Ss recent developments in corporate governance in asia

13rd Asian Roundtable

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Recent Developments in Corporate Governance

in Asia


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A common view on AsiaA common view on Asia

“My impression is that the prospects for CG are rather gloomy, that it will take a long, long time (decades) and right now all these activists and forums are just working on the form but not the substance. Where do you stand?”

-- A question recently asked of me by a foreign journalist in Asia.


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Two questionsTwo questions

Where have substantive changes or improvements occurred in Asia in recent years?

How can we facilitate the creation of substance in addition to form?


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Competition for capitalCompetition for capital

Listed companies becoming more transparent– Improved disclosure among international companies (HSBC,

Infosys) and local/regional companies (CLP Holdings, Kerry Properties, Good Morning Securities, DBS Bank).

– Study after study indicates a clear demand from institutional investors for better financial data, improved auditing, and more board independence.

Private companies restructuring their boards– Preparing for IPOs.– In response to demands of a new private equity investor.

Partially privatised state enterprises (?) Technology start-ups/second boards (?)


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Behaviour of intermediariesBehaviour of intermediaries Growing interest among investment banks,

brokers, and analysts in the commercial relevance of corporate governance:– Goldman Sachs: “Asia Restructuring Scorecard”, a quarterly

survey that includes corporate governance.– CLSA: Began ranking Asian companies in October 2000.– S&P: Developing a new company rating service.

Expansion into Asia of US and European consultancies: – Proxy voting/advisory: Institutional Shareholder Services

(ISS), Investor Responsibility Research Center (IRRC). – Company surveys: Deminor.


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Voting of sharesVoting of shares

Japan:– Pension funds are starting to vote their shares following years

of poor returns from companies. Participation is becoming a necessity.

Korea: – Elections of outside directors are being contested. Eg, PSPD

nominated a candidate for a seat on the board of Samsung Electronics in March 2001. They garnered 16.07% of the vote. Although most support came from foreign institutional investors, it was significant that several large Korean public pension funds also backed the PSPD. All private Korean institutional investors, except one, supported management.


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Shareholder actionShareholder action Korea:

– People’s Solidarity for Participatory Democracy (PSPD) Malaysia:

– Malaysian Investors Association (MIA) Singapore:

– Securities Investors Association (Singapore) Hong Kong:

– Proposed HK Association of Minority Shareholders (HAMS) Litigation:

– Malaysia: Palmco, a listed oleochemicals maker. Marking down shares:

– UBS Warburg: Market cap of certain Malaysian companies fell significantly due anti-minority proposals in last two years.


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Educational infrastructureEducational infrastructure New training programmes:

– For accountants, directors, company secretaries, internal auditors, lawyers and investment analysts.

– Being offered by private training firms.– Being undertaken by corporations for their staff.

New organisations:– Institutes of Directors: Singapore, Thailand, Philippines,

Indonesia. Revamped in Hong Kong.– Non-profit organizations: Indonesian Institute for Corporate

Governance, Malaysian Institute of Corporate Governance.– Academic centres: Asian Institute of Management, City

University of HK, Chinese University of HK (planned). New networks

– Institutes of Directors of East Asia Network (IDEA.Net)


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Better quality informationBetter quality information Media reporting: more nuanced (eg, SCMP in Hong Kong) Conference materials: OECD, APEC, ADB, Shanghai Stock

Exchange Professional journals/magazines:

– Corporate Governance International (CGI), Company Secretary magazine, Hong Kong Society of Accountants magazine

Webb-site.com RSC Asia regional report and articles Japan Investment Forum (www.japaninvest.com) International newsletters

– Global Proxy Watch (US)– Governance (UK)


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2nd question2nd question

How can we facilitate the creation of substance in addition to form?


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Focus on the banking sector tooFocus on the banking sector too Banks are a neglected element in much discussion of corporate

governance in Asia, yet clearly they have a role to play in influencing the vast majority of (unlisted) companies.

Banks may face competitive limitations in promoting corporate governance to their borrowers, but could start by improving their own governance standards.

This probably needs to be done as a group, and initially under the guidance of a regulator. For example:

Hong Kong Monetary Authority new guidelines, May 2000: – The board should ensure that the bank properly manages risk (8

types of risk are specified).– The board should ensure that provisions on connected lending are

fully understood, and the bank sets a policy on such lending.– The board should receive the external auditor’s management letter,

with comments from management. – Higher number of independent directors (3), + possibility of more.– Etc


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Public-private partnershipsPublic-private partnerships Few would dispute there was a need for greater investor

involvement in corporate governance reform in Asia. Yet costs continue to outweigh the benefits for most funds.

A useful interim mechanism may be programme partnerships between private groups and public bodies, such as:– Research into strengths and weaknesses of local governance

regimes, especially as they affect different types of companies.

– Plain-language summaries of governance rules confusingly spread across company and securities laws, various regulations, listing rules, and codes of best practice.

– Joint training programmes among officials, directors, etc.– Joint litigation (in extreme cases, as in Taiwan).

The assumption here is that governments will remain the main drivers of governance reform for some time, hence it makes sense to work with them in “strategic” ways.


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Examine procedural rulesExamine procedural rules Most government effort in Asia in recent years has been

focussed on developing new codes of best practice, amending laws and listing rules, and drawing up new policies.

But it is also important to ensure that procedural rules do not stymie the exercise of minority shareholder rights--either by making it too difficult, too expensive or too risky.

Issues to consider:– Simpler mechanisms for derivative suits.– Class-action suits with contingency fees.– Lowering arbitrary limits on the right of minority shareholders

to call a meeting, nominate a director, file a shareholder proposal, and so on.

– Methods of voting at annual meetings (eg, the show-of- hands vote).

Taiwan has evolved a unique solution: “simulated class action”


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Balance quantity with qualityBalance quantity with quality Much corporate governance discussion focusses

on increasing the:– Number of independent directors and independent board

committees;– Fees paid to independent directors;– Space devoted to corporate governance in annual reports

and other public documents. All of this is important, but:

– What is the use of more independent directors if they are of poor quality? Ditto for board committees.

– What is the point of more words in annual reports if the language is largely formulaic or full of jargon?

Quality may count for more.


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Where I standWhere I stand

“My impression is that the prospects for CG are rather good (over the medium to long term), that it will take a long time (two decades), and right now we are all still working on the foundations. But progress is rarely linear or evenly paced: reform will go forwards and backwards, and periods of apparent inaction could be followed by bursts of activity following external shocks.”

Ss recent developments in corporate governance in asia

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