Investor Protection and Strengthening Corporate Governance: The Development of the Capital Market

Over the past few years, various studies have evaluated the impact of corporate governance on the value and performance of entities and businesses. Legal scholars and economists have generated a debate emphasizing that financial development requires not only the protection of private property rights and legal certainty for contract enforcement but also the protection of investors and shareholders from exploitation by managers and controlling shareholders.

Studies show a positive correlation between shareholder rights and economic development. It has been argued that a legal framework with well-defined and highly enforced shareholder rights reduces the cost of capital, particularly by making it easier for entities to access it. These studies conclude that corporate governance, investor protection, and institutional strength directly impact the development of capital markets. Consequently, several countries worldwide have adopted reforms and new regulations to strengthen shareholder rights.

The World Bank’s Doing Business report measures how regulations encourage or restrict economic activity. This report provides quantitative indicators related to corporate norms, investor protection, and property rights. By comparing these regulations and their implementation across 189 jurisdictions, the report serves as a tool for policymakers, government entities, and analysts to design and implement reforms to improve the business climate. This data also assists investors in analyzing risks when allocating or investing capital. The results place Guatemala below the average of Latin American and Caribbean countries.

Currently, Guatemala has an adequate and well-developed regulatory framework but still has areas for improvement. The Commercial Code and the Securities and Commodities Market Law are the primary legislative sources regulating corporate law, stock markets, and shareholder rights. While the current regulations contain sufficient elements that have been essential in recent years, it is worth noting that Guatemala has an underdeveloped capital market. The National Stock Exchange lists 17 issuers and 17 agents in the securities market. This contrasts with countries like Mexico or Colombia, where the capital market has been widely utilized by numerous companies for growth and development. These economies have implemented legislative reforms and focused on strengthening investor protection. Regardless of whether Guatemala undertakes necessary reforms to modernize its corporate and securities systems, the need for capital market development is evident.

As emerging economies are projected to grow significantly over the next decade, developing capital markets is essential to finance this growth and ensure global competitiveness. According to the World Economic Forum, there are many challenges and priorities for promoting development in local markets. One key challenge is the implementation of solid and stable regulatory and legal frameworks to provide confidence to the market and its participants. Strong institutions, well-functioning legal systems, and well-implemented corporate governance are fundamental to attracting widespread investor interest. These elements provide the foundation for protecting the rights of all investors and shareholders.

In conclusion, the quality of corporate governance and investor protection can increase the value of entities, reduce agency costs, and most importantly, lower the cost of capital. This directly impacts capital market development and, consequently, the country’s financial growth. Shareholder and investor protection extends beyond what is stipulated in the law; it also depends on effective judicial enforcement. When investors are protected, it creates opportunities for the country and its companies to access more capital, which is essential for growth, innovation, and competitiveness.

Jorge Luis Rodas

Lawyer and Notary | Founding Partner NexusLegal