What is being done to improve corporate governance in Frontier Markets?


What is being done to improve corporate governance in Frontier Markets?

We recently discussed why Cambodia’s stock exchange has failed, thus far.  We received a lot of feedback on the article, including many who have suffered similar frustrations in Cambodia and elsewhere.

Cambodia’s situation unfortunately is not unique.  There are many countries in similar circumstances.  Vietnam Airlines has perpetually delayed its IPO, but it faces the same issues as Cambodia despite having a far more advanced and developed stock exchange.  This WSJ article shows that between 2011 and 2015 Vietnam planned to have 531 listings, to date, that number is only 112.  While this is disappointing, I would counter that 112 listings is still a praiseworthy achievement; we tend shy away from being depressed and locked in our homes. However, many of the companies lack basic corporate governance and reporting.

That brings us to the topic of discussion today, what is being done to improve governance and reporting in Frontier Markets and prevent failures in future stock exchange launches?

We look at three areas where agents are working to improve corporate governance and reporting; NGO activity, accounting regulation, and stock exchanges themselves.

NGO Activity

One of the initiatives which has gotten very little attention is the UN’s Sustainable Stock Exchanges Initiative (SSE).  The focus of this initiative is a peer-to-peer learning platform for stock exchanges around the world to improve ESG factors and ultimately, performance.  They publish a ‘Best Practices’ report which is quite useful.

SSE is focused on sustainability, but the lessons are equally valid for establishing basic transparency and corporate governance.   As an example, below is their template for adopting design and implementation factors that maximize desired policy outcomes:

  1. Promote responsible investment practices
  2. Consider making reference to international standards
  3. Use a multi-stakeholder consultation
  4. Provide guidance
  5. Provide incentives for disclosure
  6. Promote accessible and timely disclosure
  7. Encourage third-party assurance

This is a great list for a government keen on establishing capital markets to follow.  One of the things investors have been slow to realize is ESG reporting is just another way to discover more information about a company.   Any investor worth their mettle should be happy with more information.  Regardless of your own views on topics such as social responsibility and global warming, it should be recognized that a company that reports on these factors is likelier to have a better reputation and governance.  As an example, narrated in the highly-recommended book, ‘Private Empire: ExxonMobil and American Power’,  after the Exxon Valdez disaster, ExxonMobil introduced a target of zero occurrences and injuries which was revolutionary at the time.  From this focus on safety and environmental conscientiousness they found that their preferred performance metric, return on invested capital (ROIC) began to improve.

SSE has also released a number of reports which are useful if you are interested in the topic.  Please go here to see a full list of their research.


Grant Thornton and the Association of Chartered Certified Accountants (ACCA) have a good report here, but it is from 2012.  It addresses the need for investors to have a larger say in adopting global standards for governance and what a publicly-listed company ought to be reporting.  We fully endorse this opinion, and believe that structured shareholder engagement has been lacking even in developed markets, let alone Frontier Markets where investors rarely even have a voice in companies that are closely-held and view investors as a source of capital, rather than as shareholders.

IFRS was noble in intent but has been adopted inconsistently and remains to be adopted in many jurisdictions.  PwC has a good report from 2013 which outlines countries’ IFRS positioning.   As with most Big Four reports, the format and presentation are awful, but the content is good.  Deloitte has a handy table here.

Frontier Markets have lagged adopting IFRS, but full adoption of IFRS coupled with an audit by an internationally recognized auditing firm would instantly increase the attractiveness of an IPO and potentially increase the multiple that investors are willing to pay.

As we alluded to in our Cambodia piece, the PPWSA financials were a train wreck.  If Vietnam Airline’s financials do not conform to the highest standards, you can expect that genuine investor interest will be limited.  Genuine, being entirely separate from asset managers who need to purchase a listing to maintain good relations with a political entity.

Stock Exchanges

There are numerous failure stories, but what of the success stories?  We do not hear about them often enough.


We would like to recognize the tremendous leaps and bounds by which the Bucharest Stock Exchange has improved its own governance and done a lot of the things the SSE have highlighted above.  Earlier this year, the Romanian stock exchange introduced a guide for foreign investors.  If every stock exchange had something like this, our lives would be a lot easier.  That is not all, they have also had, since 2009 a corporate governance code, which we are big fans of.  It does not endeavour as many do, to equal something that would be published by the SEC or FSA.  Instead, it recognizes Romania’s current station and provides a realistic code for Romanian companies to follow.  It is important to also note that this code is not a legal code, but focused on governance from a shareholder perspective.  Other Frontier Markets attempt to combine legal regulations for publicly listed entities and shareholder obligations into one messy piece of legislation.


The Bolsa de Valores de Lima (BVL) had a tough time with corporate governance for listed companies.  Peru unfortunately has a market that is also heavily dependent on mining, and mining is a sector that globally has some of the poorest corporate governance of any market sector.  In 2002, Peru released its ‘Principles of Good Governance for Peruvian Companies.’  Nobody paid any attention.  So, in 2008 the BVL decided to create a ‘Corporate Governance Index.’  26 criteria were established and a company needed to score at least 60% in order to be a part of the index.  Companies conducted a self-evaluation which was then required to be audited by a recognized independent firm and an annual update was required to be submitted to the exchange.  Since then, 12 companies have joined the index and many are others are trying to meet the requirements.  We are happy with the progress, and the improvement in corporate governance in Peru is one of the reasons why we feel it is a country with strong potential from an investment perspective.

The Point

We do not expect a Frontier Market to have similar corporate governance standards as a developed market, nor do we expect that change will occur overnight.  What we do expect is that the government and/or stock exchange have the right set of policies in place to foster an environment with strong corporate governance.  Countries will be hard-pressed to find many companies like India’s Tata which imposed its own corporate governance code which was decades ahead of the country’s legislation and policies.

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