3 - Corporate Governance and Diversified Business Groups

Summary

Introduction

In 1980, the largest private domestic firm in Mexico, Banamex, was a sprawling, highly diversified (with dozens of subsidiaries), closely owned, and family-controlled business group, also known as a grupo económico or just grupo. Twenty-five years later, the Banamex group was long gone, and many observers expected that decades of profound economic and political liberalization would have transformed the rest of the corporate landscape as well. Yet, by the mid-2000s, the largest private firm in Mexico, and for that matter in all of Latin America, the grupo Carso, was a similarly sprawling, widely diversified (nearly 200 subsidiaries), family-controlled business group (Grosse 2007). The names may change, but the corporate form lives on. Similar comparisons could be made for the other large countries of the region. In fact, for the last 50 years, scholarship on large domestic firms has consistently documented the dominance of family-owned, diversified business groups (Schneider 2005).

In the absence of deep equity and credit markets, business groups, along with MNCs, have been the main private institutions for mobilizing large-scale investment. Latin America businesses could not finance investment through domestic bank finance (as in CMEs) or stock markets (as in LMEs) and relied instead on retained earnings, international loans, or loans from state agencies (see Figure 3.1). By one estimate, even companies listed on the Brazilian stock exchange relied on retained earnings for about 75 percent of their financing needs (Claessens, Klingebiel, and Lubrano 2000). Early analyses of business groups emphasized their crucial role in pooling capital and acting as internal capital markets (Leff 1978). Moreover, individual and institutional investors and banks did not own large enough shares to get on boards (save pension funds in a few companies in the 2000s). Markets for corporate control did not exist, and business groups passed instead within families from one generation to the next.