Interview: How Can Emerging Market Companies Enhance their Valuation by Foreign Investors?

Corporate Governance Insights Interview Series: Top corporate governance experts report on the latest research in emerging markets.


Igor Filatotchev is Associate Dean for Research & Enterprise and Director, Centre for Research on Corporate Governance, at Sir John Cass Business School, City University in London. His research focuses on the sociological and economic aspects  of corporate governance, among other areas.

The most interesting piece on corporate governance in emerging markets I read recently is…

…An article in the New York Times about the Chinese company Alibaba and its initial public offering on the New York Stock Exchange.  Despite the initial success of Alibaba’s IPO, the article cautions that investors should be concerned about the relatively small stake held by the members of the controlling Alibaba partnership.  These insiders have a permanent lock on control of the company but hold only a small minority of the equity capital.  As a result, U.S. investors should expect that some of the long-term value created by Alibaba may not be shared with them but rather appropriated by the insiders and companies under their control.

Right now, I am working on…

…Deeper exploration of how emerging market companies can make themselves more attractive to foreign investors through improved corporate governance.

Our research to date reveals that emerging market companies have to make an even greater effort to adhere to the highest level of corporate governance standards—in some cases well beyond what their home country requires—if they are to succeed in the global marketplace.  To achieve the same level of valuation in the US as a similar US-based company, for example, firms from emerging markets need to have a lot more governance than the US company.

For these companies, good governance serves as a proxy of sorts for being well-run, healthy and effective. The extent of their global success will depend not just on production efficiencies and other typical business benchmarks, but on how well they can adapt to the multinational policy and regulatory pressures in their various target markets.

As our research shows, firms based in countries that provide weak legal protections to investors need to adopt multiple governance mechanisms in order to achieve a high perceived value if they want to list on a US stock exchange. Specific upgrades include a higher degree of board independence, adjustment of executive equity-based incentives and evidence of backing by venture capital firms.

These improvements deliver a message that investors’ interests are protected and that they are doing business in a fair and transparent way, thus earning longer term legitimacy in the eyes of investors.

In this light, I think the Alibaba situation will be very interesting  to watch as things unfold over the next few years.

I think the most relevant CG research topic for emerging markets now is…

…Understanding more about the interface between governance policies at the national level and the individual company approach to governance at the micro level.

Companies are molded by local institutions. But, while they may be in total compliance with the rules and regulations in their own countries, they may not conform to the governance standards prized by foreign investors. This poses a challenge for growing emerging market firms that want to take advantage of a globalized economy.

There needs to be more research on the extent of institutional development and economic infrastructure such as a country’s stock market and how this affects firm level issues around governance, and—in turn—how domestic policy limitations may affect firm level performance outside the home country.

Because there is significant diversity among emerging economies with regard to institutional conditions, transition paths, and competitive outcomes, there also needs to be an understanding that firm-level governance arrangements will differ as well.

So, in countries like Brazil, India, and Taiwan, the firm-level focus should be on improved governance of family-controlled companies, since this is the dominant structure. In other countries, like Russia, Kazakhstan and other former Soviet republics, a deeper understanding of the interplay between state involvement and governance is warranted. Attention to these specific and unique national characteristics will be critical as emerging market firms approach foreign factor and product markets.

The take-away for emerging market companies is that…

…If you want to attract foreign investors you should use corporate governance as part of your strategy in doing so.

I think emerging market companies are at a crossroads of sorts. They are trying to find the right balance between complying with the institutional pressures of their home markets and their target global markets so they can operate comfortably at home while broadening their access to global markets. In some cases, these efforts can seem at cross-purposes.

What do I mean by this? Let’s look at the issue of board independence. We have seen in countries like South Korea and Israel that increased board independence leads to better decision making, more transparency, and ultimately improved firm performance. From the point of view of the global investment community, this is a good thing. It contributes to higher valuation of these companies on world markets.

But, depending on the country, a push toward more independent boards might not go over very well at home. In Kazakhstan and Russia, for example, many of the largest companies are dominated by a few people—the oligarchs—with close government ties. They may not be happy about the prospect of a heightened degree of scrutiny. So, government regulators may accede to the desires of these powerful business people and the result is that companies don’t have to meet the same stringent standards that firms in other countries do. That may suit domestic companies with no international plans just fine, for companies eying global expansion, this could be a problem because foreign investors might look askance at a firm that has too much power concentrated with just one person, as is the case with Alibaba’s founder.

For further reading, Professor Filatotchev recommends:

Robert E. Hoskisson, Mike Wright, Igor Filatotchev and Mike W. Peng. Emerging Multinationals from Mid-Range Economies: The Influence of Institutions and Factor Markets, Journal of Management Studies, 2013, vol. 50, issue 7, pages 1295-1321

Ruth V. Aguilera, Igor Filatotchev, Howard Gospel, and Gregory Jackson. An Organizational Approach to Comparative Corporate Governance: Costs, Contingencies, and Complementarities, Organization Science, Vol. 19, No. 3, May–June 2008, pp. 475–492.

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