Corporate Governance in Emerging Markets

A recent study by Melsa Ararat and George Dallas under the aegis of the International Finance Corporation (IFC) highlights some of the special issues affecting corporate governance in emerging markets. In their paper Corporate Governance in Emerging Markets: Why It Matters to Investors—and What They Can Do About It, the authors comment on the scholarly research in corporate governance in emerging markets. The foreword to the paper captures the relevance of the study:

Every day, institutional investors in emerging markets must make practical decisions on the basis of incomplete and at times conflicting information. So, it is critically important that they make the best use of this imperfect knowledge. Moreover, investors too often enter emerging markets with misguided perceptions of the underlying realities. And worse, they may cling to a conceptual framework of governance that does not allow them even to consider the searching questions they should be asking.

This Private Sector Opinion, by Melsa Ararat and George Dallas, explicitly highlights this problem. The authors identify a serious gap in research on emerging markets—between high-level cross-country studies, with their inconclusive findings on good governance indicators at the macro level, and the separate effort to establish firm-level or country-specific governance metrics, typically based on what works “in the West.” Unfortunately, fewer than one percent of the research papers available on corporate governance focus on emerging markets.

The challenge for institutional investors is how to weight country factors, even if the investors conclude, as this paper notes, that “optimal governance is firm-specific.” Alongside the country factors—rule of law, risk of corruption, competitive intensity, and capital market capabilities—the indicator that bridges to the firm-specific context is the structure of ownership. The heart of this paper is an exploration of two key dimensions of ownership structure: the quality of board independence, and mitigation of the risks of business group affiliations. The authors also provide practical guidance to investors in each of these areas.

This study points to the dearth of academic studies pertaining to emerging markets, which face issues that are different from those faced by developed markets (the subject matter of greater analysis).

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • "This study points to the dearth of academic studies* pertaining to emerging markets, which face issues that are different from those faced by developed markets** (the subject matter of greater analysis)."

    *academic studies >

    Does not this necessarily imply that all such or like studies merely satisfy the limited few among the so called 'experts' who have an inborn passion for making/keep on making such studies; or do such studies have at all any social purpose to really serve, for the benefit of the 'investors' at large; and, even if say- 'yes', in the foreseeable future?!

    **face issues that are different from those faced by developed markets >

    In today's context of the profoundly 'globalized' economy (of course, within its largely changed but shrunken and shallow meaning as obtaining), do not the very fundamental factors/norms employed for differentiating the age-old concept of 'developed economies' from the equally old other – i.e. 'developing economies' have almost faded into insignificance /been reduced to a myth?!

    One should have thought that, in our times, if at all, there are only two new kinds of them namely, 'developed' and 'not so developed' economies!

    Perhaps, the selfsame experts could be expected to come out , if necessary after researching, with some satisfactory answers to these inescapable posers / grave doubts haunting for long a common man's mind!

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