Developing World Healthcare Blog

What the Board Can Tell You

One aspect of our work that we’ve come to appreciate is evaluating corporate governance and assessing the boards of directors of potential investments. We don’t profess to be a leading expert on corporate governance, but have found this work to be helpful as a screening tool. The overarching issue is that corporate governance standards in most emerging markets aren’t as high as those in the US. In addition, there are many cases where a founder (or family) has a majority stake. Also, the expertise and experience of board members should align with the company’s strategy. Most of this discussion applies globally and this post focuses on our experiences.

You’re Not in the Delaware Court Anymore, So You Have to Protect Yourself

We wrote about the differences between Cayman Island/British Virgin Island incorporation and Delaware incorporation in June 2015 (link below) in the context of proposed Chinese ADR privatizations. This backdrop heightens the importance of assessing the backgrounds of board members and inquiring about reputations. Admittedly, this can be difficult from afar. That said, we recall asking an industry contact about the chairman of a well-known company in the Chinese pharmaceutical sector. His response, “He introduced me to my wife.” OK, check the box.

One other indicator is the presence of early-stage investors (venture capital or private equity). This is a mixed blessing because they’re ultimately sellers and can have a better-informed and different view of a company’s value and prospects. Despite the shortcomings, the presence of reputable investors is better than the alternatives.

For Chinese companies, the involvement of “haigui” (“sea turtles”) can be an encouraging indicator. They probably are less inclined to cut corners than their mainland counterparts who lack an international perspective. Please note that we are not making a sweeping generalization here.

Does the Board’s Expertise Align with Management’s Ambitions?

A management team’s willingness to have a strong board speaks volumes about its business philosophy and attitude toward minority shareholders. We recall analyzing the new listing of an emerging market-based company that planned to acquire businesses in the US and EU. A contact noted that the early-stage investors had sold their shares because they lacked confidence in management’s ability to oversee businesses outside their domestic market. We looked at the board’s composition and noticed that there wasn’t a single member with international work experience. The comment proved correct. The company’s execution has been inconsistent and the stock has been underwhelming.

And Sometimes You Hit the Jackpot

One company that we have monitored for several years announced a new US-based board member with relevant expertise. The “positive surprise” was that this person was local and we had several common interests. We were able to connect and meet. Many companies prohibit their board members from speaking with investors, but not this company. In this case, the discussion confirmed our assessment of the company’s quality (including management) with much more detail and context. Of course, gathering this information without a 10-12 hour flight was an added bonus.

Final Thoughts

Assessing the board is neither a foolproof tool for screening potential investments (believe me, we know) nor valuable in isolation. It is part of the mosaic of evaluating investments and, as mentioned above, can be surprisingly easy to apply at times. 

Chinese ADR Privatizations: The Challenges of Getting the Best Deal:

http://www.cherrystonehillcapmgt.com/blog2.asp?id=78