In recent years, we have seen encouraging trends in the evolution of corporate governance standards and ESG disclosure across major emerging markets. How do these practices compare with those of developed countries? How do we integrate the emerging market specificities?
We see progress in independence and effectiveness of Boards of Directors at listed emerging market companies, but transparency and diversity still need an upgrade.
Listed emerging market companies have recently started to recognize the necessity of having independent oversight over the company’s management. 53% of the companies composing the MSCI© Emerging Markets index (MSCI© EM) have a Board of Directors with an independent majority[1]. Besides, most companies have separated the CEO and Chair of the Board of Directors roles - although most still lack a Board Chair that is independent of the company’s management or a lead independent director. Audit Committees, Nomination Committees and Remuneration Committees have also become a more frequent practice.
In terms of gender diversity, while women representation in top management has become standard, emerging market companies are clearly lagging European and North-American ones with respect to the presence of female directors in the Board.
Lastly, executive’s performance criteria and remuneration policies remain sort of taboo: only about 13% of the MSCI© EM companies implement regular Say-on-Pay vote at the shareholders meetings, compared to over 90% for MSCI© Europe and MSCI© US.
When it comes to emerging markets, there is no cookie-cutter approach.
Investors willing to understand and assess the quality of corporate governance in emerging markets should look beyond the companies’ formal governance structure and dive into companies’ individual corporate culture as well as the specific environment in which they operate. For example, companies with controlling shareholders (holding more than 30% shares of the companies) are a relatively common practice in India - think about Tata Consultancy or conglomerate Reliance Industries, or South Korea with large listed family groups. Such practices can be seen as a governance risk from the Western lens, potentially detrimental to transparency and causing conflicts of interest against minority shareholders’ best interests. Truth is that the nature of controlling shareholders also differs among countries; this is why we make sure to analyze each situation within its specific context.
In recent years, we have seen companies engaging more with investors on corporate governance topics. We always take these opportunities to gain better insights into our companies’ corporate culture as well as convey our positions on corporate governance best practices.
Regulatory constraint remains an effective lever.
Local corporate governance codes, whether voluntary or mandatory, are instrumental in ensuring minimum governance standards as well as protection for external investors. Their evolution over time raises the bar for companies to progress towards more transparency and better governance practices. Besides, regulators and stock exchanges in major emerging markets are increasingly paying attention to corporate sustainability - South Korea for example announced the introduction of mandatory ESG disclosure by listed companies.
What can be done at investor level?
As responsible investors, we have developed a corporate governance framework to collect information on companies. Given the nuances in corporate culture in different emerging markets, a tick-the-boxes analysis cannot fully capture the specific nature of corporate governance in each country. On top of applying our internal standardized framework, we analyze the quality of their governance with three keywords in mind:
- Accountability - Is the management sufficiently accountable to investors and other stakeholders?
- Integrity - Are there adequate measures to ensure corporate integrity and responsibility?
- Transparency - Does the company provide appropriate disclosure to external stakeholders?
With these guiding questions in mind, we can determine “no go” cases such as companies involved in serious controversies and not showing sufficient efforts to address our concerns.
Behind the curtain of a governance structure that seemingly checks all the boxes, may hide a lack of transparency or lack of engagement with investors. A thorough and differentiated analysis is the key to remain on the safe side.
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[1] Statistics obtained from MSCI ESG, January 2023 © MSCI. All rights reserved.