Foreward by Andrew Chilvers
As companies continue to look for opportunities in global markets, directors from diverse jurisdictions are hired to serve on the boards of foreign businesses as well as domestic ones that have operations and assets in other countries.
Enterprises across the world look for directors from other jurisdictions for any number of reasons. Hiring board directors from other countries can help to build investor confidence, for example. Likewise, an enterprise that is headquartered in a different jurisdiction but with a subsidiary in the US or Europe could seek directors to gain expertise and credibility. The director may have valuable international or local geographic expertise regarding business objectives, strategy, operations and risk management.
Nevertheless, serving as a director on the board of a global enterprise can bring major challenges. It’s true that during the past few years corporate governance laws and regulations have started to converge across regions, but there remain critical international differences regarding the responsibilities and liabilities of directors.
With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?
In Mexico, personal data protection among individuals and companies is similar, if not identical, to the provisions set by the other countries that form part of the OECD. It’s mainly regulated by the Federal Law for the Protection of Personal Data held by Private Parties (“LFPDPPP”), published in 2010; however, there are also some provisions found in the Criminal Code in relation to sanctions, as well as complimentary rules found in the Civil and Commercial Code and the Federal Consumers Law.
According to the LFPDPPP, all companies and individuals in possession of third parties’ personal information are obliged to issue a document called a Privacy Notice containing the basis regarding the methods or mechanisms in which the third parties’ information is to be securely held, and the authority in charge of scrutinizing its compliance is the National Institute of Transparency, Access to Information and Personal Data Protection (“INAI”). This is entitled to impose administrative sanctions up to the equivalent of $1 million for breaches of the law in question, but if the personal information is also used to obtain a profit, the offender will be held accountable for criminal sanctions as well.
In order to determine accountability as to applying the aforementioned sanctions, the LFPDPPP clearly distinguishes two types of subjects; the “controller” and the “processor”, being the first the one who decides the treatment of personal data and the second, who decides over personal data on behalf of the controller. Thus, the authority will determine in each case if the breach was committed by the controller, or processor, or the processor on behalf of the controller, which is a case in which both will be held accountable. Therefore, the board or sole administrator, acting as the controller, should carefully develop a strategy and appoint the person to serve as processor, as any bad behaviour or simple mistake could involve them as well.
With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?
With the advantage of having highly homogeneous governance rules, principles and fiduciary duties around the globe, international companies have bet on the incorporation of foreign jurisdiction directors to form part of their boards.
The demand for such directors doesn’t come as a surprise as the benefits of it are significant. Whether the company is seeking to venture in a new country, or already operating there, it could make a huge difference in the decision making as the board would be provided with foreign political views and market knowledge and experience, as well as a powerful network. In addition to this, to seek a director from abroad provides you with a wider variety of candidates to consider for the position, increasing the chances to find the person who suits the company’s needs.
It is certainly difficult to appoint a director who is willing to travel overseas on a regular basis, and to manage the language barrier of participating in highly technical board meetings in a non-native language; however, it is possible due to the strong similarity of the fiduciary duties that most of the countries share.
Mexico, which received $32.9 billion of direct foreign investment just in 2019, should expect high demand of local directors to form part of foreign companies’ boards in order to provide them with an important insight into the Mexican market, whether to start investing, or to improve their ongoing operations.
How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?
Good corporate culture not just protects the value of the company, it also increases it substantially by aligning the interests of the investors, board and other stakeholders. Thus, by implementing the core principles of good corporate governance, and adopting a long-term strategy, it should increase the chances of the company to grow by attracting new investors, help prevent bad or unethical conduct within the company, or in case this happens, to facilitate accountability. It might not shield the company nor the board for fraudulent or illegal operations committed by them, but it would certainly protect them in case that lower lever members of the company incur in individual wrongful practices.
The previous certainly applies for Mexican companies, as its legislation follows the same principles or standards of good corporate governance just as the other member countries of the OECD. Hard-law provisions that set the basis for company governance are encompassed in the General Law for Commercial Companies (“LGSM)”, and Securities Market Law (“LMV”) when it comes to listed companies. However, the corporate governance voluntary principles are to be found in the Best Corporate Practices Code, which is an identical copy of the well-developed UK Corporate Governance Code.
The implementation of these practices is somehow recent in this country, but it has become more significant as the number of international companies and investors that venture into the Mexican Market has substantially increased. Therefore, corporate structures that were to be found only on big publicly traded companies are being adopted with more frequency on private medium-sized corporations. Hopefully, such a trend will continue to increase in order to help companies subsist in light of the current global crisis.