(I) Introduction

The term “corporate governance” has been typically described, in the world, as a set of rules and proceedings approved in order to enhance the efficiency of companies by better controlling administration and management. Within its scope, are embraced not only factors connected with the activity of corporate officers but also the ones involving shareholders.

Corporate Governance, which was translated into Spanish as “Reglas de Buen Gobierno Corporativo”, has grown as a shockwave from the United States to the rest of the world due to the scandals involving alleged abuses of corporate power and criminal behavior performed, basically, by directors and other officers. Corporate governance provides a framework to ensure that companies follow certain accepted ethical standards and best practices.

It was defined as “the manner in which organizations, particularly limited companies, are managed and the nature of accountability of the managers to the owners. This topic has been of increased relevance since the publication of the Cadbury Report (1992), which set out guidance in a Code of Practice (the Cadbury Code). There is now a stock-exchange requirement for listed companies to state their compliance with this Code. In particular, the Cadbury Report issued guidelines separating the roles of the chairman of a company and its chief executive, in order to reduce the power of one director. A wider role was also given to non-executive directors”.

After passing the Sarbanes-Oxley Act in 2002, the United States triggered a worldwide expansion of the idea of corporate governance, which had been previously developed by other countries in Europe and even in Latin America , but with less impact.

Another landmark in terms of corporate governance was the Organization for Economic Co-operation and Development (OECD) inquiry in 1997-99, and the publication of OECD guidelines on corporate governance, because they were adopted in national codes by all of the industrial countries. Furthermore, the World Bank and Asian Development Bank have been trying to spread those principles in development countries since then.

In Uruguay, the most important research related to corporate governance was conducted by the World Bank in 2005 (aka Report on the Observance of Standards and Codes –ROSC-) authority that will be extensively discussed in this paper.

Governance of limited companies has been an important issue in our region -and Uruguay was not an exception- since the market, approximately twenty years ago, pushed family companies to expand their business, making clear the difference between governance and power.

Under this new paradigm, some commentators have maintained that the power of the board of directors had been displaced in favor of new officers called “independent” or “executive” directors.

Moreover, Argentinean professor Matta y Trejo has said discussing Argentinean Law, which has evolved faster than the Uruguayan Law on this matter, that “(…) we have seen the transference of the power from the shareholders’ meeting to the board, but the analysis of the reality leads to conclude that there has been a new step which was the transference of the power from the board to the executive officers which are who actually run the day-to-day business”

In Uruguay, the necessity of clear rules about corporate governance is a relatively new request that has been vindicated by scholars based, among others, on the fact that the idea of a board with different types of directors is not impossible under Uruguayan Law.

Our corporate system was designed based on the idea that liability falls upon the board of directors as a body, without a differentiation among possible different functions within the board. The consequence of the system is that the directors will be held jointly and severally liable regardless, in principle, of the actual behavior of each director in the event that caused damages to the company. A main feature of corporate governance is to structure the distribution of rights and responsibilities among the different participants in the management of the company.

(II) Corporate Governance Law in Uruguay

In spite of the fact that Argentina passed a specific corporate governance regulation in 2001 (Decree 677/2001), Uruguay, that usually receives an important influence from Argentinean Law , has not legislated about this topic yet. There is no specific statute that deals, in Uruguay, organically with corporate governance.

However, in the last few years certain rules, which were embodied in different acts, can be recognized as corporate governance regulations.

The referred governmental measures were taken after the terrible consequences of the Uruguayan banking crisis of 2002, which was triggered, among others, due to lack of clear corporate governance principles.

(II.i) The Uruguayan Crisis of 2002 as a landmark for Corporate Governance

In 2002 Uruguay suffered one of the most important economic crises of its history. Since several countries in Latin America suffered an economic financial crisis before 2002 (e.g. Mexico and Brazil), the Uruguayan 2002 crisis could have been, perhaps, predicted and avoided with more controls. One explanation would be based on the fact that the referred crises did not affect the Uruguayan economy as hard as to foresee what was coming next.

At that point, Argentina continued with the parity between Argentinean Pesos and American Dollars (1 per 1). Nevertheless, when the problems in Argentina began, with restrictions in money operations in Argentinean banks and transaction limitations in customer’s access to their deposits, Uruguay should have expected serious consequences in its banking market (due to the fact that many Argentineans had money in Uruguayan banks).

Uruguay began 2002 without any suspicion that such an important crisis was coming, in apparent tranquillity and with an economy with acceptable economic indicators. It was only when Argentinean citizens crossed the “Río de la Plata” to withdraw, in many cases, all the available cash from their accounts, that Uruguay finally felt the effects of the crisis. This country lived difficult moments at that time. Several Uruguayan banks and companies that Uruguayans felt were extremely strong went bankrupt.

In this context, the Uruguayan legal system had to provide solutions to banks, depositors, creditors, debtors, consumers, and so forth.

The already mentioned 2005 Report on Observance of Standards and Codes (ROSC) on Corporate Governance, prepared by the World Bank (“Report”), states that a significant part of the blame for the 2002 financial crisis, previously discussed, can be attributed to banks’ insufficient internal controls and corporate and bank lack of transparency, which permitted the occurrence of self-dealing by controlling shareholders. As a result, the Report states “equity listings are few as investors are cautious, entrepreneur are reluctant to relinquish corporate control, and stocks are considered undervalued”.

(II.ii) Corporate Governance in the Uruguayan Market

The Report recognizes that Uruguay’s recent advances in financial and economic stability “gave rise to an adequate basis for capital markets deepening and growth”. One of the main conclusions the World Bank came up with was that a strong set of corporate governance measures, are crucial “to regain lost ground and assure further capital market development, private sector progress, SOE efficiency improvements, financial sector sophistication and an increase in the availability of external financing of business growth”.

Facing an improvement on the Uruguayan market, the Report states that some of the key corporate governance factors are: “disclosure and transparency, financial intermediation (e.g. a strengthening of broker regulation), the accounting and audit framework and a general awareness-raising on the advantages and costs of corporate governance and capital market issues, including among them CEOs and boards”.

The Report highlighted the lack of transparency and that there is no institute or code governing corporate governance in particular. It also called the attention to the necessity of dividing responsibilities among different supervisory, regulatory and enforcement authorities.

World Bank’s main suggestion was that Uruguay had to improve disclosure and transparency, mainly in terms of closely held corporations, since the Report recognizes that disclosure standards for listed companies and financial firms are strong.

In terms of close corporations, there is a tendency in Uruguay to act in the market discreetly, a fact that is fostered by the possibility of owning bearer shares . This issue is raised by commentators who explained the situation stating that, historically, Uruguayan companies run their business keeping in the strictest confidence their commercial activities. However, this is something that is changing with certain measures taken by the government, such as the obligation to register their financial statements, to reveal the name of the members of the board, among others.

(II.iii) The Role of the Board of Directors in Uruguay

The World Bank set forth that companies in Uruguay have one-tier boards and that the majority of shareholders controls the board by appointing its members. Moreover, it was pointed out that most boards are dominated by executive directors and independent directors are not so common. Also, that in certain cases, there is a separation of the Chairman and CEO. Even though it is true that independent directors are not common in our system, it is possible to appoint an independent director under the Uruguayan Law, something that I have been maintaining since 2006 .

It is also fair to say that, historically, the hats of shareholder and director were typically worn by the same person who was also, typically, the one who led the business. However, in the last years the severance between the two functions has occurred due to, mainly, two distinctive factors, on the one hand the international trend to achieve professionalism in the board and, on the other hand, the fact that the name of directors must be revealed. A shareholder, who owns bearer shares of a Uruguayan corporation and wants to remain unknown, cannot be a director as well.

Nevertheless, so far, there are no qualification requirements to become a director in Uruguay and there is no director training or an institute of directors. Furthermore, there is no mechanism such as cumulative voting or proportional representation that allows minority shareholders to have, as a rule, a voice and representation in the governance of the company.

(III) General Corporate Governance Principles in Uruguay

The Report considered Uruguay’s compliance with each of the OECD Principles of Corporate Governance.

(i) Principle I: Ensuring the Basis for an effective Corporate Governance Framework

This principle is partially observed by Uruguayan Law but sub-principles dealing with the division of responsibilities and authorities among the company were qualified by the Report as materially not observed in Uruguay. The main factors stressed by the Report were the lack of transparency (issue in which Uruguay has improved, as was explained), that there is no institute or code governing corporate governance and that regulatory authorities have overlapped functions.

Corporate governance, according to the Report, is not developed in Uruguay since there is no institute or code dealing, specifically, with it. However, it is recognized that a project to develop a Code of Corporate Governance was proposed to the Congress though that bill has not been yet approved.

The World Bank’s most important recommendations concerning this principle were “improving disclosure and transparency, financial intermediation and raising awareness on the costs and advantages of corporate governance and capital market issues”.

It has been also recommended to enhance securities’ supervision by making stronger the regulator’s powers. In order to comply with this recommendation, Uruguayan Government created in October 2008 the “Financial Services Agency” as a branch of the Uruguayan Central Bank.

(ii) Principle II: The Rights of Shareholders and key Ownership Function

The Report deemed that the four sub-principles related to shareholder’s rights in terms of fundamental corporate changes and shareholder information before shareholders’ meetings were “partially observed” in Uruguay.

The sub-principles related to the degree of shareholders control over capital structures and efficiency of the transparency of capital structures, were considered as “materially not observed”.

(iii) Principle III: The Equitable Treatment of Shareholders

The World Bank deemed the sub-principles of Principle III concerning the equalitarian treatment of all shareholders as “partially observed”. The sub-principle dealing with the prohibition of insider trading was rated as “materially not observed.”

The Report set forth that Uruguayan Law does not have any specific prohibition against insider trading. In accordance with the Report, insider trading legislation has not been actively enforced yet.

(iv) Principle IV: The Role of Stakeholders in Corporate Governance

The World Bank reports that the sub-principle concerning stakeholder’s opportunity to obtain effective indemnification is “largely observed”. However, the two other sub-principles regarding stakeholders’ rights were deemed as “partially observed”.

Finally, the sub-principle regarding the access to information was considered as “materially not observed” and the sub-principle related to insolvency framework and creditor’s rights as “not observed”. Nevertheless, in 2008 Uruguay passed a new statute dealing with the restructuring and bankruptcy proceedings taking into account the referred outcome.

(v) Principle V: Disclosure and Transparency

The sub-principles of Principle V related to: (a) quality of standards of accounting, (b) independent annual audit and (c) channels for providing information, were deemed as “partially observed”. When dealing with sub-principles regarding disclosure information and accountability of auditors, the World Bank said that those sub-principles were “materially not observed”.

The Report stated that listed companies have good disclosure standards, and financial firms have especially strong disclosure.

In addition, the Report recognizes that listed companies, financial institutions and large non-listed companies must file an annual audited report, which includes a cash flow statement, changes in equity, notes and the audit opinion of the consolidated statement.

Furthermore, according to decree 253/2001 any company with assets for more than USD 580,000 or with revenues exceeding USD 1,400,000 has to file Financial Statements with the Governmental Agency that deals with companies (similar to Secretaries of States in the United States). The decree points out that banks are not abided by its rules since they have to do the same complying with the Central Bank regulations.

(vi) Principle VI: The Responsibility of the Board

Sub-principles of Principle VI, concerning board members behavior and access to information, were deemed as “partially observed” by the Report. The sub-principles that deal with fair treatment of shareholders, ethical standards, fulfilling of certain key standards and exercising objective independent judgment were rated as “materially not observed”.

Boards in Uruguay are generally non-independent, being usually composed by members who act both as executives and representatives of the controlling shareholder.

We have already discussed this issue in this paper and we will come back to it later in the next chapter.

(IV) Corporate Governance key Issues that are discussed in Uruguay

(a) Corporate Governance Promotion

As was already mentioned, in Uruguay there is no entity exclusively in charge of promoting effective corporate governance. Nonetheless, there are various entities which, among other functions, promote such practices (e.g. professional associations and government agencies).

The Central Bank of Uruguay, the agency accountable for the financial system, has issued rules purporting to apply certain corporate governance rules to banks. Likewise, there are rules of a different type, such as those that limit or prohibit the possibility of granting preferential loans to those persons who hold positions in the corporations or companies of the same group.

(b) Transfer of Shares

Shares may be bearer, nominative or book-entry shares. In the case of bearer shares these are not registered and can be transferred by simple delivery.

For nominative (regular) shares, the transfer will take place upon delivery and assignment (endorse) of the shares, and registration of the transfer in the company’s ledger. For nominative shares that are not assignable (i.e. non-endorsable) it is necessary to execute a specific agreement of assignment of credits, deliver the shares, issue new shares, and register the change of ownership in the company’s ledger.
For book-entry shares, the transfer will take place after its registration in the Registry of Book-Entry Shares.

Act 16.749 of the Securities Market also rules on entry form shares.

(c) Voting in General Shareholder Meetings

Notice of meeting shall be published for at least three days in the Official Gazette and in another newspaper, at least ten but not more than thirty days before meeting. The notice must mention the nature of the meeting, date, place, time of meeting and agenda.

As part of their information rights (§321¬¬, Act 16.060 ) shareholders may request, among others, to be informed about the resolutions proposed by the board to the shareholders’ meetings. If those rights are not upheld by the corporation, the shareholder may bring a legal action with courts.

In accordance with §344, shareholders that represent at least 20% of the issued stock, unless the bylaws set a lower percentage, may ask for a shareholders’ meeting. The request must indicate the topics to be discussed.

According to §358 any decisions taken out of the agenda will be void, except such cases authorized by law or when the full issued stock is attending and if the resolution is adopted by unanimity.

(d) Shareholders Agreements

Agreements among shareholders (Syndication) are valid and can deal with the purchase of shares, preferential rights, voting rights and any other legal content. According to §331 to be valid and enforceable to third parties, the corporation must keep a copy, with signatures certified by a notary public and another copy has to be registered with the National Trade Registry. The agreement must be mentioned on the shares or in the Registry of book-entry shares. The maximum term of these agreements is five years; however, automatic extensions are allowed.

(e) Members of the board Publicity and Salaries

Members of the Board of Directors are elected by the Shareholders, and these designations must be reported to the National Trade Registry, as was already mentioned. This rule is provided by Act 17.904 of 2006.

According to §385 salaries of the board (if any) are set either in the bylaws or at the shareholders’ meeting.

(f) Financial Statements and Audits

International accounting standards are applied. Concerning to accountancy, local standards shall match with international standards. Typically, there is also an external audit conducted by independent auditors in order to provide an objective assurance on the way in which financial statements have been prepared and submitted.

The external auditor is generally appointed and removed by the Board of Directors.

(g) Requirements for serving as a member of the Board:

According to §80, individuals or legal entities (represented by individual/s), partners or outsiders, can be members of the body. Also, foreigners or non-residents can hold this position.

(h) Maximum term of members in the Board

Generally speaking, directors serve for a year and they may be re-elected. Uruguayan law authorizes the existence of members of the board who represent the interests of different classes of shareholders.

(i) Structure of the Board

Typically, the board of directors has between one to seven members, shareholders or not. They must remain in office until their successors take possession. The Meeting may appoint substitute directors to replace the members of the board in case of vacancies.

The shareholders’ meeting is typically called by the board. The directors may vote or be represented by another director or a third party by proxy. It can make decisions by majority vote of those present. A board of directors may have a single member, who can be also de only shareholder of the corporation.

The board has unlimited power for the administration of the company and the disposal of its property. It can rent, sell and encumber property.

Representation of the board is generally conducted by the president or vice president, indistinctly, or by any two directors acting together.

(j) Key functions of the Board

(i) Designing and leading corporate strategy, major plans of action, annual budgets and business plans; performance objective and acquisitions.

(ii) Selecting, paying, controlling and, if necessary, replacing executives.

(iii) Supervising executives and setting board remuneration. Also, guaranteeing a formal and transparent board nomination process.

(iv) Supervising and ensuring integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are working, specially, systems for monitoring risk, financial control, and compliance with the Law.

(v) Ensuring the effectiveness of the governance practices under which it operates and making changes as needed.

(k) Standards the board must follow when it makes decisions on corporate issues

As a general rule, under Uruguayan law, directors are jointly and severely liable to the corporation, shareholders and third parties for all damages directly or indirectly caused as a consequence of a violation of the law, bylaws, for a bad performance of their duties (breach of duty of loyalty, and breach of duty to act with the diligence of a “good businessman” – somehow similar to the American concept of “Business Judgment Rule”-) and for an abuse of authority, fraud or negligence.

Directors’ liability towards the company shall become extinguished by approval of their performance, resignation or a settlement resolved by the meeting, as long as the director’s liability was not a result of a breach of law, by-laws or any regulations. In addition, the referred decision should not have been challenged by 5% of the issued stock, and the issue must have been included in the agenda of the said meeting.

Derivative action can be brought by those shareholders who have challenged the director’s liability extinction.

(l) Supervisory Board

Typically, some jurisdictions have two-tier boards that separate the supervisory and management functions in different bodies. Such systems have a “supervisory board” composed for members that are not executives of the company or part of the company’s management staff. Other countries have a unitary board structure that combines executive and non-executive board members.

Uruguayan Law includes both, private auditing –which is not compulsory for closely-held corporations and is mandatory for openly-held corporations and the existence of an internal supervisory body (“Síndico” or “Comisión Fiscal”).

Functions are not overlapped since the supervisory body is in charge of auditing and the board of directors is in charge of the management of the corporation.

The supervisory body has to: control company management, supervise compliance with the Law, by-laws, regulations and decisions made by the Shareholder’s Meeting.

Finally, the most important functions of the external auditor is to inform about financial statements submitted by the Board.

According to the Uruguayan Law, it is not possible to be an auditor (or a shareholder) and also a member of the supervisory body.

V) Conclusions

In closing, we can say that Uruguay learned the lesson of the 2002 crisis and many corporate governance measures have been taken. We deem that Uruguay is not anymore in its “minority” in terms of transparency and responses to corporate governance issues.

It is clear that this country has a long path ahead in which it has to face and regulate in a specific code or general act the different problems that corporate governance has been raising in the world in the last years.

One case, in which we can see that Uruguay is changing the way of facing new challenges, is that it was one of the few countries in Latin America that was less affected by the overwhelming consequences of the 2008 world crisis. One of the conclusions of the Uruguayan Government is that this could be achieved because certain corporate government measures had been taken on time.