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Foreign Institutional Investors and Corporate
Governance in Emerging Markets
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May, 2016
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Foreign Institutional Investors and Corporate Governance
In Emerging Markets
May, 2016
Table of Contents
Executive Summary .................................................................................................................................. i
Introduction ............................................................................................................................................ 2
1. Institutional Investors: Global Trends................................................................................................... 5
1.1 Institutional investors are the largest shareholders in the developed world ................................... 5
1.2 Domestic institutional investors are growing rapidly in emerging markets ..................................... 6
1.3 Institutional investors are major investors across borders.............................................................. 7
2. How do institutional investors take corporate governance considerations into their investment
decision-making?..................................................................................................................................... 8
2.1 Governance Factors in Investment Decision-Making ...................................................................... 8
2.2 Investor business models ............................................................................................................. 10
2.3 Investment decision-making: Results from the Survey ................................................................. 11
3. What are the key corporate governance concerns for foreign institutional investors? ....................... 16
3.1 International corporate governance standards ............................................................................ 16
3.2 Evidence from the academic literature......................................................................................... 17
3.3 Corporate governance concerns: Survey Results .......................................................................... 18
4. Ownership Engagement and Stewardship .......................................................................................... 22
4.1 International standards of ownership and engagement ............................................................... 22
4.2 Challenges to the stewardship model........................................................................................... 23
4.3 Stewardship across borders ......................................................................................................... 25
4.4 Stewardship and Engagement: Results from the Survey ............................................................... 25
5. Conclusions and Implications for World Bank Policy Work ................................................................. 30
Annex 1: International Data on Institutional Investor Assets and Asset Flows ........................................ 33
Bibliography .......................................................................................................................................... 36
Annex II: ................................................................................................................................................ 41
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Executive Summary
Two of the most pressing challenges in the developing world continue to remain: attracting foreign
capital and striking a balance between financial development/growth and stability. In both instances,
good corporate governance presents a solution to ensuring adequate investor protection and resilient
institutions. This paper aims at identifying what corporate governance obstacles can be removed to
further facilitate international institutional investor investment flows towards the developing world.
To further explore the corporate governance concerns of foreign institutional investors in emerging
markets, the Finance and Markets Practice of the World Bank decided to partner with the Rotman
International Centre for Pension Management (ICPM) to conduct a survey of its research
partners/pension fund asset owners. Surveying ICPM research partners allowed us to reach out to some
of the largest asset owners in the world, and to keep our approach comprehensive, reachable, and
focused. ICPM is a global, research-based network of pension delivery organizations that stimulates
leading-edge thinking and practice about pension design and management. The survey was sent to 35
research partners of ICPM.
A total of 20 usable responses were received. The paper first briefly describes the growth of institutional
investors around the globe and then combines existing literature with survey responses to attempt to
answer these three closely-related questions:



How do institutional investors take corporate governance considerations into account in their
investment decision-making in emerging markets?
What are the specific corporate governance concerns of international institutional investors?
And in which manner can corporate governance bridge the “trust gap” between wary
institutional investors and persistent funding needs in emerging markets?
Once shares are held in a portfolio, what are the obstacles to further engagement and
stewardship in emerging markets?
Given the advantages of improved corporate governance, it seems straightforward that companies and
countries should adopt corporate governance frameworks that increase accountability, responsibility,
transparency, and good decision-making. But reform has moved slowly in many countries, and a
complementary approach that has emerged is to encourage shareholders and other stakeholders to
directly monitor portfolio companies to directly improve governance practices. Because of their size and
sophistication, the key players in this movement are institutional investors, both domestic and foreign.
In order to give a dimension to the presence of institutional investors around the globe, in the US
institutional ownership of total outstanding equity in 1950 was at 6.1%, today it is at over 50%. In the
UK, direct individual ownership in listed companies was at 54% in 1963, and it dropped at 11.5% in 2012.
Institutional presence is also growing rapidly in emerging markets along with domestic institutional
investors. If emerging markets are potential investment outlets, then why investment volumes are not
higher? Does corporate governance really matter to institutional investors? And if so, to what extent?
-i-
Apparently it does. Institutional investors have begun to integrate governance considerations when
making decisions to invest in emerging markets. Given the limited exposures, they still tend to outsource
most of the analysis to proxy firms and local asset managers. Also, corporate governance shortcomings
do not represent yet a barrier to invest and this is mainly due to two reasons: economic and financial
considerations take precedence when exploring new markets and corporate governance risk premiums
are still hard to quantify properly in emerging markets.
What concerns then institutional investors when they decide to engage in the developing world? Quality
of financial reporting, quality of boards, quality of audits, level of shareholder rights, weak rule of law
and problematic voting procedures are the most recurring preoccupations both at the
normative/country level and at the company/practice level.
In light of these findings, it seems clear that there is a need to continue to bring WB partner countries
more in line with international practices and expectations and continue to use the WB convening
powers to spur regulators engagement and to find better ways to enhance investor dialogue. Regional
research initiatives ala Asean Corporate Governance Association seem to be a potential useful option.
On research, more can be done to gather concrete evidence on the bad practices that investors are
facing around the globe. This can be achieved if research efforts attempt to include proxy voting firms
and local asset managers, which appear to have a better pulse of the corporate dynamics in emerging
markets.
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Introduction
Over the past two decades, the WBG has been engaged in three global mandates in the financial sector:
(1) promoting financial depth, stability, and integrity; (2) promoting financial inclusion; (3) contributing
to the post-2015 sustainable development agenda. Within this operational framework, the WBG has
remained engaged on legal and regulatory corporate governance (CG) reforms as an important pillar for
financial stability and sustainable financial growth.
The post-crisis financial landscape has left a lot of challenges on the table for emerging market
countries, reinforcing the need to remain engaged in the financial development and stability agendas.
The global financial system remains fragile, as it continues to absorb the market and regulatory impacts
of the recent crises. Moreover, it may be subject to further shocks as developed countries exit out of
their extraordinary monetary policies and interest rates increase worldwide. Several developing
countries still lack the institutional capacity and market depth to manage these impacts and are already
suffering from lackluster growth and remain exposed to global and regional shocks.
Recent empirical research concludes that financial development contributes to growth, but with some
important caveats. First, the link between financial deepening and growth is still strong at intermediate
levels of financial development (the range within which most of the WBG’s client countries operate) but
diminishes at high levels and can become eventually negative (the “too much finance” effect). Second,
the pace of financial deepening matters – a very rapid pace leads to instability and can erode hard-won
gains. Third, the quality of the enabling environment (e.g. regulation and supervision, financial
infrastructure) matters and can improve the links between financial deepening and growth and the
trade-offs between financial development and financial stability. Fourth, at higher levels of development
the contribution of financial markets (relative to institutions) to growth tends to increase. 1The recent
literature has important implications and emphasizes even more the importance of a strong enabling
environment and the need to address potential trade-offs.
Research also shows that improvements in the quality of the regulatory framework and of financial
infrastructure are important determinants of financial development and that a sound enabling
environment strengthens the positive impact of finance on growth and helps policy-makers address
more effectively the trade-offs between financial development and stability.
The most important challenge for our client countries continues to remain how to strike that trade-off
between financial development and financial stability, how to facilitate new investments and new
players in their financial sectors while ensuring stability and sustainable growth. Research shows that
finding a balance in this constant trade-off can be facilitated and supported by solid adoption of good
CG practices. Indeed many studies agree that better governance frameworks benefit firms through
greater access to financing, lower cost of capital, and better firm readiness to absorb economic and
financial shocks and ultimately more prepared and resilient to crises.
1 See, e.g., Rousseau and Wachtel (2011), Arcand, Berkes, and Panizza (2012), Barajas, Chami and Yousefi (2013), Aizenman,
Junjarak and Park (2015), Singh and Huang (2015) and, especially, Sahay et al (2015). The OECD (2015a) shows that the impact
of financial development on growth in OECD countries is mostly negative, but the sample consists primarily of countries at a
high stage of financial and economic development.
-2-
Given the advantages of improved CG, it seems straightforward that companies and countries should
adopt CG frameworks that increase accountability, responsibility, transparency, and good decisionmaking. But reform has moved slowly in many countries, as both the public and private sectors resist
change and openness. This in turn has resulted in a long debate on the best approaches to encourage
change in these areas. As is often the case, two basic “carrot and stick” perspectives have emerged. On
the one hand, laws and regulations can be changed to encourage or force companies to change their
behavior and adopt modern CG standards. 2
A complementary approach is to encourage shareholders and other stakeholders to directly monitor
portfolio companies to improve CG practices. Because of their size and sophistication, the key players in
this movement are institutional investors, both domestic and foreign. Many initiatives have been
launched to encourage and convince institutional investors to play a more active role. However, not
enough is known about how institutional investors utilize CG in their investment decisions, in particular
in emerging markets, where funding needs are high and investor protection standards often still low.
While some studies tend to incorporate emerging markets in a broader analysis which captures
developed markets, there is still preoccupying paucity of research data on emerging markets. As Alsarat
and Dallas (2011) point out, less than one percent of the available research on CG focuses on these
markets. And this may be in part a result of lack of comprehensive investor portfolio data and
governance information of companies operating in emerging markets.
Institutional investors tend to include governance considerations as part of a broader analysis of
environmental and social factors. Our focus remains on governance considerations. But the paper will
sometimes refer somewhat interchangeably to both governance and environmental, social, and
governance (ESG) factors.
To further explore role and activities of foreign institutional investors in emerging markets, the Finance
and Markets Practice of the World Bank partnered with the Rotman International Centre for Pension
Management (ICPM) to conduct a survey of its research partners/pension fund asset owners. 3 ICPM is a
global, research-based network of pension delivery organizations that stimulates leading-edge thinking
and practice about pension design and management. 4 The survey was carried out in November 2015 February 2016. The questionnaire was sent to 35 research partners of ICPM. A total of 20 usable
responses were received. Survey questions and responses to the survey are presented in Annex II.
This paper aims at shedding light on what the key CG priorities and concerns for institutional investors
are when investing in emerging markets. It also further refines our policy dialogue with country
authorities to design reform paths that can address international institutional investors’ preoccupations
and in turn facilitate more investment flows into emerging and developing economies.
2
This has been the focus of the World Bank’s program of Reports on the Observance of Standards and Codes (ROSC), which
benchmarks country law, regulations, and institutions against the OECD Principles of Corporate Governance to encourage
countries to update their legal and regulatory framework.
3
The World Bank is also a member of the ICPM network.
4 http://www.rijpm.com/about/about-us
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The paper will first briefly describe the growth of institutional investors around the globe and will then
combine existing literature with survey responses to attempt to answer these three closely-related
questions:



How do institutional investors take CG considerations into account in their investment decisionmaking?
What are the specific CG concerns of international institutional investors? And in which manner
can CG bridge the “trust gap” between wary institutional investors and persistent funding needs
in emerging markets?
Once shares are held in a portfolio, what are the obstacles to further engagement and
stewardship in emerging markets?
The table in Annex II provides some basic data about the survey respondents:
 The respondents are all pension funds, and come from nine counties, with a relatively large
number of funds from English-speaking countries (especially Canada), reflecting ICPM’s
membership base.
 There is a wide variation in the size of funds, ranging from an average fund size of USD 19.5
billion for the two funds in New Zealand, to an average USD 187.5 billion in the US.
 Out a total of USD 1,211.3 billion AUM, the 17 funds hold a total of USD 501.7 billion in listed
equity, or about 41 percent.
 The funds hold USD 67.27 billion in listed equity, in emerging markets about 5 percent of AUM
and 13.4 percent of total listed equity.
 The funds generally hold diversified portfolios. Most (70 percent) of the funds responding to the
survey have broadly diversified holdings. The remainder have holdings that are more
concentrated; one of the respondents has a combination of broad EM index and concentrated
holdings, the others have more concentrated holdings. Most of the funds will thus have a large
number of companies in their portfolio, reducing incentives and increasing costs for preinvestment due diligence, and post-investment monitoring and engagement.
This paper was drafted by Alexander Berg (World Bank, Finance and Markets Practice), Pasquale di
Benedetta (World Bank, Finance and Markets Practice), and Andreas Grimminger (PGS Advisors
International). Mr. John Jarrett developed the survey instrument. The authors wish to thank the ICPM
research partners that participated in the survey, Mr. Rob Bauer (Executive Director, ICPM), Ann
Henhoeffer (Associate Director, ICPM), and Karin Clarke (Associate, ICPM). We would also like to thank
the Treasury Department of the World Bank Group and in particular Mr. Sudhir Rajkumar, Lead Financial
Officer and Head of Pension Advisory Management of the World Bank and Vice Chairman of ICPM, who
facilitated the connection to ICPM and made the survey possible.
-4-
1. Institutional Investors: Global Trends
Institutional investors are legal persons that mostly act as intermediary investors, managing and
investing other people’s money. Moving beyond this general definition, there are a number of different
ways institutional investors can be categorized -- by asset origin, investment strategy, fee and portfolio
structure, ownership engagement and lastly country of origin of the investors. Understanding the
institutional landscape is important because differences among investors help to explain different
behaviors.
Institutions can in general be characterized as either “asset owners” or “asset managers”. While both
are institutional investors, asset owners are the ultimate (sometimes called beneficial) owners of assets,
often held on behalf of beneficiaries. They make asset allocation decisions based on investment
objectives and markets forecasts, as well as regulatory and accounting rules. Asset owners can manage
their assets directly and/or outsource asset management to an asset manager. Asset managers, in turn,
act as agents on behalf of clients (the asset owners). They are not the ultimate owner of the assets
under management (although they may be called nominee owners).
Institutional investors can also be divided between “traditional” institutional investors (pension funds,
investment funds and insurance companies) and “alternative” institutional investors (hedge funds,
private equity firms, exchange-traded funds and sovereign wealth funds).
1.1 Institutional investors are the largest shareholders in the developed world
Over the past 50 years institutional investors have become the primary providers of equity finance. As
Gillan and Starks (2003) state, “In many countries institutional investors became a significant, if not
majority, component of equity markets during the latter half of the twentieth century.”5
In the United States, institutional ownership has grown from US$8.7 billion in 1950 representing 6.1% of
total outstanding equity to US$10.2 trillion in 2009, representing 50.6% of total outstanding equity.6 In
the top 1,000 U.S. corporations the institutional ownership concentration is even higher at 73%. This
represents a dramatic shift in the ownership structure of listed companies.
This trend is clearly confirmed in most OECD markets where direct ownership has moved to
intermediary ownership. Isaksson and Celik (2013) calculate that in 2010, pension funds, mutual funds
and insurance companies held nearly half of the listed equity in the world, with a total market value of
USD 26 trillion.7
5
Gillan, Starks (2003), p. 3
The Conference Board 2010. Gilson and Gordon (2013) argue that this re-concentration of ownership, especially
in the United States in the hand of intermediaries is a consequence of two factors: first, the political decisions to
privatize retirement provisioning (beyond the social safety net of Social Security) and to facilitate advance funding;
and second, the intellectual triumph of modern portfolio theory, which promotes diversification as the touchstone
of investment strategy.
7
Ibid. The investor data does not cover non-OECD countries whose share in the global equity market is believed to
be low however. In addition, these numbers are calculated based on the total market value of the corporations,
which means that the institutional ownership of the global free float is likely to be considerably higher.
6
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In the United Kingdom, direct (individual) ownership in listed companies has decreased from 54% in
1963 to 11.5% in 2012.8
The presence of different types of institutional investors varies widely from country to country and
clearly increases or decreases according to the development bracket where countries are in. Overall,
their presence remains significant in high income countries (table 1).
Table 1: Institutional Investor Assets as a Share of GDP
Mutual Fund Assets
Pension Fund Assets
% of GDP
% of GDP
High income: OECD
High income: non-OECD
Upper middle income
Lower middle income
201.2
69.2
10.0
5.0
40.9
15.5
15.7
7.6
According to the aggregate country data (presented in Annex 1 and summarized in the table above),
pension funds as a share of GDP vary from 184.1 percent in the Netherlands to 104.9 percent in the
United Kingdom to 57.9 percent in Malaysia to 40.8 percent in South Africa. 9 The same is not true for
mutual funds where their share of GDP varies from 8.6 percent in the Netherlands to 47.3 percent in the
United Kingdom to 32 percent in Malaysia to 41 percent in South Africa.
A recent survey by the OECD (2011) shows that pension funds are the major institutional investors in
countries such as Australia, Chile and Israel, while insurance companies are dominant investors in
Germany, France and Sweden, and investment funds play an important role in Greece and Mexico.10
Traditional institutional investors had the largest AUM in OECD countries in 2011 totaling US$73.4
trillion, with investment funds having the lion’s share at just under US$30 trillion.11
1.2 Domestic institutional investors are growing rapidly in emerging markets
Detailed numbers for the size of domestic institutional investors in emerging markets are difficult to
obtain. Data presented in Annex 1 indicate that countries with higher income tend to have larger
institutional investors - average pension fund assets as a percent of GDP is 40.9% in high-income OECD
countries compared to, 15.5 percent in high-income non-OECD countries, 15.7 percent in upper middleincome countries, and 7.6 percent in lower middle-income countries.12
8
Isaksson and Celik (2013), p. 28
Finstats 2016 database, World Bank.
10
Footnote OECD Institutional Investor 2011 XXX.
11
OECD (2011). It is important to note, that there is double counting in these numbers as for example both
pension funds and insurance companies invest in mutual funds, which are part of the investment fund category.
12
This data does not include 2015, where flows were highly negative. Data should be interpreted with caution;
data for many countries is missing, especially for low-income countries, and these averages would almost certainly
be lower if all data were available.
9
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The size of domestic institutional investors has been growing. In Latin America, for example, pension
fund assets under management (AUM) in the region have grown by an average of 16% annually since
1999, reaching US$390 billion by the end of 2006. Pension funds are the most dominant institutional
investors in the market in many Latin American countries. 13 In Brazil, however, mutual funds AUM
dwarfed pension funds by US$784 billion to US$294 billion in 2009.
1.3 Institutional investors are major investors across borders
Portfolio investment increasingly happens across borders. Portfolio investment into emerging market
countries has grown rapidly for many years. As countries underwent rapid capital markets development,
emerging markets presented unique investment opportunities, including increased returns and
diversification.14
Table 2 in the Annex presents net portfolio flows to emerging market countries:15





Total net flows totaled $903.7 billion for the twenty –year period ending in 2014.
Flows are very variable, with negative net flows in 2008 (the year of the financial crisis) and very
low in 2011.
East Asia accounted for the largest proportion of portfolio flows (355.2 billion, or 39.3 percent of
the total), followed by Latin America (23.1 percent), South Asia (20.1 percent), Sub Saharan
Africa (11.9 percent), and Europe and Central Asia (4.8 percent of the total).
A few countries account for most of the flows. The top ten net recipients of net portfolio flows
include China, India, Brazil, South Africa, Turkey, Nigeria, Mexico, Thailand, Colombia, Vietnam,
and the Philippines. The largest three countries (the BRIC countries, excluding Russia) accounted
for almost 73% of the total.
On the other hand, only tiny amounts went to smaller and poorer countries. Low income
countries (as defined by the World Bank) accounted for only 2.5 billion in capital flows, about 2
tenths of one percent of the total.
Isaksson and Celik (2013) show that with increased international integration of equity markets, foreign
ownership of listed companies has increased in most countries. For example, in the United Kingdom, the
share of listed equity held by foreign investors increased from 7% to 41.2% between 1963 and 2010.
13
OECD and IFC (2011), p. 18
Insert footnote about 2015 XXX.
15
The data in table 2 need to be interpreted with caution, and may not be directly comparable to other related
data. They are presented in net terms (meaning gross inflows and outflows are combined). Some country data is
missing which affects regional totals. Data not adjusted for changes in prices.
14
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2. How do institutional investors take corporate governance considerations into
their investment decision-making?
This section reviews how institutional investors incorporate CG considerations in their investment
decisions. Broadly speaking, there are two approaches to incorporating governance and other nonfinancial factors. First, governance can be taken into account at the time of investment / disinvestment –
good governance increases the attractiveness of an investment at a given price. This topic is introduced
in this section. Alternatively, investors can practice “active investment” and engage to improve the
governance of companies in their portfolio, and add value instead of selling shares. This topic is
introduced in Section 4. In reality, many investors will practice a blend of these approaches.
2.1 Governance Factors in Investment Decision-Making
As noted by the CFA Institute in a recent publication (2014), investment analysts have always taken nonfinancial issues into account. “… Many investors have long considered such issues in fundamental
investment analysis by including an assessment of reputational risk, regulatory developments, or such
megatrends as an aging population.” 16 However, modern approaches to investment decisionmaking“…refer to a systematic consideration of relevant and material ESG issues rather than to a
cursory inclusion of one or more of them.” The goal is to complement traditional financial and risk
analyses and to deepen the consideration of governance issues throughout the investment process.
Thinking on the inclusion of governance factors in investment decision-making has evolved over time.
The CFA Institute notes six methods for including ESG considerations in the investment decision, of
which three are relevant for CG.17
 Exclusionary Screening. Exclusionary screening is the oldest and most traditional approach. It
excludes countries or companies from a portfolio based on relatively simple factors or
indicators, such as poor performance on standard indicators, or involvement of a company in
producing goods that are seen as socially unacceptable.
 Best-in-Class Selection. Investors using this strategy select companies that score well on
governance indicators. A number of stock exchange indices around the world are constructed
using this approach.
 ESG Integration. According to the CFA, ESG integration is the “systematic and explicit inclusion
of ESG risks and opportunities in investment analysis.” There are no preconditions, inclusion, or
exclusion – governance risks are priced into investment decision-making. Companies with lower
governance risks have higher discount rates and higher required returns. A survey of 1,325 CFA
members indicated that integration was used by 57% of respondents.
A fourth approach is to ignore ESG factors in investment decision-making. This may be because an
investor has made the decision to passively hold all shares in a given market, or to match the
performance of a benchmark index.
16
CFE Institute Footnote.
CFA Institute Footnote. The CFA considers “Active Ownership” (shareholder engagement) to be an additional
approach – this is covered in section 3.
17
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According to the Global Sustainable Investment Review (2014), for assets invested under a sustainable
investment strategy, exclusionary screening is the most common approach ($14.4 trillion), followed by
ESG integration ($12.9 trillion) and corporate engagement/shareholder action ($7.0 trillion). While
exclusionary screening is the most widely adopted strategy in Europe, ESG integration now dominates in
the United States, Australia/New Zealand and Asia in asset-weighted terms. Corporate engagement and
shareholder action is the dominant strategy in Canada. (Global Sustainable Investment Alliance, 2015).
Among ESG factors, governance criteria are generally viewed as the most important by investors. A 2012
survey of more than 1,000 investment professionals by the consultancy SustainAbility supports this
view. Of the professionals using ESG factors in their decisions, 59% of respondents often or always
consider governance issues in their investment decision, followed by social issues (40%) and the
environment (34%) (Sadowski, 2012).
The experience of the California Public Employee Retirement System (CalPERS) in the US illustrates how
thinking on investment decision-making has evolved over time. CalPERS is one of the largest pension
funds in the United‐States, and is well known for its activism and focus on CG. In 2002, CalPERS
introduced its Permissible Emerging Markets Policy, which restricted investments in countries that did
not meet a variety of an environmental, social and governance (ESG) country-level indicators, including
political stability, governance standards, and labor practices. The Policy argued that companies in
countries that did not meet these minimum standards were too risky for investment and that financial
returns would not adequately compensate investors for the given level of investment risks. To some
extent, the goal was to encourage policymakers to make changes in order to attract foreign capital. In
some respects this goal was achieved; while only 13 out of 27 emerging markets met the requirements
in 2002, 20 met the investment threshold by 2006. 18
However, while country‐level screening may have reduced risk and encouraged reform, it may not have
been in the long-term interests of CalPERS beneficiaries. The CalPERS Policy excluded several emerging
markets with high (or potentially high) returns, including China, Colombia, Egypt, Pakistan and Russia.
This significantly reduced the return earned on CalPERS emerging markets portfolio over the period. 19
In 2007 CalPERS moved to a combination of an active and integrated approach – reflected in its new
Emerging Equity Markets Principles. The new Principles permitted investments in all countries listed in
the FTSE All Emerging Index and moved towards equity screening at the company level. External
managers could now profit from market opportunities in all markets included in the FTSE All Emerging
Index. CalPERS would screen companies according to ESG factors and engage with those companies to
raise their standards, reducing risk in its portfolio and providing a better risk/return trade‐off than that
of a passive investor.
18
Particularly noteworthy was the case of the Philippines, whose government went to great lengths to improve its
policies and regulatory environment in order to qualify for CalPERS permissible market policy.
19
Huppe and Hebb (2010), p. 3
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2.2 Investor business models
The extent to which this integrated approach is being followed in practice by other international
investors is unclear, especially by foreign investors in emerging markets. As noted above, the key point is
that institutional investors have different preferences. Celik and Isaksson (2013) note that there are
likely as many investment strategies as there are investors. Nevertheless, they identify four main
strategies that are usually associated with distinct investor business models and also determine the
influence of non-financial factors on investment decision-making and behavior. These strategies include:
 Passive index, a strategy that represents a commitment to hold a portfolio of a predefined index
of shares, so share selection is automatic and does not represent an active selection. ESG
screening and ownership engagement are likely to be minimal.
 Passive fundamental is distinguished from passive index as investors initially make an active
selection of investee companies but then keep them for an extended period of time. A closedend investment company would fall under this category.
 Active fundamental illustrates a strategy of continuously buying and selling companies that are
chosen based on fundamental analysis. A high degree of ownership engagement to achieve
certain changes in companies can be associated with this strategy, typically employed by
‘activist hedge funds’.
 Active quantitative as the name implies relies on quantitative rather than qualitative
information on individual companies, based on large inflow of information and frequent trades,
for example in high frequency trading.
Asset owners may of course manage assets that use many or all of these strategies, or give portions of
their assets or asset classes to independent asset managers to do so.
There is some academic research that has been conducted focusing directly on the role CG and ESG
plays in the investment decisions of institutional investors, with the following main conclusions:
 Institutional investors’ preferences for different governance mechanisms vary across investor
type. McCahery, Sautner and Starks (2010) conduct a survey to elicit institutional investors’
views on investor protection and CG. They survey 118 global investors with holdings in the
United States and the Netherlands, representing countries with different legal origins, investor
protection regimes, and ownership characteristics. They find CG is important in investment
decisions but that issues vary depending on the typology of investors. Hedge funds in their
sample value equity ownership by managers, while insurance firms are most interested in high
free float; and mutual funds find both equity ownership by managers and transparency about
the holdings of large shareholders to be the most important. Pension funds, finally, are most
concerned about ownership concentration, board independence, and high free float.
 Better corporate governance increases institutional ownership. Chung and Zhang (2011) analyze
U.S. companies listed on the New York Stock Exchange (NYSE), American Stock Exchange
(AMEX), and NASDAQ between January 2001 and December 2006 using CG data from the
Institutional Shareholder Service (ISS) to analyze the role of CG in attracting investors. Their
results show that the percentage of a firm’s shares that are held by institutional investors is
positively and significantly related to its governance quality across all types of institutional
investors.
 Better governance mechanism, in particular sound disclosure practices, can help in reducing the
-10-
need for investors to employ own, costly monitoring of portfolio companies. This should hold
particularly true for investors with large portfolios. Bushee and Noe (2000) find that institutions
with a large number of portfolio stocks prefer higher quality disclosure as a way to offset
monitoring costs.
Anecdotal evidence (from the World Bank’s Corporate Governance ROSC diagnostics, for example)
suggests that CG is a relatively major concern for foreign investors. But how and when it is incorporated
into investment analyses, and when governance and other ESG concerns trump financial opportunities,
remains a question mark.
2.3 Investment decision-making: Results from the Survey
The survey reviews how the surveyed pension funds take CG considerations into account. The following
sections reveal five lessons learned:
 The vast majority of survey respondents do take CG considerations into account in emerging
markets, both at country and company levels
 Corporate governance shortcomings generally do not prevent an attractive investment
 Most CG analysis in emerging markets appears to be outsourced
 Governance considerations are today an integral part of the ESG analysis
 Investors continue to find it difficult to quantify CG risks
 The vast majority of survey respondents do take corporate governance considerations into account in
emerging markets, both at country and company levels
At the country level, an aggregate 60% of respondents indicated that they ‘always’ (45%) or ‘most of the
time’ (15%) carry out country-level due diligence; one third (30%) responded that this is only done
“sometimes”, and a small percentage (10%) said ‘never’.
When asked about due diligence at the company level, the results were similar – 35 percent of
respondents “Always” carried out due diligence, with 35% saying it was done “Most of the time”, 23%
“Rarely”, 18% “Sometimes” and 6% “Never”. These figures are slightly lower than the figures for the
country level. Feedback through Interviews and comments appears to suggest this is because the level
of decision are quite different – country-level due diligence tends to be taken when owners or managers
are making fundamental asset allocation decisions, like moving into a new (emerging) market, while
decisions at the company level would tend to be taken more frequently.
Before making new investments or increasing your asset
allocation to an emerging or frontier market do you carry out
due diligence on the country’s CG framework?
15. Before you invest in a company in an emerging or frontier market,
do you do CG due diligence on the company?
-11-
Sometime
s
[PERCENT
AGE]
Most of
the Time
15%
Always
35%
Most of
the
Time
23%
Never
10%
Rarely
6%
Always
45%
Never
18%
Someti
mes
18%
Many funds tend to use the same policies and procedures for assessing CG risk around the world. “The
same country-level due diligence processes are followed” as in mature markets and they “use the same
framework” when evaluating countries, with “one policy, applied to all categories and markets”. Others
reported heightened due diligence in emerging markets
The few respondents that reported less due diligence at the country level did so for three main reasons:
the lack of a material investment portfolio in emerging markets, the lack of available information (which
of necessity resulted in less due diligence), and a passive investing strategy (in which they followed the
index and did not need due diligence); “by and large we are index investors in public equity”.
 Corporate governance shortcomings generally do not prevent an attractive investment
An interesting finding is that many funds (about 80 percent) reported going ahead with investments
even though the CG issues in a particular country or company have been problematic. As noted above in
the case of CalPERS, funds go ahead with these investments for a variety of reasons, but explanations
generally include (1) financial and economic considerations and discounts compensate for the CG risk,
(2) companies have differentiated themselves and have better CG than country averages would indicate;
(3) full delegation of investment decision to asset managers.
Explanations provided by Surveyed Funds:
Why are you investing when corporate governance is problematic?
Economic and Financial Considerations:
 The primary investment case remained compelling despite corporate governance risks
 Primary considerations include: the need to gain exposure to emerging/frontier market
securities; global equity diversification; and liquidity/free float availability.
 Priced competitively, strong relationships
 Valuation that takes into account the identified risks
Corporate governance considerations:
 Favorable assessment of corporate governance issues
 Comfort around the alignment of our interests with those of the board and management.
 Overall reputation of company; quality and independence of board
-12-

We have sold out of markets where CG concerns have become too great.
Delegation to Asset Managers:
 For external mandates, managers have full discretion to invest at the company level. Internal
exposure would largely be in our thematic fund so if it had a strong investment thesis and fit
one of our themes, this would outweigh the CG concerns.
 We have a passive mandate - there are some companies we have excluded based on ESG
issues). These are primarily tobacco companies by number but we have made decisions based
on armaments, human rights, bribery & corruption and environmental damage also.
 Given our governance structure, we have no way of imposing a specific CG concern on
(external manager).
 Understanding CG risk is part of PM role, with expected returns changing if poor governance.
 Most corporate governance analysis in emerging markets appears to be outsourced.
Funds in the survey used a variety of approaches to carrying out CG due diligence, as shown in the
charts below. About a quarter of respondents rely on internal specialist CG staff, and in another quarter,
the work is carried out by the portfolio manager. Almost 1/3 of the respondents rely on the external
asset manager, and another 20 percent rely on an engagement agency or other outside firm. Overall,
most of the analysis (95%) is outsourced as most of the funds receive considerable assistance from
outside advisors and associations. Service providers mentioned include:
 Specialized proxy service and CG firms (ISS, Glass Lewis, GMO, Sustainalytics, MSCI)
 Specialized asset managers (Aberdeen, Charlemagne, Origen)
 Asset managers that provide CG advisory services (BlackRock)
 The Asian Corporate Governance Association
The internal / external split is perhaps not surprising, given the large amount of investment decisions
delegated to external managers.
If CG due diligence is performed, who undertakes this work?
Do you obtain information from outside analysts to assist in examining
CG issues in emerging and frontier markets?
-13-
External
Asset
Manager
32%
No
16%
outside
firms
[PERCENT
AGE]
Internal
Specialist
CG staff
24%
Other
12%
Yes
84%
Portfolio
Manager
23%
 Governance considerations are today an integral part of the ESG analysis
Last but not least, because of the perceived elevated ESG risks, the vast majority (95%) of the
respondents indicated that they clearly consider CG as part of a broader ESG analysis, and therefore
they do not treat cg as a stand-alone issue.
 Investors continue to find it difficult to quantify corporate governance risks
The majority of funds expect lower prices and higher returns in emerging markets due to governance
risks. Funds were split on the level of the governance premium, and estimates varied widely. One
respondent estimated the CG premium in emerging markets to be 15%, and much higher in frontier
markets (30% to 50%). Others put a much lower premium (between 1/2 of a percent and 3 percent). Still
others estimate the premium on a case by case (company by company) basis, with resulting expected
risk premiums that are highly variable between each investment. Factors mentioned that feed into the
financial models of the respondents that determine the range of the discount include the CG factors
identified below, as well as ownership structures, likelihood of adverse events materializing, and specific
CG risks related to each investment.
For those investments where CG risks were identified, was
the price discounted to take account of the CG risk?
Generally, do you expect higher returns in emerging and frontier
markets due to CG weaknesses?
-14-
No
37%
No
35%
Yes
63%
What factors determine the range of the discount (please
comment on company and country specific factors

Overall quality of investor disclosures, ownership
structures (Chaebols, family control, etc.), and strength
of regulatory framework.

Overall risk assessment and kind of CG issues

likelihood of adverse event materialising

Assessment of issues identified in questions 14 and 16.

The specific type of the CG risks, how the CG risks relate
to valuation/investment case
Yes
65%
If you can, please provide a range and further elaboration on the level
of risk premium that is attributable to CG issues.









Not a material part of the investment process
Although it varies significantly, my own view is that the level of CG
premium in emerging markets is approximately 15%, and in frontier
markets the premium can be much higher (30% to 50%).
Half a percent
2-3%
The last two questions are not relevant to our particularly
governance structure.
We do not specify this premium, but it is a part of why we expect a
positive risk premium in EMM's >should be reflected in lower
valuation, all else being equal.
2-4%
Case-by-case assessment
We haven't explicitly estimated that number. It is generally
approached on a bottom up basis looking at individual investments
and the expected risk premium can be highly variable between each
One respondent commented: ‘We believe in mean reversion and achieve EM equity exposure mainly
through passive or quantitative strategies. Our active quant manager has tested ESG information as an
input to their models - the results are not conclusive enough to impact their current models. However, we
have reviewed the academic and other evidence and we also believe CG is important to the long-term
value of a company. We believe this information will eventually be priced into the market - we currently
remain primarily passive in our approach but see that active fund managers might find it beneficial to
integrate CG information into their active risk premium calculations’.
-15-
3. What are the key corporate governance concerns for foreign institutional
investors?
This section attempts to shed light on the question of how we can better understand investor
preferences and concerns on CG in emerging markets. It distills a “long list” of key CG concerns of
foreign institutional investors, drawing from several sources:



International standards of corporate governance
Evidence from the academic literature
Survey results
3.1 International corporate governance standards
The first place to look to reveal the CG preferences of institutional investors is in the global standards on
CG. After all, the institutional investor community was an important force in putting these standards in
place.
The OECD Principles of Corporate Governance are the international standard for CG. First introduced in
1999, they cover shareholder rights, stakeholder rights, transparency and disclosure, and the proper
functioning of the board of directors. The OECD Principles are directed to both companies and countries,
and also contain recommendations for policymakers, regulators, and supervisors.
A more specific source of good practice that may be more relevant for institutional investors are the
ICGN Global Governance Principles. The International Corporate Governance Network (ICGN) is an
investor-led organization whose “mission is to inspire and promote effective standards of CG to advance
efficient markets and economies world-wide.” The ICGN Principles largely reflect the same concerns as
those of the OECD, but in many areas go beyond the OECD Principles and are more specific in those
areas that are the key concerns of international investors. These include:





Specific recommendations for board composition and independence
Creation of board committees
Specific requirements for conduct of shareholder meetings, voting deadlines, and vote
disclosure
Detailed requirements for the review and approval of executive and board remuneration
Shareholder approval of related party transactions.
-16-
ICGN Global Governance Principles
Responsibilities
1.1 Duties
1.2 Responsibilities
1.3 Dialogue
1.4 Commitment
1.5 Directorships
1.6 Induction
1.7 Committees
1.8 Advice
2 Leadership and independence
2.1 Chair and CEO
2.2 Lead independent director
2.3 Succession
2.4 Effectiveness
2.5 Independence
2.6 Independent meetings
3 Composition and appointment
3.1 Composition
3.2 Diversity
3.3 Tenure
3.4 Appointment process
3.5 Nominations
3.6 Elections
3.7 Evaluation
3.8 Nomination committee
4 Corporate culture
4.1 Codes of conduct/ethics
4.2 Bribery and corruption
4.3 Whistle-blowing
4.4 Political lobbying
4.5 Employee share dealing
4.6 Behaviour and conduct
5 Risk oversight
5.1 Proactive oversight
5.2 Comprehensive approach
5.3 Risk culture
5.4 Dynamic process
5.5 Risk committee
6 Remuneration
6.1 Alignment
6.2 Performance
6.3 Disclosure
6.4 Share ownership
6.5 Shareholder approval
6.6 Employee incentives
6.7 Non-executive director pay
6.8 Remuneration committee
7 Reporting and audit
7.1 Comprehensive disclosure
7.2 Materiality
7.3 Affirmation
7.4 Solvency risk
7.5 Non-financial information
7.6 Internal controls
7.7 Independent external audit
7.8 Non-audit fees
7.9 Audit committee
8 General meetings
8.1 Shareholder identification
8.2 Notice
8.3 Vote deadline
8.4 Vote mechanisms
8.5 Vote disclosure
9 Shareholder rights
9.1 Share classes
9.2 Major decisions
9.3 Conflicts of interest
9.4 Related party transactions
9.5 Shareholder approval
9.6 Shareholder questions
9.7 Shareholder resolutions
9.8 Shareholder meetings
9.9 Thresholds
9.10 Equality and redress
3.2 Evidence from the academic literature
The benefits of good corporate governance have been clarified by many academic studies and in several
fora. The quality of the CG framework affects not only access to external financing, but also the cost of
capital and firm valuation. This is because outsiders are less willing to provide financing and are more
likely to charge higher rates if they are less certain that they will get an adequate rate of return.20 They
charge these higher rates, as Lombardo and Pagano (2002) explain, since they are incurring higher
monitoring costs to ensure their payoff and need these costs to be compensated by a higher rate of
return.
The extensive literature also provides an indication of the specific factors that matter to investors,
including institutional investors. Key indicators used to define good corporate governance in the
literation includes:



Board composition (especially board independence) and size
Quality of disclosure
Shareholder rights (including rights during takeovers and changes of control)
A key issue in assessing investor preferences is the extent to which investors focus at the country level
(looking at laws, institutions, culture and norms and institutions that enforce the laws), or more at the
20
Claessens and Yurtoglu (2012) survey research on corporate governance in emerging markets.
-17-
company level (focusing on the specific decisions taken by each company). The relationship between
country-level and firm-level corporate governance on a company’s performance is of particular interest
in the context of our emerging market focus. A considerable amount of research has been published
that touches upon this issue. Some of the key findings are:

The quality of corporate governance is positively related to performance and this relation is
stronger in less investor friendly legal environments. Klapper and Love (2004) investigate this
linkage between country governance parameters and company governance in their research.
They find that the average firm-level governance is lower in countries with weaker legal systems
and also find that better corporate governance is highly correlated with better operating
performance and market valuation. This effect seems to be stronger in countries with weaker
legal environments as the authors provide evidence that firm-level CG provisions matter more in
countries with weak legal environments.
 Firm-level governance factors are more important than the country-level context in emerging
markets. Huggil and Siegel (2012) set out to explain the causes for variation in firms’ CG. Using
data from Credit Lyonnais Securities Asia from 2000 to 2010 and data by the Global Reporting
Initiative they find that in emerging markets a majority of governance rating variance is
explained by firm characteristics, while in developed markets the majority is explained by
country characteristics.
 Investment in in firm-level governance is costly and higher when a country becomes more
economically developed and investor-friendly. Aggarwal et al (2007) find strong evidence that
foreign firms invest less in internal governance mechanisms that increase the power of minority
shareholders than comparable U.S. firms do. Firm-level governance mechanisms that increase
the power of minority shareholders to receive a return on their investment are costly, so that
the adoption of such mechanisms by a firm is an investment, and the payoffs from that
investment differ across countries and across firms. Aggarwal et al postulate that investment in
firm-level governance is higher when a country becomes more economically and financially
developed and better protects investor rights, plausibly because the return on such investment
is higher.
Research suggests that country level factors will be more important in emerging markets, where overall
standards are lower. Country-level standards of governance tend to be more taken for granted in
developed markets.
3.3 Corporate governance concerns: Survey Results
The survey also provides insights into the key CG concerns of foreign investors in emerging markets. The
survey results indicate that pension funds investing into emerging markets have governance concerns at
the country level, and many of the same concerns about corporate governance that they have in their
home countries. However, their priorities are different, in line with the issues that they have faced. We
have grouped the findings from the survey into two categories reflecting the principal investors
concerns we encountered:
-18-


The quality of financial reporting and audit, the level of shareholder rights, and the weak rule of
law are consistent concerns both at country and company level.
Voting and general assembly procedures are recurring obstacles in many emerging economies
 The quality of financial reporting and audit, the level of shareholder rights, and the weak rule of law
are consistent concerns both at country and company level.
The survey asked pension funds to rank which corporate governance considerations were the most
important in their due diligence exercised, at both the country / market level and at the individual
company level. The responses are presented in the charts on the following page. In general, the results
correspond to good practices, as defined by international standards. However, some of the priorities
indicated by the respondents are somewhat surprising.
 Quality of financial reporting and audit quality. The quality of financial reporting ranked highly
in the survey, at both the country and company level. This is notable because of the slow but
steady progress made in many countries in adopting International Financial reporting standards
(IFRS). However, the quality of financial reporting (and the closely linked integrity of the audit
process) remains important to institutional investors, because of the importance of financial
information in their investment decisions. The responses show how much more work is left to
be done even in more sophisticated countries in improving financial reporting. The quality of
non-financial reporting is also mentioned for company-level due diligence, but is ranked at a
lower level of importance.
 Minority shareholder rights. The respondents ranked the importance of shareholder rights very
highly for both market-level and company level due diligence. Basic rights, which include rights
to appoint directors, receive dividends, and approve special transactions, are typically set by
company law. Company law reform thus remains an important priority.
 Board composition / independence. At the company level, the quality of boards of directors –
as measured by the composition of the board, and its degree of independence, was frequently
mentioned.
 Regulation and enforcement. At the country level, respondents mentioned the importance of a
code of corporate governance, and a strong securities regulator. Corporate governance codes
tend to guide CG of listed companies, especially the role and composition of the boards of
directors. Interestingly, codes and securities regulation are ranked lower in priority than the
more fundamental shareholder rights.
 One share-one vote issues. In some countries (e.g. Brazil) one share, one vote issues and the
ability of controlling shareholders to maintain a control position with a relatively small amount
of capital, remains an important sticking point for institutional investors.
Many respondents also mentioned structural features that are clearly important to measuring
governance risk. At the market / country level, this includes traditions of misuse of assets and corporate
scandals/corruption, and weak rule of law. At a company level, these included ownership structure
(government or family ownership). Both can be seen as a symptom of poor governance, but are not easy
to directly manipulate by policy-makers.
-19-
Key Factors Reported: Country Level Due Diligence
13
Quality of financial reporting
13
Level of shareholder rights
12
Quality of audits
11
Weak rule of law
Traditions of misuse of assets and corporate
scandals/corruption
11
Quality of non-financial reporting (ownership,
remuneration, governance)
10
9
Strength of securities regulator
8
Existence of a corporate governance code
5
Ease of voting at shareholder meetings
Key Factors Reported: Company Level Due Diligence
120
Board composition/ Quality of directors
Quality of financial reporting
114
Weak or limited voting rights
113
108
Board independence
100
Treatment of minority shareholders
91
One share-one vote issues
83
Quality of audit firm
Quality of non-financial reporting (ownership,
remuneration, governance)
79
Family ownership
79
Government ownership
78
Other
4
* Score is a weighted calculation. Items ranked first are valued higher than the following ranks, the score is
the sum of all weighted rank counts.
-20-
 Voting and general assembly procedures are recurring obstacles in many emerging economies
As noted in Section IV below, the mechanics of shareholder voting is an important concern for the
respondents. It is ranked lower at the country level, but relatively high at the company level, implying
that respondents may see the problem as idiosyncratic to specific companies and voting situations. The
problems of information, casting votes, show of hands voting, vote confirmation, and lack of split voting,
are not just emerging market problems but exist around the world.
Proxy voting, particularly important due to the geographical distance between investors and emerging
market companies appears overly complex due to often long custody chains, the lack of vote
confirmation and a general lack of accountability, according to a number of responses. One pension
fund noted, “Proxy voting is the greatest challenges [we] encounter with respect to our equity
investments in emerging markets. We have encountered POA (Power of Attorney) issues, which have
prevented us from voting shares in Poland, Hungary, and Brazil. Recalling shares on loan for proxy voting
is an issue for proxy voting in China and South Korea. Another issue is the transparency of the "Proxy
Voting Pipeline". There is no way for us to audit the proxy voting process end to end to ensure votes
were properly instructed”.
When asked to rank the five emerging markets where investors find it difficult to vote, the five biggest
emerging markets by volume were named most often, reflecting their omnipresence in emerging
market portfolios (Brazil, Russia, India, China, and Mexico). However, Brazil and Russia came out on top
by a relatively wide margin. Even though the sample size is relatively small, this is still a relevant finding.
Ranking
1
2
3
4
5
Country
Brazil
Russia
India
China
Mexico
Frequency Ranking Country Frequency
20
6
Taiwan
7
17
7
Egypt
6
14
8
Poland
5
10
9
S. Korea
4
8
10
Romania
4
Source: ICPM Survey: * Score is a weighted calculation. Items ranked first are valued five times higher than
items ranked fifth (out of five possible).The score is the sum of all weighted rank counts. 33 total responses out
of 100 possible.
-21-
4. Ownership Engagement and Stewardship
Many CG concerns stem from the separation between ownership and control. As first noted over 80
years ago by Berle and Means,21 there is no incentive for small shareholders to monitor corporate
management, because the individual owner would bear the entire monitoring costs, yet all shareholders
would enjoy the benefits, thus creating a free rider problem.
The rise of institutional investors as significant shareholders has the potential to mitigate agency
problems (Gillan and Starks 2003). Since all shareholders benefit from the actions of a monitoring
shareholder without incurring the costs, only large shareholders have sufficient incentives to monitor
due to the size of their holdings. They also have the capacity to affect change because of their voting
blocks.
4.1 International standards of ownership and engagement
Over the past 15 years, a variety of national and international standards and codes have taken these
ideas further, and actively encourage institutional investors to behave as active owners of the
companies in their portfolio. This includes the 2004 and 2015 updates to the OECD Principles of
Corporate Governance, and the International Corporate Governance Network’s Statement of Principles
for Institutional Investor Responsibilities (2013). At a national level a number of countries have issued
codes of responsible investment or stewardship, led by the UK’s Stewardship Code (2010).
The high expectations for institutional investors to advance corporate governance in their investee
companies is based on the assumption that they have more capacity, resources, and incentives to
monitor than individual investors. Stewardship essentially becomes its own investment strategy – invest
in the entire market, and then engage with companies to improve their governance and increase their
valuation. “The longer-term endgame should be to realize value by reducing, or possibly eliminating, this
governance discount.”22
The definitions of responsible investment and stewardship continue to evolve. The core principles were
already reflected in the updated 2015 OECD Principles of Corporate Governance, which note that “…the
effectiveness and credibility of the entire CG framework and company oversight depend to a large
extent on institutional investors’ willingness and ability to make informed use of their shareholder rights
and effectively exercise their ownership functions in companies in which they invest.”23 The Employee
Retirement Income Security Act (ERISA) in the United States de facto obliges institutions subject to it to
vote all shares under their management. Stewardship Codes in the United Kingdom, Japan, Malaysia,
and (2016, forthcoming) Kenya encourage engagement and voting. In some emerging markets, local
pension funds are required to nominate independent directors (Chile), vote their shares (Peru) and
disclose their CG policies (Colombia). The basic legal framework also plays a role.24 Investors that are
subject to “more stringent fiduciary standards likely have greater preferences for “better” CG
21
As described in Gilson and Gordon (2013)
Alsarat and Dallas 2011?
23
OECD (2015), p. 32
24
Bushee, Carter and Gerakos (2009)
22
-22-
mechanisms as a defense against investor lawsuits. “25 Bank trusts, pension funds and endowments are
more likely to be sensitive to governance than insurance companies and investment advisors.
4.2 Challenges to the stewardship model
Although now a recognized international standard, in practice the level of adoption of the stewardship
model varies widely in both the developed and emerging market worlds. The expectations of strong
institutional investor engagement have only partially been met. Issakson and Celik (2013) note that “one
of the most straightforward explanations is simply that a great majority of intermediary investors
actually lack the incentives to exercise their ownership functions.”26
Celik and Isaksson (2013) identify four different degrees of ownership engagement and tie the level of
ownership engagement directly to the institutional investors’ business model. The four broad degree of
ownership engagement the authors identify are:
1. No engagement: The authors summarize investors under this category who neither monitor
investee companies directly nor engage in any form of dialogue and do not vote their shares.
Exchange-traded funds can fall under this category.
2. Reactive engagement: Described as investors who follow voting practices based on mainly
generic, pre-defined criteria, often relying on proxy advisers in guiding their decisions. The level
of engagement may be increased when other, active shareholders come forward with specific
proposals. Pension and mutual funds who are required to vote their shares often fall under this
category.
3. Alpha engagement: Associated with ownership engagement that “seeks to support short or
long-term returns above market benchmarks.”27 Activist hedge funds and private equity funds
can both employ this strategy, albeit with very different ownership stakes. Hedge funds tend to
influence companies through small holdings, at times complemented by derivatives and seek
the support of other investors to increase the chances of success of their interventions. Private
equity firms aim to achieve similar goals by acquiring large or controlling stakes.
4. Inside engagement: Characterized by “fundamental corporate analysis, direct voting of shares
and often assuming board responsibilities.”28 Controlling stakes and long-term engagement are
typical features of this engagement level. Closed-end investment companies such as Berkshire
Hathaway or some sovereign wealth funds are examples of such engagement.
Celik and Isasksson argue that one needs to understand the underlying business models of different
investors to understand their engagement level. In an illustrative example, they juxtapose two
performance fee-charging hedge funds with a short-term liability structure. Neither faces regulatory
requirements to engage in the governance of their investee companies or has any particular social and
political objectives. However, they differ in their investment strategy and portfolio structure and
consequently, they have completely different levels of engagement. One hedge fund has an active
25
Bushee, Carter and Gerakos (2009), p. 26
Isaksson and Celik (2013), p. 34
27
Celik and Isaksson (2013), p. 27
28
Ibid
26
-23-
qualitative strategy with a concentrated portfolio, thus follows what the authors dubbed “alpha
engagement”. The other fund employs an active quantitative strategy with a diversified portfolio,
showing no interest in the governance details of its individual portfolio companies and instead relying on
software to process large quantities of information. Such a hedge funds engagement would fall in the
“no engagement” category.
Wong (2010) identifies additional structural deficiencies that are a consequence of modern investment
management practices. These deficiencies preclude a long-term ownership mindset that is essential for
a functioning stewardship model.
1. Inappropriate performance metrics and financial arrangements. The incentives for most asset
managers promote trading and short-term returns since compensation is based on the shortterm performance of investments. Long-term commitment and engagement therefore runs
against the economic incentives of the principal investor agents.
2. Excessive portfolio diversification. Modern risk management investment techniques employed
by institutional investors often result in equity portfolios containing hundreds or even
thousands of stocks. This naturally creates difficulties in monitoring and “weaken an ownership
mindset.”29
3. Lengthening share ownership chain. Similar to the point raised by Gilson and Gordon, new
agency problems arise since in the modern investment world, there are several layers of
financial intermediaries between the ultimate beneficial owner of shares and the accompany.
This phenomenon, also dubbed ‘separation of ownership from ownership’ creates significant
agency and accountability problems.
4. Misguided interpretation of fiduciary duty. Wong argues that across the investment chain, there
is “an increasing emphasis on furthering the economic – as opposed to non-financial –interests
of clients and ultimate beneficiaries, “leading to an excessive reliance on evaluating investment
and other decisions “principally in quantifiable financial terms.”
5. The rise of passive funds. In general, passive funds tend to fully replicate a broad or sometimes
specific market index such as the S&P 500 or a sector or specialty index. Exiting individual
holdings is not an option in this model. The move of many investors towards indexing is driven
by two important factors: (1) it helped investors to dispose of heavy brokerage commissions and
advisory fees, and (2) active institutional investors were unsuccessful in beating the market
averages over time.30 While the long holding periods of passive index funds should bode well for
their stewardship, Wong points that the bulk of passive funds “pay scant attention to corporate
governance,” since their marketing focuses entirely on the low cost and close tracking of the
respective benchmark.
As a result the resources and capacity of many investors for active monitoring and engaging with
investee companies are limited. Today, the principal means of shareholder participation by pension
funds, mutual funds and insurance companies is through voting their proxies. Since the funds do not
have the capacity to analyze their holdings, the use of proxy advisors has grown dramatically in the US
29
30
Wong (2010), p. 407
Isaksson and Celik (2013), p. 32
-24-
and Europe. A survey conducted by the Dutch Corporate Governance Code Monitoring Committee in
2011, cited by Isaksson and Celik found that 88% of institutional investors in the Netherlands made use
of the voting advice from third parties.
Filling the assurance void on corporate governance practices and thereby ‘outsourcing’ the stewardship
duties to CG raters like Governance Metrics International and Deminor and proxy advisory firms like ISS
and Glass Lewis is now an established practice in developed markets. However, these providers have yet
to start comprehensive coverage in emerging markets since it would not be economical from their
standpoint. As of March 2013, GMI Ratings was covering 6,100 companies worldwide with its ESG
(Environmental, Social, Governance) ratings, 998 of which were in emerging markets, but heavily
concentrated in the BRICS markets Brazil, Russia, India, China, and South Africa (Grimminger 2014).
4.3 Stewardship across borders
Most of the efforts around stewardship have focused on the markets in the developing world. Much less
research has been done on the focus of this paper – the role played by foreign institutional investors in
emerging market countries. While the benefits of stewardship are presumably even larger – because of
weaknesses in local CG frameworks – the costs are larger as well.
A number of factors may make stewardship and engagement more difficult in emerging markets:





More limited information. Information disclosure and availability is weaker, making it more
difficult for investors to make voting decisions or set engagement priorities.
Lack of information providers. The traditional proxy service firms mentioned above are much
less present in emerging markets (especially in smaller frontier markets).
Higher costs. Costs of voting and engaging are likely to be higher.
Reluctance to engage outside of the home market. Investors are likely to be reticent about
taking strong positions in countries where they are unfamiliar with local business practices and
cultures.
Lack of trust and reluctance to engage on the part of companies. Companies are generally less
likely to be willing to meet with shareholders that they do not know.
4.4 Stewardship and Engagement: Results from the Survey
The survey of ICPM research partners provide a number of important insights into how pension funds
are engaging with their portfolio companies in emerging markets. Pension funds are voting and
engaging in emerging markets, but to a limited degree, and to a much lesser extent than in developed
markets. The main reasons cited appear to be proxy voting issues, lack of available information, and the
small size of many positions that makes costly engagement less-than-worthwhile. Below are the four
principal findings from on this topic from the survey:
 Pension funds vote generally their shares in emerging markets companies, but less than in developed
markets
-25-
 In emerging markets, cost considerations make funds’ engagement opportunistic and carried out
through third parties
 Three factors appear to account for the lack of voting and engagement: voting problems, lack of
information, and the relatively small size of investments in emerging markets.
 Funds use a variety of approaches to overcome obstacles and obtain information necessary to
engage
 Pension funds vote generally their shares in emerging markets companies, but less than in developed
markets
Pension funds in the sample vote the shares of their emerging markets portfolio, but generally less so
than in developed markets. 56 percent of respondents report that they “always” vote their shares,
followed by 11 percent voting “most of the time” and 11 percent “sometimes”. 59 percent of funds
report voting less than in developed / mature markets, and 41 percent said it was about the same (with
none voting more).
When your shares have voting rights, do
you vote your shares in your equity
investments in emerging and frontier
markets?
If you vote your shares, does your Fund
make the voting decisions itself or is this
delegated to another party?
Most of the
Time
11%
Always
56%
Delegated
but based
on clear
guidelines
37%
Sometimes
11%
Seldom
5%
Fully
delegated
19%
Ourselves
44%
Never
17%
44 percent of funds report that they vote themselves, 37 percent delegate the voting process, but based
on clear guidelines, and 19 percent fully delegate their votes. One respondent noted that “…we instruct
our managers to vote according to their policies if we believe they have a good policy and team in place
- otherwise we instruct to vote according to their proxy voting agency policy or recommendations.”
Another, referencing concerns about costs, notes that “…we have a market value cap on the number of
companies we vote outside North America so the emerging and frontier markets only make up a small
portion of this international voting list.” A third (in the partially delegated category) adds that “…
Investment professionals in the Equities Department use ISS research but apply our own guidelines to
each and every vote.”
-26-
 In emerging markets, cost considerations make funds’ engagement opportunistic and carried out
through third parties
83 percent of funds reported less engagement with companies in emerging markets relative to
developed markets.
56 percent of respondents indicated that they were engaging directly with companies. One fund states
that “…based on an earlier prioritization of companies and issues, we engage with companies through
different levels of management to voice our concerns over CG and other ESG issues.”
However, even those that claimed to engage directly with companies noted that cost considerations
drive the degree of communication. One fund noted that “we do [engage], but given location and
relatively limited investments, we engage within developed markets much more extensively than with
companies in emerging/frontier markets. We rely heavily on foreign investor groups (e.g. Asian
Corporate Governance Association) and other local investors for detailed analysis.” Another agrees that
they “usually only [engage] in collaboration due to geographical limitations.” A third remarked that they
“will meet on roadshows, will also participate in ACGA events” while noting that they “…will also directly
travel and meet companies in their home markets.
76 percent of surveyed funds delegate the engagement process to third parties, typically the asset
manager. Others included specialist engagement providers (Hermes, BDO) or the index fund provider.
If you engage with portfolio companies in emerging and frontier markets, does your
Fund do this itself or is it undertaken by another party?
Ourselves
24%
Other
43%
Asset Manager
33%
 Three factors appear to account for the lack of voting and engagement: voting problems, lack of
information, and the relatively small size of investments in emerging markets.
Proxy voting, particularly important due to the geographical distance between investors and emerging
market companies appears overly complex due to often long custody chains, the lack of vote
confirmation and a general lack of accountability, according to a number of responses. One pension
fund noted, “Proxy voting is the greatest challenges [we] encounter with respect to our equity
investments in emerging markets. We have encountered POA (Power of Attorney) issues, which have
prevented us from voting shares in Poland, Hungary, and Brazil. Recalling shares on loan for proxy voting
is an issue for proxy voting in China and South Korea. Another issue is the transparency of the "Proxy
-27-
Voting Pipeline". There is no way for us to audit the proxy voting process end to end to ensure votes
were properly instructed”.
When asked to rank the five emerging markets where investors find it difficult to vote, the five biggest
emerging markets by volume were named most often, reflecting their omnipresence in emerging
market portfolios (Brazil, Russia, India, China, and Mexico). However, Brazil and Russia came out on top
by a relatively wide margin. Even though the sample size is relatively small, this is still a relevant finding.
A number of respondents also mentioned corporate disclosure as well as the relatively low level of
quality of governance and financial reporting, and often the complete absence of relevant ESG
information as the greatest challenges to monitor, vote and engage with companies in emerging
markets.
In addition to the difficulties in applying standard proxy voting procedures and lack of quality
information, a number of respondents also stated that their emerging market holdings are too
insignificant to warrant engagement. “Given location and relatively limited investments, we engage
within developed markets much more extensively than with companies in emerging/frontier markets”,
stated one of the respondents. Another manager noted “we have a market value cap on the number of
companies we vote outside North America so the emerging and frontier markets only make up a small
portion of this international voting list.”
 Funds use a variety of approaches to overcome obstacles and obtain information necessary to engage
As noted above, virtually all of the surveyed funds work with proxy advisors such as ISS and specialist
engagement providers such as Hermes EOS. Some funds indicated that the coverage they received from
proxy advisors was sufficient. But when information is limited, other funds take advantage of a number
of options to obtain information about companies as part of their engagement process. Most rely on
local institutions and existing relationships for help; only 11 percent report that they “undertake the
analysis ourselves. “
In many emerging and frontier markets there may be limited or no proxy advisory
services available, or coverage may be limited. In such circumstances and in order to
exercise stewardship over your investments does your fund:
Invest only in companies
in which we can get direct
access to management
4%
Other
25%
Undertake analysis
ourselves
21%
Rely on a local fund
manager to gather any
information necessary
32%
Use local corporate
governance analysis
providers
18%
-28-
40 percent of respondents noted that they approach governments or regulators to seek additional
safeguards, showing the potential such investor interventions can have. Investor groups such as the
Asian Corporate Governance Association with a regional focus, or the UN PRIs were cited as platforms
investors utilize for collective engagement. One respondent stated that “we tend to pursue advocacy
opportunities that focus on shareholder rights and CG (and) pursue company engagements that address
ESG risk- such as an ongoing 2+ year engagement with companies that source goods or have factories in
Bangladesh.”
-29-
5. Conclusions and Implications for World Bank Policy Work
The survey generally confirms what was anticipated by the literature review – most of the respondents
are factoring corporate governance considerations into their investment decisions, at country and
company levels. In addition, governance considerations are today an integral part of the ESG analysis
There were a number of important caveats to this general conclusion:
 Corporate governance shortcomings generally do not prevent an attractive investment
 Most corporate governance analysis in emerging markets appears to be outsourced
 Investors continue to find it difficult to quantify corporate governance risks
Of note, there is probably some upward bias in the role that governance plays in pension fund decisionmaking, since our survey respondents are not only long term investors but most likely the ICPM
members most interested in both governance topics and ESG investing.
Likewise, survey respondents generally identified the corporate governance concerns that are
emphasized in the international standards. Somewhat surprisingly, core long-term issues like the quality
of financial reporting and audit and the level of shareholder rights were ranked the highest at the
country and company levels. In their comments, survey respondents also focused on the practical
obstacles to voting and engagement with their portfolio companies, especially voting and general
assembly procedures are recurring obstacles in many emerging economies
In spite of these obstacles, the survey respondents generally vote their shares in emerging markets
companies, but less than in developed markets. Engagement (where investors raise concerns directly
with boards and management of portfolio companies) happens significantly less than in developed
markets. In emerging markets, cost considerations make funds’ engagement opportunistic and carried
out through third parties. Three factors appear to account for the lack of voting and engagement: voting
problems, lack of information, and the relatively small size of investments in emerging markets. Funds
use a variety of approaches to overcome obstacles and obtain information necessary to engage
What are the policy implications of these findings?
The World Bank’s goals in its work on corporate governance are to bring savers and investors together,
in order to increase international portfolio investment, increase access to financing, leading to better
firm performance, and more favorable treatment of stakeholders. We also hope to assist all of our client
countries to expand inbound portfolio investment over the long term. The ultimate purpose of this
study was to initiate a stream of research that can have practical implications for World Bank programs
and initiatives.
The surveyed pension funds were asked to give their suggestions as to where the World Bank should
direct its efforts. The suggestions (presented in the chart below) are notable for their focus on the
“fundamentals” of corporate governance – updating company law, increasing the capacity of regulators,
increasing disclosure requirements, and updating corporate governance codes.
-30-
Thinking about the key corporate governance factors that you look at in investing in EME’s, what are
the three top corporate governance reform priorities that the World Bank should consider addressing
to improve the investment environment in emerging markets?
Updating company law to improve shareholder rights
87
Increasing the power and enforcement activity of regulators
70
Increasing disclosure requirements
60
Updating corporate governance codes
55
Improving corporate governance disclosures
48
Improving audit oversight
43
Reforming the courts
Other
29
3
* Scores are weighted calculations. Items ranked first are valued eight times higher than items ranked eighth (out
of eight possible).The score is the sum of all weighted rank counts. 72 total responses out of 160 possible.
There are two general implications of the study for World Bank Group policy work:
Corporate governance issues remain important to foreign instructional investors. While the small
sample size of the survey precludes definitive judgment, a significant number of institutional investors
factor CG into their pre-investment and post-investment decision-making. Governance discounts to
investing in emerging markets are significant.
The clear policy and research conclusions are that there is important room to improve corporate
governance at the country and company level.

At the country level, efforts to improve corporate governance by improving law and
regulation, enforcement, financial reporting, and audit oversight need to continue. This
implies ramping up existing World Bank diagnostic programs (including the Corporate
Governance and Accounting and Auditing Reports on Observance of Standards and Codes
programs) and capacity building programs to securities regulators and audit oversight agencies
to improve enforcement of existing rules.

At the company level, more can be done to enhance individual company governance practices
and procedures to begin to create market champions of good governance who in turn can have
a positive demonstration effect for the market itself in each jurisdiction.

The World Bank Group can use its convening power to bring together policymakers and
investors to improve engagement and communication. Continued problems with proxy voting
(and the challenges of cross-border monitoring and engagement) present a challenge to all
stakeholders. The large number of concerned parties (global investors, global custodians, local
-31-
custodians, proxy voting agencies, regulators, and the companies themselves) with a variety of
conflicting interests, make it difficult to resolve problems. The opportunity exists for the World
Bank Group and international investor organizations to use their convening power to bring
together the stakeholders and try and resolve obstacles to improved engagement and
communication.

On research, more can be done to gather concrete evidence on company (good and bad)
practices that impact investors’ willingness to invest. This can be achieved if coordinated
research efforts attempt to include proxy voting firms and local asset managers, which appear
to have a better pulse of the corporate dynamics in emerging markets.

Regional based hubs of knowledge and information sharing on corporate governance appear
to be an effective solution to bridge the information gap. The experience of the Asean
Corporate Governance Association appears to be a favorable and useful tool for investors. The
possibility to replicate a similar initiative in other regions should be explored.
-32-
Annex 1: International Data on Institutional Investor Assets and Asset Flows
Annex 1:
Institutional Investor Assets as a Share of GDP
High income: non-OECD
Argentina
Croatia
Cyprus
Hong Kong SAR, China
Latvia
Lithuania
Malta
Russian Federation
Singapore
Trinidad and Tobago
Uruguay
High income: OECD
Australia
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
Japan
Korea, Rep.
Luxembourg
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
United Kingdom
United States
Lower middle income
Armenia
Mutual Fund Assets
% of GDP
69.2
1.8
(2013)
4.6
(2013)
15.0
(2013)
467.7
(2013)
2.6
(2013)
0.7
(2013)
33.6
(2014)
N/a
N/a
27.5
(2014)
N/a
201.2
17.0
(2012)
46.1
(2013)
26.5
(2013)
73.0
(2014)
16.7
(2014)
2.7
(2014)
35.4
(2014)
2.4
(2013)
31.8
(2014)
49.2
(2014)
51.6
(2013)
2.2
(2014)
15.6
(2013)
19.5
(2013)
616.9
(2014)
22.0
(2013)
11.1
(2014)
17.0
(2014)
22.1
(2014)
5,024.6
(2014)
8.6
(2014)
21.0
(2014)
22.5
(2014)
4.8
(2014)
3.7
(2014)
4.2
(2014)
5.2
(2014)
19.5
(2014)
48.9
(2014)
57.6
(2014)
47.3
(2014)
91.0
(2014)
5.0
0.4
(2006)
-33-
Pension Fund Assets
% of GDP
15.5
9.2
(2007)
21.0
(2014)
37.4
8.5
5.3
8.2
2.5
25.6
17.1
20.6
40.9
102.3
5.8
5.0
76.2
68.3
7.8
75.7
11.9
50.3
0.4
16.4
0.1
4.1
147.2
53.0
50.4
6.2
29.4
7.5
2.4
184.1
17.9
9.5
8.7
9.2
10.5
6.5
11.8
24.9
117.8
104.9
83.2
7.6
N/a
(2014)
(2014)
(2014)
(2012)
(2012)
(2014)
(2007)
(2014)
(2013)
(2014)
(2014)
(2014)
(2014)
(2014)
(2014)
(2014)
(2013)
(2013)
(2014)
(2013)
(2014)
(2014)
(2013)
(2012)
(2013)
(2014)
(2014)
(2014)
(2014)
(2013)
(2014)
(2014)
(2013)
(2014)
(2014)
(2014)
(2014)
(2013)
(2013)
(2013)
Bangladesh
Bolivia
Egypt, Arab Rep.
El Salvador
Honduras
India
Indonesia
Kenya
Lesotho
Morocco
Nigeria
Pakistan
Philippines
Sri Lanka
Ukraine
Zambia
Upper middle income
Albania
Bosnia and Herzegovina
Brazil
Bulgaria
China
Colombia
Costa Rica
Dominican Republic
Ecuador
Jamaica
Jordan
Kazakhstan
Macedonia, FYR
Malaysia
Mauritius
Mexico
Namibia
Panama
Peru
Romania
Serbia
South Africa
Suriname
Thailand
Turkey
Mutual Fund Assets
% of GDP
0.0
(2004)
3.0
(2007)
N/a
N/a
N/a
6.6
(2014)
N/a
N/a
N/a
26.4
(2009)
0.2
(2013)
1.7
(2014)
1.8
(2014)
N/a
N/a
N/a
10.0
3.7
(2013)
3.1
(2011)
46.2
(2014)
1.3
(2014)
6.8
(2014)
0.1
(2013)
4.2
(2014)
N/a
0.2
(2013)
N/a
N/a
1.9
(2012)
0.9
(2007)
32.9
(2013)
N/a
9.3
(2014)
N/a
N/a
3.0
(2013)
2.5
(2014)
N/a
41.9
(2014)
N/a
N/a
2.1
(2014)
Pension Fund Assets
% of GDP
N/a
30.5
(2013)
1.8
(2014)
32.0
(2014)
0.9
(2013)
0.3
(2012)
1.7
(2011)
12.7
(2012)
13.2
(2012)
N/a
4.4
(2012)
0.0
(2012)
3.5
(2014)
0.6
(2006)
0.2
(2013)
4.6
(2005)
15.7
0.0
(2013)
0.6
(2011)
14.0
(2013)
8.7
(2013)
0.9
(2012)
20.4
(2014)
11.4
(2014)
8.6
(2014)
N/a
21.2
(2012)
34.9
(2006)
11.7
(2014)
6.4
(2014)
57.9
(2014)
1.8
(2012)
13.8
(2014)
74.3
(2012)
8.1
(2012)
19.9
(2014)
3.0
(2014)
0.6
(2014)
40.8
(2011)
10.0
(2006)
6.9
(2014)
2.0
(2014)
Source: World Bank, Finstats Database 2016. Latest year available is
shown. Data come from a variety of sources and should be compared with
caution.
-34-
Table 2:
Net Portfolio Equity Flows to Developing Countries
1995-2014
Billions of USD
Total
19952007
2008
2009
2010
2011
2012
2013
2014
Total
19952014
All developing countries
445.2
-39.1
112.0
124.0
3.7
92.5
72.3
92.7
903.2
By Region
East Asia & Pacific
Latin America & Caribbean
South Asia
Sub-Saharan Africa
Europe & Central Asia
Middle East & North Africa
168.0
83.4
90.6
74.0
25.8
3.4
-6.8
-11.1
-15.9
-5.6
-.2
.4
31.6
41.3
24.2
10.8
3.0
1.2
40.7
39.4
29.8
8.2
4.0
2.0
7.1
3.0
-4.3
-1.1
-.5
-.6
35.3
18.6
23.3
9.6
6.9
-1.3
28.8
13.2
20.5
7.0
3.1
-.3
50.5
20.5
13.7
4.5
2.8
.6
355.2
208.5
181.9
107.3
44.9
5.3
By Income Category
Middle income
444.9
-39.0
112.0
124.1
3.7
92.1
71.6
91.3
900.6
Upper middle income
Lower middle income
Low income
332.1
112.8
.3
-21.6
-17.4
-.1
85.0
27.0
.1
83.7
40.4
-.1
3.5
.1
.0
54.0
38.2
.4
45.5
26.1
.6
72.2
19.2
1.4
654.3
246.4
2.5
Top 10 Countries
China
India
Brazil
South Africa
Turkey
117.6
88.1
67.4
69.4
15.8
8.5
-15.0
-7.6
-4.7
.7
29.1
24.7
37.1
9.4
2.8
31.4
30.4
37.7
5.8
3.5
5.3
-4.0
7.2
-3.8
-1.0
29.9
22.8
5.6
-.7
6.3
32.6
19.9
11.6
1.0
.8
51.9
12.4
11.8
2.6
2.6
306.2
179.2
170.8
79.0
31.5
Nigeria
Mexico
Thailand
Colombia
Vietnam
4.0
13.2
28.0
1.7
7.7
-1.0
-3.5
-3.8
-.1
-.6
.5
4.2
1.7
.1
.1
2.2
.4
3.2
1.3
2.4
2.6
-6.6
.0
2.3
1.1
10.0
9.9
.1
3.2
1.9
5.6
-.9
-3.4
1.9
1.4
1.0
4.8
-5.8
3.8
.0
24.9
21.4
20.0
14.2
13.9
Philippines
6.5
-.5
.3
.8
1.0
1.8
.0
1.2
11.2
Source: World Bank, International Debt Tables. Portfolio equity includes net inflows from equity securities other than those
recorded as direct investment and including shares, stocks, depository receipts (American or global), and direct purchases of
shares in local stock markets by foreign investors. Data are in current U.S. dollars.
-35-
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Annex II:
Assets under Management of Surveyed Funds
(Billions USD)
Home Country
Number of
Funds
Total AUM
Average
fund size
Of which: AUM
in listed equity
Of which:
AUM in emerging
markets listed
equity
Of which:
held by
tracker /
index funds
Australia
2
110.5
55.3
48.2
8.20
0.00
Canada
5
286.2
57.2
125.8
18.16
6.70
Denmark
1
28.0
28.0
5.0
0.70
0.20
Finland
1
38.1
38.1
10.2
1.20
0.00
Netherlands
2
218.0
109.0
76.0
8.86
8.86
New Zealand
1
19.5
19.5
8.2
1.10
0.80
Sweden
1
35.0
35.0
15.0
3.70
0.00
United Kingdom
2
101.0
50.5
43.2
7.75
0.01
United States
2
375.0
187.5
170.0
17.60
7.00
Grand Total
17
1,211.3
71.3
501.7
67.27
23.57
Source: WB / ICPM Survey. Excludes 3 funds that had missing AUM data.
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