Governance improves as more investors turn to emerging markets

As more investors focus their attention on the very attractive investment opportunities emerging markets can offer, many companies in these markets have responded by polishing up their governance standards.

However, according to George Dallas, director of Corporate Governance at F&C, poor governance practices by companies across different emerging economies remain a pressing concern for investors.

F&C has been using its position as a leading investor in emerging market companies to press proactively for better corporate governance standards. Through its responsible engagement overlay programme, reo, the firm has exercised its influence through voting and engaging with companies across the globe.

"As an asset class, emerging markets are very attractive indeed but there are still concerns regarding corporate governance in many emerging market companies," said Dallas. "One of our main worries is protecting minority shareholder rights, particularly in companies with controlling shareholders, and also improving levels of transparency and disclosure across the different regions." F&C applies its reo programme to funds which are managed in house, as well as a further £7bn of funds managed by other investment institutions.

To guide this process in emerging markets, F&C has developed customised voting guidelines for a wide range of regions including China, Russia, India, South Korea and Latin America. In its latest reo report, F&C's voting record highlights how it presses for better emerging market corporate governance practices In 2007, F&C did not support 42% of the individual resolutions presented by management in Mexico and 40% in Russia - but it only objected to 3% of management proposals in the UK during the same period. Dubious financial transactions, lack of clarity about who director candidates are and what interests they represent and limited independent board oversight, are some of the reasons behind F&C's decision of voting against individual management proposals.

"In many cases we have seen improvements as some countries have reacted to concerns raised by investors, India being a good example." Dallas explained. "Governance codes and standards now exist in many emerging markets around the world and it is clear that regulators are taking these issues more seriously. But we are not just talking about structural or regulatory changes. Cultural changes are also needed."

F&C has also been playing a mayor role in driving the FSA to revisit the standards that apply to foreign issuers seeking listings on the London markets. "While very strict standards currently apply to UK-domiciled primary-listed companies, new listings in London are dominated by issuers of Global Depositary Receipts (GDRs), largely from emerging markets," Dallas said. "We have been driving discussions with the FSA to improve standards of corporate governance among overseas companies coming to London by encouraging a voluntary guidance standard focused on providing better disclosure of corporate governance standards."