Good Corporate Governance’s Praise Premium
The IMF’s October Global Financial Stability Report lauded stronger emerging economy corporate governance and investor protection practices in recent decades, as illustrated in country legislation and new firm-level indices to support the analysis. Better frameworks enhance stock market efficiency and shock resilience, and firm balance sheets show lower debt and default ratios, but disclosure, independence and minority rights progress continue to lag global norms. The review cites historical episodes where poor treatment differentiated performance, including the 1990 Asian financial crisis, the 2013 US Federal Reserve taper tantrum, and this summer’s Brexit vote. Insiders can misappropriate and misallocate assets and lack of transparency correlates with greater volatility, but G20 and OECD governance guidelines remain a distant goal across the developing world as a reflection of distinct legal and judicial systems. Even with statutes on the books enforcement is sporadic, and emerging markets tend toward a higher concentration of big, often family shareholders. Bad practice can harm liquidity and capital structures, as price discovery is blocked and leverage and short-term debt are favored, the study notes. Cross-border access and international accounting standard adoption are major reform catalysts but one-time issuance and unqualified auditors cannot spur lasting changes. The World Bank’s “Doing Business” reference ranks countries by a half-dozen protection and reporting measures, and original work draws from a survey of 600 listed companies in twenty-five markets. It finds better scores with equities also available as ADRs on US exchanges, and they also carry a valuation premium. Statistical regressions associate superiority with reduced information asymmetry and smoother trading, and less co-movement with a broad index. Outright crash risk is also slimmer, as is sensitivity to global turmoil as captured by the VIX benchmark. Earnings and solvency indicators mirror good company regimes, and are connected in particular to independent director presence. Despite advances, the Fund criticizes the absence of related party, beneficial ownership, and group structure provisions, and urges company law to expand board powers and split the chair and chief executive functions.
Codes were updated for Russia in 2014 and Malaysia in 2012, although the former has not been strictly enforced and the latter is voluntary. Brazil’s 2000 Novo Mercado tier was an earlier launch, and companies there have been major beneficiaries of this year’s MSCI leading 60 percent gain. Korea recently introduced new management compensation disclosure, and Morocco and Peru eased document requests. India and Kazakhstan stiffened conflict of interest rules, and Vietnam hiked director qualifications. Egypt and Lithuania banned subsidiaries from buying parent company shares, while China is an exception where pervasive state ownership is barrier to governance and restructuring strides, the report concludes. Less-integrated frontier markets have not assigned priority to the issue, which may account for the 2 percent loss on the MSCI composite through September while all other asset classes rallied. Gulf exchanges were off double-digits and Africa was battered by 30 percent declines in Ghana and Nigeria. Pakistan was a winner with a 15 percent surge as the bourse may sell a stake to the Chinese, amid both public and private sector governance doubts with cool military-civilian government relations as the Taliban retakes cities in next-door Afghanistan.
