corporativo: el desarrollo del mercado de capital Protection for investors and strengthening of corporate governance: The

Protection for investors and strengthening of corporate governance: The development of capital market

Jorge Luis Rodas

Lawyer

Sound institutions, well-functioning legal systems and well-implemented corporate governance are essential to attracting the general interest of investors because they provide the basis for protecting the rights of all investors and shareholders.

In recent years, some analyses have been carried out evaluating the impact corporate governance has on the value and performance of entities and businesses. Law and Economics scholars have debated on the fact that financial development not only requires protection for private property rights and that there is legal certainty for contract compliance but also that investors and shareholders can be protected against the exploitation of controlling administrators and shareholders.

Studies reflect a positive correlation between shareholder rights and economic development. It has been said that a legal order with welldefined and highly enforceable rules relating to the rights of shareholders reduces the cost of capital, especially because of the ease with which entities are able to access it. These studies help come to the conclusion that corporate governance, investor protection and institutionalism have a direct impact on the development of capital markets. As a result, several countries around the world have adopted modifications, reforms, and / or new regulations to strengthen shareholder rights.

The World Bank, through the Doing Business report, measures which regulations promote economic activity and which others restrict it. This report shows quantitative indicators related to corporate standards and investor and property rights protection. Comparing these regulations and their implementation in 189 jurisdictions has created a support tool for political actors, government entities and analysts to design and implement reforms with the aim of improving the business climate. This data also helps investors when analyzing risks when

they place or invest capital. The results rank Guatemala below the average of Latin American and Caribbean countries.

Guatemala currently has an adequate and well-developed regulatory framework, but it has aspects that need to be improved. The Commercial Code and the Securities and Merchandise Market Act are the main legislative sources regulating aspects of corporate law, stock markets and shareholder rights. Even if the current legislation is considered to have sufficient elements that have been elementary in recent years, it should be noted that we have an underdeveloped capital market. The National Stock Exchange has registered 17 issuing entities and 17 agents on the stock market, unlike other countries such as Mexico or Colombia where the capital market has been used by a large number of companies to grow and develop. It is interesting to note that these economies have implemented legislative reforms and focused on strengthening investor protection. Whether necessary reforms are made to modernize our corporate and stock market system, we must understand that capital markets need to be developed.

Since emerging economies are expected to grow strongly over the next decade, the development of capital markets is necessary to finance growth and ensure the competitiveness of these economies globally. According to the World Economic Forum3 there are many challenges and priorities to promote development in local markets in countries. One of the identified challenges is the necessary implementation of sound and stable regulatory and legal frameworks, as an essential aspect to bring trust to the market and its participants. Sound institutions, well-functioning legal systems and well-implemented corporate governance are essential to attracting the general interest of investors because they provide the basis for protecting the rights of all investors and shareholders.

In conclusion, the quality of corporate governance and protection for investors can enhance the value of entities, reducing the agency cost and above all reducing the cost of capital. All of this directly affects the capital markets development and hence, it has an impact on the financial development of the country. The protection for investors and shareholders is inclusive but is not limited to the written law, it is also very important to enforce it through an effective judiciary system. When investors are protected, an opportunity opens for the country and companies to have more access to capital, which is necessary to grow, innovate and compete.

Source: 1 Rafael La Porta, Florencio Lopez de Silanes, and Andrei Shleifer, The Economic Consequences of Legal Origins, Journal of Economic Literature, Vol. 46:2, pp. 285-332, 2008 2 Edward L. Glaeser and Andrei Shleifer, Legal Origins, The Quarterly Journal of Economics, Vol. 117, No. 4, pp. 1193-1229, Oxford University Press, 2002 3 "Accelerating Capital Markets Development in Emerging Economies." World Economic Forum. http://www3.weforum.org/docs/WEF_accelerating-capital-marketsdevelopment-in-emerging-economies.pdf.