There have been improvements in corporate governance in a number of emerging markets, but it remains a work in progress. In the second of this two-part series, Franklin Templeton Emerging Markets Equity’s Chetan Sehgal and Andrew Ness explore the steps some regulators and companies in emerging economies have taken to improve corporate governance. They also share where they see opportunities for investors to potentially benefit from the positive trajectory of change.

Governance improvements across emerging markets (EMs) have been uneven. Nonetheless, the overall progress we have observed in several areas is encouraging. Accounting standards are a case in point. Local standards have increasingly converged with internationally recognized ones, providing a boost for information quality and transparency. Brazil, for example, is among EMs that have fully adopted the International Accounting Standards Board’s International Financial Reporting Standards. ​

Regulators have also taken steps to empower minority shareholders by giving them greater say on related-party transactions, for example. In its annual study on the ease of doing business around the world, the World Bank noted that low-income economies have been catching up with their high-income peers when it comes to the transparency of related-party transactions over the last 10 years.1

In India, the securities regulator recently tightened rules around royalty payments made by listed companies to related parties—payments above a certain level would require approval from shareholders (with related parties excluded from voting).​

Moreover, we have seen EM companies pay greater attention to enhancing shareholder value, whether through dividend increases or share buybacks. And, they are generally in a good position to do so, thanks to surging free cash flows. Investors’ hunt for yield in an environment of low interest rates has turned up the heat on companies to distribute more cash to shareholders.