Trouble At LAN Airlines Highlights Broader Investment Risks In Chile

LAN aeroplane

Photo: mavalenzu via Wikimedia Commons

A year has passed since the devastating 8.8 magnitude earthquake that rocked Chile in February 2010. Far from collapsing under the weight of the global recession and earthquake recovery efforts, Chile’s economy has rebounded, growing at a brisk 4% rate in 2010. 

However, the country’s strong macroeconomic performance masks a number of serious micro issues, most notably weak governance at major publicly listed companies.  One major concern for investors is the prevalence of politically connected board members at companies that operate in heavily regulated sectors. 

Politically connected board members are seen as providing a boost to negotiations with government officials, but they can also draw public companies into the political fray, and might even raise a risk for politically-motivated investigations.

Chilean airline giant LAN Airlines has been in the news recently as Chile’s regulatory authorities have opened an investigation into anti-trust concerns related to the company’s proposed merger with Brazilian rival Tam S.A.  This week both companies’ shares fell to their lowest levels in at least seven months after a Chilean antitrust tribunal decided to proceed with a review of the LAN-Tam merger.  If approved, the combined company will be the largest airline in Latin America.

The investigation, however, highlights the complicated relationship between Chile’s business and political communities, and draws attention to a broader investment risks in Chile.
 
After all LAN was previously owned by Chilean billionaire Sebastian Piñera, who sold his stake in the company after being elected as Chile’s president in 2010.

 In general, Chile’s major companies are characterised by cozy relationships between board members and company owners.  At Chile’s 17 largest companies, only 25% of directors are “independent,” that is, free from ties to owners or management.  There are only two major Chilean companies that have majority independent boards of directors.  According to a recent study by GovernanceMetrics International (GMI), the New York City based corporate governance and Environmental, Social, and Governance research firm, Chile’s governance standards lag behind internationally recognised best practices.  In GMI’s global comparison, Chile comes in last place, behind countries such as Mexico, China, and South Korea.
 
This assessment of Chile’s corporate governance practices contrasts sharply with the country’s performance of other areas of political and economic governance.  Chile is regarded as having Latin America’s best economic management as well as the region’s best campaign finance transparency laws.  The country has established strict rules regarding corporate political donations, and has implemented strong mechanisms of oversight.   Overall, corruption and bribery are relatively rare in Chile.
 
However, Chile’s publicly listed companies that operate in regulated sectors have found that it pays to appoint politically connected board members.  In a country where corporate political donations are closely monitored, politically connected board members are seen as an asset for companies trying gain a competitive edge over their rivals.
 
During a recent interview, Marcelo Bucheli, co-author of a recently published paper on corporate governance in Chile, said “in Chile there is a revolving door between the private sector and government agencies.”
 
For example, the board of LAN Airlines, the company formerly owned by Chile’s current president, Sebastian Piñera, includes the Chairman of Codelco, Chile’s state-owned Copper Mining company.   Enersis, a major Chilean electricity company, appointed Chile’s former Central Bank chief as well as another former government minister to serve on its board.  Likewise, the board of Empresa Nacional de Electricidad S.A. (ENDESA) another major electric company, is chaired by a former government minister and also includes two other former senior government officials.
 
In 2011, Chile’s economy may continue to demonstrate impressive growth; investors, however, should still keep an eye out for possible governance risks, especially when it relates to politically connected board members at publicly listed companies.

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