By: Antoine del Sordo
For the purpose of this Article, “Short-termism” can be defined as the excessive focus of the companies' on short-term quarterly earnings and a lack of attention to long-term value creation' 1 . Usually Short-term strategies are based on accounting driven metrics imposed by institutional investors that generate that consequently the board and officers of companies focus more on short-horizon investments and immediate objectives, such as an instant high in the stock price of the company, at the cost of long-term investments which could lead to more outstanding results for the company in the future 2 . This problem is exacerbated, among other reasons, because the members of the board and officers of the company are aware of the fact that in a near future they may not be part of the company to benefit from long-term projects, which generates a lack of linkage with long-term goals and strategies 3 . As a response, measures such as the appointment of independent directors seek to avoid the effects of short-termism.
Pursuant to the current trend, the importance of appointing independent directors lies in the fact that they are responsible for scrutinizing the performance, both of the board as a body and of each of its members individually, of the long-term performance objectives of the company. 4A task that if having been diligently carried out prior to the financial crisis of 2008, probably would have contributed to identify many of the unsafe practices carried out by board members and officers of financial institutions, based on short-term goals that did not consider the long-term financial stability of the institutions. Therefore, since the financial crisis, mainly in the US and the UK, there has been an increasing tendency to incorporate independent directors, particularly among enterprises listed at the top of the S&P 500 and FTSE 150 indexes.
In Mexico, the Securities Market Law (‘SML’) provides specific regulations regarding the composition and structure of the board of directors applicable to companies listed in the Mexican stock exchange market or incorporated as a public stock corporation, which include provisions concerning the appointment of independent directors. The SML limits the number of members of the board to 21 and mandates that at least 25% of them must be independent. 5
As it may be deducted from the law itself, the SML prioritizes non-independent directors over independent directors 6, following the reasoning that despite the size of the board of directors, if 25% of the members are independent, the company fulfilled the legal requirements in that respect. To qualify as independent, the SML provides that the directors must not have any conflict of interest (personal or economic) that could affect their judgment or acting, itemizing situations where the law considers that a person is unable to be appointed as an independent director 7.
Another particularity of the Mexican legislation is that the monitory function, which in other jurisdictions such as the US and the UK is relied upon the independent directors, legally in Mexico rests in all the directors (independent and non-independent). 8 The foregoing implies that in addition to the fact that the board supervises the lower-ranking officials of the company, the board members themselves also supervise the actions of their peers. However, from a merely legal perspective, it is not entirely clear how such peer supervision would operate besides the legal actions to claim liability initiated by shareholders against the board of directors or one of its members in case of fraudulent or negligent conduct.
On the other hand, the SML is silent regarding the appointment of independent directors to avoid short-termism specifically, and even commentators in Mexico have not elaborated much in that respect. However, soft law instruments such as the Best Corporate Practices Code (‘BCPC’) [“Código de Mejores Prácticas Corporativas”] issued by the Business Coordinating Council of Mexico [“Consejo Coordinador Empresarial”], which is a private organization that represents the private sector and groups more than two thousand companies that contribute to around 80% of Mexico’s GDP, 9allocates particular emphasis on the importance that the board of directors manages the company with a long-term vision, recommending that at least the board meets once a year to define and update the long-term strategy to secure the stability and permanence in time of the company 10. Such code also instructs the independent directors to particularly monitor that the shareholders’ interest reflected in the company’s long-term goals and strategy is followed. 11.
Nevertheless, the weak point in Mexico’s approach to avoiding short-termism through the appointment of independent directors, relies upon the fact that hard-law provisions in force do not provide the duties that independent directors shall perform, and consider that both independent and non-independent directors shall carry out the same function, being the latter primary input bringing to the board the external point of view to the company. On the other hand, although the BCPC responds to the current trend, recognizing short-termism as a problem that companies must face, and the appointment of independent directors as a measure to avoid it, the lack of enforceability causes a low level of adherence and compliance, so the impact is still limited.
1 CFMI 'Breaking the Short-Term Cycle' (2006) accessed March 26, 2023.
2 Razeen Sappideen, Focusing on corporate short-termism (2011, Singapore Journal of Legal Studies) 415.
3 CFMI (n 1)
4 Section 13 of the UK Corporate Governance Code published in 2018.
5 Article 23 of the SML.
6 Article 24 of the SML
7 Article 26 of the SML.
8 Articles 28 and 30 of the SML.
9 CCE, accessed March 27, 2023.
10 Practice 49 of the BCPC.
11 Practice 12 of the BCPC.
