A recent study by Melsa Ararat and George Dallas under the aegis of the International Finance Corporation (IFC) highlights some of the special issues affecting corporate governance in emerging markets. In their paper Corporate Governance in Emerging Markets: Why It Matters to Investors—and What They Can Do About It, the authors comment on the scholarly research in corporate governance in emerging markets. The foreword to the paper captures the relevance of the study:
Every day, institutional investors in emerging markets must make practical decisions on the basis of incomplete and at times conflicting information. So, it is critically important that they make the best use of this imperfect knowledge. Moreover, investors too often enter emerging markets with misguided perceptions of the underlying realities. And worse, they may cling to a conceptual framework of governance that does not allow them even to consider the searching questions they should be asking.
This Private Sector Opinion, by Melsa Ararat and George Dallas, explicitly highlights this problem. The authors identify a serious gap in research on emerging markets—between high-level cross-country studies, with their inconclusive findings on good governance indicators at the macro level, and the separate effort to establish firm-level or country-specific governance metrics, typically based on what works “in the West.” Unfortunately, fewer than one percent of the research papers available on corporate governance focus on emerging markets.
The challenge for institutional investors is how to weight country factors, even if the investors conclude, as this paper notes, that “optimal governance is firm-specific.” Alongside the country factors—rule of law, risk of corruption, competitive intensity, and capital market capabilities—the indicator that bridges to the firm-specific context is the structure of ownership. The heart of this paper is an exploration of two key dimensions of ownership structure: the quality of board independence, and mitigation of the risks of business group affiliations. The authors also provide practical guidance to investors in each of these areas.
This study points to the dearth of academic studies pertaining to emerging markets, which face issues that are different from those faced by developed markets (the subject matter of greater analysis).