Corporate Governance Pitfalls in Emerging Markets
Part of the Emerging Markets For Dummies Cheat Sheet
When you invest in another country, the laws of your home country don't apply. The accounting systems may be different, and it may seem as though all the company executives are related to one another. When investing in emerging markets, here are a few of the differences to watch for:
Different accounting standards: In many emerging markets, the financial statements aren't detailed. Companies may be allowed to use reserves to manage income, and they may be allowed to book revenues before they're certain that they'll receive them.
Nepotism: In some places, hiring relatives is viewed as a good thing because they're known to other employees and are loyal to the business. In other places, the practice is considered to be bad because you end up with mopes who can't get jobs elsewhere and who can't be fired for incompetence. You're likely to run into a lot of nepotism in emerging markets, and it isn't always good.
Family ownership and control: Many companies in emerging markets were started and are controlled by prominent families. They may control the board of directors and have most of the votes on shareholder issues. In these situations, the family's concerns are always more important than those of other shareholders.
Cross-ownership: In many countries, public companies are owned in part by the shareholders and in part by other public companies. This arrangement can make business complicated; as with family ownership, the concerns of the smaller shareholders aren't considered.
Corruption: Corruption is common in some emerging markets, often because the government and other institutions haven't always worked, and people have had to find ways to work around them. Corruption can interfere with free markets and add to expenses, making business more difficult.