Focusing oversight: companies improve corporate governance in effort to tighten bottom line.

Devastating accounting scandals and reports of profligate executives throwing champagne-soaked parties for their closest friends were the damaging images of corporate life in the early part of this decade.

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Wall Street reeled as Enron and WorldCom folded under the weight of their scandals, and the U.S. Congress took action. In an effort to restore some luster and sense of integrity to the shaken economy, lawmakers passed the Sarbanes-Oxley Act of 2002, which PricewaterhouseCoopers called "the most important piece of legislation affecting corporate governance, financial disclosure and the practice of public accounting since the U.S. securities laws of the early 1930s."

A daunting document and set of rules that takes on corporate fraud, oversight, conflicts of interest and increased penalties for white-collar crime, the law has become business-as-usual for U.S. firms, and has now begun to affect how companies act in Mexico.

Several companies, notably the boutique business consulting firm Tactikal (based in Mexico City and a strategic partner of Deloitte Mexico), have looked to take advantage of this new climate, stressing that companies in Mexico have much to gain in this changing corporate landscape.

"The motivation of the businessman tends not to be of the law or adhering to the requirements of the law," said Guillermo Cruz, senior partner in charge of corporate governance practice at Deloitte Mexico.

Instead, for these consulting firms, it becomes a matter of selling corporate governance to corporations because it is in their best interest to follow the guidelines of Sarbanes-Oxley, even though they operate outside the United States. While legislation requiring better corporate practices in Mexico is still evolving, several draft rules are being circulated in Congress, and the Banking Commission may incorporate some of the U.S. rules into its regulatory practices. In addition, federal regulators are updating the Mexican Code of Best Practices that was first published in 1999.

WHAT'S IN IT FOR US?

Corporate governance was initially concerned with transparency of reporting and disclosure, but has grown to encompass the broader themes of organizational structure and management of performance. The concept is gradually becoming a part of that tricky equation of competitiveness, and experts stress the importance and advantages that Mexico stands to reap if it takes the lead on this subject.

"Corporate governance is not just about complying with rules and regulations. Its scope extends to strategic and operational planning, to assigning clear responsibilities and to monitoring activity continually, with the aim of achieving company goals in the most efficient way," said Inaki Roza, former CFO of Peugeot and now a senior partner at Tactikal.

If adopted on a large scale, such business practices will make for effective administration, which will instill confidence in the markets. This in turn will make Mexico and attractive destination for foreign investment.

And there is the defensive aspect of this monitoring, as its proper application can protect companies from potential litigation and prevent internal theft from wreaking havoc on an otherwise healthy bottom line. With tightly run corporate ships in which finances are monitored professionally, the nation--struggling to modernize itself in an international economic arena--stands to gain in general.

"The Bolsa has not had the growth that we have expected. This is because there is not much confidence by investors, and we need to immediately reassure them," said Cruz, whose multinational firm Deloitte has teamed with Tactikal to bring corporate governance principles to the often nepotistic and corrupt Mexican business world.

A cynic would say this righteous corporate model will never take hold in Mexico, where power is concentrated in the hands of a few (see Carlos Slim's stranglehold on the nation's telecommunications market) or family-run small-and medium-sized business that seldom open their companies to outsiders.

"The families of course don't want to lose control of their own business or finances, and this tends to be the first thing they think of regarding corporate governance. But this is misinformed thought," Cruz said. "Corporate governance in reality does not run counter to the concept of a family business."

"To the contrary, it gives strength to the family business. It allows a professional administration, and it permits families to run their businesses more efficiently and profitably. It does not take any power out of the hands of the owners."

CYA--COVER YOUR ASSETS

Mexican firms--particularly those with international partners--can protect themselves from nasty lawsuits or simply a tarnished image. This is at the root of the corporate governance ideal.

"Globally and in the aftermath of Enron, everyone is concerned that they might not be looked at transparently. Responsible companies are very careful to do things right because the litigation in the United States is spilling over into other parts of the world," said Patricia Hernandez, a lawyer and partner with PricewaterhouseCoopers in Mexico.

And while the Bolsa is only beginning to incorporate some of the rules of Sarbanes-Oxley, major companies such as Bimbo and Herdez have implemented corporate governance policies, even though they are not compelled legally to do so. When a TV Azteca board member resigned in May, citing poor corporate governance, shares of the media company fell 20% within a day.

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PART OF A GLOBAL MOVEMENT

Repeatedly in their public and private discussions, corporate governance insiders stress the international angle to the movement and see opportunity in Mexico's placement on the doorstep of the United States and on the cusp of emerging markets in Latin America.

Firms like Deloitte, PWC and Tactikal see their corporate governance model providing needed structure and allowing Mexico to piggyback on the new ethical policies of the United States and become a paragon of good management in the region as a whole.

"Mexico should and I think will take the lead in Latin America," Hernandez said. "If it does, and if Mexican organizations can be forward-looking enough to embrace corporate governance, the country as a whole will benefit as it becomes more efficient and competitive on a global scale."

As Carl Wood, the English-born CEO of Tactikal, said, "The current fervor surrounding corporate governance provides Mexico with an excellent opportunity to create an effective business environment, which, of course, is conducive to sustainable growth." The initial signs, at least, are positive.

Matthew Brayman is a former editor of Business Mexico.