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The 1997 Asian crisis illustrates well the impact that corporate governance practices may have on financial markets: The crisis was mainly caused by the poor corporate governance behaviour of a number of leading financial institutions in various Asian countries. Mismanagement, but also inappropriately structured boards, with lack of oversight over related party transactions led to a loss of confidence by domestic and foreign investors in all emerging markets. The fall in capital inflows and an increase in capital outflows that followed caused a depreciation of stock prices and the resulting market breakdown. An examination of the aftermath of the crisis revealed that in countries where shareholders, and particularly minority shareholders, were less protected, there was considerably more volatility in stock market performance.
Role of Non listed companies and foreign investors
Listed companies are not the only actors of a financial market, non listed companies as SMEs and family owned companies play a major role in building a transparent and safe investment environment. Foreign companies also play an important role in the counties where they operate by influencing local business, therefore they could contribute to the promotion of good corporate governance practices.
Role of Institutional investors
Corporate governance is a crucial factor for institutional investors, especially in Anglo-Saxon countries such as the UK or the US, where some of the most important beneficiaries of companies' investment activities are holders of pension funds and life insurance policies, looking to secu
re their income in their old age.In the interest of their clients, it is important for institutional investors to place great emphasis on exercising ownership rights in all companies in which they invest in order to create value for shareholders.
During a financial crisis, investors could be considered responsible for corporate governance debacles almost as much as boards, if they do not exercise their controlling/voting rights.
Role of rating agencies
S&P has developed its own framework of standards. Using the OECD principles as a starting point, the S&P rating strategy consists of an interactive process based on a range of corporate governance principles. Companies are observed from inside: S&P analysts meet with directors and look at confidential documents as well as published ones.
When assessing companies, S&P breaks down governance into five components:
At a country level
1. Laws and regulations in place: Determine whether the national/regional laws, regulations or self-regulatory codes provide support to governance at the company's level. There is a strong correlation between sovereign credit rating and countries' corporate governance standards.
At a company level
- Ownership structure and influence of major shareholders: This is a major starting point, particularly in emerging economies where family and state ownership are common models.
- Shareholders' rights: How does a company treat its stakeholders, mainly the shareholders? What kind of mechanisms ar
e in place to ensure that stakeholders are properly informed of companies' major pending decisions?
- Transparency disclosure and the audit process: Is there transparency? How accurate is the information disclosed?
- Board effectiveness. This last element is the most difficult one to assess, especially for outsiders.
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