Corporate responsibility and governance

Corporate governance practices have

improved in Asia since the Asian Financial

Crisis although disparity exists across the

region. Besides promoting economic growth

and financial stability, corporate governance

will become even more important over

the next decade as investors place greater

emphasis on environmental, social and

governance issues.

History is littered with numerous examples of

corporate collapses arising from poor corporate

governance practices. Although the corporate

governance movement began in the 1970s in

the United States, it only attracted a great deal

of attention and interest in the aftermath of the

corporate and banking scandals in the 1990s and

early 2000s. Poor governance impedes economic

growth and increases financial market volatility;

both the 1998 Asian Financial Crisis (“AFC”)

and the 2008 Global Financial Crisis (“GFC”)

underscore this fact and the consequences of

weak governance.

Research shows that during the AFC, countries

with the lowest corporate governance were also

those which experienced the largest currency

depreciation and stock market decline. Following

this, policymakers in the region undertook a series

of structural reforms to strengthen their economies

to deal with future external shocks. Apart from

financial and corporate restructuring, many

adopted new laws to address corporate bankruptcy

and governance. This led to stronger balance

sheets in both the public and private sectors which

allowed the Asian corporates to fare better during

the GFC.

20 YEARS ON FROM AFC --------------- A joint biennial corporate governance watch survey

conducted by the Asian Corporate Governance

Association and CLSA shows the overall breadth

and depth of corporate governance practices

have improved across Asia since the AFC. Yet the

disparity in ranking across the region is significant;

Philippines and Indonesia have to do much more

to bridge the gap. The survey also indicates that

countries such as Singapore and Hong Kong

come out tops due to robust legal, regulatory and

economic institutions (see fig.1).

Out of all the assessed categories, corporate

culture ranked the lowest across the region while

accounting and auditing scored the highest due

to the acceptance of international accounting

and auditing standards by governments and

independent audit regulation (see fig.2).

TRACKING CORPORATE GOVERNANCE IN ASIA

Fig.1: CG watch market scores: 2010 to 2016

Fig.2: Market category scores (CG watch 2016)

Business culture is different in Asia compared to the

Western nations. Many companies do not engage

in open communication with shareholders to

avoid unwanted attention. This holds true for the

listed companies that are majority family-owned;

related party transactions, cross-shareholdings and

minority shareholder rights are some of the key

areas that will come under scrutiny.

(%) 2010 2012 2014 2016 Change 2014 vs 2016 (ppt)

Direction of CG reform

Australia - - - 78 - -

1. Singapore 67 69 64 67 (+3) Mostly sunny, but storms ahead?

2. Hong Kong 65 66 65 65 - Action, reaction: the cycle of Hong Kong life

3. Japan 57 55 60 63 (+3) Cultural change occurring, but rules still weak

4. Taiwan 55 53 56 60 (+4) The form is in, now need the substance

5. Thailand 55 58 58 58 - Could be on the verge of something great, if...

6. Malaysia 52 55 58 56 (-2) Regulation improving, public governance failing

7. India 49 51 54 55 (+1) Forward movement impeded by vested interests

8. Korea 45 49 49 52 (+3) Forward movement impeded by vested interests

9. China 49 45 45 43 (-2) Falling further behind, but enforcement better

10. Philippines 37 41 40 38 (-2) New policy initiatives, but regulatory ennui

11. Indonesia 40 37 39 36 (-3) Losing momentum after progress of recent years

(%) Total CG rules and

practices Enforcement

Political and regulatory

Accounting and auditing

CG culture

Australia 78 80 68 78 90 74

1. Singapore 67 63 63 67 87 55

2. Hong Kong 65 63 69 69 70 53

3. Japan 63 51 63 69 75 58

4. Taiwan 60 54 54 64 77 50

5. Thailand 58 64 51 45 77 50

6. Malaysia 56 54 54 48 82 42

7. India 55 59 51 56 58 49

8. Korea 52 48 50 53 70 41

9. China 43 38 40 36 67 34

10. Philippines 38 35 19 41 65 33

11. Indonesia 36 35 21 33 58 32

Fig.4: Minimum shareholding requirement to request an EGM

INTERESTING OBSERVATIONS --------------- A standard approach to corporate governance

is difficult due to varying regulatory, cultural

and economic differences between countries.

Nonetheless most countries tend to adopt these

six OECD Principles of Corporate Governance in

their national corporate governance frameworks:

1. Ensuring the basis of an effective corporate governance framework

2. Rights of shareholders

3. Equitable treatment of shareholders

4. Role of stakeholders

5. Disclosure and transparency

6. Responsibilities of the board

The implementation mechanism, however, varies

across jurisdictions. The framework, for example,

can be on a ‘binding’, ‘voluntary’ or ‘comply

or explain’ basis. Under the ‘comply or explain’

approach, companies have to comply with the

general principles of the corporate governance

codes under the stock market listing rules but

non-compliance is allowed based on the premise

of full disclosure.

Fig.3 shows that more countries prefer the

principles-based ‘comply or explain’ approach as it

is less rigid and allows companies to go beyond the

minimum requirements. On the flipside it can be

ambiguous and too broad to be an effective guide.

The rules-based ‘binding’ approach, on the other

hand, provides clarity and standardisation but may

not be suitable for all companies.

On the issue of rights of shareholders, the OECD

surveyed the minimum shareholding requirement

for a shareholder to request an extraordinary

general meeting (“EGM”); more than half require

a minimum 5% shareholding while within Asia the

majority stipulated 10% (see fig.4).

Fig.3: Corporate governance implementation mechanism

Coverage: 45 OECD

and non-OECD jurisdictions

Coverage: 45 OECD

and non-OECD jurisdictions

7%

11%

33%

27%

84%

53%

Up to 3%

Binding Binding

Up to 3%5%

Comply or explain Comply or explain

5%10%

Others Voluntary

10%More than 10% 20%

17%

9%

9%

31%

4%

50%

55%

9%

Taiwan, Hong Kong, Indonesia, Malaysia, Singapore & Thailand

China, India, Indonesia, Malaysia, Singapore & Vietnam

Thailand

China, India, Philippines & Vietnam

Taiwan, Korea & Philippines

Korea & Philippines

Hong Kong

Coverage: 11 Asian countries

Coverage: 11 Asian countries

Fig.6: Directors’ qualification requirements in Asia

The equitable treatment of all shareholders is

just as important and one way to assess this is to

look at related party transaction and the approval

process associated with it; 59% of jurisdictions

require board approval for certain types of

related party transactions. A similar percentage

requires shareholder approval as an alternative or

complementary feature (see fig.5).

Another area that warrants close examination

is the board of directors; structure, size,

independence and maximum term of office are

some of the categories that come under scrutiny.

Countries typically have a one-tier board system

but more are now choosing to institute a two-

tier system that delineates the supervisory and

management functions. The size of the board varies

with caps on minimum rather than the maximum

number of directors. On the independence feature,

the survey shows that most prefer to have at least

50% of independent directors. But within Asia,

more countries have kept this ratio at 33%.

Still on this topic, the qualifications of the

directors matter and these are implemented by law

or code. Most jurisdictions require the entire board

of directors to be qualified. Within Asia, 100% of

the countries in the survey require a Fit and Proper

clearance while half additionally require minimum

education and training as well as professional

experience (see fig.6). Interestingly, gender

representation data from a Credit Suisse Research

Fig.5: Within Asia, more countries require both board and stakeholder approval for related party transactions

Shareholding and board approval

Fit and proper test

China

China

Taiwan

Taiwan

Korea

Indonesia Singapore

Hong Kong

Hong Kong

Thailand

Korea Thailand

India

India Philippines

Vietnam

Malaysia Vietnam

Vietnam

Indonesia

Taiwan

Malaysia

Indonesia

Singapore

Malaysia Philippines Singapore

Philippines

Shareholder approval

Minimum education and training & professional experience

Board approval

Fig.7: Women in senior positions in Asia

in 2016 showed that Korea lagged the region

while Thailand topped in terms of women in senior

positions (see fig.7).

WHY IT MATTERS? --------------- According to an Ernst & Young survey1, 39%

of the investors will rule out an investment

immediately if there is a history of poor corporate

governance. This number will likely increase as the

millennial generation becomes the key driving force

for the global economy. Millennials are known

to strongly value corporate social responsibility

(“CSR”) initiatives.

According to the European Commission,

CSR is a concept whereby companies integrate

social and environmental concerns in their business

operations and in their interactions with their

stakeholders on a voluntary basis. An increasing

number of companies are including CSR initiatives

as part of their overall corporate governance

practices. This in turn allows them to infuse ethical

norms and accountability measures into their

business practices.

Corporate governance expectations have

also increased since the GFC with a number of

jurisdictions opting to embrace investor stewardship

codes, first implemented by the United Kingdom

in 2010. The code which is directed at institutional

investors came into being, prompted by questions

on whether a more active shareholder involvement

in investee companies would have helped prevent

or lessen the crisis. Most stewardship codes are

voluntary and according to the Ernst and Young

report dated 2017 it is still too early to gauge if

they have had an impact on improving corporate

governance. Nevertheless the adoption of these

codes should encourage investor engagement,

improve disclosure and transparency and

contribute to the long-term success of companies.

Going forward, the world will see the growth

and impact of millennials as a socio-economic

group become meaningful. Individuals born after

1980 will constitute the largest age demographic in

the world at more than 2 billion, versus 1.4 billion

Gen Xers and 1.2 billion Baby Boomers. By 2020,

they will account for around 50% of the global

workforce – 75% by 2025 – and they will inherit

the largest intergenerational transfer of wealth

we have ever seen with more than USD30 trillion

of global wealth to be handed down

(see Millennials and Artificial Intelligence).

Given this generation’s attention to

environmental, social and corporate governance

(“ESG”), and community engagement in general,

investment strategies that integrate ESG principles

and/or thematics resonating to millennials should

be a major part of the future product offerings

(see Mainstreaming ESG investing in Asia).

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Female representation on boards Female representation on senior management

Chicago | Ho Chi Minh City | Hong Kong | Jakarta | Kuala Lumpur | London | Luxembourg | Mumbai | Seoul | Shanghai | Singapore | Taipei | Tokyo

Sources: 1Ernst & Young Global Limited – Investors see long-term financial benefits in companies with high ESG ratings, as at 2017. Fig.1 - 2. Asian Corporate Governance Association. Fig.3 - 6. Eastspring Singapore and OECD Survey of Corporate Governance Framework in Asia, as at 2017, and OECD Corporate Governance Factbook, as at 2017. Please note that the data for a number of countries come with individual conditions and requirements. Please note that the summary charts shown may not necessarily have taken into consideration all specific requirements in certain countries. For full details, please refer to [http://www.oecd.org/daf/ca/corporate-governance-factbook.html and https://www.oecd.org/daf/ca/OECD-Survey-Corporate-Governance-Frameworks-Asia.pdf]. Fig.7. Credit Suisse Research, as at 2016.

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