Why should investors care about corporate governance in emerging markets?
Emerging markets companies differ from those in developed countries because of the context in which they operate. Instability in government institutions and less strict regulations mean that EM companies are often less democratic and transparent in their ownership and management. Differing norms and lack of oversight can present new risks and challenges for investors seeking maximal returns and efficient use of their resources.
EM companies are particularly risk-prone in the following areas:
Ownership Structure and Stakeholder Rights: EM companies often have more concentrated ownership, comprised of either individuals, families, institutions, or governments. Although more concentrated ownership avoids the agency problems arising from the more diffuse ownership structures typical of developed markets, it creates different risks for minority shareholders. These risks include the pursuit of private gain by controlling shareholders and a disparity between economic stakes and voting rights.
Competence of Executive Management: Concentrated company ownership in EMs is often accompanied by a tight coupling between ownership and executive management, which can lead to the absence of meaningful board oversight. Management and boards might be selected without regard to competence. A lack of independent directors, succession planning, and compensation disclosure can signal unreliable or risk-prone executive management.
Disclosure and Transparency: In order to make informed investment decisions, minority shareholders need a clear and complete understanding of company finances, operations, and governance. With less strict regulation on the disclosure of both financial and non-financial information, it is often more difficult for investors to obtain critical information on companies in EMs. Risks include information asymmetry between controlling and minority shareholders, the usage of non-standard accounting principles, and the delayed disclosure of key corporate actions and deliberations.
What can investors do to promote stronger corporate governance?
We recommend the following strategies for investors to advocate for better governance practices:
Engage with management (preferably a specific director for investor outreach) to prompt disclosure of finances and operations.
Pursue clarification on ownership structure (particularly beneficial ownership), relationships with third-party affiliates, and the correspondence between economic stake and voting control.
If possible, establish a relationship agreement, whereby the controlling shareholder commits to promoting the interests of the company as a whole. This type of contract protects the rights of minority shareholders and creditors in areas such as the appointment of board members, approval of capital transactions, conflicts where controlling shareholder-appointed directors cannot vote, and related-party transactions involving the controlling shareholder.
- Encourage independent directors to have private meetings in order to scrutinize related-party transactions.
Exercise due voting rights
An independent valuation exercise can help protect voting rights by removing voting-rights differentials between share classes or consolidating share classes.
- If this is not possible, companies should at least guarantee tag-along rights to nonvoting shareholders.
Support lobbying and research for increased regulation and better practices
- Sign lobbying statements and engagement letters released by groups such as the Forum for Sustainable and Responsible Investment (US SIF).
Seek advice and training from initiatives provided by the Global Corporate Governance Forum, associated with the International Finance Corporation.
- Dallas, George. “Corporate Governance in Emerging Markets.” Accessed May 7, 2014.
- International Finance Competition. “Global Corporate Governance Forum.” Accessed May 7, 2014. https://www.ifc.org/wps/wcm/connect/171715ec-8cfe-43ea-8d2f-22785ce7d58f/Toolkit1.pdf?MOD=AJPERES&CVID=jtCvMNW
- The Organisation for Economic Co-Operation and Development. “OECD Principles of Corporate Governance.” Accessed May 6, 2014.
Simon Pickard chairs the Investment Committee and sits on the Advisory Board for UBP's Positive Impact equity funds, which invest in companies whose activities further the UN Sustainable Development Goals. He also acts as an independent consultant for these impact funds.
Previously, Simon co-managed the Unconstrained Emerging Equity strategy at Man GLG, having joined the firm in June 2015. Prior to that role, he was Head of Emerging Markets at Carmignac Gestion, running their large and mid-cap GEM funds from 2008 on after an initial five years covering Pan European equities.
His more than 20 years of equity investing also include four years with Jupiter and three years with Argos. Prior to his financial career he worked for four years in the shipping industry in Asia with Swire Group. Simon holds a history degree from Trinity College, Cambridge University and is a CFA charterholder.