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June 04, 2001
Better Corporate Governance Pays Off for Large Companies in Emerging Markets
by Mark Thomsen
Recent study across global emerging markets finds large companies with good corporate governance
yield better bottom lines.
SocialFunds.com --
A study conducted by a Hong Kong-based financial firm specializing in emerging markets found "a
quite robust correlation," especially among large-cap companies, between corporate governance and
stock price performance, valuations and financial ratios. Entitled "Saints and Sinners - Who's Got
Religion?," the report issued by CLSA (Credit Lyonnais Securities Asia) Emerging Markets analyzes
survey results of 495 companies in 25 emerging markets around the world.
 "In many markets, companies with good corporate
governance have outperformed their indices in recent years and move to valuation premia," explained
Amar Gill, Head of CLSA Emerging Markets in Kuala Lumpur and author of the report. "Our research
shows that companies with governance are also those with high ROEs (return on equity) and the
largest value creators on an EVA (Economic Value Added) analysis."
Companies were
surveyed on 57 main issues that were divided into seven categories: management discipline,
transparency, independence, accountability responsibility, fairness and social responsibility. The
first six categories were equally weighted at 15 percent, and social responsibility was weighted
slightly lower at 10 percent. All questions had only yes or no answers.
The report
acknowledges that no system for rating corporate governance is perfect. "There is little point in
having nominally independent directors on the board if they are in fact friends of the major
shareholders who give the major shareholders complete leeway to do with the company as they
choose." CLSA tried to balance quantitative and qualitative analysis of corporate governance by
having about 30 percent of the questions require interpretation by an analyst.
In
examining the 100 largest companies in emerging markets, researchers found a strong correlation
between corporate governance and financial performance ratios. For example, the average ROCE
(return on capital employed) for the largest 100 firms was 23.5 percent for fiscal year 2000.
Companies that were ranked in the top quarter of corporate governance, however, yielded an average
ROCE of 33.8 percent. Firms in the bottom half of the corporate governance rankings had an average
ROCE of only 16 percent.
Of the 100 largest companies, firms that garnered the top five
scores for corporate governance were HSBC (Hong Kong), Infosys (India), Singapore Airlines
(Singapore), Li & Fung (Hong Kong) and Richemont (South Africa). The lowest five scores of the
largest firms were Lukoil (Russia), TPSA (Poland), Isbank (Turkey), Tenaga (Malaysia) and PCCW
(Hong Kong).
As a provider of brokerage and investment banking services in the emerging
markets of Asia, Latin America, Emerging Europe, the Middle East and Africa, CLSA Emerging Markets
is able to research companies on a global basis. The firm was launched in 1998 by CLSA, Ltd.,
which itself began operations in Hong Kong in 1986.
CLSA Emerging Markets believes that
there is a trend toward improving corporate governance. While it is most evident in Asia, which
saw the consequences of poor corporate governance in the form of a financial crisis, CLSA says
there has also been improvement in Latin America and EEMEA (Emerging Europe, Middle East and North
Africa). It said that Latin America and EEMEA, however, have been slow to beef up regulations and
enforcement.
©
SRI World Group, Inc. All Rights Reserved.
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