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A Importância da Governança Corporativa para os Mercados Emergentes
Renato de L. GrandmontHead, Global Corporate Governance Research
2
Contents
1 Background
2 Corporate Governance and its Implications for GEMs
3 Global Trends in Corporate Governance
4 Conclusion
3
What Is Corporate Governance?
Corporation– Weak board of directors
– lack of independence
– lack of accountability
– Unfair shareholder treatment
– One share one vote
– Tag along rights
– Lack of information disclosure
– Off balance sheet operations
– Accounting standards
– Business practices
– Cross group subsidies through transfer pricing
– Old habits are hard to change (mindset of controlling families)
Country– Legal system does not work (can’t sue)
– Weak enforcement of laws and regulations
– Outdated laws and regulations
– Lack of transparency in fiscal matters
– Structural problems:
– Different share classes
– Deficient capital structure (voting - non-voting)
– Ownership structures
Corporate Governance is a measurement of risk
Examples of Corporate Governance Problems
4
Why Corporate Governance Is Key For GEMs
• One of the causes of the GEMs’ Valuation Discount
• Investors’ perception about GEMs must change for valuations to increase
• Corporate Governance is a key ingredient to change that perception– Laws– Regulations– Corporate Action - Be a Global Player!
• Viability of asset class is at risk – Companies and entire countries are being black listed!
5
Exemplary Emerging Companies Can Access A New Investor Base
Fund Flows Into Emerging Markets: From 26% to 6% of an International PortfolioFund Flows Into Latin America: From 23% to 7% of an Emerging Market Portfolio
0%
5%
10%
15%
20%
25%
30%
1/8
/1992
5/8
/1992
9/8
/1992
1/8
/1993
5/8
/1993
9/8
/1993
1/8
/1994
5/8
/1994
9/8
/1994
1/8
/1995
5/8
/1995
9/8
/1995
1/8
/1996
5/8
/1996
9/8
/1996
1/8
/1997
5/8
/1997
9/8
/1997
1/8
/1998
5/8
/1998
9/8
/1998
1/8
/1999
5/8
/1999
9/8
/1999
1/8
/2000
5/8
/2000
9/8
/2000
1/8
/2001
5/8
/2001
9/8
/2001
1/8
/2002
5/8
/2002
9/8
/2002 0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
Emrg/Intl Assets (1,000s)
Source: DB Corporate Governance Research, AMGDS
6
For How Long Will The Asset Class Remain “Undervalued”?GEMs - Valuations and Estimates
15-Nov-02 PER EPS Growth PBV ROE PCF EV/EBITDA Mkt Cap Mkt Cap
2002E 2003E 2002E 2003E 2002E 2002E 2002E 2003E 2002E 2003E GDP 02E MSCI
Country (x) (x) $(%) $(%) (x) $(%) (x) (x) (x) (x) $(%) (%)
Asia
Taiwan 23.6 18.2 46.7 29.7 2.1 12.4 12.1 10.3 13.5 11.6 81.6 72,754
China 15.5 14.5 23.3 7.4 1.2 12.7 10.1 9.2 9.4 9.2 42.7 34,493
Korea 8.6 7.0 56.4 21.6 1.2 18.1 4.4 3.7 5.4 4.8 160.3 120,135
Malaysia 14.6 13.1 9.3 11.2 1.6 15.5 7.9 7.1 10.4 9.1 31.8 29,639
Indonesia 5.0 4.6 12.2 11.1 1.2 28.0 3.5 3.3 4.0 3.5 7.7 4,908
Philippines 19.9 15.1 1.7 31.7 1.0 9.3 5.2 5.0 8.2 7.6 3.7 2,759
Thailand 11.1 9.3 44.4 21.1 1.6 17.0 5.1 4.7 7.5 6.6 8.8 8,741
India 12.5 11.4 20.3 9.7 2.4 33.5 9.7 9.1 9.2 8.6 21.1 22,562
Total Asia 14.1 11.7 41.1 19.9 1.6 17.0 7.7 6.8 8.7 7.7 41.6 297,193
Latin America
Argentina 8.1 9.5 26.8 5.7 1.2 45.7 4.7 5.4 5.3 5.1 20.2 1,734
Brazil 6.3 4.7 5.2 35.3 0.7 21.0 2.5 2.1 5.1 4.6 31.8 30,785
Chile 14.2 11.6 -14.2 22.7 1.1 7.9 3.7 4.3 8.6 7.9 97.2 8,364
Colombia 6.5 5.5 47.1 18.1 0.3 6.1 na na na na 17.9 571
Mexico 9.9 8.5 11.9 17.1 1.4 18.7 3.6 3.4 5.4 5.1 43.5 40,362
Peru 10.3 9.4 23.7 10.3 2.2 40.7 0.9 0.8 3.5 3.8 27.5 2,404
Venezuela 8.6 6.3 70.7 36.9 na na na na na na 16.5 768Total Lat Am 9.0 7.4 8.3 24.0 1.1 19.6 3.2 3.0 5.6 5.2 46.2 84,988
EMEA
Turkey 19.5 13.1 nm 58.7 2.2 9.8 5.0 4.4 10.5 6.3 32.0 8,890
Israel 16.6 9.0 40.0 39.6 2.0 20.0 4.7 8.2 11.6 10.8 45.9 18,024
Russia 8.8 8.1 12.7 9.1 1.0 13.8 4.8 4.5 5.8 5.5 29.4 25,001
Poland 19.9 17.5 48.1 33.0 1.5 9.5 3.5 3.7 6.2 6.0 8.5 6,552
Hungary 11.3 9.9 36.6 16.9 1.6 15.5 3.9 3.4 5.5 5.0 32.8 6,260
South Africa 9.8 8.7 27.0 13.3 1.9 25.3 6.5 5.8 7.2 6.6 157.2 68,719
Egypt 5.8 5.7 29.4 -0.9 1.0 17.3 3.3 3.7 4.4 5.7 na 1,121
Czech 10.9 10.4 19.8 4.8 0.7 8.3 2.2 2.1 4.2 3.7 na 2,629
Total EMEA 11.7 9.4 27.4 19.8 1.7 19.9 5.5 5.5 7.5 6.8 80.1 139,605
GEM Total 12.6 10.4 32.1 20.5 1.5 18.2 6.4 5.8 7.9 7.1 52.6 521,786
EU Total 15.5 13.1 20.8 16.4 1.8 9.6 8.0 7.0 6.5 5.8
EAFE Total 16.6 14.1 30.0 16.3 1.6 8.3 7.9 7.1 6.5 5.9US Total 17.2 14.3 17.5 20.5 2.7 16.2 10.6 9.2 8.4 7.2
[1] DNE (Decrease on Negative Earnings); [2] INE (Increase on Negative Earnings)
Source: Deutsche Bank GEMs Strategy, IBES, Bloomberg, MSCI
7
Is Texas Another Emerging Market?
Enron - Corporate Governance Wake Up Call for the US
Some of the Issues: – Lack of transparency– Complicated accounting system - insufficient disclosure - off-balance sheet financing– Lack of board independence (consultants, charitable donations)
Enron is leading to:– Legal and regulatory changes– An overhaul of US accounting standards
– Review of the role of auditors and of US GAAP– Stock exchange listing requirements could change– Institutional investors also reacting
Corporate governance is a global issue, present in all developed markets as well
8
Valuation Analysis: It Pays To Be Good
Premium of Top Performers versus Bottom Performers: Quintile
Source: Deutsche Bank Securities Inc. estimates and company information
25%
65%
84%
193%
158%
70%
131%
240%
85%
30%
96%
241%
47%
61%
89%
244%
0%
50%
100%
150%
200%
250%
300%
Latin America South Africa EEMEA Emerging Europe
Average of PE Average of PB Average of PCF Average of EV/EBITDA
Note: Based on 2002 estimates, priced as of November 2002
9
Performance Analysis: It Pays to Hold the Good
Source: Deutsche Bank Securities Inc. estimates, Factset, Bloomberg, MSCI
0
20
40
60
80
100
120
140
160
180
MSCI EMF Latin America Top Quintile Bottom Quintile Top Decile Bottom Decile
Bottom Quint
Top Quintile
MSCI LA
Bottom Decile
Top Decile
Latin America: Corporate governance appears to be a contributing factor to price performance (5 Years, U$ indexed, rebased)
10
Performance Analysis: It Pays to Hold the Good
EEMEA South Africa
Corporate governance appears to be a contributing factor to price performance(5 Years, U$ indexed, rebased)
0
20
40
60
80
100
120
140
160
180
08/0
1/19
97
10/0
1/19
97
12/0
1/19
97
02/0
1/19
98
04/0
1/19
98
06/0
1/19
98
08/0
1/19
98
10/0
1/19
98
12/0
1/19
98
02/0
1/19
99
04/0
1/19
99
06/0
1/19
99
08/0
1/19
99
10/0
1/19
99
12/0
1/19
99
02/0
1/20
00
04/0
1/20
00
06/0
1/20
00
08/0
1/20
00
10/0
1/20
00
12/0
1/20
00
02/0
1/20
01
04/0
1/20
01
06/0
1/20
01
08/0
1/20
01
10/0
1/20
01
12/0
1/20
01
02/0
1/20
02
04/0
1/20
02
06/0
1/20
02
08/0
1/20
02
Tier 1 Tier 5 Tiers 1 & 2 Tiers 4 & 5 MSCI SA
Tier 1
Tiers 1&2
Tier 5
Tiers 4&5
MSCI SA
Source: Deutsche Bank Securities Inc. estimates, Factset, MSCI
30
50
70
90
110
130
150
170
190
210
230
Msci EMEA Tiers 1+2 Tiers 4+5
MSCI EMEA
Tiers 1+2
Tiers 4+5
11
Implications of Better Corporate Governance
Corporation– Attract global investors – Increase in value– Reduction of cost of capital– Enhances capital efficiency– Protection of all shareholders attracts more shareholders
Economy– Reduces the “country risk” - micro efforts– Accelerates the development of capital market– Induces stable long term foreign capital inflows– Increases national competitiveness– Helps achieve sustainable growth– Helps increase transparency in both private and public sectors, which helps reduce corruption
12
Global Trends in Corporate Governance
Increased Fiduciary Responsibilities
Corporate Failures will help the US work to improve corporate governance– Legal and regulatory implications for all that trade in US markets
Awareness is being raised about corporate governance issues
Institutional Investors and Analysts
Corporates and Lenders
Regulators and Stock Exchanges– are trying to improve corporate governance in order to boost their equity markets
Governments concerned about reducing:– want to reduce the “country risk” and the cost of capital for their companies
Codes of Corporate Governance being adopted
13
Increased Fiduciary Responsibilities - The Role of Corporate Governance
New Law in the US (Sarbanes-Oxley Act) regulations to follow, key issues:
CEO/CFO certification (criminal offense)
Audit Committee (independent directors)
Accounting standards (disclosure & move towards principles based accounting?)
New Environment has Implications for:
Securities Exchange Regulators
Board Members, specially Independent Directors
Institutional Investors
Investment Banks (research independence)
Stock Exchanges (adopt new measures to protect investors)
Governments (reduce investment risk to attract more capital)
14
Conclusion - CG Has Direct Implications for Investment Decisions
GEMs are undervalued and the viability of the asset class depends on investors returning to the region to stay
– requires both macro and micro reforms
Companies want to attract global investors and so need to improve their standards
Corporate governance impacts equity valuation and stock price performance – Countries/Companies want to attract global investors and so need to improve their standards – Valuation re-rating is possible through better Corporate Governance– But the opposite is also true
Increased fiduciary responsibilities for board members and investors– Legislative/regulatory changes taking place in many countries– Corporate governance is a measurement of risk