Asia embraces corporate governance

There is a growing realisation among Asian companies that corporate governance plays a key role in the competition for institutional capital, and inspiring investor confidence in the sound running of publicly listed companies. Fianna Jurdant, senior policy manager at the OECD Corporate Affairs Division, speaking to Commercial Risk Asia, said this realisation has been demonstrated by Asian policymakers, who have welcomed the Organisation for Economic Co-Operation and Development’s (OECD) new G20/OECD Principles of Corporate Governance, launched in October 2015. In addition to the November 2015 announcement from the Indonesian Financial Authority that it would adopt the Principles (see last issue), a number of fellow Asian market authorities have followed suit.hideAlthough the Principles are not legally binding, they are intended to offer practical guidance for national policymakers as they establish their own corporate governance policy frameworks. Furthermore, they have been adopted as one of the Financial Stability Board’s key standards for sound financial systems and are increasingly used as a corporate governance standard for international governments and regulators. The Philippines’ Securities and Exchange Commission (SEC) is developing a corporate governance blueprint for the next five years and will use the Principles as the benchmark in its bid to promote a corporate governance culture among its regulated companies. “The SEC was very keen to do this and had actually awaited submitting the draft of its blueprint until the new Principles were finalised,” said Ms Jurdant. It is the first time that the Philippines has produced such a blueprint. But for a number of other Asian supervisory authorities, the OECD’s revised principles will serve as the basis for updating its existing corporate governance programmes. For example, the Malaysian Securities Commission is taking such a step as it updates its Corporate Governance Code. And the Association of Southeast Asian Nations (ASEAN) Corporate Governance Scorecard will be similarly updated to reflect the new Principles. China, Japan, India, Korea and Indonesia have also committed to the use of the Principles as part of their respective corporate governance frameworks, given that the revised Principles have been formally endorsed by the G20. India has been a particularly vocal proponent of the Principles. The chairman of the Securities and Exchange Board of India, Upendra Kumar Sinha, recently called for the OECD’s corporate governance principles to be readily adopted by Indian companies. “Governance is going to be very important for us. If we are not able to sustain and follow the best standard of corporate governance, it will be very difficult for our corporates to attract investment and talent to build businesses,” he said at an event in February. Asian growth companies A number of the changes made to the G20/OECD principles will be especially relevant for Asian growth companies that are competing for funding in the national and global markets, said Ms Jurdant. “The most notable change in the Principles is a new chapter on on institutional investors and stock exchanges. It’s about the corporate governance framework providing sound incentives throughout the investment chain and for stock markets to function in a way that contributes to good corporate governance,” the OECD executive told Commercial Risk Asia. “There is also an emphasis on the treatment of related party transactions and the monitoring and enforcement of appropriate disclosure. This was identified as an important issue for many Asia policymakers as far back as 2009 by the Asian Roundtable on Corporate Governance (ARCG) and was subsequently considered by the OECD’s Corporate Governance Committee and included in the latest Principles,” she added. The aforementioned ACRG has been a central part of the OECD’s efforts to promote corporate governance in Asia and offers a platform for senior officials, regulators, practitioners and academics to debate the promotion of improved corporate governance in the region. The first event was held in 1999 and last year’s took place in Thailand in October, coinciding with the publication of the revised principles. In addition to the provision of a forum to reflect on the relevance and implementation of the Principles in Asia, the event also covered a number of corporate governance topics that are deemed pertinent to the companies in the region. For example, a key topic at the event was the issue of family-controlled businesses, which are particularly prevalent in Asia—accounting for 85% of all companies and 32% of total market capitalisation, according to a survey from consultant EY. However, the majority of these family firms are small in size compared to their international counterparts and corporate governance can help them to both compete for capital in international markets and solve specific challenges such as succession planning. Another topic addressed at the ACGR was the disclosure of beneficial ownership and control in Asia. Key findings from a recent OECD survey of Asian jurisdictions were presented as a way to encourage greater transparency around the control structures of Asian companies, which in turn will inspire greater investor confidence in Asian companies. The next meeting of the ACGR will take place in October in Korea, which will mark the 20th anniversary of the country’s decision to join the OECD. Another more recent OECD project to promote corporate governance in Asia is the OECD-Southeast Asia Corporate Governance Initiative. Launched in 2014, the initiative aims to support the promotion of corporate governance in those countries within Asia—Cambodia, Lao PDR, Myanmar and Vietnam—that are at an earlier stage of their economic and corporate development and recognises their specific reform needs to help build a capital market. The inaugural meeting was held in July 2014 in Yangon, Myanmar and was organised by the OECD with the support of the government of Japan. This was followed up with a subsequent event in Hanoi, Vietnam in May 2015, during which the subjects discussed included the development of capital markets, the corporate governance of state-owned enterprises and the integration of capital markets in the ASEAN region. The next event will be hosted by Laos in early June. Risk management The primary focus of the OECD’s corporate governance principles is on the development of capital markets and promotion of the idea that the adoption of robust corporate governance can help listed companies compete for institutional investors’ capital. In part, this is because many Asian companies now find themselves competing internationally for investor capital. But it is also clear that Asian-based investors place more emphasis on corporate governance and ethical business practices. Socially responsible investment has grown considerably in recent years. For example, the global investors that have signed up to the United Nations Principles for Responsible Investing (PRI) now manage more than $59tn in assets, up from just $4tn in 2006. And the number of Asian investors that have signed up to the PRI has climbed from 7 to 70 in the same period. Meanwhile, Asian firms now make up more than half of the Dow Jones Sustainability Emerging Markets Index, a benchmark for the environmental, social and governance performance of companies, and seven of the last 13 additions have been Asian companies. In addition, both Japan and Malaysia launched their own responsible investment indices in 2014. However, the importance of the risk management role has also been emphasised in the OECD’s latest revisions, the first changes to the Principles since the global financial crisis of 2008-2009. “One of the main lessons learned from the financial crisis was the importance of risk management,” said the OECD’s Ms Jurdant. In particular, risk management needs to be recognised as a discipline that is not solely the responsibility of senior management and line managers but should be embedded across the organisation, she adds. Board diversity Another new element in the revised Principles is the need to bring in a wider pool of candidates to board nomination and election as well as attracting a mixed skillset. The OECD recommends that countries may wish to consider measures such as voluntary targets, disclosure requirements, boardroom quotas and private initiatives that enhance gender diversity on boards and in senior management. The OECD is planning more evidence-based work on these issues, which are a high priority globally in view of ageing populations and the goal of inclusive growth. Boardroom diversity has become a topical issue in Japan of late. Japan has been rocked in recent years by a number of accounting scandals at leading corporations, such as technology company Toshiba and optical equipment manufacturer Olympus. Meanwhile, another corporate giant—electronics maker Sharp—was the subject of a state-backed bailout. Consequently, Prime Minister Shinzo Abe has vowed to put corporate governance at the heart of his economic reforms and the so-called ‘Abenomics agenda’. Japan has subsequently taken a number of steps to impose more rigorous standards on listed companies. These steps include the Financial Services Agency’s introduction of a ‘stewardship code’ for asset managers and trustees engaging with companies; and the Tokyo Stock Exchange’s adoption of a corporate governance code, which includes a requirement for every listed company to have at least two independent external directors. These developments have helped to improve the makeup of Japanese boardrooms, with more than 90% of listed companies now boasting at least one external director. However there is still some way to go in terms of meeting international standards for the diversity of directors, as pointed out in a letter from the chairman of the UK’s Institute of Directors, Lady Barbara Judge, to the Financial Times, now owned by Japan-based media group Nikkei. Lady Judge wrote: “As one of the few foreign independent directors sitting on a Japanese board, I can confirm that waiting for change in corporate Japan requires considerable patience… Before the introduction of the corporate governance code last year, fewer than 4% of board seats at Japan’s largest companies were held by women. “If Prime Minister Shinzo Abe is to raise Japan’s corporate governance standards to the level of other developed economies, he must consider applying political pressure, and targets, for female board representation, as we have done in the UK.”

Asia embraces corporate governance

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