Improving board perfomance in emerging markets

Improving board performance in emerging markets

Contents

1. A high concentration of ownership
2. Weak recruitment processes and a shortage of experienced directors
3. Poor focus
4. An inadequate supply of information
5. Complex cultural traditions
6. Underdeveloped legal regimes
7. Article at a glance
8.
The pressure keeps growing for companies to tackle arange of governance issues
Improving the effectiveness of boards is a priority for corporations everywhere, but in emerging markets it is especially important. In most emerging markets, the institutions that help guard against corporate malfeasance — securities regulators, stock exchanges, the judiciary, institutional investors, equity analysts, accountants, and a probing media — are stillrelatively weak or lack critical mass. Boards may therefore be the most robust line of defense. As India's technology giant Infosys Technologies acknowledges in its annual report, "An active, well-informed, and independent board is necessary to ensure the highest standards of corporate governance."
The issue of sound boards is also well to the fore because of their clear link to the cost of capital. In2002. McKinsey's global investor opinion survey showed that equity investors would pay a premium of 20 to 40 percent for emerging-market companies with strong boards of directors. More recently, a study by the Asian Development Bank Institute found that South Korean and Indonesian companies whose board-effectiveness ranking rose from the median to the top quartile saw their market value increase by13 to 15 percent.[ 1] South Africa Mervyn King, the judge who headed the drafting of that country's corporate-governance code, observed that foreign capital flows to places that exude a "perception of good governance." Debt investors too are paying more attention to corporate governance in emerging markets. In 2005 Moody's upgraded the credit ratings of issuers such as GS Caltex and SKCorporation (South Korea) and Lukoil (Russia), in part because of their improved governance, including developments at the board level. Our own experience confirms the significance of these trends. One financial institution in an emerging market, for example, recently set out to use governance reform as a way of achieving a higher valuation for its impending IPO. Another cited the possibility of an improvedcredit rating as a principal reason for reviewing its governance practices.
Although many companies in emerging markets are responding to the pressure for higher standards, a range of cultural, legal, structural, and operational issues not encountered in more developed economies hampers progress at the board level. Attempts to import best practices from Western countries tend to be frustrated.Governance changes that are accepted locally in principle — notably, more independent directors, the introduction of board committees (for instance, an audit committee), and the development of a written board charter — can be superficial exercises in practice. As a result, boards in emerging markets rarely get to grips with core issues, such as strategy, talent, and risk management, or withefficiency questions, such as information flows and the allocation of time.
Our work with companies across the world has helped us identify six characteristics that significantly influence the effectiveness of corporate boards in emerging markets: a high concentration of ownership, weak recruitment processes and a shortage of experienced directors, poor focus, an inadequate supply of information,complex cultural traditions, and underdeveloped legal regimes. Only by grappling with and understanding these issues will companies in emerging markets create effective systems of board governance.
A high concentration of ownership
In contrast to the Anglo-Saxon world, where corporate ownership is typically dispersed among many shareholders, a high percentage of listed companies in emerging markets...