East Capital, the specialist asset management firm focusing on developing markets, has just published a white paper entitled "Navigating Emerging and Frontier Markets with Corporate Governance" which is a good source of information for directors operating in these fast growing markets.
East Capital is sympathetic to the view that the valuation gap in emerging markets (versus more developed markets) such as Russia and Turkey are due, at least in part, to perceived greater investment risks, which may be explained by higher governance uncertainties.
Reducing these uncertainties can have a positive impact upon investment valuation. The paper presents four major forces contributing to the development of higher corporate governance standards in emerging and frontier markets today:
Reducing these uncertainties can have a positive impact upon investment valuation. The paper presents four major forces contributing to the development of higher corporate governance standards in emerging and frontier markets today:
- Active investor engagement at EGMs and AGMs producing a monitoring effect upon firms and executive management teams,
- A free and independent media which keeps the general public and investment community aware of corporate developments,
- Peer pressure at a local and global level of business, and
- Positive inducement from governance sector initatives, associations, and international institutions including the IMF and OECD, to name just a few.
The article also argues that ownerhship structure and board composition are the key corporate governance considerations in emerging and frontier markets which can impact "... all other governance related risks and opportunities". East Capital provides an interesting case study on the increasingly active role Fondul Proprietatea, a government organised restitution fund set up in 2005 and now managed by Franklin Templeton. The case study notes key actions taken by the investment manager include requesting improved corporate governance processes, seeking representation on portfolio companies boards, measures to increase transparency, introducing specialist expertise and financing, and supporting management during IPOs.
It also puts forward actions for improvements in the developing markets, including:
- strengthening minority interests including legal protections,
- introducing clear codes for corporate governance, based on international standards, and
- recruiting of professional management team and board members, notably in SOEs.
The East Coast website and this white paper can be found at the below link: http://www.eastcapital.com/Documents/White_Paper-Corporate_Governance_September_2014.pdf
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