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Online Extra: A Lesson in Transparency for Mexico


The U.S. Securities & Exchange Commission's announcement on Jan. 4 that it had filed civil fraud charges against TV Azteca (TZA), its flamboyant chairman, and two other company directors and executives should serve as a stern warning to Mexico's corporate titans: If they still want to tap the world's equity and debt markets, they'll have to pay more than lip service to internationally accepted norms of corporate governance.

The SEC alleges that Ricardo B. Salinas Pliego, a 49-year-old billionaire who's the controlling shareholder of a family empire spanning media, retail, telecoms, and banking, violated U.S. securities law by engaging in an elaborate and undisclosed debt transaction that earned him a personal profit of $109 million. The agency charges he sold off $9 million worth of TV Azteca shares without notifying fellow shareholders and then lied to company directors about the transactions.

WAKE-UP CALL. TV Azteca's U.S. legal counsel, after repeatedly warning top management and the board that the company was required to disclose the transactions, resigned last year, citing obligations to ensure compliance with the Sarbanes-Oxley Act. TV Azteca, Mexico's second-largest broadcaster, is subject to U.S. regulations because its shares trade on the New York Stock Exchange as American depositary receipts.

Perhaps these shenanigans seem like kids' play in comparison to Enron and Parmalat. But in Mexican business circles, the SEC's decision should sound a sobering wake-up call. Countries that depend so heavily on international equity and debt investors must do a better job of maintaining a high standard of corporate ethics and government oversight. Mexico is the largest Latin American recipient of U.S. investment in stocks and corporate bonds, with more than $50 billion tallied at the most recent count.

Salinas -- no relation to former Mexican President Carlos Salinas de Gortari -- has been criticized for years that he mistreats minority shareholders in his various companies. Investors called him to task for often blurring the lines between his different businesses, using funds from one to finance another. But a few years ago, Salinas pronounced himself a convert to the gospel of corporate governance.

TALKING THE TALK. He sponsored splashy conferences on the subject and added several high-profile American independent directors to the boards of his companies. One big coup was getting former U.S. ambassador to Mexico James R. Jones, who headed the American Stock Exchange from 1989 to 1993, to join TV Azteca's board. Jones told BusinessWeek and others that he was impressed by Salinas' efforts at reform but had warned the cocky entrepreneur that he would be the first to blow the whistle if he saw any funny stuff going on.

And that's just what he did: As head of the company's independent directors group, Jones hired a U.S. law firm to investigate the debt scheme. When TV Azteca officials failed to own up to any wrongdoing, Jones, along with another independent board member, resigned in May.

What are the larger lessons in all of this? Most of the 24 Mexican companies whose shares are listed in the U.S. are well aware they need to be completely above-board with investors, especially given the stringent new requirements mandated by Sarbanes-Oxley, passed in 2002 to keep corporate accounting tricks from harming investors.

DEFIANT RESPONSE. Mexico's banking and securities regulator, widely known by its Spanish acronym of CNBV, has also worked to bring the nation's corporate-governance guidelines in line with international norms. That effort led to the introduction of a code of ethics in 1997 and then a set of "best corporate practice" guidelines for publicly listed companies. These guidelines, among other things, "suggest," but don't require, corporate boards to include a certain percentage of independent directors, hold board meetings at least four times a year, and provide better internal auditing and public disclosure of information.

Still, the difference between simply complying with regulations and "suggestions" and embracing the ethical spirit behind them is huge. Mexico still has a reputation as the kind of place anyone from a motorist to a corporate chieftain can easily circumvent the rules with a wink and a nod.

Indeed, Salinas' defiant response to the SEC charges shows he still doesn't get it. In a statement released Jan. 4, he called the accusations "false," "irresponsible," and "arbitrary," and went on to say: "It's absurd for the SEC to use a Mexican company and Mexican citizens to try to impose U.S. regulations in an extraterritorial manner, unilaterally ignoring international laws and the Mexican legal framework."

Then, truly thumbing his nose at the SEC, he added: "In my view, they are trying to politically compensate their deficiencies in supervising U.S. companies in the past."

CONCRETE EXAMPLE. In stark contrast, other Mexican companies have learned to play by the U.S. rules. Take Cemex (CX), the Monterrey-based concern that's now the world's third-largest cement maker with more than $7 billion in annual sales. Today, investors eagerly snap up Cemex shares and bonds, after the Mexican company spent years convincing them it was completely above-board.

In 1992, a few months after issuing hundreds of millions in international bonds, Cemex debuted as a multinational by spending $1.8 billion to buy two Spanish cement outfits. Wall Street analysts and foreign investors doubted Cemex' ability to run an international operation. They complained that the company had led them to believe it would devote the proceeds from the bond sale strictly to paying down debt.

But Cemex officials pointed out that the prospectus said the money could be used not only to improve the company's debt profile but also to finance corporate development. And investors were pleased when Cemex handily turned around the Spanish companies and went on to establish a vast network of operations in 16 countries.

TIMID REGULATORS? But Hector Medina, Cemex executive vice-president for planning and finance, says delivering results isn't enough: Investor trust is everything. "If you want to attract international investors, you have to do everything in a transparent fashion, and you have to follow the rules," he says. "Today, capital markets are so open, if investors don't trust you as a company, they'll punish you more than any regulatory authority might."

Mexico's CNBV says it's conducting its own investigation into the TV Azteca affair and will announce its findings soon. The SEC has praised its Mexican counterpart, saying cooperation with the CNBV is "testament to the efficiency and effectiveness of collaborative international enforcement."

Still, one is left with the distinct impression that Mexican regulators are ill-equipped or too timid to go after the country's powerful tycoons on their own and are acting now only because they have the SEC's investigative heft behind them. Perhaps that's an unfair judgment, but it's rare to see a Mexican businessman sanctioned, or even receive as much as a slap on the wrist from government agencies.

That's not good for Mexico's image as a safe investment spot. A country with a low national savings rate, rampant tax evasion, and eroding competitiveness cannot afford to snub investors, domestic or foreign. By Geri Smith in Mexico City

EDITED BY Edited by Cristina Lindblad


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