57
Corporate Governance in Asia-Pacific

John Zinkin

Managing Director of Zinkin Ettinger Sdn Berhad

Introduction

This chapter explores the rising importance of Asia-Pacific; the different underlying foundations for capital markets globally; the makeup of capital markets in Asia-Pacific; the components of an ideal corporate governance (CG) ecosystem; and compares the CG regimes in Asia-Pacific.

It is tempting to assess CG through one single frame of reference, since so much of the literature views CG from an Anglo-Saxon perspective; written in English about Anglo-Saxon capital markets, which for decades represented the overwhelming majority of business capital raised through equity. There are, however, three reasons why it may no longer make sense to assess CG solely through an Anglo-Saxon worldview.

The Rise of Asia-Pacific

The first reason is the growing importance of Asia in public equity financing globally, shown in Figure 57.1.

Figure 57.2 shows the breakdown globally of IPOs in 2017. Note the relative unimportance of the United States, UK, Australia, and Canada compared with Asian markets and China.

The second reason is the use of sanctions and “national security” concerns by the United States may force Chinese companies, following the actions against China's ZTE,1 Ant Financial,2 and Huawei,3 to choose Hong Kong instead of New York:

Graph depicts the Asia's growing importance in global public equity financing.

FIGURE 57.1 Asia's Growing Importance in Global Public Equity Financing

Bar chart depicts the Asia's Dominance in IPOs in the year 2017.

FIGURE 57.2 Asia's Dominance in IPOs in 2017

Mainland China's vast but immature capital markets are not a substitute for Wall Street. Hong Kong, China's offshore hub, is far from perfect.… Still, it has become a plausible alternative venue for China's global companies. It now welcomes firms with dual-share classes after a rule change in 2018. It has expanded its role as a conduit through which mainland investors can buy shares and global investors get access to China. Last year more money was raised in listings in Hong Kong ($37bn) than on Nasdaq or the New York Stock Exchange.

… Last year seven of the top 20 equity underwriters in Asia were Chinese. Chinese banks are among the largest cross-border lenders in Asia. America still controls the dollar-payments system, but in time that could change, too.... 4 [Emphases mine]

Despite convergence of views across International Organization of Securities Commissioners's (IOSCO's) emerging markets regarding the importance of good CG,5 different jurisdictions have different solutions.6 Assuming only one way of evaluating the effectiveness of CG fails to consider countries' political history; chosen path of industrial and economic development; and the maturity of their capital markets.7

Research by McKinsey in 2001 suggested8 there were two types of capital markets, shown in Figure 57.3.

The institutional contexts and the shareholder environments in the two models differ, as does the likelihood of activist shareholders holding boards to account because of the difference in the liquidity of the two types of markets and in the levels of ownership concentration. The corporate contexts show boards are structured differently. This affects their respective levels of independence and the value placed on the importance of shareholder rights and transparency.9

Consequently, it is not surprising CG cannot just be “exported” using the two variants of the “Anglosphere” model: the U.S.-rules-based “black-letter law” or the UK's and Commonwealth's slightly different “principle-based” approaches.

Schematic illustration of two capital market models as Worlds Apart.

FIGURE 57.3 Two Capital Market Models: Worlds Apart

Capital Markets in Asia-Pacific

Asia-Pacific includes ASEAN,10 Australia, China, Hong Kong, India, Japan, Korea, and Taiwan.11 It covers a range of CG approaches:

  • The Anglosphere model: Australia's capital market has dispersed ownership and sophisticated institutional investors with a liquid capital market, active equity participation requiring shareholder protection. It emphasizes director independence and performance.
  • The control model: China's capital markets reflect Communist party controls over state-owned enterprises (SOEs) and their importance in the economy, representing an extreme “control” model. Japan's model has interlocking alliances of companies grouped around a bank at their center (keiretsu) with boards of insider directors, making it difficult for external investors to really understand what is happening.12 Korea's variant on Japan's model reflects state-driven investment priorities, government-directed bank credit to chosen industry champions (chaebols) with limited historical interest in shareholder protection, but with a minimum of 25 percent outside directors.13 India, Indonesia, the Philippines, Taiwan, and Thailand have reasonably developed markets with the “control” model and, with the exception of India and the Philippines, have legal traditions not based on Anglo-Saxon commercial common law.
  • The hybrid model: Despite the dominance of Government Linked Companies (GLCs) and Government Listed Investment Companies (GLICs) and family firms creating concentrated ownership and “insider” boards, Singapore and Malaysia have overlaid a regulatory framework based on the Anglosphere model on what suits their domestic participants, because like Hong Kong they compete with Anglosphere capital markets for IPOs. In some jurisdictions, companies have two-tier boards,14 while others have unitary boards.15 Their different political histories affected their choice of legal system: Some have a long tradition of Anglosphere commercial common law;16 some chose continental European commercial law;17 yet others developed their own unique approaches,18 and some are still works-in-progress.19

The impact the share of market capitalization has on CG approaches is important. Table 57.1, shows the share by different types of publicly listed firms.

Key points to note about Asia-Pacific on average are:

  1. Corporations owning other corporations come first (24%), unlike the UK (7%) and United States (2%).

    Table 57.1 Share of 100 Largest Listed Companies20 by Type of Ownership (%)21

    Jurisdiction Corporations Governments Institutional Investors22 Strategic Individuals
    China 12 35  9 12
    Hong Kong 11 41 12  7
    India 31 21 22  7
    Indonesia 36 20 11  7
    Japan 20  7 28  3
    Korea 23 13 21  9
    Malaysia 22 42 12  6
    Philippines 52  1 10 19
    Singapore 29 14 14  9
    Taiwan 14  7 25  5
    Thailand 21 21 13 14
    Vietnam 19 30  6 10
    Asia average 24 21 15  9
    UK  7  6 60  2
    US  2  2 68  3
  2. Governments come second (21%), unlike the UK (6%) and United States (2%).
  3. Institutional investors come third (15%), unlike the UK (60%) and the United States (68%).
  4. Strategic individuals come fourth (9%), unlike the UK (2%) and the United States (3%).

Ownership concentration makes a critical difference to the relevance of the principal-agent conflict, at the heart of CG regulation in Anglosphere markets. Asia-Pacific markets have a quite different level of concentrated ownership from Anglosphere markets, shown in Table 57.2.

Excepting Taiwan, Japan, and Korea, Asia-Pacific markets exhibit such high levels of concentrated ownership, they raise the question whether the Anglosphere approach to CG with its emphasis on resolving the principal-agent conflict is relevant. Governments play a significant role in capital markets, reflecting the development trajectories of the countries in Asia-Pacific. The relative unimportance of institutional investors versus governments in Asia-Pacific markets is highlighted in Figure 57.4.

Table 57.2 Companies (%) with Controlling Shareholdings Greater Than 50%23

Jurisdiction as of end 2017 Largest shareholder 2nd largest shareholders 3rd largest shareholders
China 40 54 63
Hong Kong 51 56 61
India 47 56 62
Indonesia 69 84 87
Japan  8 10 10
Korea 11 21 30
Malaysia 40 66 82
Philippines 52 71 81
Singapore 37 48 54
Taiwan  2  5  8
Thailand 23 39 50
Vietnam 28 42 47
Bar chart depicts the relative importance of government and institutional investors.

FIGURE 57.4 Relative Importance of Government and Institutional Investors

Figure 57.4 shows an inverse correlation between the importance of institutional investors and the importance of government and whether the capital markets are Asian, with the exception of Japan, the Philippines, and Taiwan. This difference matters because publicly listed companies, family firms, and SOEs have different objectives by which their success is measured, affecting how they are governed. We need also to recognize the different behavioral expectations of independent nonexecutive directors (INEDs) in Anglosphere and traditional Asian family firm environments, when deciding what can be expected in terms of good CG, shown in Table 57.3.

Table 57.3 Different Expectations of INEDs24

Anglosphere perspective Traditional Asian family firm perspective
To represent the interests of the owners (especially minorities), the INED must be independent, for without independence the INED cannot be effective through the process of fearless, but constructive challenge. Families know best where the best interests of the firm lie, so there is no real need for INEDs, who in any case do not understand the business, because they cannot give it the time and attention it requires.
Graphs depict the family companies outperform of non-family companies.

FIGURE 57.5 Family Companies Outperform Non-Family Companies

Despite this difference in expectations of INEDs, evidence for the ability of Asian family-controlled firms to deliver better long-term value than companies with widely dispersed shareholders is shown in Figures 57.5 and 57.6.

They were more long-term focused across a number of dimensions, shown in Figure 57.6.25

SOEs do less well and are most likely to fail to meet the standards set by OECD guidelines26 in the areas of transparency and accountability as informed and active owners, in disclosure and accounting/auditing standards, and in exercising their board responsibilities. The reasons for such shortfalls are the temptations for governments to use SOEs as a source of political patronage and economic control combined with the shortage of experienced directors who understand business, and shortage of good auditors. Succession planning is a problem as a result of political interference, most notably when there is a change of government or minister. The impact of these shortfalls can be seen in the performance of SOEs on average, as governments seem to have higher stakes in lower performing companies, shown in Table 57.4.

Bar chart depicts the family company performance by jurisdiction.

FIGURE 57.6 Family Company Performance by Jurisdiction

Table 57.4 Average Government Ownership and Performance27 as of End 201728

Jurisdiction High performers (%) Low performers (%) Difference
China 20 37 −17
Hong Kong (China)  7 47 −40
India 11 26 −15
Indonesia 14 30 −16
Malaysia 21 36 −15
Thailand  8 17  −9
Vietnam 29 38  −9

The Components of an Ideal Corporate Governance Ecosystem and How Countries Compare

In 2016, CLSA, a stockbroker, and the Asian Corporate Governance Association (ACGA) published “Ecosystems Matter: Asia's Path to Better Home-Grown Governance,” emphasizing the importance of CG ecosystems.29 Figure 57.7 shows the components of an ideal “CG ecosystem.”

Effective CG depends on eight ecosystem components.30 Regulatory discipline does not just cover IOSCO best practices regarding CG enforced by securities commissions and stock exchanges; it includes all legislation affecting how companies operate.

Schematic illustration of the components of an ideal CG ecosystem.

FIGURE 57.7 Components of an Ideal CG Ecosystem

The professionalization of directors who are properly trained before they join boards and the professionalization of capital intermediaries is important. As far as intermediaries are concerned, their professionalization is an essential regulatory response to rebuild the trust lost because of the Asian Financial Crisis in 1998, the Global Financial Crisis in 2009, and banking malpractices in Australia in 2017.31

Wherever financial inclusion is an important goal, it is essential to educate retail investors regarding the inherent risks of capital markets so they have realistic expectations regarding investing, considering their own risk appetite and the consequences of investment downsides. All of this regulatory work can be undone by corrupt governments that violate the basic principles of CG in their companies, turning a blind eye to malpractice by cronies.

Investors must consider three additional components. First is a free press with investigative journalists who are not beholden to political parties; who understand business and how it works; and who are unafraid of “following the money.” Second, investigative journalists need the support of an independent judiciary who are specialists in commercial law and white-collar crime; who can reach informed judgments; who are not afraid of punishing malefactors, regardless of who they are. Third, a good CG ecosystem requires a strong body of professional external auditors.

I briefly review the performance of 12 countries using the 6 components of an effective CG ecosystem discussed above:32

Effective Regulatory Discipline

This depends on a combination of what the ACGA calls “CG rules and practices,” “enforcement,” and “government and public governance”:

  1. CG rules and practices:33 These are compared with IOSCO best practices and cover:
    1. Discipline where management sticks to its core business; has not issued capital against the interest of owners; has not restructured excessively or mismanaged or abandoned agreed strategy; and understands and applies cost of equity to its transactions.
    2. Transparency in financial reporting, including quarterly reporting and continuous disclosure; with full year financials available within two months; accounts in line with International Financial Reporting Standards (IFRS) without dubious practices; market sensitive information disclosed punctually; and easy to understand nonfinancial, CG, and ESG reporting.
    3. Independence covering: board structure and composition; including appropriate skills balance, percentage and term limits of independent directors, and gender diversity; with board committees chaired by INEDs with more than half the audit committee being independent; and poll voting at annual general meetings (AGMs) and extraordinary general meetings (EGMs).
    4. Responsibility. The company reconciles the need to protect minority shareholders and avoids abusive related-party transactions (RPTs) with companies representing the controlling shareholder's primary interests.
    5. Fairness with regard to minorities including whether decisions at the expense of minorities have been taken in the past five years; no nonvoting common shares have been issued; executive remuneration has not risen faster than net profit; and how analysts feel about the levels of remuneration.

      Figure 57.8 shows the markets ranking regarding CG rules.

      Table 57.5 shows the overall CG scores by market.

      Key points to note from Table 57.5 are:34

    1. Discipline yields an average score of 58.4 percent and even Australia scores lower on discipline than the other parameters. The other countries lie within a 50–60 percent range, with outliers Indonesia at 45.8 percent and Korea with 40.5 percent.
      Bar chart depicts the markets ranked by CG rules scores.

      FIGURE 57.8 Markets Ranked by CG Rules Scores

      Table 57.5 Overall CG Scores by Market by Category35

      Percent Disciplined Transparent Independent Responsible Fair E&S Overall CG
      Australia 74.9 92.2 77.5 84.2 85.2 68.6 81.4
      China 51.4 61.7 46.2 52.7 75.7 56.3 58.3
      Hong Kong 62.4 69.6 50.1 63.8 85.9 68.9 66.6
      India 57.0 77.1 40.3 55.0 86.6 67.8 63.7
      Indonesia 45.8 63.1 31.9 34.9 80.3 59.2 52.0
      Japan 69.0 64.7 27.7 84.2 88.0 74.2 67.5
      Korea 40.5 57.9 29.9 51.1 55.5 67.1 49.0
      Malaysia 61.3 72.8 49.6 58.4 85.9 64.4 56.5
      Philippines 59.6 59.0 27.5 31.0 63.7 56.3 49.9
      Singapore 55.9 83.8 59.2 57.4 94.2 66.1 69.7
      Taiwan 70.0 53.1 48.9 77.4 79.5 73.0 66.5
      Thailand 53.1 81.8 58.1 37.5 81.3 66.7 62.8
      Average 58.4 69.7 45.6 57.3 80.2 67.2 62.7
      Average ex-Aust. 56.9 67.7 42.7 54.9 79.7 67.1 61.0
    2. Transparency achieves an average score of 67.7 percent because of countries' ability to benchmark against global accounting standards. Australia, Singapore, Thailand and Japan do well while Korea and Philippines are below average.
    3. Independence produces the lowest average score of 45.6 percent, with seven of the markets below 50 percent, and Indonesia, Japan, Korea, and the Philippines below 40 percent. Most Asian boards “are heavily influenced by a founding shareholder, controlling family or the government.”36 Australia is the standout outlier at 77.2 percent in ACGA's scoring, as expected, given it is an Anglosphere market.37
    4. Responsibility achieves an average of 57.3 percent, the second lowest average, reflecting the high levels of government or family ownership creating the potential for conflict with minority interests. Australia and Japan lead with 84.2 percent each, closely followed by Taiwan (77.4%). Poor performers are Thailand (37.5%), Indonesia (34.9%), and Philippines (31.0%), with the remaining countries in the range 50–65 percent.
    5. Fairness delivers the best result with an average of 80.2 percent. This is to be expected because violations of fairness represent the most serious and rarest forms of CG malpractice. Singapore (94.2%) is the standout performer with Japan (88.0%), India (86.6%), Hong Kong and Malaysia (85.9% each), and Australia (85.2%) all scoring very well. Other countries lie in the range 70–85 percent, the exceptions being the Philippines with 63.7 percent and Korea with 55.5 percent.
    6. E&S achieves an average of 67.2 percent. Only Japan (74.2%) and Taiwan (73.0%) achieve better scores than 70 percent. Other countries lie in the range 60–70 percent, with Indonesia as the exception with 59.2 percent.
  2. Enforcement: Effective enforcement depends on eight factors:
    1. The political and social culture must respect the process of enforcement, without interference with regulatory sanctions either to protect the politically well-connected or jobs threatened by the consequences of enforcement.
    2. Penalties must be severe enough to deter malpractice; this is likely to mean custodial sentences and fines paid by individual directors rather than fines paid by companies.
    3. There must be clear rules and regulations, applicable across the board with due process in enforcing them.
    4. Regulators must have the power to prosecute, rather than handing over prosecutions to other government agencies.
    5. There must be a “joined up” regulatory regime, if there is more than one regulator tasked with enforcing the rules.
    6. Regulators must be staffed with sufficient people, as smart as the lawyers employed by businesses seeking to exploit regulatory loopholes.
    7. Regulators must be well-funded, with politically independent sources of finance.
    8. There must be no “regulatory capture” by vested interests.

The ACGA has the following to say about enforcement in Asia-Pacific:

There has been increasing pressure on regulators to enhance the effectiveness of enforcement.… [G]overnments have been happy to give regulators increasing powers—something we have seen in every market in Asia with the exception of Indonesia and the Philippines, and the possible exception of Japan (which occupies a more neutral position in this regard).38

See Figure 57.9.

Hong Kong stands out as the leader in enforcement with China coming a surprising second. The other countries achieve similar levels of score, with the exception of the Philippines and Indonesia as laggards.

Good Public Governance

In each jurisdiction, investors must assess the political and regulatory environment, itself a reflection of the independence and effectiveness of the judicial process, and the freedom of the press.

Political and regulatory environment: The criteria by which to assess the effectiveness and independence of the judicial process, are:

  1. Restraints on government: “The extent to which those who govern are bound by law … the means, both constitutional and institutional, by which the powers of the government and its officials and agents are limited and held accountable under the law. It also includes non-governmental checks on the government's power, such as a free and independent press.”39
    Bar chart depicts the markets ranked according to regulatory enforcement scores.

    FIGURE 57.9 Markets Ranked According to Regulatory Enforcement Scores

  2. Absence of corruption: “The absence of … bribery, improper influence by public or private interests, and misappropriation of public funds or other resources … with respect to government officers in the executive branch, the judiciary, the military, police, and the legislature.”40
  3. Regulatory enforcement: “The extent to which regulations are fairly and effectively implemented and enforced. Regulations, both legal and administrative, structure behaviors within and outside of the government. This factor does not assess which activities a government chooses to regulate, nor does it consider how much regulation of a particular activity is appropriate. Rather, it examines how regulations are implemented and enforced.”41
  4. Civil justice: This assesses “whether ordinary people can resolve their grievances peacefully and effectively through the civil justice system … whether civil justice systems are accessible; affordable; and free of discrimination, corruption, and improper influence by public officials … whether court proceedings are conducted without unreasonable delays, and if decisions are enforced effectively. It also measures the accessibility, impartiality, and effectiveness of alternative dispute resolution mechanisms.”42

Table 57.6 shows the four criteria relevant to corporate governance43 identified by the World Justice Project as a proxy measure for judicial independence.

Based on the rankings above, it makes sense to divide the countries into three groups: those with “good” judicial processes and independence as far as CG is concerned (Australia, Singapore, Japan, Hong Kong, and Korea); those with “average” processes and independence (Malaysia, India, and Indonesia); and those with “below-average” processes (Thailand, China, and the Philippines).

The ACGA have their own equivalent under the heading “Government and public governance” and ranked the markets on the basis of their public governance, shown in Figure 57.10.

An important contributor to the effectiveness of public governance, from a CG perspective, is the quality and financial independence of the regulators. Figure 57.11 ranks the markets by regulatory capacity.

Malaysia leads as far as regulatory capacity is concerned, followed closely by Hong Kong, India, and Taiwan. The Philippines and Indonesia are the laggards. Australia and Japan, which normally rank high, are constrained by the way in which their regulators are funded:

Table 57.6 Judicial Independence Country Ranking44

Overall country ranking ()45,46 Restraints on government ranking47 Absence of corruption ranking48 Regulatory enforcement ranking49 Civil justice ranking50
Australia (10)  10 12  7 13
Singapore (13)  25  4  2  5
Japan (14)  19  8 13 10
Hong Kong (16)  30 10 11 12
Korea (20)  26 30 18 15
Malaysia (53)  74 44 60 51
India (62)  36 67 66 97
Indonesia (63)  33 90 45 90
Thailand (71)  80 56 59 59
China (75) 100 47 69 57
Philippines (88)  59 62 55 81
Bar chart depicts the Asia-Pacific markets ranked based on public governance.

FIGURE 57.10 Asia-Pacific Markets Ranked Based on Public Governance

Some securities commissions in Asia-Pacific are well-funded relative to the job they have to do. They include: Hong Kong, India, Korea, Malaysia, and Thailand. Others are either less well-funded or poorly resourced. The source of funding is one factor that determines the adequacy of budgets: if funding comes from a levy on the market (the “user-pays system”), then it is more likely that funding will be sufficient. If a commission has to fight each year for a government budget allocation, as in Australia or Japan, then by definition it will not receive as much as it would like.… In general, better funded regulators tend to be able to do more on regulatory reform, something we found in Korea, Malaysia and Thailand. Other factors come into play as well, such as whether regulators have the political room and opportunity to make reforms. Hong Kong underperformed on the reform questions because we took points off for DCS, while Taiwan outperformed despite getting an average score for funding. In both cases, politics played a large part in the outcome.51

Bar chart depicts the regulatory capacity ranked by market.

FIGURE 57.11 Regulatory Capacity Ranked by Market

Freedom of the Press

  1. The results of the 2018 World Press Freedom Index rate the countries covered by ACGA in descending order in Table 57.7.

The ACGA deals with this under the heading “Civil society and the media.” Figure 57.12 shows ACGA's ranking by market.

Given the change of government in Malaysia, it is likely Malaysia's ranking will improve both for press freedom and for an active civil society.

Professional Boards

These are essential to meet the much more demanding standards of twenty-first-century CG, especially in Commonwealth jurisdictions, where directors are responsible for “managing and directing the affairs of the company.” Directors are expected to do the following, in the words of Justice Middleton:

Table 57.7 Press Freedom by Country52

Country Rank53 Comments
Australia 19 “While Australia has good public media, the ownership of its print media is heavily concentrated. Two media groups—News Corporation and Fairfax Media—are responsible for 85% of newspaper sales.”54
Taiwan 42 “The main threat to media freedom comes from China, which has been exerting growing economic and political pressure on the Taiwanese media. The editorial line of some privately-owned media has changed … taking a line similar to the Chinese Communist Party's propaganda. Journalistic independence has also been threatened by Taiwanese officials who have interfered directly in the editorial policies of the state-owned media.”55
S. Korea 43 “The election of Moon Jae-in … as president has been a breath of fresh air.… The South Korean media showed their grit in the course of the battle they waged with President Park Geun-hye from 2014 and 2016, and finally won when she was impeached for corruption and removed.”56
Japan 67 “Japan … respects the principles of media pluralism. But journalists find it hard put to fully play their role as democracy's watchdog because of the influence of tradition and business interests. The system of “kisha clubs” (reporters’ clubs) continues to discriminate against freelancers and foreign reporters.”57
Hong Kong 70 “As Hong Kong has become polarized between pro-Beijing and pro-democracy factions, its media have experienced growing interference by the Chinese authorities.… When … Alibaba bought the South China Morning Post in late 2015, Hong Kong residents realized they would have to fight to preserve the press freedom to which they are accustomed. The resistance is being led by a handful of independent online media…. After years of fighting, these new online outlets finally obtained official recognition by the authorities last year.”58
Indonesia 124 “President Joko Widodo's … presidency continues to be marked by serious media freedom violations, including drastically restricting media access to the Papua and West Papua provinces … where violence against local journalists continues to grow. Foreign journalists and local fixers are liable to be arrested and prosecuted if they try to document the Indonesian military's abuses there.… Radical religious groups also pose a threat to the right to inform. Many journalists say they censor themselves because of the threat from an anti-blasphemy law and the … Electronic and Information Transactions Law.”59
Philippines 133 “… In June 2016, Rodrigo Duterte cryptically said: “Just because you're a journalist you are not exempted from assassination, if you're a son of a bitch. Freedom of expression cannot help you if you have done something wrong. It was a grim warning. Four journalists were killed in the Philippines in 2017, making it Asia's deadliest country for the media. Private militias, often hired by local politicians, silence journalists with complete impunity.”60
India 138 “With Hindu nationalists trying to purge all manifestations of “anti-national” thought from the national debate, self-censorship is growing in the mainstream media and journalists are increasingly the targets of online smear campaigns by the most radical nationalists, who vilify them and even threaten physical reprisals. At least three of the journalists murdered in 2017 were targeted in connection with their work…. Three other journalists were killed for their professional activity in March 2018. Prosecutions are also used to gag journalists who are overly critical of the government, with some prosecutors invoking Section 124a of the penal code, under which ‘sedition’ is punishable by life imprisonment.”61
Thailand 140 “Thailand is ruled by … the National Council for Peace and Order … it keeps journalists and citizen-journalists under permanent surveillance, often summons them for questioning, and detains them arbitrarily. Any criticism of the junta is liable to lead to violent reprisals made possible by draconian legislation and a justice system that follows orders. The already feared Computer-Related Crime Act was reinforced in 2016, giving the authorities even more surveillance and censorship powers.”62
Malaysia 145 “Under Malaysia's Printing Presses and Publications Act, newspapers have to apply to the government every year to renew their operating license. Journalists and media outlets are subjected to harassment campaigns when deemed too independent or critical of the government led by Prime Minister Najib Razak, who is still embroiled in the “1MDB” corruption scandal. News websites such as Sarawak Report and The Edge are often blocked for covering this story … Bloggers are closely monitored by the authorities, who can prosecute them for spreading ‘false news,’ a euphemism for criticism of the government. Thousands of ‘cyber-troopers’ are used by the government as social network trolls. The Sedition Act still poses the biggest threat to journalists. Under the latest amendment to the act, a journalist convicted of sedition faces a sentence of three to 20 years in prison.”63
Since the May 9, 2018, election, the new government has promised to review all laws affecting freedom of speech.
Singapore 151 “Prime Minister Lee Hsien Loong's government reacts quickly to criticism from journalists and does not hesitate to sue them, apply pressure to make them unemployable, or even force them to leave the country. The Media Development Authority has the power to censor all forms of journalistic content. Defamation suits are common in the city-state and may sometimes be accompanied by a charge of sedition, which is punishable by up to 21 years in prison. As a result of judicial and financial pressure from the authorities, self-censorship is widespread, including within the alternative independent media.… As in many southeast Asian countries, governmental plans to legislate against “fake news” are seen as a threat to the freedom to inform. A proposed law that would allow the police to search homes and electronic devices without a warrant poses a grave threat to the confidentiality of journalists' sources.”64
China 176 “By relying on the massive use of new technology, President Xi Jinping has succeeded in imposing a social model in China based on control of news and information and online surveillance of its citizens.… China's state and privately-owned media are now under the Communist Party's close control while foreign reporters trying to work in China are encountering more and more obstacles in the field. More than 50 journalists and bloggers are currently detained in conditions that pose a threat to their lives … Under tougher Internet regulations, members of the public can now be jailed for the comments on a news item that they post on a social network or messaging service or even just for sharing content.”65
Bar chart depicts the civil society and media development ranked by market.

FIGURE 57.12 Civil Society and Media Development Ranked by Market

Nothing that I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her.66 [Emphasis mine]

Figure 57.13 shows how listed companies have been ranked by market based on their adoption of good CG practices—what the ACGA used to term “CG culture” in its previous biennial reports.

Consistently over the years, this is the area of greatest disappointment for the ACGA, with only Australia living up to the ACGA's expectations. The low scores reflect a “compliance only” mentality in many of the markets—fostered in part by the emphasis regulators place on compliance.67 In part it demonstrates an attitude in some markets and among small-cap companies that CG is a cost of being listed rather than helping them create long-term value. This may be because the principal-agent conflict is felt to be less important, given the predominance of controlling shareholders who behave as owners, leading to less regard for the needs of minority shareholders, perceived not to have skin in the game.

Bar chart depicts the listed companies ranked by market.

FIGURE 57.13 Listed Companies Ranked by Market

Professional Intermediaries/Educated Investors

There are no direct comparisons of the quality of countries' capital market intermediaries as a whole. However, the absolute and relative levels of ownership represented by both foreign and domestic institutional investors may provide a guide to the level of sophistication of each country's capital market, shown in Figure 57.14.

Bar chart depicts the levels of absolute and relative institutional investor ownership.

FIGURE 57.14 Levels of Absolute and Relative Institutional Investor Ownership

Bar chart depicts the investor quality ranked by market.

FIGURE 57.15 Investor Quality Ranked by Market

The ACGA provides another way of assessing the quality of investing based on company reporting. It appears companies are not afraid of shareholder blowback as so many companies indulge in boilerplate annual reporting.68 In part this is because there are so few committed international investors in the markets, already highlighted in Figure 57.15.

The ACGA believes the introduction of stewardship codes may be a game-changer as eight markets now have them; India has a code but only for insurance companies. China, Indonesia, and the Philippines have yet to introduce stewardship codes.69

Professional Auditors

The relatively high scores in Figure 57.16 achieved for auditors reflect regulation more than the actual quality of the audits undertaken.

“Key audit matters” (KAM) reports are being adopted across the markets with only India, Indonesia, and Japan still to adopt them. Korea is adopting them gradually. All but three of the markets have independent audit oversight boards, with the laggards (Hong Kong, India, and the Philippines) finally making progress. The Philippines has already joined the International Forum of Independent Audit Regulators (IFIAR); Hong Kong is expected to establish an independent audit oversight board by the end of 2019 and the status of India's regulator, established in 2018, has yet to be finalized.70

Bar chart depicts the auditors and audit regulators ranked by market.

FIGURE 57.16 Auditors and Audit Regulators Ranked by Market

Conclusions

As economic power moves east and Anglosphere sources of capital become less important or closed off by U.S. “national security concerns,” global investors will need to reconsider whether the underlying assumptions of Anglosphere CG are still appropriate in Asia-Pacific markets.

In any event, investors will have to judge each market on its own merits. Australia still needs an overhaul of its banking system and a national anti-corruption agency. Hong Kong and Singapore have introduced dual-class shares and Korea is considering following suit, undermining the “fairness principle.” Malaysia's new government needs to make headway against the corruption and cronyism of the previous government. Taiwan and Thailand are making progress, but press freedoms are under pressure. India's banking governance needs overhauling. Japan needs to have hard law reform rather than just relying on soft law. China's increased emphasis on Communist Party control at all levels is a cause for concern. CG reform is low on the list of priorities for both Indonesia and the Philippines.71

There has been remarkable improvement in CG since the Asian Financial Crisis of 1998, based on a shared belief that higher standards of CG will lead to more competitive markets and companies. Regulators have worked on raising levels of transparency and accountability and treating consumers and shareholders fairly. However, a word of caution is needed:

While a belief in the value of transparency and accountability remains largely intact, at least in official statements, some governments are showing a striking lack of interest in the third principle: fairness. In the face of stiff competition from the USA for listings of Asian companies, mostly so-called new-economy firms from China, certain governments have pushed aggressively for dual-class shares as necessary to “maintain competitiveness and fund innovation.”72 [Emphasis mine]

The “fairness” principle may be further threatened for the following reasons. First, the structure of Asia-Pacific markets differs greatly from that of the United States and UK. Controlling shareholders are the norm. Consequently, there is less need to mitigate the effects of the principal-agent conflict because shareholders behave like owners with skin in the game. Research by Credit Suisse supports the view that controlled companies deliver superior returns long-term as a result.

Second, the argument of FAANG73 companies, that long-term value creation in the fourth industrial revolution can only be achieved by founder-owners having dual-class shares, will be used by new companies coming to market in Hong Kong and Singapore, increasing the likelihood other markets will follow suit.

Third, most East Asian entrepreneurs tend to share the view of Jack Ma, the founder of Alibaba:

Customers should be number 1, Employees number 2, and then only your Shareholders come at number 3.74

About the Author

Photo of John Zinkin.

John Zinkin is managing director of Zinkin Ettinger Sdn Berhad, a boutique consultancy specializing in corporate governance, change management, ethics, and branding.

John Zinkin has written four books on CG: Better Governance Across the Board: Creating Value Through Reputation, People and Processes (2019), published by de Gruyter; Rebuilding Trust in Banks: The Role of Leadership and Governance (2014); Challenges in Implementing Corporate Governance: Whose Business Is It Anyway? (2010), and Corporate Governance (2005), published by John Wiley & Sons. He also wrote the FIDE Good Governance Handbook (2013), designed specifically for Malaysian banks and insurance companies, under the auspices of Bank Negara Malaysia. He is a faculty member of the Institute of Corporate Directors Malaysia (formerly MINDA), Securities Industry Development Corporation, and Pinnacle Perintis.

John was a member of the Malaysian Corporate Governance working party in 1999 and was involved in the launch of the Malaysian Code on Corporate Governance in 2000. He was a member of the working party that drew up the Malaysian Corporate Governance Blueprint in 2011 and the revised Malaysian Code on Corporate Governance in 2012. He has led board effectiveness evaluations in banking, insurance, and government entities and has written codes of conduct and board charters for several development banks. Since 2007 he has trained more than 1,500 directors in CG as well as senior managers of public listed companies and securities regulators in Asia-Pacific.

Notes

  1. 1.   Reuters (2019), “U.S. lawmakers target China's ZTE with new sanctions bill in case it fails to adhere to Trump agreement,” South China Morning Post, February 6, 2019, https://www.scmp.com/tech/big-tech/article/2185118/us-lawmakers-target-chinas-zte-new-sanctions-bill-case-it-fails-adhere, accessed on June 1, 2019.
  2. 2.   Roumeliotis, G. (2018), “U.S. blocks MoneyGram sale to China's Ant Financial on national security concerns,” Reuters Business News, January 3, 2018, https://www.reuters.com/article/us-moneygram-intl-m-a-ant-financial/u-s-blocks-moneygram-sale-to-chinas-ant-financial-on-national-security-concerns-idUSKBN1ER1R7, accessed on June 1, 2019.
  3. 3.   “Huawei has been cut off from American technology,” The Economist, May 25, 2019, https://www.economist.com/business/2019/05/25/huawei-has-been-cut-off-from-american-technology, accessed on June 1, 2019.
  4. 4.   “The trade war and finance: Alibaba's experience shows how relations between America and China have soured,” The Economist, May 30, 2019, https://www.economist.com/leaders/2019/05/30/the-trade-war-and-finance, accessed on June 1, 2019.
  5. 5.   G20/OECD Principles on Corporate Governance, revised in 2015.
  6. 6.   OECD (2016), op. cit., p. 70.
  7. 7.   OECD (2016), op. cit.
  8. 8.   Coombes, P., and Watson, M. (2001), “Corporate Reform in the Developing World,” cited in Zinkin, J. (2010), Challenges in Implementing Corporate Governance: Whose Business Is It Anyway? (Singapore: John Wiley & Sons), p. 10.
  9. 9.   The adoption by the Singapore and Hong Kong Stock Exchanges of dual-class shares (DCS) in 2018 will reduce the importance of shareholder rights and. It is ironic such weakening of CG should be the result of both markets adopting U.S. stock exchange practices.
  10. 10. ASEAN includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
  11. 11. These countries accounted for 3.526 billion people in 2017 and a nominal GDP of US$24,496.6 trillion or 32.0% of global GDP.
  12. 12. “Lectures on Corporate Governance: Three Models of Corporate Governance from Developed Capital Markets,” EWMI/PFS Program, October 2015, p. 7, http://www.emergingmarketsesg.net/esg/wp-content/uploads/2011/01/Three-Models-of-Corporate-Governance-January-2009.pdf, accessed on October 23, 2018.
  13. 13. Jang, H., and Kim, J. (2001), “Korea Country Paper: The Role of Boards and Stakeholders in Corporate Governance,” The Third OECD Asian Roundtable on Corporate Governance Singapore, 4–6 April 2001, http://www.oecd.org/corporate/ca/corporategovernanceprinciples/1873050.pdf, accessed on October 23, 2018.
  14. 14. China, Indonesia, Taiwan, and Vietnam.
  15. 15. Australia, Hong Kong, Korea, Malaysia, Singapore.
  16. 16. Australia, Hong Kong, India, Malaysia, and Singapore share a common law tradition and judges will cite cases from each other and the UK and United States. With the exception of India, their Companies Acts, however, specify directors “manage and direct the affairs of the company,” as opposed to reflecting the view of most CG codes that “boards direct and govern; management manages.”
  17. 17. Indonesia and Vietnam.
  18. 18. China, Japan, Korea, Philippines, Taiwan, Thailand.
  19. 19. Cambodia, Laos, and Myanmar.
  20. 20. Foreign institutional investors are likely to be only interested in the largest listed companies so the table shows market capitalization weighted average ownership by category of owner. Calculations are based on ownership data for the largest 100 listed companies in each market:
  21. 21. OECD (2018), op. cit., p. 45.
  22. 22. “The increased integration of Asian capital markets with global markets has given foreign institutional investors the opportunity to increase their participation in the region. Today most of the institutional ownership in Asian countries is attributed to foreign institutional investors who on average hold 12% of the capital.” OECD (2018), op. cit., p. 45.
  23. 23. Ibid., p. 46.
  24. 24. Based on “Non-Executive Directors Development” directors training program run by the author when CEO of Securities Industry Development Corporation with PwC for listed companies on the Malaysian Stock Exchange.
  25. 25. Klerk, E., et al. (2017), “The CS Family 1000,” Credit Suisse Research Institute, September 2017, pp. 35–37.
  26. 26. OECD (2015), OECD Guidelines on Corporate Governance of State owned Enterprises, 2015 Edition (Paris: OECD Publishing), pp. 17–26, https://www.oecd-ilibrary.org/docserver/9789264244160-en.pdf?expires=1542261379&id=id&accname=guest&checksum=29D7D3455C42A7989C3D141939B2AAC9.
  27. 27. This excludes investments in financial companies. High performers are defined as companies with a five-year average ROE above the median; low performers with a five-year average ROE below the median. The difference in the size of government ownership is computed as the difference in the average holding in high and low performers.
  28. 28. OECD (2018), op. cit., p. 48.
  29. 29. Allen, J. (2016), CG Watch: Ecosystems Matter: Asia's path to better home-grown governance, CLSA and ACGA, September 2016, p. 12.
  30. 30. Zinkin, J. (2019), Better Governance Across the Board: Creating Value Through Reputation, People, and Processes (Boston: The De|G Press).
  31. 31. Ralston, D. (2018), “The problem with Australia's banks is one of too much law and not enough enforcement,” The Conversation, September 29, 2018, https://theconversation.com/the-problem-with-australias-banks-is-one-of-too-much-law-and-too-little-enforcement-103996, accessed on September 30, 2018.
  32. 32. Combining parameters used by the ACGA's CG Watch, the World Press Freedom Index, and the World Justice Project.
  33. 33. Cochrane, S. (2016), CG Watch: Ecosystems Matter: Asia's path to better home-grown governance, CLSA and ACGA, September 2016, pp. 20–21.
  34. 34. Yonts, C. (2018), CG Watch 2018: Hard Decisions: Asia faces tough choices in CG reform, CLSA and ACGA, December 5, 2018, p. 6, https://www.acga-asia.org/cgwatch.php, accessed on December 8, 2018.
  35. 35. Ibid., p. 6.
  36. 36. Cochrane, S. (2016), op. cit., p. 23.
  37. 37. ACGA assumes that a higher score on Independence is better, reflecting the Anglosphere need to control the “principal-agent conflict” in dispersed shareholder companies—a conflict which does not really exist in closely controlled family firms that form such a large part of Asian capital markets and which the Credit Suisse research shows create better long-term value.
  38. 38. Allen, J. (2018), op. cit., p. 17.
  39. 39. Ibid., p. 36.
  40. 40. Ibid., p. 37.
  41. 41. Ibid., p. 41.
  42. 42. Ibid., p. 42.
  43. 43. The following considerations are excluded because they are not relevant to corporate governance: “open government”; fundamental rights; order and security; and criminal justice. Their inclusion in the overall ranking scores makes a difference to where each country stands relative to the four factors under review.
  44. 44. Based on World Justice Project (2018), Rule of Law Index, 2017–2018, https://worldjusticeproject.org/sites/default/files/documents/WJP-ROLI-2018-June-Online-Edition_0.pdf, accessed on November 5, 2018.
  45. 45. Ibid., pp. 20–21.
  46. 46. The ranking is based on 113 countries and Taiwan is not included.
  47. 47. Ibid., p. 36.
  48. 48. Ibid., p. 37.
  49. 49. Ibid., p. 41.
  50. 50. Ibid., p. 42.
  51. 51. Ibid., pp. 16–17.
  52. 52. Reporters Without Borders (2018), 2018 World Press Freedom Index, https://rsf.org/en/ranking, accessed on November 4, 2018.
  53. 53. Countries ranked out 180.
  54. 54. Reporters Without Borders (2018), Australia, https://rsf.org/en/australia, accessed on November 4, 2018.
  55. 55. Reporters Without Borders (2018), Taiwan, https://rsf.org/en/taiwan, accessed on November 4, 2018.
  56. 56. Reporters Without Borders (2018), South Korea, https://rsf.org/en/south-korea, accessed on November 4, 2018.
  57. 57. Reporters Without Borders (2018), Japan, https://rsf.org/en/japan, accessed on November 4, 2018.
  58. 58. Reporters Without Borders (2018), Hong Kong, https://rsf.org/en/hong-kong, accessed on November 4, 2018.
  59. 59. Reporters Without Borders (2018), Indonesia, https://rsf.org/en/indonesia, accessed on November 4, 2018.
  60. 60. Reporters Without Borders (2018), Philippines, https://rsf.org/en/philippines, accessed on November 4, 2018.
  61. 61. Reporters Without Borders, (2018), India, https://rsf.org/en/india, accessed on November 4, 2018.
  62. 62. Reporters Without Borders (2018), Thailand, https://rsf.org/en/thailand, accessed on November 4, 2018.
  63. 63. Reporters Without Borders (2018), Malaysia, https://rsf.org/en/malaysia, accessed on November 4, 2018.
  64. 64. Reporters Without Borders (2018), Singapore, https://rsf.org/en/singapore, accessed on November 4, 2018.
  65. 65. Reporters Without Borders (2018), China, https://rsf.org/en/china, accessed on November 4, 2018.
  66. 66. Justice Middleton, Centro judgment in Australia [ASIC v Healey] in 2011.
  67. 67. Allen, J. (2018), op. cit., p. 19.
  68. 68. Ibid., p. 20.
  69. 69. Ibid., pp. 19–20.
  70. 70. Ibid., p. 20.
  71. 71. Yonts, C. (2018), op. cit., p. 4.
  72. 72. Ibid.
  73. 73. Facebook, Amazon, Apple, Netflix, and Google.
  74. 74. Ma, J. (2011), Jack Ma in an interview with Kara Swisher of All Things D on June 1, 2011, http://allthingsd.com/20110601/alibaba-group-ceo-jack-ma-live-at-d9/, accessed on December 9, 2018.
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