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EM governance: Breaking through

2 Mar 2018

Andrews says that whether it is from government or investors, local support is needed to drive change. Japan is an example of corporate governance change coming from the top. In a bid to revive growth the government shook up the corporate governance code, a move that has proved exciting for many global investors.

There is external pressure on emerging markets from investors and organisations such as the International Monetary Fund (IMF) to ensure that governments and regulators are pushing best practice. Initiatives have included pushing corporate governance guidelines and codes. These efforts might be having the desired effect.

“Regulators are now better informed, are more active in terms of seeking out better corporate governance codes,” Datta says. “In general, the financial system is better regulated than it was, particularly pre-financial crisis.

I have seen corporate governance that is part of that improvement in the way financial regulation has improved post-crisis.”

Improvements that Newton is seeing include a Korean company that intends to start taking investor calls in English. The investor is also engaging with a company to ensure child labour is not used in its supply chain.

Companies take these things on board when you have a significant shareholding. “There are others who couldn’t give two hoots, to be frank. Those will be companies that we don’t invest in,” Marshall-Lee says.

Newton invests with at least a five-year horizon, which means it pays close attention to capital allocation decisions and how the board is structured.

Good governance is something that should be a concern for long-term investors, but short-term investors may not escape the impact that bad governance can have on a stock.

“You don’t tend to get so called fat-tail events on the upside associated with good governance,” Streur says. “You tend to get fat-tail events on the downside associated with bad governance.

“There is a place for short-term investors to be cautious if the governance is not appropriate or inadequate,” he adds.

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