Interview: Do Investors in Emerging Market Companies Care about Corporate Governance?

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

 Dr. Bernard Black is Nicholas D. Chabraja Professor at Northwestern University School of Law and Kellogg School of Management. His research focuses on international corporate governance and law and finance, among other areas.

The most compelling recent finding on corporate governance in emerging markets is…

…That transparency and disclosure really matter.

Our research provides strong evidence that good disclosure pays off.  This is a consistent theme across countries that have very different characteristics.  We study Brazil, India, Korea, Russia, and Turkey. Why should companies focus on transparency and disclosure? Because investors care about this, so the advice for firms is, if you work on improving your disclosure, you will be rewarded with a higher share price.

We also see evidence, though less strong, of a similar correlation for independent directors. It makes sense that investors will be happier if a firm has some independent directors, because there is more comfort that decisions are being made for business-related reasons, rather than, say, for the benefit of the controlling family group. In Korea, for example, we found that shareholders ascribed a higher value to large companies when legal rules required 50 percent outside directors for these companies.

Right now, I am working on…

…Deeper exploration of the effect of particular aspects of governance, such as disclosure and outside directors, on firm value.

For instance, while we have evidence that disclosure is important, we know very little about what companies should disclose. And, while there is evidence that outside directors can make a difference, we don’t know much about how important they are, or how many outside directors is enough—or even if there is a right number. The answers will likely depend on both country and firm characteristics.  For example, in Turkey, very few companies have any outside directors, so the addition of one or two at a company can set it apart and could affect investor perceptions. In India, the addition of another independent director might not matter quite as much, because Indian companies are mandated to have a minimum number of outside directors on their boards.

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

….Understanding more about what matters to investors.

While research can tell us a great deal, one of the most important tools that firms can use to enhance corporate governance is easily available and often overlooked: asking investors themselves what they care about!

There’s not as much rationale for making changes if investors don’t care about the changes proposed.  So, listen to your investors.  The message is equally important for country officials and regulators as it is at the firm level.

We are beginning to develop a body of evidence suggesting that broad measures of corporate governance can help predict firm market value. We don’t yet understand much about how and why. Talking to investors about what matters to them could shed some light on this.

The takeaway for emerging market countries is…

…That the findings about the value of good disclosure apply across countries. As I mentioned before, even in countries that are quite different, it’s clear that  investors care about disclosure – this is an important message.

That said, our research suggests that country characteristics can strongly influence which aspects of governance predict firm market value, as does the nature of the firm itself.  There is no one-size-fits-all approach to corporate governance that will lead to successful outcomes. Firms have options in identifying their own path forward with regard to implementing specific corporate governance enhancements. Listening to investors as they articulate what matters to them can play a key role here, in helping the company refine its corporate governance approach.

In addition, flexibility in regulating corporate governance is critical. The same rules may not work for all firms or all countries.


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