Peru: Capital goods sector looks to CG

Ferreyros is a Peruvian company founded in 1922 and has been a Caterpillar dealer in Peru since 1942, being today the leading distributor of capital goods in the country. It serves key economic sectors such as mining and construction, and along with the country, has grown significantly in recent years, tripling its size in revenues in the last four years to show revenues of $1bn in 2010.

During 2010 Ferreyros acquired the Caterpillar dealerships in Guatemala, El Salvador and Belize after receiving an invitation from Caterpillar to service its brand in new territory.

In the last few years the corporation’s activities have been related to the development of important mining, construction and hydroelectric projects. It employs more than 4,000 people, including Ferreyros and its subsidiaries in Peru and subsidiaries in Central America, all of them linked to the capital goods business, which consists not only of selling machinery but also providing value added services to its customers.

After registering its stocks in the Lima Stock Exchange (BVL) in 1971, the shareholders decided to attract new investors committed to the company’s future and growth. Therefore the company changed its nature, going from a family owned company to a public company. Today there are more than 1,500 shareholders.

In 1994 Ferreyros decided that the capital market should become one of its key funding sources and placed its first issuance of corporate bonds for $5m with a two year maturity. Today, after 25 years it has placed more than $250m in corporate bonds. Responding to the growth experienced, in 1997 the company successfully placed shares locally and abroad, increasing its net worth by $22m.

Today, after the issuance of corporate bonds, securitisation bonds, commercial papers and new shares Ferreyros is recognised as an important player in the Peruvian stock exchange and is well known by investors.

Ferreyros understood the value of good corporate governance practices implementation from the beginning.

Although at that time the company did not use the term ‘corporate governance,’ its performance had always been lead by ethical principles gathered today in the corporate governance concept. In order to attract investors and differentiate itself from other companies participating in the capital markets, it was important to constantly adopt changes that ensure transparency, equitable treatment of shareholders and efficiency in its operations.

This ongoing commitment to continuous improvement was possible because members of the board and top management have always been clear on the role of corporate governance.

In 2001, Ferreyros joined an association with other firms interested in good corporate governance practice. Each company in the group was asked to complete a governance self-assessment questionnaire looking at several areas: transparency of ownership, financial transparency, board structure and procedures and shareholder relations. The company scored well on the assessment and the leaders used the results as a starting point to implement improvements in some of its governance processes.

In 2006 Ferreyros participated in a corporate governance contest organised by Procapitales (a private association of key players in local capital markets that actively promotes best corporate governance practices) and Universidad Peruana de Ciencias Aplicadas. This contest required the presentation of information related to shareholder treatment, board practices including independent directors, board committees, transparency of information, management structure and risk administration, and finally relations with internal and external stakeholders.

The completion of the required information helped the company to again assess its current status and determine more positive changes to be implemented in the future. Ferreyros participated in the contest with both the desire to be recognised as a leader in the field, considering that at the end investors will pay back for good corporate governance practices, and secondly to receive a feedback from the organisers on its practices.

Ferreyros obtained different awards in every edition of this contest: in 2006 the Shareholder Rights prize, in 2007 the award for Best Annual Progress in Corporate Governance, in 2008 the awards for Shareholder Rights and Best Board of Directors Practices and in 2010 it again received the prize for Shareholder Rights (there was no 2009 contest).

However, Ferreyros was aware that its endeavours in good corporate governance matters should continue and even go beyond the frontiers of Peru. That is why in 2006 it joined the Companies Circle of the Latin American Corporate Governance Roundtable. The Companies Circle was launched in 2005 by the Organisation for Economic Cooperation and Development (OECD) and the International Finance Corporation (IFC) along with eight founder members. Composed of 20 Latin American companies that lead in good corporate governance practice, the circle seeks to: (i) be a forum for the discussion of the challenges and achievements reached in the improvement of corporate governance, (ii) share practical solutions to corporate governance challenges to the Latin American business community, and (iii) contribute to the work of the Latin American Corporate Governance Roundtable by offering the vision and experience of companies that have already undergone a number of reforms.

Ferreyros has been part of the Corporate Governance Index of the Lima Stock Exchange since the index was established in 2008. Just 10 Peruvian companies are listed in this index, after the validation of the questionnaire of the 26 corporate governance principles that each company published in its annual report.

Among other subjects, these principles include protecting shareholders’ rights (including equitable treatment of minority and foreign investors), providing appropriate disclosure of the company’s outstanding concerns (including the financial situation, performance, risks and shareholding), and the responsibilities of the board of directors to the shareholders.

According to literature on the subject, the improvement in corporate governance can be driven by the following motivating factors:
1. Ensuring company sustainability and commercial strategy
2. Improving institutionalisation process to ensure less dependence on specific people to run the business
3. Increasing market value and attracting new investors
4. Increasing share liquidity
5. Achieving better operational results and improving business processes
6. Confidence in carrying out mergers and acquisitions because of standards of transparency
Ferreyros’ efforts to maintain good corporate governance have brought many benefits, including better investor confidence and recognition from stakeholders, including local and international institutions.