While rising oil prices, higher US interest rates and an abrupt end to the global technology rally may be the biggest reasons for this dismal performance, investors say disregard for good corporate governance - the equitable treatment of minority shareholders and the timely and accurate disclosure of information - has been a significant factor. After impressive strides by many countries over the previous two years, fund managers complain that efforts to improve the situation have stalled and in some cases even reversed.

Just a few weeks ago, South Korean education minister Song Ja was forced to resign amid allegations he received preferential treatment from Samsung Electronics to buy shares in the company at a price significantly below market. He was an outside director at the time of purchase, meaning he was supposed to be an independent observer on corporate-governance issues. A Samsung spokesman said there was "nothing illegal" about the transaction.

But investors viewed it as an effort to compromise the outside director's objectivity.

Unless companies start paying more attention to corporate governance, emerging markets could remain stuck in the backwaters of global finance for years to come. Many investors say it is easier to "vote with their feet" and simply abandon many of these markets.

Some of the most dedicated activists are bowing out. Julian Robertson's Tiger Management announced earlier this year it was closing after a prolonged period of weak performance. That eliminated a high-profile battler for shareholder rights. Others are suddenly doubting their ability to foster change. Mark Mobius, a veteran emerging-markets investor at Templeton Asset Management, says he has rarely been so discouraged. His funds recently unloaded shares in Hungarian chemical companies BorsodChem and TVK and Poland's BIG Bank Gdanski because he found management unresponsive to shareholder concerns. "Corporate governance is not improving, so why spend the time to fight it?" Mr Mobius asks. "I am coming to the realisation that we should not bother to talk about reform. Its too Herculean a task and its too embedded in the culture."

Poor corporate governance is, in large part, the reason most US investors still shun the Russian market, where minority shareholders of Norilsk Nickel are protesting a recent reorganisation plan that they say dilutes their positions in favour of company insiders.

It is at least part of the reason US fund managers have crossed most, if not all, of Southeast Asia off their investment maps. In Malaysia, minority shareholders have been dumping shares of Berjaya Sports Toto after the gambling company revealed it has been increasing loans to affiliated companies. Analysts say the increases came despite management assurances that the loans - which potentially put minority shareholder money at risk - would decline.

As bad as the situation may be, some governments have at least taken steps to change it. South Korea, for instance, recently passed laws requiring the 30 largest family-run conglomerates to publish consolidated financial statements, and mandated that all listed companies allocate a quarter of their board seats to outside directors.

Brazilian Central Bank president Arminio Fraga, meanwhile, has backed plans for a new stock exchange that would be open only to Brazilian companies that meet tougher corporate-governance standards. He also has thrown his support behind a pending bill to strengthen the rights of minority shareholders.

If some government officials have learned to recognise the importance of good corporate governance in attracting foreign capital, they often face stiff opposition from the offenders. These companies frequently are controlled by a small group of shareholders and can be reluctant to treat outside shareholders as equals.

More worrying, some companies are even managing to turn back reform efforts. This has been perhaps most notable in Seoul, where the conglomerates successfully lobbied the government to abandon legislation that would have allowed minority shareholders to vote for or against individual board members.

Investors' best hope may be that the "guilty" parties will realise companies with good corporate governance are more resilient during market downturns.

That is the conclusion of CLSA Emerging Markets. The Hong Kong brokerage firm found that during the 1997-1998 financial crisis, a basket of 108 emerging-market stocks fell 10.5 per cent. The 10 companies that scored best on corporate-governance criteria gained 133 per cent. CLSA also ranked 25 emerging markets based on how conducive their macro environments are for good corporate-governance practices. South Africa and Latin America ranked near the top. Since companies in these places also have listings in London or New York, they abide by corporate governance levels established in the developed markets, and this likely sets a higher standard, CLSA suggested.

Eastern Europe, meanwhile, ranked among the worst. The survey placed Singapore and Hong Kong number one and two for good governance practices, but most Southeast Asian markets brought up the rear.

(The Wall Street Journal)