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(originally published by Booz & Company)


Pitting Latin Multinationals against Established Giants

To succeed globally, “multilatinas” — and all aspiring international companies from developing nations — must make rapid strides in governance, transparency, and executive appointments.

Latin-owned companies such as Mexico’s Cemex, Argentina’s Arcor, and Brazil’s Embraer and Petrobras have achieved remarkable success in their home markets, often against U.S. and European competitors. Building on this success, many of these companies have become “multilatinas,” pursuing an aggressive strategy of regional and international expansion by acquiring companies and establishing cross-border joint ventures.

In 2006, 82 percent of M&A deals in Latin America originated with Latin companies. Brazil provides an excellent example: Its Gerdau Group acquired several international companies in 2007, including U.S.-based Quanex (Macsteel) and Chaparral Steel; CVRD acquired the Canadian Inco in 2006; and AmBev merged with Belgium’s Interbrew, creating InBev, which recently acquired U.S.-based Anheuser-Busch. These moves and many other similar ones are creating a new corporate elite in Latin America. From 2002 to 2006, annual revenue for multilatinas grew 20 percent, compared with 12 percent for other multinational corporations. And in the mid-2000s, 59 percent of the 500 largest companies in Latin America were Latin-owned, compared with 52 percent at the beginning of the decade.

But the rise of these companies on their home turf does little to guarantee that they will be able to prosper on the global stage competing against established multinationals. Indeed, like many companies in emerging nations, these businesses face critical challenges relating to the necessity of more open governance procedures and transparency of information for internal and external stakeholders. And integral to the governance challenge is the need to seed boards and top management with new members who have an international perspective and experience.

Based on extensive interviews with dozens of executives in Argentina, Brazil, Chile, and Mexico, we found that access to international capital markets often hinges on good governance. Moreover, sustained long-term stock price appreciation is dependent on investor confidence in the company, which is frequently a reflection of the business’s transparency.

One study of Brazilian companies generated results that we believe are relevant to the entire region. It identified three building blocks of corporate governance that are essential for emerging market multinationals to implement.

  • Shareholder rights. Investors should closely examine the relationship between controlling shareholders (typically wealthy families) and minority shareholders. To win investor confidence, these minority shareholders must be protected through clear and fair dividend distribution and mechanisms to adequately compensate them in the event of a sale or merger.
  • Compliance. This is the basic building block of governance. It’s critical to have an empowered audit committee acting on behalf of the board that evaluates financial statements before disclosure to the market and oversees internal audits.
  • Board and management composition. Because many multilatinas are still in the process of building a rigorous governance system, to boost investor confidence, it is crucial that they appoint board members and top managers with credible professional backgrounds and the confidence and experience to make key global strategic decisions.

Putting the right board and management dynamics in place not only improves access to capital, it also serves the very practical function of helping companies implement successful international management models. Many multilatinas were originally family-owned or still are, with high concentrations of equity held by a few family members. Hence, participation of nonfamily professional managers with deep knowledge of international aspects of the business in board-level strategy formulation is still an exception. As a result, many boards, dominated by members who may be trusted by controlling families but not expert in global operations, neglect the international activities that often represent new opportunities for growth.

To ensure the right balance between decision making by managers at the company’s core and by its geographic, or country, managers, multilatinas must encourage global managers to participate in strategic decision making and perhaps to join the board. In addition, multilatinas should consider the creation of committees that involve solely the international business. For example, one Brazilian sporting goods company has established country-specific advisory boards to counsel international executives on unique cultural or political factors in their countries of responsibility. And decision rights must be clarified. In one successful implementation of this approach, executives at a consumer goods company identified which decisions had to go through headquarters (for example, those that may have an impact on the corporate image or introduce systemic risk) and which could be delegated to local managers (such as decisions in arenas that need local customization and faster market response).

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  1. Letícia Costa, Paolo Pigorini, Arthur Ramos, and Ivan de Souza, “Setting Out to Conquer the World: Business Model Challenges and Lessons Learned in the Internationalization of Latin American Companies” (PDF), Booz & Company white paper, December 2007: The article on which this piece is based goes into challenges beyond governance.
  2. Charles Davidson and Stephen Kay, “Latin Multinationals Become Global Headliners,” EconSouth, vol. 9, no. 3, Third Quarter 2007: A look at Latin companies in the context of all emerging market multinationals.
  3. Ivan de Souza, Paolo Pigorini, and Arthur Ramos, “Tailored to Fit: How Brazilian Companies Can Improve Their Governance Structure,” Booz & Company white paper, October 2008: An in-depth assessment of how every Brazilian company can devise a governance structure suited to its circumstances.
  4. Clifford Krauss, “Latin American Companies Make Big U.S. Gains,” New York Times, May 2, 2007: A look at the strategies of multilatinas in the American market. 
  5. Alonso Martinez, Ivan de Souza, and Francis Liu, “Multinationals vs. Multilatinas: Latin America’s Great Race,” s+b, Fall 2003: One of the first examinations of the subject.
  6. Javier Santiso, “The Emergence of Latin Multinationals” (PDF), Organisation for Economic Co-operation and Development Emerging Markets Network Working Paper, April 2007: Explores the impact of Spanish companies on the emergence of Latin American counterparts.
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