Corporate Governance in Chile 2010 by OECD

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									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)
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Series: Corporate Governance
ISSN 2077-6527 (print)
ISSN 2077-6535 (online)




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                                                                                                                       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.




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                                                                                                                                                           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




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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




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                                                                                 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



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                                                                                    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.



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                                                                                    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.


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                  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
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                 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



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             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
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                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


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             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.



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                 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.



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             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.


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                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


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             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
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                 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.




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                  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
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            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”.


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                  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
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            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



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             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
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                 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


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             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


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            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).



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                        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

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                 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


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            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.




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                  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


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            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


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             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


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            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


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             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


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            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.


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             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


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                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



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             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


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            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.




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                  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.




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     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


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             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


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            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


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             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



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            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.




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                   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


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            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,


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             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


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            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


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             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


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                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.



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              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



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               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.



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                                                                                                            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
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                                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.




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