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EM governance: Breaking through

2 Mar 2018

Cathrine De Coninck-Lopez, head of ESG at Invesco Perpetual, says corporate governance in Asia has been on an improving trend, while developments in China are more nuanced.

“Most importantly, at the big state-owned enterprise level, there have been significant management changes due to a drive against corruption and bribery, spearheaded by President Xi Jinping. Similarly, some of these entities have been proactive in improving consideration for minority shareholders in the form of more efficient use of capital.”

She adds that at the same time big tech firms continue to operate under majority control and variable interest entity structures, giving limited rights for minority shareholders.

“While some of these have not abused this position, others have arguably been less considerate,” De Coninck-Lopez says. “This really highlights that the way to address the risk-adjusted view associated with poor corporate governance, or the opportunities associated with improving corporate governance, are best identified through fundamental analysis. This will continue to be key as the Chinese A-Share stocks become part of the MSCI Emerging Market index.”

Cheng says that disclosure in emerging markets has been a challenge in recent years, describing it as a work in progress.

“It takes two to tango,” he adds. “So from the perspective of global investors and also from the issuer’s perspective this is something that is good to work on.”

The issue with emerging markets is that it is as diverse as any other economic region, with it stretching from Latin America to Asia via Africa. Each has its various governance challenges. In Asia, for instance, there is a dominance of family-controlled companies.

“Whether it is the state or families with controlling interests, their influence, although on the wane, is still an issue with emerging markets,” Datta explains.

Progress is being made, but there is a long way to go to avoid another Petrobras.

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