATE GOVERNANCE IN CHILE © OECD 2011 63 ANNEX A To focus discussion of the corporate governance landscape, the analytical framework relied on four Principles drawn from the OECD Principles of Corporate Governance: ● Principle I.A: “The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets”. ● Principle I.B: “The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable”. ● Principle I.C: “The division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served”. ● Principle I.D: “Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained”. To address the five core features of corporate governance, the framework selected the main items in the OECD Principles and the OECD Guidelines on Corporate Governance of State-Owned Enterprises as shown in the five boxes that follow, it being understood that all Principles and Guidelines remained relevant to the accession reviews. Finally, the OECD’s Methodology for Assessing the Implementation of the OECD Principles of Corporate Governance, 2007, played an important role in the accession reviews. The Methodology emphasises the importance of focusing on implementation and outcomes, rather than on the legal and regulatory framework alone. It also emphasises “functional equivalence”, meaning that the outcomes advocated by the Principles can be achieved by different legal or institutional approaches. Accordingly, the Committee’s assessment and recommendations take account of each country’s specific corporate governance arrangements and how they relate to its overall market characteristics and corporate governance landscape. Box A.1. Five core corporate governance features of the Accession Roadmap and the relevance of individual Principles of Corporate Governance and Guidelines for State-Owned Enterprises Core feature 1: Ensuring a consistent regulatory framework that provides for the existence and effective enforcement of shareholder rights and the equitable treatment of shareholders, including minority and foreign shareholders Principles II.E, II.F, II.G: The implementation will depend on country circumstances. Principle III.A: All shareholders of the same series of a class should be treated equally. Principle III.B: Insider trading and abusive self-dealing should be prohibited. Principle III.C: Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation. Guideline III.A: The co-ordinating or ownership entity and SOEs should ensure that all shareholders are treated equitably. 64 CORPORATE GOVERNANCE IN CHILE © OECD 2011 ANNEX A Box A.1. Five core corporate governance features of the Accession Roadmap and the relevance of individual Principles of Corporate Governance and Guidelines for State-Owned Enterprises (cont.) Core Feature II: Requiring timely and reliable disclosure of corporate information in accordance with internationally recognised standards of accounting, auditing and non-financial reporting Principle V.B: Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure. Principle V.C: An annual audit should be conducted by an independent, competent and qualified, auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects. Disclosure of i) the ownership and voting structure of the company (in accordance with Guideline V.E.2, Principle II.D and Principle V.A.3); ii) related party transactions (in accordance with Guideline V.E.5, Principle V.A.5); and iii) corporate governance structures and policies (in accordance with Principle V.A.8). Guideline V.C: “SOEs, especially large ones should be subject to an annual independent audit based on international standards”. Guidelines V.D: “SOE’s should be subject to the same high quality accounting and audit standards as listed companies. Large or listed SOE’s should disclose financial and non-financial information according to high quality internationally recognised standards”. Core Feature III: Establishing effective separation of the government’s role as an owner of state-owned companies and the government’s role as regulator, particularly with regard to market regulation Guideline I.A: There should be a clear separation between the state’s ownership function and other state functions, particularly with regard to market regulation. Guideline I.B: “Governments should strive to simplify and streamline operational practices and legal forms under which SOEs operate. Their legal form should allow creditors to press their claims and to initiate insolvency procedures”. Guideline I.C: Obligations that the SOE are required to undertake should be mandated by laws or regulations, publicly disclosed and funded in a transparent manner. Guideline I.D: SOEs should not be exempt from the general application of laws. Stakeholders, including competitors, should have access to efficient redress and even-handed ruling when they consider that their rights have been violated. Guideline I.F: SOEs should face competitive conditions regarding access to finance. Their relations with state owned banks…should be based purely on commercial grounds. Core Feature IV: Ensuring a level playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions Combining Guidelines I.A-I.F with elements of Principles I.A-I.D. Core Feature V: Recognising stakeholder rights as established by law or through mutual agreements and the duties, rights and responsibilities of corporate boards of directors Principle IV.A: The rights of stakeholders that are established by law or through mutual agreements are to be respected. CORPORATE GOVERNANCE IN CHILE © OECD 2011 65 ANNEX A Box A.1. Five core corporate governance features of the Accession Roadmap and the relevance of individual Principles of Corporate Governance and Guidelines for State-Owned Enterprises (cont.) Guideline IV.A: Governments, the co-ordinating or ownership entity and the SOEs themselves should recognise and respect stakeholders’ rights established by law or through mutual agreements, and refer to the OECD Principles of corporate governance in this regard. Principle IV.B: Where stakeholders’ interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. Principle IV.E: Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this. Guideline IV.C: The boards of SOEs should be required to develop, implement and communicate compliance programmes for internal codes and ethics. These codes of ethics should be based on country norms, in conformity with international commitments and apply to the company and its subsidiaries. Principle VI.A: “Board members should act on a fully informed basis, in good faith, with due diligence and care and in the best interests of the company and its shareholders”. Guideline II.B: “The government should not be involved in the day to day management of the SOEs and allow them full operational autonomy to achieve their defined objectives”. 66 CORPORATE GOVERNANCE IN CHILE © OECD 2011 ANNEX B ANNEX B Key Characteristics of Chile’s State-Owned Enterprises CORPORATE GOVERNANCE IN CHILE © OECD 2011 67 68 ANNEX B CURRENTLY BILL ON SOES’ CORP GOV SOEs (State-Owned Short % State- Independent Ministers Independent Ministers SEP SVS1 No SVS2 Committees of directors4 SEP SVS1 No SVS2 Committees of directors4 Enterprises) name Owned directors5 on the board6 directors7 on the board6 I. Government Enterprises (stakes hold by FISCO) 1. Corporación Nacional CODELCO 100 NO X Audit Committee, Investment 2 2 Finance NO X Audit Committe, Investment 4 NO del Cobre de Chile Committee and Remunerations and Mining Committe and Remunerations Committee Committee 2. Empresa Nacional ENAMI 100 SEP8 X Audit Committee and Mining 0 1 Mining NO X Audit Committee and Mining 0 1 Mining de Minería Property Committee Property Committee 3. Empresa Nacional ENAP 100 NO X Audit Committee; Projects, 0 1 Mining NO X Audit Committee; Projects, 0 1 Mining del Petróleo Businesses and Investments Businesses and Investments Committee, Committee for Committee, Committee for services agreements between services agreements between UF100.000 y UF300.000, UF100.000 y UF300.000, Derivatives Committee; Ad-Hoc Derivatives Committee; Ad-Hoc for Specific topics Committee for Specific topics Committee and Advisory Committee and Advisory Committee on Magallanes on Magallanes 4. Empresa EFE 100 SEP X Audit Committee, Finance 1 NO SEP X Comité de Auditoría, 2 NO de los Ferrocarriles Committee and Strategic de Finanzas y Estratégico del Estado Committee 5. Empresa de Correos CORREOS 100 SEP X14 Audit Committee, Finance 1 NO SEP X9 Audit Committee, Finance 2 NO de Chile Committee and Commercial Committee and Commercial Committee Committee 6. Empresa Periodística LA NACION 69.3 NO X Audit Committee 0 NO SEP X At least Audit Committee 0 NO La Nación S.A. 7. Puerto Madero GPM 69.3 NO X Audit Committee in process 0 NO SEP X At least Audit Committee 0 NO Impresores S.A of constitution. 8. Empresa Portuaria EPA 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 111 NO Arica Revision Committee and Investment Projects Committee (all Ad-Hoc)10 CORPORATE GOVERNANCE IN CHILE © OECD 2011 9. Empresa Portuaria EPI 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 111 NO Iquique Revision Committee and Investment Projects Committee (all Ad-Hoc) CORPORATE GOVERNANCE IN CHILE © OECD 2011 CURRENTLY BILL ON SOES’ CORP GOV SOEs (State-Owned Short % State- Independent Ministers Independent Ministers SEP SVS1 No SVS2 Committees of directors4 SEP SVS1 No SVS2 Committees of directors4 Enterprises) name Owned directors5 on the board6 directors7 on the board6 10. Empresa Portuaria EPA 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 111 NO Antofagasta Revision Committee and Investment Projects Committee (all Ad-Hoc) 11. Empresa Portuaria EPCO 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 111 NO Coquimbo Revision Committee and Investment Projects Committee (all Ad-Hoc) 12. Empresa Portuaria EPV 100 SEP X Audit Committee, Agreements 1 NO SEP X Audit Committee not Ad-Hoc 2 NO Valparaíso Revision Committee and Investment Projects Committee (all Ad-Hoc) 13. Empresa Portuaria EPSA 100 SEP X Audit Committee, Agreements 1 NO SEP X Audit Committee not Ad-Hoc 2 NO San Antonio Revision Committee, Investment Projects Committee and Labour Committee (all Ad-Hoc) 14. Empresa Portuaria EPTHNO 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 2 NO Talcahuano-San Revision Committee and Vicente Investment Projects Committee (all Ad-Hoc) 15. Empresa Portuaria EMPORMOTT 100 SEP X Audit Committee, Agreements 1 NO SEP X Audit Committee not Ad-Hoc 111 NO Puerto Montt Revision Committee and Investment Projects Committee (all Ad-Hoc) 16. Empresa Portuaria EPCHA 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 111 NO Chacabuco Revision Committee and Investment Projects Committee (all Ad-Hoc) 17. Empresa Portuaria EPA 100 SEP X Audit Committee, Agreements 0 NO SEP X Audit Committee not Ad-Hoc 111 NO Austral Revision Committee and Investment Projects Committee (all Ad-Hoc) 18. Empresa de EMAZA 100 SEP X None 0 NO SEP X At least Audit Committee 2 NO Abastecimiento de Zonas Aisladas ANNEX B 69 70 ANNEX B CURRENTLY BILL ON SOES’ CORP GOV SOEs (State-Owned Short % State- Independent Ministers Independent Ministers SEP SVS1 No SVS2 Committees of directors4 SEP SVS1 No SVS2 Committees of directors4 Enterprises) name Owned directors5 on the board6 directors7 on the board6 19. Televisión Nacional TVN 100 NO X Remunerations Committee 012 NO NO X Remunerations Committee 012 NO de Chile 20. Banco Estado de Chile BECH 100 NO X13 Executive Committee and Audit 0 NO NO X13 Executive Committee and Audit 0 NO Committee Committee II. CORFO’s companies Water and sewage sector 21. Empresa de Servicios ECONSSA 100 SEP X Audit Committee and Legal 1 NO SEP X Audit Committe and Legal 2 NO Sanitarios de Committee Committee Antofagasta S.A. 22. Empresa de Servicios PEÑUELAS 98.7 SEP X None 0 NO SEP X At least Audit Committee 2 NO Sanitarios Lago Peñuelas S.A. Transport sector 23. Empresa de Transporte METRO 100 SEP X Audit and Financial Committee, 0 NO SEP X Audit and Financial Committe, 2 NO de Pasajeros Project Administration Committee, Project Administration Committee, METRO S.A. Transantiago Committee Transantiago Committe Services sector 24. Zona Franca ZOFRI 72.7 SEP X Audit Committee, Management 1 NO SEP X Audit Committee, Management 1 NO de Iquique S.A. Committee, Communications Committee, Communications Committee Committee 25. Polla Chilena POLLA 100 SEP X Audit and Management Committee 1 NO SEP X Audit and Management 2 NO de Beneficencia S.A. Committee 26. Comercializadora COTRISA 97.2 SEP X14 None 0 NO SEP X At least Audit Committee 2 NO de Trigo S.A. 27. Sociedad Agrícola SACOR LTDA. 100 SEP X None 0 NO SEP X At least Audit Committee 2 NO Sacor Ltda. CORPORATE GOVERNANCE IN CHILE © OECD 2011 28. Sociedad Agrícola y SASIPA 100 SEP X Island Committee and Continental 0 NO SEP X At least Audit Committee 2 NO Servicios Isla de Committee. Pascua Ltda. Coal sector 29. Empresa Nacional del ENACAR 100 SEP X Audit Committee; Finances, Sales 0 NO SEP X Audit and Financial Committee, 2 NO Carbón S.A. and Legal Committee; Mining Committee, AssetsCommittee Comercialization and Fixed Actives Sales Committee CORPORATE GOVERNANCE IN CHILE © OECD 2011 CURRENTLY BILL ON SOES’ CORP GOV SOEs (State-Owned Short % State- Independent Ministers Independent Ministers SEP SVS1 No SVS2 Committees of directors4 SEP SVS1 No SVS2 Committees of directors4 Enterprises) name Owned directors5 on the board6 directors7 on the board6 III. Defense companies10 30. Astilleros y ASMAR 100 NO X None 0 NO SEP15 X Not compulsory 2 NO Maestranzas de la Armada 31. Empresa Nacional ENAER 100 NO X Audit, Financial, Management and 0 NO SEP15 X Audit, Financial, Management 2 NO de Aeronáutica Investment Committee and Investment Committee 32. Fábrica y Maestranzas FAMAE 100 NO X None 0 NO SEP15 X Not compulsory 2 NO del Ejército 1. Registered with SVS and required to publish FECU (uniform financial statements). 2. Not Registered with SVS. Not obliged to publish FECU. However, a recent law to be published shortly, states that all SOEs must submit to the SVS the same information than listed companies (including FECU). According to this new law, all SOEs on this column will submit FECU to the SVS and will disclose FECU and other information on their websites. 3. Differences with companies registered with SVS (apart from SVS’s supervision). 4. Includes all committees established by the board of directors for specific issues. 5. Current independent directors: elected by the President of the Republic in Codelco and elected by the SEP in the other SOEs, on grounds of technical expertise and no relationship with the government. SEP will continue appointing independent directors in SOEs that currently do not have one, as the presidential mandate was to have at least one independent director in each SOE under SEP supervision. 6. Ministers being on the Board of Directors. 7. Independent directors according to the bill: elected by the President of the Republic among a list of 3 people proposed by the Consejo de Alta Dirección Pública (public service in charge of selecting high level civil servants) in Codelco and by a committe of 3 SEP Board members (2 of them being the two independent SEP Board members, ratified by the Senate) in the other SOEs. 8. Enami is currently under SEP, except for appointing board members. SEP does not appoint board members in Enami. 9. Correos has announced its intention to Register promptly with SVS. 10. Port companies usually constitute ad hoc audit committe twice a year. 11. In port companies with boards of 5 members, there would be 1 independent director. 12. In TVN, according to its organic law, 6 of its 7 directors are approved by the Senate. 13. Besides the SVS, Banco Estado is supervised by the Superintendency of Banks and Financial Institutions 14. Already submits FECU even if not registered with SVS. 15. For board members appointment only. 16. In Zofri there is one independent director named by SEP and a second one named by minority shareholders. Source: Ministry of Finance, Chile. ANNEX B 71 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16 (26 2010 02 1 P) ISBN 978-92-64-09594-6 – No. 57813 2011 Corporate Governance Corporate Governance in Chile The review of Corporate Governance in Chile was prepared as part of the process of Chile’s accession to OECD membership. The report describes the corporate governance setting including the structure and ownership concentration of listed companies and the structure and operation of the state-owned sector. The review then examines the legal and regulatory framework and company practices to assess the degree to which the recommendations of the OECD Principles of Corporate Governance and the OECD Guidelines on Corporate Governance of State-Owned Enterprises have been implemented. Please cite this publication as: OECD (2011), Corporate Governance in Chile, Corporate Governance, OECD Publishing. http://dx.doi.org/10.1787/9789264095953-en This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and statistical databases. Visit www.oecd-ilibrary.org, and do not hesitate to contact us for more information. ISBN 978-92-64-09594-6 www.oecd.org/publishing 26 2010 02 1 P -:HSTCQE=U^Z^Y[:
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