This article was first published in the May 2016 China edition of Accounting and Business magazine.

If there is one region in the world that could benefit from a rationalisation of corporate governance structure, it is surely Asia, with its shifting sands of complex company ownership structures. Globalisation has only increased the size of subsidiary/parent relationship webs and has helped prompt the release in November 2015 of an updated version of the G20/OECD Principles on Corporate Governance. Many major events have occurred since they were last revised in 2004, not least the global financial crisis and the long, hard look in the corporate governance mirror that followed.

These principles have no legally binding status. Rather, they are a framework for regulators in independent jurisdictions with the ultimate aim of building investor trust and healthy growth in capital markets – an important issue among sovereignty-minded Asian countries. The revised edition maintains large tracts and the core values of the 2004 text with additions that include a new chapter pulling together the 2004 principles on institutional investors, stock markets and intermediaries, additional focus on disclosure at all levels of the investment chain, and tighter rules around ‘related-party transactions’ (RPTs).

The focus on RPTs includes the obligation for jurisdictions to apply a broad but precise definition of what constitutes a related party as well as rules to efficiently approve legitimate transactions between entities, minimising negative potential. ‘The challenge of related-party transactions is due to their complexities,’ says Jo Iwasaki, ACCA’s head of corporate governance.

This is especially relevant regarding the ownership structures of Asian corporations. A study by investment professionals organisation the CFA Institute has identified three predominant models of ownership in Asia: state-owned enterprises (best illustrated in China where the central government has a controlling interest in many key corporations); the vertical holding company ruled by a family dynasty (common throughout Asia but typical of Hong Kong conglomerates); and the circular ownership model seen in South Korean ‘chaebols’, where family-controlled conglomerates oversee subsidiaries that own shares in each other.

Accounting for minority shareholder rights in such scenarios is inevitably fraught, says Vivienne Bath, director of the Centre for Asian and Pacific Law at the University of Sydney: ‘RPTs will always be an issue in Asia because of the way boards are structured,’ she says. ‘The problem is how you liberate the board’s [decision-making] from the majority stakeholders when this is a family who are operating in their own interests.’

‘Long-term future’

Yet increasing attention is being given to corporate governance in South-East Asia and often from surprising quarters, according to Irving Low, partner and head of risk consulting at KPMG Singapore. ‘I know of one Thai business that has been taken over by the head of a wealthy family who is very focused on good corporate governance because there is a corollary for him between good governance and the long-term future of his corporation,’ he says, adding that this approach resonates throughout the region. ‘Heads of family dynasties that control Asian corporations believe that if corporate governance is good, then their children will have a framework that will ensure the corporation will pass onto the next generation and be a sustainable entity. When children are not automatically entitled to a business, this makes the business sustainable, and this is a common sentiment I have heard.’ 

A 2014 study by ACCA and KPMG on corporate governance codes showed that 16 out of the 25 markets studied (the majority of which were in the Asia-Pacific region) have aligned their country codes with more than 80% of OECD-related principles. Notable exceptions were Brunei, Laos and Myanmar that did not have any requirements in place – nor, in Brunei and Myanmar, a stock exchange (Yangon Stock Exchange opened in December).

Bath says that improving corporate governance through standards such as the G20/OECD principles should always be encouraged, although implementation was a challenge throughout the Asia-Pacific region, despite the best efforts of regulators. ‘Even in Australia, we have had events like the HIH collapse [the infamous AU$5.3bn collapse of the insurance company in 2001], which led to a comprehensive rethink of Australian regulation and legislation,’ she says. ‘The principles are valuable but are ultimately only as good as their implementation.’

There is, however, an upside to corporate governance flexibility within the region. ‘Where there are fewer rules and lesser degrees of knowledge in Asia it is easier for good corporate governance to flourish, because the environment is more flexible,’ Loh says. ‘Corporate governance is not one size fits all. It should be on the basis of principles rather than being prescriptive. The challenge is when you make it mandatory and about ticking a box, instead of about principles’.

Meanwhile, analytical tools to monitor progress are becoming increasingly sophisticated. The Association of Southeast Asian Nations (ASEAN) corporate governance scorecard, for example, an initiative of the ASEAN Capital Markets Forum, is forensic in its detail. While the 2014-2015 scorecard is due for release later in 2016, the 2013-2014 scorecard assessed public company data from 529 publicly listed companies across six ASEAN jurisdictions – Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam – against the G20/OECD principles. The report card compared scores on 209 questions in five areas: rights of shareholders; treatment of shareholders; disclosure and transparency; responsibilities of the board; and the role of stakeholders from 2012-13. Thailand scored the highest overall in mean rankings, followed closely by Malaysia and Singapore, while Indonesia stood the middle ground and Vietnam came last. The greatest gains could be seen in transparency and disclosure outcomes although several jurisdictions continued to demonstrate poor communication with shareholders, such as inadequate reporting of voting outcomes, minutes and attendance at annual general meetings (AGMs).

An analysis of 2014 scorecard data published in 2015 by Lawrence Loh of the National University of Singapore’s NUS Business School found that even in wealthy Singapore, where well-defined corporate governance frameworks are in place, a mere eight out of 100 Singaporean companies conducted an annual review of the performance of the CEO or managing director, and only 18 out of 100 companies had the minutes of the AGM available on the company website.

Structural challenges

Next door, Indonesia is an example of an Asian jurisdiction that has embraced the G20/OECD principles but is grappling with significant structural challenges to implementation. The first edition of the Indonesian Corporate Governance Manual was published in 2014 as a joint project between the newly established national financial services authority Otoritas Jasa Keuangan (OJK) and the International Finance Corporation (IFC), of the World Bank. It draws heavily on the G20/OECD principles as the touchstone of Indonesia’s own corporate governance code, but inexperienced and inadequate corporate bodies and unwieldy holding structures characteristic of the sector are holding back progress, the publication points out. 

Low says that although the OJK might write the rules in Indonesia, the dominance of state-owned enterprises, multinationals and financial institutions (with their own sets of standards) in the corporate mix means that the G20/OECD principles are difficult to enforce – a problem that needs to be addressed to make sure corporate governance guidance is not seen as a toothless tiger. ‘I would like to see it incumbent on directors [not only in Indonesia] to take more responsibility for how and when governance issues are followed through,’ he adds.

A US$1.5m Asian Development Bank project launched last year is providing technical assistance to Indonesian regulators, and has recommended that capacity development of the OJK be given priority in order to deepen the financial market and improve access to financial services. Despite being one of the most populous nations in Asia, Indonesia’s financial sector has seen limited growth, with bank credit, market capitalisation and bonds representing 103% of GDP in 2013, as compared with 194% for the Philippines and more than 300% for Malaysia, Singapore and Thailand, according to project report data. Reform is a priority if the country is to attract more capital investment; the most recent revision of its investment controls list, announced in February 2016, should see 100% foreign ownership allowed in 35 sectors where overseas control was limited – including tourism, raw materials and toll road operators.

Lee Adendorff, journalist