Question

Buenaventura

Growth is more than merely one part of the mission and vision of Buenaventura – the leading mining company in Peru and one of the largest gold and silver producers in the world. It is the company’s daily mantra. Operating in a capital-intensive industry and in a geographic environment not as welcoming to investments as it should be, the company has to be persistent to maintain the degree of success it has achieved over the years. Joint ventures, offerings through the Lima Stock Exchange, and American Depositary Receipts (ADR) issuance on the New York Stock Exchange (NYSE) were all means to achieve the company’s goal of continued growth. But when it came to creating long-term sustainable shareholder value, there was only one way to do it: by enhancing governance practices.

The Roots of the Need for Governance

Buenaventura has focused on exploration and acquisitions, both on its own and through joint ventures, since its founding in 1953. For Buenaventura, conducting business responsibly and effectively is part of its strategy to increase shareholder value. Buenaventura suffered several years of losses that ultimately led to a high level of debt amid Peru’s weak economic environment during the 1980s. In the early 1990s, however, Peru emerged into a period of greater stability, allowing Buenaventura to plan for a more promising future. When the company decided to invest in Yanacocha, now a world class gold deposit, Buenaventura faced high-cost exploration and development investments.

Convinced that the market pays for good corporate governance practices, Buenaventura chose to cancel its debt with the proceeds of an initial public offering (IPO) of ADRs on the NYSE in 1996. The decision reflected Buenaventura’s Board of Directors’ and management’s commitment to comply with United States Securities & Exchange Commission (SEC).regulations. Prior to the IPO, the company took several critical steps toward improving its governance: revamping its Board of Directors, incorporating independent members and establishing Board Committees; implementing an Ethics Code; creating a Disclosure Committee; and finally, eliminating its dual class share structure and converting all its shares into a single class, with equal voting rights.

         Corporate Governance Steps

Buenaventura has implemented a comprehensive set of rules to ensure good governance. The reforms were inspired by the recommendations of major international organizations, such as the OECD and the World Bank/IFC. The decision to convert all shares into a single class of common shares served to keep the controlling group together, and was also considered the best way to continue to maximize the value of the company. The stock’s liquidity was bolstered as a result, as investors responded positively to the single voting class of shares. In the event of a tender offer, the Board must review the proposal and make its recommendation all shareholders, who in turn make their own decisions on whether to accept the offer. Buenaventura takes voting rights seriously. To facilitate the participation of all shareholders in General Meetings, the company calls Meetings 25 days in advance and provides shareholders the Meeting’s agenda. ADR holders receive proxies through the depositary bank and special procedures have been put in place to ensure that ADR holders have sufficient time to consider how to vote and that their votes are duly represented at General Meetings.

         Results

Buenaventura recognizes that it must continue to improve its governance framework as it strives to maximize shareholder value. Its governance improvements are clearly recognized by the market, as demonstrated by its three-fold increase in market capitalization, from around US$ 400 million to US$ 3.6 billion. The company reported net revenue of US$ 316 million in 2004, generating operating income of US$ 86.6 million in that year. Today, Buenaventura is working on complying with the Sarbanes-Oxley requirements. The company expects to be certified by external auditors as Sarbanes-Oxley compliant in June 2006.

Critically evaluate how Buenaventura achieves success through corporate governance. Provide justifications within the case study.

Imagine that you have been appointed as the CEO of Buenaventura. Discuss how you would strengthen the corporate governance using BRC Model.

Answer 1

Steps to be taken to Strenghten the Corporate Governance:

A reasonable person would not expect the information to be disclosed

A reasonable person would not expect information to be disclosed if the result would be to cause unreasonable prejudice to the entity.

Similarly, a reasonable person would not expect disclosures of an inordinate amount of detail. Confidentiality requires that the information that is not to be disclosed be confidential.

Confidential in this context has the sense of secret, and generally implies control by BRC of the use that can be made of the information. The mere fact that a confidentiality agreement has been entered into will not automatically satisfy this element. Confidential means that no one in possession of the information is entitled to trade in BRC’s shares.

Unusual activity in BRC’s shares may suggest that the information is no longer confidential. The ASX accepts that confidentiality is not breached if information is given to BRC’s advisers, a person with whom BRC is negotiating, or other regulatory authorities, if it is given on a basis which restricts its use to the stated purpose.

It would be a breach of the law to disclose the information. The information concerns an incomplete proposal or negotiation. The information comprises matters of supposition, or is insufficiently definite to warrant disclosure. The information is generated for internal management purposes of BRC. The information is a trade secret. BRC’s Policy All share price sensitive information will be released to the market as soon as practicable. Executive directors will discuss corporate developments and ensure that the market is fully informed. Any significant matters that arise from which questions on whether or when disclosure to the ASX should be made are to be considered by the executive directors, the Chairman of the Audit and Risk management Committee and the Company Secretary.