Emerging Market Corporate Governance – Going Above And Beyond the Call of Duty

Of all the many factors that we take into account when analysing companies within our emerging market universe, corporate governance is arguably the most important, given the chequered track record emerging market companies have in managing this risk. The importance of prioritising this was also highlighted by the fact that ‘failure of national governance’ was flagged as a broad emerging market risk in the World Economic Forum’s Global Risks Perception Survey 2016.


Part of the issue is that emerging markets are relatively immature and there tends to be a lot of family, government and individual influence in the private sector, all of whom have different intentions and whose actions could undermine shareholder value.

Thus, we take governance risk very seriously because, as a fund manager entrusted with other people’s money, we don’t want to wake up one day and find that the value of a company in which we have invested has been adversely impacted by a failure of corporate governance.

To mitigate against this risk in our portfolios, we have developed an internal, proprietary framework that helps us determine whether the corporate governance environment of a company is adequate enough for us to invest clients’ money in.

We also rely on an independent, quantitatively-based assessment of companies that was developed by our Responsible Investment team, which uses different sources and comes up with a corporate governance score against which we can compare our own qualitative assessment.

We are firm believers that certain minimum governance standards need to be in place in order to protect minority shareholders (i.e. our clients) and that it is not sufficient to discount governance risks into fundamental stock valuations – where the governance tail risk of a stock is significant we would rather avoid it completely.


Although we do analyse factors such as ethics, social responsibility and environmental issues, our analysis goes beyond typical environmental, social and governance (ESG) factors. We assess companies based on Value Creation and Capital Management, Board and Shareholder Structure, Fair Information Disclosure and Management Access and Representation of Data. This enables us to identify and assess risks, evaluate whether company management and/or majority shareholders’ interests are aligned with minority investors and to benchmark governance standards across various countries and sectors that the Fund invests in.

As an illustration of our corporate governance analysis process, we take you through two company case studies below. Both these companies appear to be high quality companies (another pillar in our investment philosophy) , as measured by their Cash Flow Returns on Investment (CFROI), using Credit Suisse’s HOLT model. However, as shown below, we decided to only invest in one of them, for corporate governance reasons.


NMC Health – healthcare provider in the United Arab Emirates

We still felt comfortable investing client money in the company despite the following shortcomings:

  • The founder is the Chairman and CEO
  • Only six of the 12 Board members are independent
  • There is no specific disclosure of remuneration policies

We invested client money in the company based on the following positives:

  • The founder own 26% and is aligned with our interests
  • The Audit and Remuneration committees are fully independent, providing us with protection as minority shareholders
  • Total shareholder return is a key part of the remuneration structure of top executives
  • The company has very strong policies and practices around Information Disclosure, Management Access and Representation of Data.



BEC World – media company in Thailand

We decided not to invest because:

  • The founding family controls 57% of the shareholder vote and seven of the 14 members of the Board are family members, providing limited protection to minority shareholders
  • The father is the Chairman and his son is the CEO and thus there is no real separation of the CEO and Chairman functions
  • The level of disclosure on remuneration policies is low and the remuneration committee is not sufficiently independent
  • They have very poor policies and practices around Information Disclosure, Management Access and Representation of Data. For instance:

    - There is no investor relations (IR) section on their website or IR contact details
    - There are no interim earnings releases, only an Annual Report
    - They only give ad hoc presentations to shareholders, with very few key performance initiatives (KPIs) against which to measure the company.

Our assessments of these two companies, and resultant investment decisions, have worked in our clients’ favour, as NMC Health’s share price is up by 27% YTD, whilst BEC World is down 17% (both in local currency terms).


Enlisting the Responsible Investment team to quantify governance best practice
In addition to this rigorous assessment process, we also factor in the governance support of Old Mutual Investment Group’s Responsible Investment (RI) team at three different levels:

1) The ESG Engagement Manager votes 100% of our proxies across their listed equity holdings. Proxy voting is an important aspect of being a responsible steward of the assets we manage on behalf of our customers. It gives investors a voice in terms of how management teams and executive committees run their companies and set their policies on important issues such as executive pay and board composition. All our votes are publically disclosed on our website.

2) The MSCI ESG Accounting Governance Report is integrated into Global Emerging Markets’ current research and company assessments. This is a statistical evaluation of corporate integrity, based on accounting and nonaccounting metrics that have been associated with poor financial reporting and corporate governance. This score is then factored into the governance model that the RI team developed specifically for the Global Emerging Markets context, described below.

3) The Emerging Markets Governance Model is a proprietary assessment tool and is a purely quantitative, unbiased systems-based model.
This model is integrated throughout the Global Emerging Markets company and portfolio screening process, and is used for ongoing assessment of investee companies. It consists of nine pillars the RI team has identified as the markers of good governance in the emerging market context. Each pillar is weighted according to its impact on the good governance of an emerging market company:

  • Auditing and Accounting (10%)
  • Board structure and Experience (20%)
  • Capital Structure (10%)
  • Directors (15%)
  • Remuneration (15%)
  • Diversity (5%)
  • Human Capital (4%)
  • Governance of Environmental and Social Issues (11%)
  • MSCI ESG Accounting Governance Report (10%)

Underlying each pillar is a selection of metrics, and it is from the rating of these that the pillar derives its overall score. For example, Auditing and Accounting with a weight of 10% in the overall model has three underlying metrics. Two of these are yes (=1) or no (=0) answers, while the other answer has a percentage ranking that is then scored between 0 – 4.



We are confident sustainable investment growth potential can be realised in the emerging market investment space, provided proven good governance is a non-negotiable. That is why the integration of ESG factors into investment decisions is of great importance to us. These include openness, integrity, accountability, protecting shareholder rights and treating shareholders equally. As long as these factors are carefully considered in the investment process, the perceived risks of investing in emerging markets can be mitigated; unlocking significant long-term opportunities for investors in emerging market assets.


Feroz Basa
Joint Boutique Head, Global Emerging Markets

Wium Malan
Investment Professional, Global Emerging Markets


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