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EM governance: Breaking through

2 Mar 2018

GOVERNANCE, GOVERNANCE, GOVERNANCE

Governance is at the top of the agenda for professional investors and market watchers, alike.

Marshall-Lee, who manages $3.3bn of emerging market assets, describes governance as critical to Newton’s investment decisions.

Calvert, a responsible investor that is part of Eaton Vance with around $1bn in emerging market equities, always has a mini mum governance weighting of 20% in its modelling. “It is likely the most important point of analysis,” chief executive John Streur says: “Everything starts with governance.”

Candriam has a filter for assessing the governance of companies, the results of which are compared to its peers to assess where a business stands in its market. “If a company has poor governance it is not going to be in our emerging market universe,” Meloni explains.

Aon head of asset allocation Tapan Datta believes backing better quality companies reduces cost of capital and produces higher stock prices.

“In terms of hard facts there is a lot of evidence that good corporate governance ultimately produces better investment returns,” he adds. The performance of the MSCI EM ESG Leaders index in 2017 could be held up as proof.

It appears that there is a feeling transparency in the emerging markets is improving and some firms are making more of an effort to be more shareholder-friendly. Yet there appears to be some way to go before it stands on par with the codes and practices common throughout the developed world.

Streur says that some larger companies in the emerging markets are doing a good job of discussing non-financial risk with shareholders, although this is “not a uniform practice across the market”.

Datta points to more independent directors and board members with fixed tenures as one area where there has been an improvement.

“The issue is that the improvements come off a base that is still not ideal,” he adds. “What we take comfort from is that the trend is moving in the right direction.”

Datta names the financial crisis of 2008 as a catalyst driving improvements in corporate governance in some of these markets. However, Meloni has not seen an immediate response to the governance failures at Petrobras.

For real change to happen following the scandal she believes that it is going to have to come from regulators.

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