Corporate governance in Peru has seen progress since the voluntary Code of Good Corporate Governance - modeled on the Organization of Economic Cooperation and Development (OECD) recommendations - was first published in 2002 by a Committee assembled by the National Supervisory Commission for Companies and Securities (CONASEV). Still, a 2004 World Bank assessment concluded that the development and reform of corporate governance in Peru was at an early stage, and made a number of specific recommendations. The same World Bank report also noted that a key challenge going forward will be the implementation and enforcement of corporate governance. It recommended granting more independence to CONASEV, as well as improving CONASEV's enforcement mechanisms. A 2006 OECD Progress Report for Peru noted various changes occurring in 2005 and 2006 that addressed previous shortcomings in the areas of shareholder rights, corporate control markets, integrity of financial reporting, and the development of guidelines for the selection of board members. Since 2005, Peruvian companies have been required to document their adherence to the Code of Good Corporate Governance in their annual reports on a "comply-or-explain" basis.

General Overview

The World Bank's 2004 Report on the Observance of Standards and Codes (ROSC) provides an assessment of the corporate governance policy framework, enforcement, and compliance practices in Peru. The report concludes that the development and reform of corporate governance in Peru is still at an early stage, but legislation intended to offer greater protection to shareholders has been introduced. The voluntary Code of Good Corporate Governance was published in 2002 by a Committee under the aegis of the National Supervisory Commission for Companies and Securities (Comisión Nacional Supervisora de Empresas y Valores, or CONASEV). It includes general recommendations on board organization and functions, as well as the protection of minority rights, and is modeled on the Organization of Economic Cooperation and Development (OECD) recommendations. Since 2005, companies have been required to document their adherence to the Code in their annual reports on a "comply-or-explain" basis. The 2004 World Bank ROSC was, however, critical of the Code's focus, which was judged to be too broad and too general in its recommendations. The Bank recommended that the Code be revised to more clearly address Peruvian corporate governance issues.

More specifically, the 2004 World Bank report has five recommendations: (1) Annual General Meetings (AGM) should be organized by procedures conducive to shareholder participation; (2) a more transparent and lawful approval process for related party transactions should be adopted; (3) lower thresholds for challenges to corporate decisions across all listed companies were desirable; (4) a minimum number of independent directors as well as an audit committee should be a requirement; and (5) training for directors to better understand their duties and responsibilities should be available. The report also proposes increased independence and stronger enforcement mechanisms for the securities regulator.

The 2004 World Bank report more broadly notes that a key challenge going forward will be the implementation and enforcement of corporate governance. It hence recommends greater independence for CONASEV, and the improvement of CONASEV enforcement mechanisms. In particular, the actual content of disclosure provisions needed better enforcement. To achieve this, the report recommended that CONASEV strengthen its capacity to monitor disclosure. Furthermore, the facilitation of information exchange between CONASEV and the Superintendence of Banks, Insurance and Pension (Superintendencia de Banca, Seguros y AFP, or SBS) would make investigations into insider trading easier.

In 2006, in the context of the Latin America Corporate Governance Roundtable, the OECD published a Progress Report on Peruvian corporate governance, following up on the recommendations offered in its original White Paper and those of the World Bank's 2004 ROSC. The 2006 OECD report noted that progress had been achieved in 2005 and 2006 in addressing previous shortcomings. Shareholder rights were being taken more seriously by facilitating the request for extra-ordinary shareholder meetings. New regulations for public tender offers and de-listing offers were enacted that seemed to simplify the corporate control market. The integrity of financial reporting and the disclosure of related party transactions had been improved via new rules requiring companies to disclose certain type of information. The National Fund for the Financing of State Enterprise Activity (Fondo Nacional de Financiamiento de la Actividad Empresarial del Estado, or FONAFE) had begun developing guidelines for the selection of board members, CEOs, audit committees, and criteria for performance evaluation of directors, aimed at creating more effective boards of directors. Lastly, the 2003 CONASEV resolution requiring disclosure of the compliance with the 2002 Code of Good Corporate Governance had been made more specific through a new resolution in January 2006.

The 2006 OECD report found two other developments particularly noteworthy. First, in 2006, FONAFE issued a Code of Good Corporate Governance for State-owned enterprises (SOEs). Although the OECD guidelines are intended for listed companies only, the inclusion of SOEs is viewed as an important stepping stone for the development of the overall corporate governance in Peru. Second, the 2004 World Bank assessment notes that major issues of corporate governance are driven by the growing importance of the private pension funds (Administradora de Fondos de Pensiones, orAFPs). As of 2004, the AFPs were managing assets of US$6.5 billion (11.4 percent of GDP), making them the most important institutional investors. The World Bank cautioned that "the governance structure of the pension fund administrators is weak, and there are not enough checks and balances to deal with conflicts of interest" (p. 1). The 2006 OECD report notes that Supreme Decree Nº 182-2003-EF, published in December 2003, modified the Regulations of the Law of the Private Pension Fund Administrators System that had been approved by Supreme Decree Nº 004-98-EF. According to the OECD report "modified article 94 states that the representatives of the AFPs have to perform the duties and defend the rights that pension funds have as holders of securities. Also, the representatives of the AFPs have to follow best corporate governance practices and promote them in the portfolio companies of the administered pension funds" (p. 4).

Overall, according to the 2004 World Bank ROSC, Peru's equity market is relatively important, both in terms of market size and the number of listed companies, especially when compared to other Latin American markets. At the end of 2002, market capitalization was US$13.4 billion, or 23.5 percent of GDP. This can be attributed to a 1970s government participatory scheme called "investment shares" (acciones de inversión), which requires firms to share 15% of net profits with their employees in the form of shares. In the words of the ROSC: "These shares were non-voting and had no special dividend or liquidation privileges - they were not even considered part of share capital - but they were listed on the exchange. This is one of the reasons why the majority of listed companies are Sociedades Anónimas Ordinarias (SA) [Joint Stock Companies] rather than public companies" (p. 1), explains the World Bank assessment. Even today, about 35 percent of listed shares are still non-voting. Most trading is concentrated in voting shares. Banks, insurance companies, AFPs, financial institutions, leasing companies, public companies, and agricultural sugar cane companies are required to be listed according to the World Bank. The Bank further reports that at the end of 2003 the Lima Stock Exchange (Bolsa de Valores de Lima, or BVL) listed 232 companies, 158 of which never trade. Overall, the corporate sector is characterized by concentrated family ownership. Business groups, horizontally and geographically diversified, but with cross shareholdings, are frequent. The U.S. Department of Commerce, in its 2007 Doing Business Guide, confirms that large firms often use "cross-shareholding" and "stable shareholder" arrangements to restrict investment by outsiders - not necessarily foreigners - in their firms, as "close families or associates generally control ownership of Peruvian corporations, [so that] hostile takeovers are practically non-existent" (p. 66).

The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investor Protection Index consists of three dimensions 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 indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Peru scores 8.0 in the disclosure index, against a regional average of 4.3 and an OECD average of 6.3. It scores 5.0 in the Director Liability Index, against a regional average of 5.1 and an OECD average of 5.8. It scores 7.0 in the Shareholder Suits Index, against a regional average of 3.5 and an OECD average of 6.6.

The Principles

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

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The 2004 World Bank report notes that Peru's legal system is based on the civil law tradition. Relevant laws for corporate governance are the General Companies Law of 1997 and the Securities Market Law of 1996. Basic company forms and shareholder rights are formulated in the General Companies Law. Publicly offered securities, financial intermediaries, securities exchanges, and collective investment schemes are regulated in the Securities Market Law. Financial markets are regulated by two institutions.: the SBS, which is also responsible for the supervision of private pension funds; and CONASEV, which is in charge of the surveillance and control of compliance with the Securities Market Law and the Law on Investment Funds and their managers. CONASEV also regulates issuers of securities, including their disclosure of information, and enforces certain aspects of the General Companies Law on public companies. CONASEV is a public institution with a separate legal identity, reporting to the Ministry of Economy and Finance (MEF). At the time of the World Bank assessment ROSC, 140 people worked at CONASEV. The ROSC reports that the independence of CONASEV needs to be strengthened and criticized the board nomination process as being prone to conflicts of interests. This is problematic, according to the ROSC, because the administrative tribunal rulings are routinely appealed to the board. To alleviate this situation, the ROSC suggested that the CONASEV chair be appointed to a longer term than that of the board executive, and that the board be institutionalized. To achieve the latter goal, the ROSC recommended that representatives of the SBS, Central Bank, MEF, and other institutions be granted seats on the board. However, Peru's compliance with this principle was not addressed by the World Bank assessment.

Principle II: The Rights of Shareholders and Key Ownership Function

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In its 2004 Corporate Governance Country Assessment of Peru, the World Bank found Peru to largely observe the following sub-principles of Principle II. "Basic shareholder rights" and "Rights to participate in fundamental decisions" indicating that the assessment found only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The sub-principles "Shareholder's Annual General Meeting rights," "Disproportionate control disclosure," "The functioning of control arrangements," and "The cost/benefit to voting" were rated as "Partially Observed", indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge.

The 2004 World Bank report recommends that CONASEV strictly enforce the requirement for listed companies to hold an annual general meeting and extend the mandate of CONASEV's committee for the protection of minority shareholders to all listed companies. The report further recommends that consideration be given to extending the notice period for shareholder meetings to 30 days, and to establishing a minimum percentage of shareholders required to force items on the agenda. Finally, the 2004 ROSC suggests that the annual report should state the rights of the different classes of shares and the names of ultimate beneficial owners holding more than a certain percentage of total share capital.

The 2006 OECD progress report notes that Supreme Decree No. 182-2003-EF, published in December 2003, modified several articles of the regulations of the Law of the Private Pension Fund Administrators System that had been approved by Supreme Decree Nº 004-98-EF. According to the OECD report, modifications in Article 94 require representatives of the AFPs to perform the duties and defend the rights that pension funds have as holders of securities. In addition, the AFP's representatives must both promote and comply with best corporate governance practices in the portfolio companies of the administered pension funds. The 2004 World Bank report notes that the decree establishes the AFP's duty to appoint directors to the boards of portfolio companies, but the definition of "independence" used in the decree fails to include certain insiders' classes, such as legal counsel. The report further recommends that, to ensure that the AFPs understand and fulfill their role as fiduciary investors, the detailed regulations of the decree should be reformulated to achieve greater clarity on the expectations of the pension funds in mind.

Principle III: The Equitable Treatment of Shareholders

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In its 2004 Corporate Governance ROSC assessment, the World Bank rates Peru as partially observant of the sub-principle requiring that "all shareholders be treated equally," indicating that while the legal and regulatory framework complies with the principle, practices and enforcement diverge. The subprinciples "Prohibit insider trading" and "Board/Management should disclose interests" are rated as "Materially Not Observed," indicating that, despite progress, there are enough shortcomings to raise doubts about the authorities' ability to achieve observance. The report further observes that the high thresholds to minority shareholder redress and the concentration of ownership that prevails in Peru have resulted in a dearth of remedies for grievance. It suggests that threshold requirements be harmonized for all listed companies.

In addition, the 2004 World Bank ROSC reports that companies are obliged to report insider transactions above 1% of capital to CONASEV and the BVL within five days, but adds that "market participants and regulators share the view that insider trading and abusive self-dealing remain a problem" (p. 8). The report recommends that CONASEV provide more resources for market surveillance and investigation, and that it ease the exchange of information between regulating institutions. Noting that, in 2004, fines were capped at 10% of annual income, the ROSC recommends that this be changed to a multiple of gains made or losses avoided, adding that a single "successful and highly publicized prosecution of an insider trading case could set an example and act as a deterrent to the market as a whole" (p. 8). Finally, the 2004 ROSC suggests that CONASEV make it a top priority to monitor and strictly enforce disclosure obligations of related-party transactions. Further, the assessment notes that "rules that govern the conduct of directors who are connected to major shareholders and other bodies with a vested interest in board decisions should be developed, and a clear definition of 'controlling party,' should be formulated" (p. 9).

Principle IV: The Role of Stakeholders in Corporate Governance

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The 2004 World Bank assessment rates Peru as largely observant of the sub-principles regarding "Legal Rights of stakeholder are respected," "Stakeholder Redress," and "Access to Information," indicating that there are only minor shortcomings that do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Performance-enhancing mechanisms," were rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the sub-principle, practices and enforcement diverge.

Corporations are not specifically required by law to consider stakeholder interests, reports the 2004 World Bank ROSC. The Code of Good Governance has a section on stakeholder participation, and some corporations are voluntarily complying with the Code. Nonetheless, the ROSC recommends that CONASEV should raise awareness about stakeholder issues and corporate social responsibility.

Principle V: Disclosure and Transparency

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The 2004 World Bank ROSC assessment rates Peru as partially observant of the sub-principles regarding "Disclosure standards," "Standards of accounting and audit," and "Fair and timely dissemination," indicating that while the legal and regulatory framework complies with the principle, practices and enforcement diverge. The sub-principle "Independent audit annually" was rated as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.

According to the 2004 ROSC, listed companies must file periodic financial information with CONASEV and the BVL. At the time of the assessment, the implementation of accounting and auditing standards was found to be relatively satisfactory, albeit with clear cases of non-compliance on a few issues. "The fact that 70 percent of all cases before the administrative tribunal of CONASEV are financial reporting cases suggests that (1) compliance needs to be further improved; [and] (2) CONASEV is attempting to enforce disclosure requirements" (p. 10). According to the assessment, the crucial point of the Peruvian disclosure regime is an exception that allows companies to disclose material events when they materialize, so as not to harm business interests. This exception appears to be often granted by CONASEV.

Peru uses the 2002 version of the International Financial Reporting Standards (IFRS) and annual financial statements are audited. The 2004 World Bank assessment recommends that CONASEV should build the capacity to review and evaluate the quality of listed companies' financial reports. The assessment recommends that this could be done on the "basis of a 'risk analysis' and on a periodic cycle, so that all firms are reviewed within e.g. two years" (p. 11). Further, CONASEV should be able to evaluate and react to material events when they occur. Lastly, the 2004 World Bank Report recommends changing the definition of auditor independence to meet international standards and consider possibilities to subject auditors to an independent oversight body.

Principle VI: The Responsibilities of the Board

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The 2004 World Bank assessment rates Peru as largely observant of the sub-principle regarding "Ensuring compliance with the law," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. For the sub-principles of "Acting with due diligence and care," and "The board should fulfill certain key functions," Peru is rated as partially observant, indicating that the legal and regulatory framework complies with the principle, but practices and enforcement diverge. The sub-principles "Fair treatment of all shareholders," and "Exercise objective judgment" are rated as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.

The 2004 World Bank ROSC recommends that the fiduciary duties of the board should be specified more explicitly in the law and by-laws, in order to clarify its primary responsibility to the corporation and all shareholders. The Code of Good Corporate Governance should clarify the duties of the board. The ROSC adds that "directors should have access to training in order to fully understand their rights, responsibilities and liabilities, as recommended by the Peruvian Code of Good Governance. The quality of disclosure could be enhanced if boards were to create audit sub-committees with financial and accounting expertise" (p. 14).

Peruvian law currently does not specify the number of independent directors required on a board, leading the 2004 World Bank ROSC to recommend that a minimum number of independent directors as well as an audit committee should be required. The ROSC also recommends regular board meetings with quorum requirements that guarantee the participation of independent directors in all decisions.