Corporate Governance in Developing Economies: Country Studies of Africa, Asia and Latin America

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McGee, Danielle N. Igoe, Thomas Tarangelov, Michael Tyler. McGee, Xiaoli Yuan. International Influence on Accountancy in Vietnam. Robert H. Back Matter Pages About this book Introduction Much has been written about the economic and political problems of countries that are in the process of changing from centrally planned systems to market systems. Accounting and financial system reform Case and comparitive studies Corporate Governance Developing Countries Developing Economies Disclosure and transparency Financial reporting Governance Insider trading Shareholder rights Transition and devel.

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Why Some Countries Are Poor and Others Rich

As this study found that Brazil and South Africa have ESG legislation in place encouraging responsible investor behavior, our findings contradict the literature which purports that there are significant differences in corporate behavior between common and civil law countries e. Rather, this paper indicates that, instead of examining the effect of national institutional configurations e. The literature has treated emerging markets in a homogeneous manner cf.

Corporate Governance in Developing Economies

As argued by Hah and Freeman , given the differences between Asian emerging economies in terms of political and legal systems and cultural norms, research findings in the Asian region cannot be generalized to the whole of Asia. Likewise, this study indicates that within emerging markets there are significant institutional differences which must be taken into consideration in corporate governance studies for a better analysis of governance practices in these nations.

This study strongly suggests that legislation encourages shareholder engagement indirectly by encouraging Responsible Investment more broadly. By studying the impact of regulation on shareholder engagement in emerging markets, this study makes a number of academic and practical contributions. Firstly, this research contributes to the academic literature related to private investor engagement, particularly in emerging markets.

Therefore, the present study helps to fill a substantial gap in the literature with regard to this particular area of research. While institutional theory has been applied to research corporate governance widely e. Prior research from an institutional perspective has put much emphasis on coercive isomorphism pressures with regard to government policies on Responsible Investment. However, the present research points to the importance of the normative isomorphism function of government legislation in terms of endorsing and facilitating rather than mandating changes in investor behavior on social and environmental issues through influencing the basis of the discourse among investors on ESG issues, and these normative indirect pressures appear to be more effective in changing investor behavior than perhaps previously anticipated in the literature.

At the same time, this paper highlights the need to disaggregate corporate governance institutional arrangements into individual variables to more accurately examine the influence of the institutional environment on governance practices. Hence this study contributes to filling a gap in the qualitative governance research by carrying out a comparative analysis of governance practices of two emerging markets.

As for practical contributions, this study draws investors' attention to the importance of a thorough understanding of the local legal environment of the companies with which they engage. For example, this research indicates how the combination of regulation limiting foreign investment from South African pension funds and the restricted investment universe increases the importance of the engagement strategy for local investors. It also identifies and discusses the legal mechanisms that are available to minority shareholders in Brazil willing to engage with investee companies as an insider in the boards of directors.

Further, it shows how the incorporation of ESG issues into national legislation contributed towards redefining the concept of fiduciary duties for pension funds. This research finally offers insights to governments interested in fostering engagement practices in their countries.

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Like any other study, the present study has a number of limitations. First, given our finding that the level of sophistication of the legislation in Brazil and South Africa is more similar to that of developed countries than other emerging markets, it may not be possible to generalize the research findings to all emerging markets.

Second, the interview sample is largely comprised of PRI signatories as priority was given to interviewees who value Responsible Investment practices, hence this study cannot claim to be representative of all institutional investors in Brazil and South Africa.

Third, by interviewing investors who value Responsible Investment practices, this study focused on identifying the factors that encourage shareholder engagement rather than factors that may discourage shareholder engagement in these nations. Nonetheless, this research study clearly addresses a gap in the current literature and it provides rich empirical insights from two leading emerging markets. At the time of the interviews, some changes to the institutional contexts were taking place, and, according to the interviewees, the full effects of these changes had not yet been felt.

In South Africa, it is still uncertain what the full effects of Regulation 28 may be. In Brazil, a possible amendment to Law is unconfirmed thus far. Moreover, in April , the Brazilian Central Bank issued Resolution , requiring that financial institutions establish and implement a policy of social and environmental responsibility Banco Central do Brasil, , creating an additional driver for financial institutions to incorporate ESG issues in Brazil. While we cannot generalize the research findings to all emerging markets, our results may be of considerable relevance for those emerging markets with significant assets employing Responsible Investment strategies such as South Korea and Malaysia ASrIA, and, in particular, emerging markets whose regulatory institutions incentivize investor responsible behavior, as is notably the case with the Mexican Pension Fund regulator CONSAR , which recommends pension fund administrators to disclose whether investee companies have social responsibility certifications Montes, Given that there are significant institutional differences within emerging markets, future studies examining institutional variables individually would be more useful to investigate how the institutional context encourages or curbs shareholder engagement in these nations.

Our main finding that rising legislation encourages shareholder engagement and Responsible Investment in some emerging economies stands in contrast to the widespread axiomatic assumption in the political CSR literature that national governments are progressively losing the power to regulate the private sector in a globalized economy e. Our findings are even more significant given that regulation impacted investor behavior through normative — rather than coercive — isomorphism channels, falling in line with wider scholarship in sociology which suggests that governments employ signaling processes in order to shape norms and standards for organizations to follow, without the need for mandatory regulation e.

The authors are very grateful to the Associate Editor Ruth Aguilera and two anonymous reviewers for their insightful guidance in improving this article. The authors would also like to thank Andrea Werner, Costas Priporas, and Christine Mallin for their comments on an early draft. In this study, shareholder engagement is defined as direct negotiations between investors and portfolio companies regarding the company's strategic and operational matters.

For the purposes of this research, only shareholder engagement between institutional investors and listed companies on environmental, social, and corporate governance ESG concerns will be considered. Filing resolutions and voting at Annual General Meetings will not be considered engagement. Main interview questions: Please state your position and main responsibilities. Please describe the state of Responsible Investment and shareholder engagement in the country: are institutional investors incorporating ESG issues into their investment decisions and engaging with investee companies on these issues?

Which is the approach to Responsible Investment of your organization? Is your organization engaging with companies at the moment on ESG issues? In your opinion, what encourages shareholder engagement? Camila Yamahaki is an independent researcher in Brazil.

Additionally, she has been involved in several research projects on topics related to CSR, corporate philanthropy, Responsible Investment and shareholder engagement in emerging markets, and has contributed to The Routledge handbook of responsible investment Routledge, and The world guide to CSR Greenleaf, Volume 24 , Issue 5.

The full text of this article hosted at iucr.

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Abstract Manuscript type Empirical. Introduction There has been a significant growth of Responsible Investment in emerging markets as institutional investors increasingly take into consideration environmental, social, and corporate governance ESG issues in their investment decision making.

The Role of Legislation in Responsible Behavior The body of academic research finds that legislation and legal systems are important factors influencing corporate governance e. Research Findings To investigate whether regulation influences private shareholder engagement in Brazil and South Africa, the interviewees from these two countries were asked whether they believe that legislation encourages shareholder engagement behavior in their countries. Total value is over percent because some interviewees were categorized into more than one alternative. Representative quotations supporting direct impact of legislation Quote 1.

So South Africa wasn't as badly affected by the financial crisis because we had limited exposure to international markets. The bulk of our investments had to be within South Africa, so investment managers in a sense, because there is a limited number of possible investments on the JSE, Johannesburg Stock Exchange, specifically for listed equities, your investment universe is quite small.

Hence, it [the law] has established a few instruments So, to redress [this situation], the [Companies] law offered [minority shareholders] the election of the Fiscal Council, the election of minority representatives to the Board of Directors. CRISA is guidance, but Regulation 28 is regulation and it appears that Regulation 28 has ensured the interest of the asset owners, so all of a sudden now, there seems to be a big focus on Responsible Investment.

And, even though it is broad, pension funds have already started being interested and paying attention to So, eventually, that went through a discussion with the management of the small pension funds. It is a start. Hence, pension funds were concerned about learning about the topic and about making progress in relation to ESG issues.

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So asset owners would send questionnaires about what you consider Responsible Investment to be, how are you responding to CRISA, Regulation 28, how your investment processes are changing as a result of that. They just have no idea. There might be shop stewards that are voted by their work colleagues to sit on the board of the pension funds. They probably have quite a low educational skills level as it is, then they come into a quite overwhelming environment of now sitting and become financial managers or trustees of this fund.

They will take a lot of their guidance from the investment consultants and actuaries and then they will take a lot of guidance from the asset managers and they will just expect them to take care of this for the fund. So the change to [Regulation] 28 provides, at least, recognition which is what we've been saying anyway for a long time that sustainability of a pension fund is not — or at least the financial return is not narrowly related to the numbers.

Direct Positive Influence of Legislation Four interviewees claimed that direct encouragement to engagement behavior occurs through requiring South African pension funds to invest the major part of their assets domestically and through protecting the rights of Brazilian minority shareholders. Indirect Positive Influence of Legislation The research findings strongly suggest that legislation provides an indirect encouragement to shareholder engagement behavior. Increased Awareness of Responsible Investment Nearly 39 percent of interviewees 42 percent in South Africa and 35 percent in Brazil believe that legislation contributes to improving the level of understanding of investors on Responsible Investment issues.

Increase of Pension Fund and Asset Consultant Interest in the Asset Managers' Responsible Investment Practices Approximately 21 percent of the South African interviewees, representing 56 percent of all South African asset managers interviewed, noted that Regulation 28 has also encouraged pension funds and asset consultants to start asking current and potential asset managers about their Responsible Investment practices. Pension Funds Less Wary of Violating their Fiduciary Duties Nearly 16 percent of interviewees 25 percent in South Africa, 5 percent in Brazil argued that legislation makes pension funds less wary of violating their fiduciary duties when incorporating ESG issues in their investment processes.

Discussion In this paper, we analyzed to what extent regulations influence private shareholder engagement attitudes and behavior of pension funds and asset managers with listed companies in Brazil and South Africa; in particular, we investigated the role of the Pension Funds Act in South Africa and the Companies Law and Resolution in Brazil. Conclusions and Implications This study strongly suggests that legislation encourages shareholder engagement indirectly by encouraging Responsible Investment more broadly.

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Acknowledgements The authors are very grateful to the Associate Editor Ruth Aguilera and two anonymous reviewers for their insightful guidance in improving this article. Appendix Appendix 1: Interview guide to institutional investors Definition of shareholder engagement In this study, shareholder engagement is defined as direct negotiations between investors and portfolio companies regarding the company's strategic and operational matters.

Aaronson, S.


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