View more on these topics

Culture of change

Corporate governance is an important yardstick for assessing emerging market companies.

Whether a company is an Armenian yogurt manufacturer or a big technology firm in Germany, corporate governance is a universal concept. But corporate governance practices in the emerging markets have long been viewed as far less rigorous and transparent than in developed markets.

Things are changing. Corporate governance in the developing world has improved and continues to evolve. This is good news for investors as it is an important yardstick for assessing a company’s fundamentals and unique risks.

The following are key characteristics that we believe should be present.

– Adequate legal system.

– Accounting transparency.

– Appropriate compensation to ensure that incentives for the company’s management are aligned with the interests of all stakeholders.

– Minority shareholder protection.

These are the most desirable guidelines for corporate governance but there are a number of areas where emerging markets companies often struggle. Emerging economies often have less well developed legal systems, yet clear and enforceable corporate laws should benefit companies in a developing economy.

Accounting transparency, while improving, is still rather poor across the developing world. Since valuations are still relatively low, aggressive raiders can threaten weak minority shareholder rights. This can lead to greater control for majority shareholders and the potential for abuse owing to limited minority shareholder protection.

Corporate governance as a matter of policy was all but absent in the developing world until the financial crises in Latin America, the Far East and Russia in the mid to late 1990s, leading to seven years of famine for emerging market investors.

The Organisation of Economic Co-operation and Development has identified a number of factors critical to the long-term development of emerging economies. One is the transition from relationship-based to rule-based governance.

In many emerging market countries, wealthy individuals or families may own controlling interests in one or more big companies. In some instances, this may take the form of a pyramidal business group where those one or two companies have controlling interests in many more companies, each of which has controlling interests in even more companies. An individual, a family or several families could effectively exercise control over a significant portion of an emerging country’s economy, leaving companies vulnerable to problems of abuse.

Catalysts for change in corporate governance standards can come from many sources – government-led legislation, as a takeover defence, because of pressure from institutional investors, or even public opinion (witness the Thai people’s outcry over then prime minister Thaksin Shinawatra’s tax-free sale of Shinawatra to Singapore Telecom).

Today, there are many incentives for an emerging markets company to adopt a more transparent corporate structure. Additionally, as an emerging country adopts more market-friendly economic policies, it can effectively institutionalise the formal and informal rules and guidelines comprising corporate governance policy.

There are a number of things to look for if trying to identify when corporate governance is inadequate or failing. Rarely part of the investment process, these issues can materially affect company performance. Asset transfers by government-controlled or family-controlled companies are a red flag issue as these have often been conducted at arbitrary levels. Excessive management contracts and non-aligned incentives, including big cash bonuses, all detract from the potential performance of a stock.

Governance is a sector and company-specific issue and must be addressed on a company-by-company basis.

James Donald is portfolio manager for emerging markets at Lazard Asset Management.


Victims’ victory could be overturned by MPs

Pension victims who lost their savings when company schemes collapsed won a victory in the House of Lords last week but the amendment may still be defeated in the Commons.The Government was defeated by 55 votes – 181 to 126 – when peers backed proposals for a lifeboat fund to top up compensation awarded to […]

Industry tax contributes equivalent of 36 hospitals or 600 academies a year

The financial service industry pumps enough into the UK economy each year to build 36 new hospitals or 600 city academies, according to reach from the British Bankers’ Association.In the first of a series of analysis reports on the financial sector, the BBA found the financial services industry makes a £50bn contribution to the UK […]

Edeus announces Deutsche Bank funding deal

Edeus has announced a deal with Deutsche Bank that will give them access to £500m via a Deutsche Bank warehouse funding line, allowing the diversification of its funding base and an increase in liquidity.Edeus chief financial officer Ian Lonergan says: ‘This is great news for Edeus as it allows us greater choice and flexibility in […]

Pru extends discount concept

Prudential is to extend the concept of discounted premiums for healthy living to its flexible protection product.The discounts will be offered to PruHealth policyholders who can already benefit from the firm’s Vitality proposition. The enhanced FPP will start in September.The move is part of the planned integration of PruHealth and Pru’s protection proposition which will […]

Five ways to invest in the connected world

Smart utility metering; fitness trackers; connected cars; smart factories; precision agriculture: the internet of things encompasses myriad applications. But how do you gain exposure – and profit – from this growing trend, asks Neptune fund manager & CTO Ali Unwin. Read more: Important information Investment risks Neptune funds may have a high historic volatility rating […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm