According to a 2005 International Financial Law Review (IFLR) report on corporate governance, in September 2004, a new Financial System Law was passed introducing "modern" corporate governance regulations for financial institutions in Honduras. These regulations primarily focused on the accountability of directors and officers for corporate and management decisions and covered aspects that, thus far, did not exist in Honduran commercial law. Furthermore, a 2007 World Bank report notes that the enactment of the Accounting and Auditing Law mandates the use of International Financial Reporting Standards (IFRSs) and International Standards on Auditing (ISAs) beginning January 2008. Finally, an ongoing World Bank project addresses issues concerning the oversight of the corporate sector and effectiveness of insolvency proceedings in Honduras. Despite these initiatives, a number of deficiencies were identified in the Honduran corporate governance framework. For instance, the 2007 World Bank report noted that the implementation deadline for IFRSs and ISAs was "too ambitious," given the fact that Honduras is faced with inadequate human and financial resources. Furthermore, the IFLR report observed that the establishment of a supervisory body for corporations is not likely to occur in the near future. Most significantly, the World Bank assessment pointed out that although a stock exchange exists in the national capital of Tegucigalpa, Honduras has no active securities market. Overall, there is insufficient publicly available information to assess Honduras's compliance with the Organization for Economic Co-operation and Development's (OECD) Principles of Corporate Governance.

General Overview

Corporate governance regulations in Honduras are primarily contained in the 1950 Commercial Code, according to a 2005 International Financial Law Review (IFLR) report. The financial sector, including banks and insurance companies, is regulated by the National Banking and Insurance Commission (NBIC). According to a 2007 World Bank assessment of Honduran accounting and auditing practices, the Commercial Code lays down the different legal forms for private companies. The corporation and the limited liability company are the two most common forms. Since its enactment, the Commercial Code has had only minimal revisions. Various financial institutions experienced insolvencies in Honduras in the late 1990s, many of which were attributed to elements of poor corporate governance, such as lack of accountability for management and directors. In September 2004, the Financial System Law was passed to remedy the situation. According to the IFLR report, the new Law introduced modern corporate governance regulations for financial institutions. These regulations primarily focus on the accountability of directors and officers for corporate and management decisions. The report explains that "the selection of directors and upper management is now subject to numerous requirements and close scrutiny, which was previously non-existent in common commercial law." In its 2007 assessment of Honduran accounting and auditing practices, the World Bank commended Honduras's efforts to improve financial reporting standards and noted that the enactment of the Accounting and Auditing Law in 2004 mandates the application of International Financial Reporting Standards (IFRSs) and International Standards on Auditing (ISAs) beginning January 1, 2008.

Honduras has taken further steps to improve its corporate governance framework. For instance, a component of an ongoing World Bank project, "Financial Sector Technical Assistance Credit," was initiated in 2003. This focuses on the creation of an oversight unit for monitoring corporate sector soundness and improving the legal and institutional frameworks for insolvency and creditor rights. The World Bank website discloses that the closing date for this project is June 2009. While these efforts are commendable, the 2007 World Bank assessment found the implementation deadline for IFRSs and ISAs to be "too ambitious". Additionally, the IFLR report observed that the establishment of a supervisory body for corporations is unlikely to occur in the near future.

The World Bank 2007 report describes Honduras as a small, open economy, largely reliant on agriculture. While a stock exchange exists in the national capital of Tegucigalpa, the report notes that Honduras has no active securities market. The assessment further observes that the Honduran private sector seemed apprehensive about developing a stock market of any significance in the near future. The banking sector is dominated by local banks with assets of US$7.5. The insurance market is also relatively small, with ten companies in total.

In its 2008 Doing Business report, the World Bank rates investor protection in Honduras as being below average for both the region and for member states of the Organization for Economic Co-operation and Development (OECD). The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three aspects of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Honduras scores 1.0 in the disclosure index, against a regional average of 4.2 and an OECD average of 6.4. It scores 5.0 in the Director Liability Index, against a regional average of 5.0 and an OECD average of 5.1; and it scores 4.0 in the Shareholder Suits Index, against a regional average of 6.0 and an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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Per the 2005 IFLR report, corporate governance regulations are primarily contained in the 1950 Commercial Code, which has been revised only minimally since its enactment. However, in September 2004, a new Financial System Law was passed to modernize corporate governance regulations for financial institutions. These regulations primarily focus on the accountability of directors and officers for corporate and management decisions. The report explained that the new law subjects the selection of directors and upper management to restrictions and places it under close scrutiny, which was not the case under common commercial law. Furthermore, according to the 2007 World Bank assessment, the enactment of the Accounting and Auditing Law in 2004 mandates the application of IFRSs and ISAs beginning January 1, 2008. However, the publicly available information does not directly address Honduras's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to the 2005 IFLR report, with the enactment of the Financial System Law in 2004, limits have been imposed on the transfer of stocks or shares. Additionally, the regulator must "revise any transfer of shares of 10% or more of the capital of the financial institution, or if the percentage being transferred is lower than 10% but would imply a change of control in the institution". The distribution of dividends to the stockholders must be first approved by the regulator. The regulator is entitled to approve, recommend modifications, or deny the distribution of dividends to the stockholders. However, the publicly available information does not directly address Honduras's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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The 2005 IFLR report points out that under the Financial System Law, enacted in 2004, transactions with related parties are "meticulously" defined and regulated. Furthermore, credit operations entered into by the institution with related parties must comply with the standards issued by the Central Bank of Honduras (CBH). All credits granted to related parties that represent an accumulated amount equal to or more than 30% of the institution's capital must have prior authorization by the CBH. However, the publicly available information does not directly address Honduras's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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An ongoing World Bank project addresses issues concerning the oversight of the corporate sector and effectiveness of insolvency proceedings in Honduras. Further, the 2005 IFLR report noted that "the employment of family members is subject to consideration, mandating it to be self-regulated, but emphasizing the need to establish predetermined conditions to their employment." However, the publicly available information does not directly address Honduras's compliance with this principle.

Principle V: Disclosure and Transparency

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According to the 2005 IFLR report, with the enactment of the Financial System Law in 2004, transactions with related parties are "meticulously" defined and regulated. Furthermore, credit operations entered into by the institution with related parties must be in compliance with the standards issued by the CBH. All credits granted to related parties that represent an accumulated amount equal to or more than 30% of the institution's capital must have prior authorization by the CBH. The World Bank assessment further noted that with the enforcement of the Accounting and Auditing Law in 2004, IFRSs and ISAs are mandatory beginning January 2008. The application of international standards, the IFLR report said, will create the regulatory framework to obtain more transparent financial information. However, the publicly available information does not directly address Honduras's compliance with this principle.

Principle VI: The Responsibilities of the Board

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The 2005 IFLR report points out that the Financial System Law enacted in 2004 placed "utmost importance" on the accountability of directors and officers for corporate and management decisions. Unlike the Commercial Code, under the Financial System Law, the selection of directors and upper management is closely scrutinized. The law also mandates that the regulator approve directors' appointment and that at least one-fifth of the board members are able to "serve their post with professional independence from management and the majority stockholders to safeguard composition and independence." Additionally, the IFLR noted that, under the new Law, directors and officers are held legally accountable with respect to issues of liquidity and solvency of the financial institution. They are also held responsible for establishing financial and credit policies. Finally, they must ensure compliance of these policies with applicable laws and regulations. Furthermore, officers are personally responsible for damages to the institution and disclosure of confidential information. The IFLR report noted that "conflicts of interest are dealt with unambiguously and they extend according to this law to family members also." However, the publicly available information does not directly address Honduras's compliance with this principle.