Innovations In Emerging Markets

The Changing Course of Socially Responsible Investing

Socially responsible investing may now be taking a new tack: instead of steering money away from controversial sectors such as breweries, weapons manufacturers, and casinos, investors are beginning to have a higher tolerance for “sin,” says the Wall Street Journal. That’s because returns on SRI are flagging: high-growth funds have returned approximately 1 percent in the past year, but large-growth SRI funds returned only 0.21 percent for the 12 months through July.

Some funds, such as Pax, will ask its shareholders to vote on whether to eliminate a zero-tolerance policy against gambling and alcohol, while considering whether to take environmental issues into account. Other SRI funds are also taking a similar path but adding different critera, such as employee treatment and diversity.

Multinationals and Human Rights: Getting It Right

Activists aren’t the only ones concerned with human rights – it’s a big priority for multinationals, too, reports the Financial Times. A recent U.N. survey of the Fortune 500 found that 91 percent of firms that responded said they had management plans in place regarding human rights and the consequences of company operations. But only 46 percent of firms stated that they had experienced “a significant human rights issue.”

As a sector, the extractive industries had the most significant difficulties: two-third said they had experienced human rights problems.

An Indian CEO Explains How Good Governance Leads to Growth

Good corporate governance is good business, declares the CEO of one leading emerging market company in a Wall Street Journal op-ed.  Neeraj Bhargava, head of India's WNS Global Services -- a business process outsourcing firm -- believes that by adopting international best practices he is ensuring a healthy bottom line for his company.

There are other benefits as well. By adopting such standards, firms take their place in the global corporate community, becoming better partners to do business with. International best practices also make companies more attractive to employees.

The cost of good governance does not come cheaply. But says Bhargava, the benefits of adopting high standards outweigh the drawbacks as companies move toward greater efficiency, stability, and long-term growth.

Private Companies in China Alive and Well, and Suing

A July 6 South China Morning Post article reports that China's Xugong Construction Machinery is considering suing rival Sany Corp for disrupting its buyout deal with the U.S. Carlyle Group. An IFC colleague in Beijing sent us the clipping (article still not posted), noting the key aspects of the news report.

On the one hand, the threat of legal action indicates a thriving Chinese private sector. Even more salient to our colleague is the reference made by a Xugong official regarding corporate governance issues. IFC keeps a close watch on the development of corporate governance standards in private firms throughout the emerging markets, offering advisory services where needed. Talk of corporate governance is a vital step forward in the evolution of China's firms. Action on corporate governance is the next step in tehir ability to compete globally.

Russia's Gazprom Board Battles to Up Degrees of Separation from State

A little over six months ago, Russia's energy company Gazprom allowed foreign investors to buy its stock. This week, its board of directors is engaged in a battle which could spell the death knell of the former Soviet ministry once and for all.

The contest for a place on Gazprom's 11-member board will take place at a general shareholders' meeting. The International Herald Tribune describes what is at stake:

"The question is whether an independent outsider -- and perhaps a foreigner, at that -- can break into the [club of government ministers and appointed businessmen] circle and bring a more market-oriented view to the board of one of the largest publicly-traded energy companies."   

Global investors have been watching Russian companies closely over the past year or so, unhappy  about the ties that bind many --especially those in Russia's vital natural resources sectors-- with the Kremlin. The battle shaping up for admission of foreign investors to the Gazprom board of directors will be a watershed mark for instituting several degrees of separation between Russia's firms and the state.

Foreign Investors Stay Away from Firms with Poor Corporate Governance

A study on investment decision-making by U.S. firms finds that they shy away most from overseas companies with ownership structures that "are more conducive to outside investor expropriation." The study of 4,411 firms in 29 emerging and developed markets is carried by the Development Gateway. It notes that lack of information about firms and the state of national legal institutions are greater factors in investment decisions than a country's economic development.

In an era when foreign capital is an increasingly important source of financing for emerging market companies in particular, the study's findings go a long way toward answering the question of whether corporate governance matters and how to address it.       

China's Minsheng Bank Provides Corporate Governance Test Case

China Minsheng Banking Corporation, one of a still rare breed of Chinese majority-held private banks, is expected to pick a successor to its ailing 87-year old chairman of the board next month. The process is being carefully watched by foreign investors and banking sector analysts. How this succession goes will say a lot about how far the Chinese banking sector has come in instituting corporate governance reforms and market-oriented approaches.

The Wall Street Journal says things have not come along that far.

"Although Minsheng bills itself as a bank run by private businesspeople, the government will get to choose who runs the lender. The 15-member board and its nominations committee will take a back seat, waiting for the government to hand down its choice."

Like Minsheng's current board chairman, the successor is likely to have close government ties in one form or another, observers say. There have been major improvements in corporate governance in Chinese banks in recent years, they agree, and the government has made it a priority for their plans to open banks to full foreign competition in December. Minsheng will be an early test case. 

Minsheng and IFC recently partnered to finance energy efficiency projects. For more, see here.

Hello, Korea Mobile Operators? Time to Enroll in Corporate Governance 101

South Korean regulators slapped a hefty fine on three local companies for price collusion --the first punishment of its kind in that country, the May 18 Financial Times reports. South Korea's telecoms market is one of the most heavily regulated in the emerging markets, but the South Korean case of unfair business practices appears to be pretty straightforward.

Meanwhile, back in Seoul, at the three firms involved in the unfair business practices, the question their executives should be asking themselves is whether their companies have the right corporate governance systems in place. That's the first thing they must address --after paying their fines, of course-- if they want their companies to remain viable in both their domestic and global markets. In today's globalized world, both mature and emerging markets are no longer forgiving of such infractions. Governance systems for firms are no longer a luxury, they are no longer an afterthought, they are part of the fundamentals of running a business. They are part of the "Corporate Governance 101" course the Seoul executives presumably failed to take.

For more Corporate Governance sources, check out International Corporate Governance, Eldis - Corporate Social Responsibility, Development Gateway - corporate governance.

For more on IFC's Corporate Governance practice -- click here.

Corporate Governance: What Separates Asian Financial Markets from the Best

The latest "it" thing in Asian countries, eager to attract a greater share of global capital market deals, is to develop international financial hubs in the region, says Financial Times columnist Guy de Jonquieres. Before building those "fields of dreams", de Jonquieres cautions, Asian countries would do well to set up the prerequisites of a modern financial market. Corporate governance is one such prerequisite. So is efficient capital allocation, as well as transparent and competitive market practices.

How far are Asian markets from matching the global reach and depth of New York and London? Not even in the ballpark, de Jonquieres argues. He adds: Asia has some hard work ahead to institute good corporate governance practices, among others. The payoff, however, will be well worth it and measured in better, sustainable economic performance.

For IFC activities on corporate governance, click here.

Emerging Market Firms as Socially Responsible as Global Peers

There are no significant differences between the level of corporate responsibility exhibited by companies in emerging markets and companies operating in OECD member countries, according to a 2005 OECD study. This myth-busting conclusion of the fact-finding study "Corporate Responsibility Practices of Emerging Market Companies" came as a surprise, even to its authors.

Another finding is that the business case for corporate responsibility --such as attracting  employees, improving product market positioning, and protecting reputation -- is equally compelling for emerging market companies.

Finding no. 3: Emerging market companies are the ones leading the way in corporate responsibility. South African firms are singled out for their record in this area in more sectors and across more dimensions than their OECD peers. WRI's NextBillion.net and IFC's Innovations in Emerging Markets blogs have both showcased the leadership of Egypt's Sekem company in this area.

This OECD study deserves revisiting, despite its 2005 publication date. It provides a still rare snapshot of corporate responsibility practices by emerging markets firms that are steadily working to expand their share of global investment flows.