Corporate Governance in Emerging Markets – from an investor perspective
Nordic investors tend to rely on fairness, democracy and rule of law in general in their daily lives. It is no surprise that this is reflected on how corporate governance mechanisms look in our listed companies as well as how investors look at governance risk in their portfolios. The discussions around Nordic corporate governance tend to revolve around the fiduciary duty related role of board members and for example, board and top management compensation.
This is natural. The majority of our institutional investors are state actors, pension funds, fund companies and other public entities making the corporate governance related risks public and mutual.
This is very different in emerging markets. Stock markets in Asia, for example, are dominated by private individuals and their families. Many companies list only a fraction of their outstanding shares to public markets leaving the control steadily to these families, the so called strategic investors.
From an investor perspective, analyzing corporate governance risks in this context is also very different. The softer factors, understanding the role of the strategic investors for example, can be much more decisive. Around 30% of the Asian companies have more than two family members in the top management board and more than 40% of the time, the strategic investor’s primary financial interest is not the listed company.
Given the prevalence, it is fair to assume that around one third of the time the key strategic decisions of the companies in your Asian portfolios are decided at secluded family dinners rather than at the board meetings and the annual general meetings.
Given the dominance of private families not only within the listed companies, but also within the market rule making bodies, corporate governance rules in Asia do not improve fast enough to cover all the related risks. While major stock exchanges in Singapore and Hong Kong have recently improved their transparency requirements for listed companies, most soft corporate governance related risks tend to fall out of the scope of these general requirements.
Corporate governance mechanisms are multifaceted everywhere. One needs to look at tens of different indicators in order to establish a true understanding whether a certain company has good enough corporate governance mechanism. There are plenty of methodologies to do that, but unfortunately they are time consuming for the practical purposes of private investors.
Given the time and restrictions on resources, as a bare minimum I would suggest to always look at the chairman of the audit committee. If he is not truly independent and does not have a professional background to run an effective audit committee, it is very likely that your corporate governance risks are materializing over dim sum rather than at the annual general meetings.