There is no single, easy solution for the challenge of strengthening corporate governance in emerging markets. Each market is economically and politically distinctive and each will have to customise their own solutions to meet international standards.
That was the message from Philip Armstrong, head of Global Corporate Governance Forum, a body that supports regional and local initiatives to improve standards in middle- and low-income countries.
Emerging markets accounted for about 62 per cent of global GDP growth, and next year they are expected to expand at an average of 6 per cent relative to something less than 2 per cent in more developed markets, he noted.
Assertiveness
Another interesting trend is the increasing investment flows between emerging markets rather than the more historical flows from the North to the South.
In such a changing global scenario, Armstrong expects some kind of assertiveness in how emerging countries will respond to the tough task of improving corporate governance globally continues. When it comes to looking at the issue of corporate governance, the emphasis is somewhat different in emerging markets, he points out.
“What we encounter in emerging markets revolves much more around issues of market integrity, concerns around related party transactions and how to deal with that effectively, the perennial problem of conflicts of interest particularly in markets which are heavily concentrated in terms of ownership.
“Then there are issues related to reporting, not necessarily in the nature of what’s being reported but the necessary mechanism to ensure that accuracy is tested and validated in the market,” he said.
In contrast, in the developed markets there is a lot of emphasis on structural issues — board diversity, how to get the shareholders to be more active, and the quality of independence of directors.
A lot of concerns in emerging markets is around the issue of independence from the controlling shareholder and influence of the family, Armstrong added.
Another real challenge for the regulators is finding the necessary resources, skills, expertise and capacity to enforce increasingly complex standards within their own individual markets. In fact, corporate governance codes in many markets have been attempts to try to introduce a more voluntary and self-regulatory mechanism.
Challenge
“I think the challenge to make a success of compliance depends a lot on a very effective regulatory regime already being in place, effectively enforcing the law,” Armstrong said. “And second, an active engagement of institutional investors. Third is [the presence of a] well informed media that is constantly testing and validating the integrity and quality of some of the reporting that takes place.”
The political willingness to confront very powerful business groups that exist in the market is another big challenge, he said.
In emerging markets confronted with the challenge of enforcement regulation, “[the issue is] how to innovate or incentivise the market in other ways which may well respond to these governments’ challenges,” he says.