corporate governance : an institutional investor’s perspective manish singhai, cfa vice president,...

Corporate Governance :Corporate Governance :An Institutional Investor’s An Institutional Investor’s

PerspectivePerspective

Manish Singhai, CFA

Vice President, Portfolio Manager - Global Emerging Markets

Alliance Capital Management, Singapore

[email protected]

December 14, 2001

The AICG Conference,Seoul, South Korea

Corporate Governance : An Institutional Investor's Perspective 2

Does Corporate Governance Does Corporate Governance Matter?Matter?

Difficult to Isolate and Quantify the impact of Corporate Governance on Stock Market Returns

– What are the appropriate proxy indictors?– Even if correlation is established, can causality be

proven?– How to factor in the different issues that exist at

the company and market levels?

But a few empirical surveys & studies do confirm the intuitive conclusion that good governance does matter!


Empirical Evidence: McKinsey Empirical Evidence: McKinsey SurveySurvey

In 1999-2000, McKinsey & Co. surveyed 200 Institutional Investors with US$3.25tn in total Assets Under Management, in cooperation with the World Bank and the Institutional Investor journal

– LatAm: 90 Respondents, AUM: US$1,650bn

– Europe/US: 42 Respondents, AUM: US$550bn

– Asia: 84 Respondents, AUM: US$1,050bn


Empirical Evidence: CLSA StudyEmpirical Evidence: CLSA Study

In 2000, brokerage firm CLSA published a study on the impact of corporate governance issues on historical stock price performance

– The sample comprised 115 large-cap stocks (Average Market Cap: US$4.9bn) spread across 25 Emerging Markets in Asia, LatAm & EMEA regions

– Stocks and markets were ranked on Corporate Governance scores that were derived from a Binary Response (Yes/No) questionnaire


CLSA Study: Key Findings

Stocks with Good Governance Significantly Outperformed the Rest, particularly displaying Greater Resilience during Market Downturns

Correlation between Market-wide Governance and Superior Returns for the Market was almost Non-Existent

Significant Room for Improvement Implied by the Overall Poor Governance Standards in Emerging Markets


Elements of Good GovernanceElements of Good Governance

From an Institutional Investor’s standpoint, a good Corporate Governance Framework should ensure:

1. Protection of Basic Shareholder Rights

2. Equitable Treatment of All Shareholders

3. Transparency and Disclosure

4. Independence, Responsibility & Accountability of the Board


CG : Context is Important !

Relative rather than Absolute Quality of Governance is More Important for the Stock Markets

Good Governance is Prized more when it is ScarceA company that voluntarily tries to practice good CG in an unregulated market is likely to be rated higher than another that does just enough to meet statutory requirements in a highly-regulated market

Investors react to changes in CG Quality over TimeIrrespective of the absolute level, companies that show progressive improvement in governance are likely to be re-rated by the market, implying higher return potential


CG in Alliance Capital’s Investment Decisions

Recognize CG as a Very Important Investment Parameter, particularly in the Emerging Markets

Our in-house Research Team assigns a Quantitative CG Rating to each Company in our Investment Universe, which is Reviewed at Regular Intervals

At the outset, CG is used as an Investment Screen

Regular Monitoring helps in Responding to Changes in Absolute and Relative Levels


CG in South Korea - i

Relative to the Extremely Poor Standards of the pre-1997 Economic Crisis Era….

…. there is Visible Improvement in Almost All Aspects of Governance in the Korean Corporate Sector today

The Regulatory Bodies and Companies have played their parts….

…. But Korea has also been served uniquely by the PSPD Movement in forcing some of the contentious issues


CG in South Korea - ii

While a Long Way Forward since 1997, there is Ample Scope for Improvement both in the Depth and Breadth of Governance amongst Korean Companies

Market Re-rating is a Slow, Suspicious, and Easily Reversible Process….

….So Any Lapses in Commitment at this Stage could Seriously Set Back the Ongoing Reduction in the “Korea Discount”


CG in State-Owned Enterprises

Very Little Focus on CG in Listed SOEs despite their Large Size and Significance in Emerging Stock Markets

Conflict of Roles: Government as a Regulator Vs. Government as a Controlling Shareholder

Conflict of Objectives in the Long-Term: Maximization of Shareholder Value Vs. Meeting Socio-Economic Obligations

Conflict of Tactics in the Short-Term : Populist Politics Vs. Tough Economics

corporate governance : an institutional investor’s perspective manish singhai, cfa vice president,...

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