Ferreyros: Bringing good corporate governance to Peru

Ferreyros, the largest distributor of capital goods in Peru, has not only strived to maintain a high compliance with the principles of good corporate governance, but has also contributed to their dissemination throughout the market

 
 

Ferreyros believes in good corporate governance practices and regularly participates in events that allow it to share its own experiences. The aim is to motivate other companies to continue working on the application of these principles that in turn will contribute to the development and growth of Peru. Concepts such as corporate governance are becoming more important in the business environment. The term refers to the system by which a company is operated and controlled in the development of its economic activities.

It is focused on the rights and responsibilities that each member of the organisation must assume and the rules to be followed in the decision-making process.

Furthermore, the corporate governance concept includes all those formal and informal practices that establish the relationships between the board of directors – who define the goals of the business; the management members – who run and operate the business; and the shareholders – who invest in the company. The purpose of these actors is to obtain greater corporate transparency, which implies more information, accessibility, circulation of information and the active participation by all those involved.

Time-proven values
With a history spanning 90 years, the Ferreyros Group stands out in Peru and abroad for its good corporate governance and social responsibility practices, which have been recognised on several occasions. Since their 2002 annual report statement, the company has decided to integrate the concept of corporate governance into everyday activity, with the commitment to making it a central part of their business principles.

Transparency, fairness and integrity are some fundamental values of the company, which are also reflected in the principles of corporate governance that have contributed to strengthen its international reputation with customers, suppliers and local and regional investors. This is the distinguishing feature of the company in relation to its competitors in the Peruvian market.

Furthermore, the continuous improvement of the organisation has been made possible by the members of the board of directors and senior management who have always been clear about the role that corporate governance plays within a company and the benefits it brings about. That is why they have promoted and developed exemplary corporate practices, such as equal treatment of shareholders; adequate and timely submission of all relevant matters, including the company’s financial position, performance, risks and share ownership; and compliance with the strategic guidance of the company, through monitoring and self-assessment of the board and the responsibilities they assume before the shareholders.

However, the company acknowledges that there are aspects of management that can still be improved. Under this premise, several improvements in its processes have been made in recent years, in a completely voluntary manner and as a consequence of their own decisions. For example, Ferreyros has increased the number of independent directors – to add value with their experiences and perspectives – and has also created internal committees of the board and modified the by-laws of the company in order to meet better practices.

90 years of commitment to Peru
Ferreyros, a Peruvian company founded in 1922, has as its main business the trade of capital goods and services. It began its activities as a family business, and to date has established itself as one of the top companies in the country. It has been the sole distributor of Caterpillar and other prestigious global brands in Peru since 1942. As a result, it offers its customers a complete range of goods and related services, concentrated in key economic sectors such as mining, energy, construction, transport, agriculture and fishing, among others.

The company maintains its strategy to hold leadership in its operating markets in order to achieve significant increases in both revenue and profitability for its shareholders. The company’s identification with the country’s development is manifested through its presence in more than 60 locations (network of branches and service points in the various mining and construction sites) in response to its proposal to adjust its investments to the needs of its customers.

In 2010 the company entered the international market, with the acquisition of Caterpillar sales representative firms in three Central American countries: Guatemala, Salvador and Belize. Thanks to the experience gained in two years of operations, the company is confident that the factors that have yielded success in Peru will translate into these new territories, which are still far from the development achieved by Peru in the last decade.

It is important to point out that Ferreyros and its subsidiaries have experienced an impressive growth of 300 percent over the past six years, ending 2011 with sales of over $1.4bn – a record for the company. This increase is the result of an ambitious growth strategy and the consolidation of a larger portfolio of products and services.

Customer-focused company
It is noteworthy that Ferreyros’ value proposal is to provide its clients with high quality products and excellent customer service as part of the acquired world-class capabilities that enables it to maintain leadership in the markets in which it operates. In addition, the company invests significant amounts to improve its management skills and thereby achieve a “unique after-market service.” Based on its strategic objectives, the company dedicates careful attention to human resource development and recruitment, both in Peru and Central America. Currently, the entire organisation (Ferreyros and its subsidiaries) is made up of more than 4,500 employees.

One must also note Ferreyros’ advantages over other competing brands, such as its 27 workshops of cutting-edge technology throughout Peru; its inventory of parts and components worth more than $120m at market value; and its rental fleet of more than 400 machines and certified used equipment sales. It is also important to emphasise the training that Ferreyros provides to its technicians – as well as to its clients’ technicians.

Another aspect that characterises the company is the financial services it provides to its clients, which range from offering direct loans to pay for the equipment they purchase, to the design of financing programmes through banks – in particular from Caterpillar Financial Services, the financial arm of Caterpillar. Being a company that purchases all of its products from abroad, Ferreyros has developed an efficient supply chain to respond promptly and effectively to its customers, with unique geographic coverage in the country that complements the above capabilities.

As a result of its impressive growth and its goal of maintaining leadership in its field, the organisation has appropriate sources of financing to obtain resources that enable them to carry out the acquisition of inventories and fixed assets. In that sense, Ferreyros has been able to maintain its activities through reinvestment of profits and varied sources of funding, starting with the traditional systems of local and foreign banks, as well as organisations such as Caterpillar Financial Services, especially in Peruvian capital markets. Regarding this last point, which is closely related to the topic of corporate governance, it is important to note that Ferreyros’ shares have been traded on the Stock Exchange of Lima since the 1960s.

Continuous improvement
To date, the company currently has more than 2,500 shareholders, being a publicly-owned entity and having a significant percentage of its shareholding held by Peruvian pension fund management companies. Another relevant issue related to capital markets is the active participation of Ferreyros, since the 1990s, in the issuance of debt instruments, having at the moment a programme of existing instruments representing debts, which is the company’s main source of funding to obtain better costs.

Ferreyros’ board of directors and management strongly believe that good corporate governance practices are the answer to the company’s access to various forms of financing and reinvestment of profits. In the case of companies listed on a stock exchange, it is essential to continue improvement in this area in order to retain existing shareholders and to attract new investors. The company is also committed to improving its governance to build trust in minority and foreign shareholders, assuring them that their rights will be duly respected and protected through equitable treatment over the controlling shareholders.

The more active the exchange of the company’s shares in the stock market is – thanks to the measures that privilege their free-trading – the easier it is for minority shareholders to increase and decrease their stake in the company. In addition, it is estimated that with greater liquidity, an appreciation of the stock is maintained. Ferreyros is one of the pioneers of this matter in the Peru. These commitments to continuous improvement are possible because the members of the board and senior management clearly understand the role of corporate governance in the company and its motivating factors such as:
– ensuring company sustainability;
– improving professionalism to achieve lesser dependence on specific individuals to run the company;
– increasing market value, attracting new investors and increasing stock liquidity;
– building confidence in mergers and acquisitions (M&A) processes through standards of transparency;
– reducing the cost of capital.

Good practices
Good corporate governance seeks to contribute to the competitiveness of enterprises through the promotion of good practices, both individually and at sectoral and macroeconomic levels. Work in this area enables the company to improve risk management and the availability and conditions for obtaining financial resources, as they have lower monitoring costs and lower risks associated with its management. It also allows the establishment of resolutions for better conditions and longer terms with other stakeholders by having a counterpart that offers greater transparency and a better focus on value creation.

At an aggregated level, the adoption of good corporate governance practices supports the institutional development of the financial system and that of the stock market. In this environment, companies with high governance standards have a competitive advantage over others, being rewarded by the market with a greater interest in their instruments, thus showing a high demand for their shares and bonds, with better stock prices and attractive interest rates, among other benefits.

Experienced business leaders point to the need of having access to capital and improving a company’s image before its various interest groups as primary reasons for initiating improvements in corporate governance practices. In fact, companies with proven corporate governance practices have had access to external capital and saw a reduction in the cost of capital.

In many cases, the initial capital contributed by the founders of the company and the capitalisation of profits are sufficient to start the business and finance some expansion. However, the company’s success is tied to its ability to sustain growth and rely on outside sources of financing for this purpose, and its ability to actively participate in the capital market to achieve greater capital costs.

This has been understood by the different agencies related to the capital market in Peru. Such is the case of the Superintendency of the Stock Market (Superintendencia de Mercado de Valores), which is responsible for regulating corporate governance activities, through the Code of Corporate Governance (Código de Gobierno Corporativo) for Peruvian companies and the implementation of a corporate governance principles self-assessment questionnaire. Also, the Lima Stock Exchange (Bolsa de Valores de Lima – BVL) promotes good corporate governance practices through the creation of the Good Corporate Governance Index of Peru, which comprises 10 issuing companies recognised for their work in this area, including Ferreyros.

Dedicated to shareholders
Indeed, the leading capital goods company received special awards in two events during the four years of its term in this index. These awards were granted after a thorough validation process performed by a consulting firm qualified by the BVL, based on the self-assessment that Ferreyros presented in its annual report about its corporate governance practices. Such validation confirmed that the company had complied 100 percent with the principles in this field. Also, the liquidity of the firm’s stock was considered.

On the other hand, major organisations such as Procapitales consider Ferreyros a benchmark in the field, which is why it has been a member of its Good Corporate Governance Committee for several years and has won major awards in all the editions of the contest organised by this entity. At an international level, Ferreyros has participated in the Companies Circle of the Latin American Corporate Governance Roundtable since mid-2006. The Companies Circle, an initiative that was launched in 2005 by the OECD and IFC, seeks to strengthen policies and good practices of corporate governance in Latin America.

The 19 Latin American companies that comprise the Companies Circle are leaders in the implementation of good governance practices in Latin America, and assist each other in order to promote better practice in the region through a better understanding of the meaning of corporate governance. They also seek to share life experiences, as they are recognised as a group of experts with an extensive knowledge of – and a vast experience in – corporate governance practices in Latin America, in addition to informing the international community about national and regional reform initiatives.

The goals of the Companies Circle are to be a forum where members can discuss the challenges and achievements in improving their corporate governance; to share practical solutions found to deal with challenges in this field with the Latin American business community; and to contribute to the work of the Latin American Corporate Governance Roundtable with the vision and experience of companies who have undergone a high degree of reforms.

Ferreyros considers that its task in terms of good corporate governance must continue and, therefore, has committed to keep on being a leader in this field, within the country and throughout the region.