Who Cares about Corporate Governance? | Chief Investment Officer

(April 26, 2013) – A report released by the OECD on Monday asked the question “who cares?” about corporate governance in today’s equity markets.

It reveals that changes in how equity markets function, “may call for a fresh look at the economic effectiveness of corporate governance regulations”. The working paper outlines many of the core problems and on-going confusion within corporate governance and the emerging markets.

Last month, aiCIO reported on emerging markets and asked the question, “Cheap or good value?” After share prices fell back to 2002 levels, Deutsche Bank warned investors not to take it as a sign to dive straight in, adding that practically all cheap sectors and stocks had fundamentals that were visibly deteriorating.

Jan Dehn, co-head of research at emerging markets specialist Ashmore Investment Management, disagreed. He estimated emerging markets were to grow 6% this year up from over 5% in 2012, and for this growth to continue for at least a few years.

Fast forward to this week, and the OECD report argues more should be done to regulate investors and make sure they and the funds involved are not only seeing the importance of the total amount invested, but also that the capital is allocated to the best possible use.

Not everyone agrees that changes, enforcements and a more regimented approach to handling investors and pension funds should be put in place.

Sarah Wilson, chief executive of global proxy and governance support service Manifest, told aiCIO the controls put in place are already perfectly fine. She argues the hard regulations put in place don’t always work: “Rules are there to be broken and subverted; we shouldn’t go down the check box route of doing things”.

Julie Dickson, an equities fund manager at Ashmore, pointed to the corporate governance already in existence at many investors: “Exchanges and regulators are taking tougher stances on malfeasance and governments are introducing new laws to punish bad behaviour.

“That being said, there are still many companies which limit direct access to management, or are employing dubious accounting or employment practices.”

The OECD report also looked at the impact of the changing corporate landscape. It said the presence of proxy advisors, asset managers, and other service providers have made the corporate governance process more complex. This then increases the risk that the ultimate savers’ objectives become misaligned, not only in terms of investment strategy, but in terms of corporate governance priorities too.

Manifest’s Wilson said she wants to see the quality of reporting “substantially improve”–a call backed by the OECD. It noted today’s policy discussions have come to focus more on the costs and efficiency of reporting and compliance requirements.

Respondents to the interim report of the UK’s Kay Review, which looked at the increasing short-termism of equity markets last year, indicated that quarterly reporting and interim management statements fell into the category of “useless and misleading information”.

Following the Kay Review, the UK government put forward a draft regulation for comments that aims to remove several reporting requirements.

“Increasing numbers of companies are establishing well-resourced investor relations departments to communicate to shareholders,” Ashmore’s Dickson says. “Transparency is improving, and IFRS [International Finance Reporting Standards] methodologies for reporting is becoming increasingly adopted.”

As to whether the OECD paper provides anything worthwhile, views are mixed. Manifest’s Wilson argues that although the report does a good job at outlining the key elements within corporate governance, it fails to come to any conclusions.

“The OECD paper is a useful contribution to the debate–I get the feeling that there should be more to come.”

There is one question that should be put forward by all investors and pension funds: is it worth the risk?

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, said: “The conclusion that the developed world is most likely locked into low growth for an extended period has far-reaching implications for developed world monetary policy.”

He said central banks in the region were focusing on growth and employment rather than any other pressing issues.

“Emerging economies are likely to grow more rapidly than the developed world but will also face challenges. Growing pains are likely to include asset price bubbles from excesses that will inevitably get in the way from time to time,” he said.

Ultimately, it all comes down to the investor to decide where to place their asset. There will inevitably be peaks and troughs in this development as pace outstrips governance controls in some areas.

Poole argued: “Emerging markets have become the engines of global growth as their global influence increases, leaving developed markets in their shade.”

Here’s the divide when it comes to an investor’s stance on corporate governance: Do they see emerging markets as a good investment with capital gains? Or do they see the background of the asset class and determine potential risks to investment gains through that lens?