Implications of ESG for Corporate Governance

In this article we focus on the corporate governance criterion, which refers to the appropriate management of the companies’ governing and administrative bodies to ensure, principally, that they are managed for the benefit of their shareholders and other stakeholders. In Mexico, private business associations and public entities have undertaken significant efforts to promote the implementation of sound corporate governance policies. The Business Coordinating Council has repeatedly published and updated a Code of Best Corporate Governance Practices, which contains various principles and rules that companies may use as a reference in this area. This Code had great influence on the Securities Market Law (2005) (LMV), which establishes mandatory guidelines on corporate governance for publicly traded corporations (SAB) and investment promotion corporations (SAPI) that decide to adopt the SAB management regime. Evidence of this is Article 24 of the LMV, which provides that the Board of Directors of SABs must be composed of at least 25% independent directors. Another example is the creation of committees to assist companies in audit functions, considered an obligation under the LMV for SABs. Both practices strengthen the corporate governance of companies, pursuing objectives of institutionalization and administration. The international ESG corporate governance standards reflect strict criteria by which companies must govern their conduct for the benefit of their shareholders and other stakeholders. Among the indices used to determine the degree of companies’ compliance with ESG criteria, and which investors evaluate, are: • The composition of the management bodies, taking into account aspects such as diversity and qualifications, as well as the independence of certain members; • Clear and effective compensation parameters for the members of the management bodies; • Implementation of codes of conduct for executives and suppliers; • Use of adequate risk management methods; • Integration of sustainability and social responsibility policies into the supply chain; • Management of clear and objective policies for the engagement of suppliers; and • Use of external auditors to verify financial information and significant risks specific to the company’s activity (e.g., money laundering prevention, information security and data privacy). Currently, Mexican legislation allows companies (including corporations and limited liability companies) a degree of self-regulation. That is, to adopt and incorporate into their bylaws and other internal regulations the corporate governance criteria they deem appropriate, including the responsibilities, compensation for compliance and consequences for non-compliance for their executives. Such parameters may be agreed upon by the shareholders, both at the time of their incorporation into the bylaws and through shareholders’ meeting resolutions. The implementation of corporate governance policies under the ESG framework entails multiple benefits for the companies that do so. To mention a few, it provides greater investment opportunities in certain financing schemes that consider following such policies a requirement; it positively impacts their reputation, thereby fostering a close and fruitful relationship with their shareholders, executives and other stakeholders, who feel secure in the management of the company; it generates greater competitive advantages by the manner in which decisions are made; and it helps achieve institutionalization, through internal controls in decision-making, that allows for better and more efficient management of their governing bodies, conflicts of interest and risk management. For this reason, although the regulation of corporate governance in Mexico is limited, today there is a clear trend and a genuine commitment among companies to adopt policies in this area, which undoubtedly paves the way toward better management of institutions that positively impacts all of their audiences. For further information on the subject of this note, please contact our experts: Luis Burgueño, Partner: +52 (55) 5258-1003 | lburgueno@vwys.com.mx Gloria Martínez, Counsel: +52 (55) 5258-1016 | gmartinez@vwys.com.mx Elías Jalife, Associate: +52 (55) 5258-1003 | ejalife@vwys.com.mx

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