Using Market Incentives to Move Beyond Law and Regulation in Emerging Markets—The Case for Corporate Governance Stock Exchange Indices

Investor demand for well-governed companies has steadily increased over the past decades, thus strengthening the role market incentives can play in improving corporate governance. Specifically in emerging markets though, where legal and regulatory frameworks for corporate governance often lag, three obstacles need to be addressed: the often low corporate governance quality; the lack of assurance of corporate governance practices of emerging market companies; and the communication challenge for well-governed corporations in ill-reputed jurisdictions. If implemented correctly, stock exchange corporate governance indices (CGIs) have the potential to address these obstacles but choosing the right evaluation criteria and effectively disclosing methodologies and results is critical. This chapter finds that listing tiers like Brazil's Novo Mercado with contractual compliance requirements address the obstacles to meet investor demand most effectively. The constituent growth of all index types suggests that companies understand the financial and reputational benefits that positive corporate governance differentiation can offer.