Increasing Scrutiny of Emerging Market Issuers

 The TSX and TSX-V have issued a consultation paper on Emerging Market Issuers.  Most of this relates to the well-publicized failures of some ChinaCos.  My interest is particularly drawn to the potential risks with management and corporate governance.  They have identified particular concerns with:  knowledge of Canadian regulatory requirements, communication between board and management, and local business knowledge.  The entire paper is here: TMX Joint Consultation Paper on Emerging Market Issuers  

My experience, both positive and negative, with ChinaCos is that these concerns are valid.  I would however warn against over-reaction on the part of the exchanges and regulators.  My answers to the questions posed to Market Participants are below: 

Management and Corporate Governance

  (a)   What, if any, specific attributes and experience do independent directors require in order to properly oversee management of an Emerging Market Issuer? For example, TSX seeks at least one independent director with both public company experience and significant knowledge and experience in the principal business jurisdiction of the issuer. (b)   How many directors (or what percentage of the board) should be independent directors with public company and local business experience?

The position of independent director is crucial to sound corporate governance.  Practically, though, an individual that has experience with public companies AND emerging country business experience is rare.    When I was based in Shanghai, I came across many expats and locals with considerable China market knowledge, but few if any with public company experience.  In Canada, the number of candidates is fewer again.  The few that have both skills would be challenging to recruit as an independent director, particularly for TSX-V positions where the position recieves little or any remuneration. 

The composition of the board of directors collectively is the key factor.  Collectively, the independent directors should have public company experience and emerging country business experience, the percentage of the board that collectively possess this experience to be appropriate to the guidelines of the TSX and the TSX-V.

(c)   Should TSX require an independent chair for all Emerging Market Issuers? Is it sufficient to require an independent chair only if other risk factors are present, such as when a significant security holder is also a senior officer of the issuer? (d)  If an independent chair is not required or present, is an independent lead director sufficient? 

An independent lead director is sufficient.

(e)   Are there additional corporate governance measures TSX should consider for Emerging Market Issuers?

Additional attention needs to be paid to the residency of independent directors. Certainly an individual domiciled in an emerging country can be a valuable member of a board if they have significant industry specific experience, but these directors need to be balanced with Canadian domiciled directors, where independence is more part of the cultural landscape.