• A Governance Update — With some observers attributing recent volatility in EM equities in part to governance issues, we update the analysis in our 2014 report.
  • Weakening Governance Generally — The percentile ranking of two-thirds of the countries in a governance composite declined in 2015 versus 2014.
  • Governance Even More of an Issue in Some EMs — Many Emerging Markets saw a notable deterioration in various governance metrics, including national governance (corruption in China and Russia) and corporate governance (India). Paradoxically, as some EMs seek to boost economic growth, it may be the case this only weakens governance — more corruption, an undermining of corporate ethics, etc.
  • Worrisome Trends — Given that the quality of country-level governance affects corporate governance and, thus, firm value, some valuations could be at risk of downward readjustment should governance weaken further.
  • Strategy Implications — Governance trends are one of the reasons why we are Underweight Latin America, India, Russia, China in our regional strategy model.

Figure 1: The Cornerstone Capital Governance Composite: Ranking 2015 vs. 2014

Geraghty GGG chart

Source: Cornerstone Capital Group

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Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.