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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.

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.


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