Analysis: Family ownership drags on Mexico's equity market

MEXICO CITY (Reuters) - To have a say in what goes on in a listed Mexican firm, all shareholders need to do is be born into the right family, marry well or be the world's richest man. Otherwise, it can be a struggle.

Mexico's tycoons, including Carlos Slim, who topped this year's rich list from Forbes magazine, often run companies with a separate share class that gives them and other insiders extra voting power on corporate actions.

Or they may simply hold most of the shares.

So in spite of a string of reforms to improve the way companies are managed, foreign investors are wary of corporate governance standards in the country and Mexico's equity market struggles to attract investment.

Of the 34 companies in Mexico's benchmark stock index, about 80 percent are mostly owned by an individual or family, including majors like baker Grupo Bimbo (BIMBOA.MX), mining company Industrias Penoles (PENOLES.MX), retail and financial company Grupo Elektra (ELEKTRA.MX) as well as Slim's empire.

"If we discover they have a history of not treating minority shareholders well, we'll tend to avoid investing in those companies," said Eric Anderson, head of Latin American equities for ING Investment Management.

"It does raise all the governance flags," he said.

Portfolio investment in Mexico in 2009 is much lower than in Brazil, which has been a rare bright spot in the struggling global economy, although the economy is decelerating now.

Mexico's stock market capitalization is about 30 percent of its gross domestic product, next to some 50 percent in Brazil.

"Mexico has passed significant, positive rules ... but the market hasn't really followed in terms of any increase in capitalization," said Daniel Blume, a senior policy analyst at the Organization for Economic Co-Operation and Development.

Mexico's biggest business owners tend to limit outside investment and seem reluctant to relinquish control over their companies.

"There's not the culture there is in the United States, where people start a company and invite many people to invest in it," said Hector Macias, a partner at PricewaterhouseCoopers in Mexico City. "Here in Mexico, it's still the patriarch who does everything."

The annual U.S. regulatory filing by Slim's mobile phone giant America Movil -- Mexico's biggest company -- makes it clear to minority shareholders that his family comes first.

"We cannot assure you that the Slim Family will not take actions that are inconsistent with your interests," the company's statement says.

Slim's family owns most of America Movil's (AMXL.MX) voting stock and may elect the majority of its board of directors.

CULTURAL SHIFT

According to a report by academics at the University of Barcelona, in 2008 about 50 percent of Mexico's 100 biggest companies were family-owned, compared to 18 percent in Brazil.

"On balance, particularly in the developing markets context, the risks of family control to investors over time generally outweigh the strengths," Moody's analysts wrote in a report on corporate governance earlier this summer.

To be sure, many family-owned businesses are well run and the interests of the majority shareholders are firmly focused on improving profitability.

Generational change is also prompting more family-run companies to consider structural changes.

Take Bimbo: under the leadership of the founder's son it has increased the number of independent directors on its board and expanded rapidly into Asia, the United States and Canada.

As families prepare to pass the company onto a new generation, many are looking to improve aspects of corporate governance such as disclosing interests and increasing independent board members, because they need to grow.

"Family-run companies are starting to consider corporate governance as a necessity, usually because of generational changes or management changes," said Raul Obregon, head of a business and corporate governance consultancy in Mexico City.

But it is a slow process and in the meantime Mexico's stock market is struggling to gain traction. There have been just two initial public offerings by Mexican companies this year.

In Brazil, the Bovespa formed a 'novo mercado' listing category for companies that are only composed of common shares and conform to certain rules that back shareholder rights and improve the transparency of those companies.

Novo mercado-listed companies attract a greater proportion of Brazil's trading volume and contribute more to market liquidity than other listed companies, Bovespa data shows.

An official at Mexico's Bolsa Nacional de Valores said the exchange is considering following the lead of the novo mercado among other options to bolster liquidity.

(Editing by Dave Graham and Bernard Orr)