www.acga-asia.

org

Asian Corporate Governance Association (ACGA)

“Corporate Governance In Asia:

Regional Overview and Hot Topics”

Presentation by
Jamie Allen, Secretary General, ACGA
Moody’s Seminar, Hong Kong
June 24, 2009

ACGA Presentation 1
Moody’s, June 24, 2009
 Agenda

1. Rating Corporate Governance Quality in Asia

2. Regional Hot Topics

3. Developments in Japan

4. Final Thoughts

ACGA Presentation 2
Moody’s, June 24, 2009
 Introducing ACGA

„ The Asian Corporate Governance Association

(ACGA) was formed in 1999 to facilitate the
implementation of effective corporate
governance in Asia. Our scope of work covers
research, advocacy and educational events in
11 Asian countries.

„ ACGA is incorporated in Hong Kong as a non-

profit association and is independently funded
by a corporate membership base.

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Moody’s, June 24, 2009
 1. Rating Corporate Governance Quality in Asia:
“CG Watch” Survey
Market 20041 20052 20073

1. Hong Kong 67 69 67

2. Singapore 75 70 65

3. India 62 61 56

4. Taiwan 55 52 54

5. Japan - - 51

=6. Korea 58 50 49

=6. Malaysia 60 56 49
1. Introduced a detailed
survey and scoring
8. Thailand 53 50 47 Source: “CG Watch”, a
methodology in 2004. joint report by ACGA
and CLSA Asia-Pacific
2. Made the methodology
more regorous in 2005.
9. China 48 44 45 Markets
3. Enhanced the methodology
further in 2007. (No survey
in 2006.)
10. Philippines 50 48 41

11. Indonesia 40 37 37
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 Why scores in “CG Watch 2007” were lower

„ Methodology became more rigorous

„ “The more we looked, the less we found”
„ Varying degrees of regulator, issuer and investor
complacency in booming markets
¾ “The job is done, we now just need to refine
the rules”
„ Political paralysis (eg, Korea) or upheaval (eg,
Thailand)
„ Accounting + auditing standards & practices
lagged international norms more than expected
(in many markets)

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Moody’s, June 24, 2009
 “CG Watch 2007” category scores

CG Rules & Political/

Market Enforcement IGAAP CG Culture TOTAL
Practices Regulatory

1. Hong Kong 60 56 73 83 61 67

2. Singapore 70 50 65 88 53 65

3. India 59 38 58 75 50 56

4. Taiwan 49 47 60 70 46 54

5. Japan 43 46 52 72 49 52

=6. Korea 45 39 48 68 43 49

=6. Malaysia 44 35 56 78 33 49

8. Thailand 58 36 31 70 39 47

9. China 43 33 52 73 25 45

10. Philippines 39 19 38 75 36 41

11. Indonesia 39 22 35 65 25 37

Source: “CG Watch 2007”, ACGA & CLSA Asia-Pacific Markets Figures in %
 “CG Watch 2009”

Topical issues in our next survey include:

„ Are governments taking a more strategic view of corporate
governance as a result of this crisis, or are they seeking expedient
solutions to immediate problems?
„ Are regulators removing or waiving any core shareholder rights to
allow easier capital raising in response to the financial crisis?
„ How sound are systems of corporate financial reporting and
external auditing?
„ Are listed companies seeking a more open dialogue with their
shareholders and key stakeholders?
„ Are shareholders exercising their ownership rights more vigorously
following the crisis?
„ Are directors becoming more knowledgeable and committed?

ACGA Presentation
Moody’s, June 24, 2009
 2. Regional hot topics

¾ Improved financial reporting

¾ Strengthened shareholder rights

¾ More effective enforcement

¾ Better board practices

¾ Focus on ESG

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 Improved financial reporting

„ What investors are looking for:

¾ More detailed/quicker translation of reports:
Japan, Korea, Taiwan

¾ Faster reporting deadlines: Hong Kong, for example, is

moving from 90 days to 60 days for unaudited interim
results from June 30, 2010 and from 120 days to 90 days
for audited annual results from December 30, 2010

¾ Quick disclosure of stock-option grants: Singapore and

Hong Kong have both tightened their listing rules.

¾ Continuous disclosure: More regular disclosure sought of

price-sensitive information.

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 Strengthened shareholder rights

„ What investors are looking for:

¾ Improved proxy voting standards: Investors need the
earlier release of final AGM agendas if they are to vote
in an informed way (28 days). They want their votes
properly counted (“voting by poll”) and the results
published.
¾ Stronger “pre-emption rights”: Large and dilutive private
placements to a select group of investors increases risk
to other (minority) shareholders.
¾ Stricter rules on privatisations/delistings: Protection for
minority shareholders (eg, approval processes) is weak
in much of Asia. Better in Hong Kong, but the PCCW
case highlights a legal problem.

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 More effective enforcement

„ What the market expects:

¾ Regulatory spine and focus: a clear and consistent signal to
the market on how financial regulators will enforce.
¾ Securities law: a faster, fairer approach to dealing with insider
trading and fraud. Cases drag on for years.
¾ Listing rules: most exchanges have weak powers to enforce
their own rules; investors want to see more rigorous efforts
made.
¾ CG Codes: these are rarely “enforced”; exchanges could be
more active in promoting them (eg, in IPOs)
¾ Transparency: regulators could be much more active in
disclosing their enforcement actions and processes.

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 Better board practices

„ What investors are looking for:

¾ Genuinely independent directors
¾ Split chairman / CEO: hard to achieve in reality given large
family & state controlling shareholders.
¾ Board composition: should reflect the business needs of the
company.
¾ Board structure/committees: less box-ticking and more
thought as to how board committees are structured and
operated, and the types of committees formed.
¾ Audit committees: could be greatly improved; Singapore
formed an Audit Committee Guidance Committee in Jan 08.
¾ Director training: a conundrum—if mandatory, often
ineffective; if voluntary, limited take-up. Focus on pre-IPO.

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 Focus on ESG

„ What global institutional investors are doing:

¾ Policy focus: signing up to the UN Principles of
Responsible Investment; some are writing internal
guidelines on ESG criteria for investment and voting.

¾ IPO focus: starting to ask questions about whether IPOs

meet all requisite environmental and labour standards.

¾ Execution ability: starting to look for fund managers who

can invest along ESG lines.

Question: Should it be E, S + G? Or G, then E &S?

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 3. Developments in Japan:
Background -- “ACGA White Paper on Japan” (2008)
1. Treatment of shareholders: Many listed companies
disregard their shareholders. Not a level playing field with
other stakeholders. Shareholders not seen as owners.
2. Capital inefficiency: Many companies hoard cash and do
little with it. Some invest in risky stocks and bonds.
3. Supervision of management: Most boards of directors do
not supervise management, since the directors are
themselves managers. Few independent directors.
4. Pre-emption rights: Japan did not have regulatory controls
on dilutive “private placements”.
5. Poison pills: An increasing number of companies adopted
them to protect entrenched management.
6. Shareholder meetings & voting: The clustering of meeting
dates still a problem. No publication of voting results.
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 Certain principles not widely accepted in Japan

OECD
USA UK Germany* HK China# Japan
Principles
Board structure Not defined Single Single Two-tier Single Two-tier Two-tier

Directors should Yes

be accountable Yes Yes Yes (and to Yes Yes Yes
to shareholders employees)

Boards should be
independent of,
and supervise,
Yes Yes Yes Yes Yes Yes No
management

Boards should
form independent
committees Recommended Yes Yes Yes Yes Yes No
(eg, audit,
nomination)

*Answers refer to the Supervisory Board in Germany.

#In China, there is also a “board of supervisors” that supervises directors and senior managers.

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 The government’s fragmented response

„ The Japanese Government wants to move forward on

corporate governance, but has traditionally found it
difficult to produce a coordinated and clear response.
„ Three new committees:
¾ METI Corporate Governance Study Group: Formed in late 2008
by the Ministry of Economy, Trade and Industry (METI) to
propose a way forward on outside directors. Reported in June.
¾ FSA Study Group on Strengthening the Competitiveness of
Japan’s Financial and Capital Markets: Formed by the
Financial Services Agency (FSA) in late 2008, but has a wider
brief: outside directors, private placements, proxy voting,
cross-shareholdings, defense measures. Reported in June.
¾ TSE Advisory Group on Improvements to the Listing System:
Formed by the Tokyo Stock Exchange (TSE) to look at private
placements, defence measures, proxy voting and other
matters. Reported on April 23, 2009.

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 The business sector: Conservatives vs reformers

„ The Nippon Keidanren (Japan Business Federation) released a

new discussion paper on April 14, 2009 titled, “Towards Better
Corporate Governance”. The Keidanren is controlled by large
industrial firms and its views on CG have always been
conservative. Main points:

1. Outside directors: There should be no mandatory rule requiring

them. It is up to companies to choose their own CG system.
2. Definition of “outside director”: Opposed to any amendment of
the company law to make them independent.
3. Role of Kansayaku (statutory auditors): They provide adequate
supervision of management. No need for independent directors.
4. Disclosure of voting results: Voluntary disclosure by companies is
“commendable”. But opposed to any mandatory rule.
5. Third-party allotments: Supports in principle the idea that these
should be regulated to protect existing shareholders.

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 Companies with a more reformist view

„ Eisai (pharmaceuticals)
¾ Views shareholders as one of its “principal stakeholders”.
¾ Board: 7 of 11 directors are outside (incl. outside chair)
¾ AGM materials: A full page for each director, with personal statements
explaining why they want to be on the board.
¾ Has an “Independent Committee of Outside Directors”

„ Shiseido (cosmetics, 2nd largest in Japan)

¾ With sales flat at home, Shiseido has been expanding overseas. It
needs to become internationally competitive and sees improved
governance as one element of its restructuring.
¾ Two independent directors and one foreign executive director.
¾ Separating the decision-making and supervisory functions of the
board from the business execution functions of management.

„ Voluntary publication of proxy voting results: Sony, Shiseido and

Mabuchi Motors in 2008 and Nissen in 2009.

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 4. Final thoughts

„ Corporate governance reform is a dynamic process--an

attempt to continuously improve the financial system and
create a more level playing field for participants.
„ Reform efforts are never perfect or complete, but without
them investor confidence and trust would not return.
„ CG regimes in Asia have improved since 1997, but there is
still a lot of work to do.
„ The recent financial crisis highlights not the failure of CG
standards per se, but a failure of implementation by major
financial institutions and, arguably, a failure of regulatory
governance.

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 Contact details

Jamie Allen
Secretary General
Asian Corporate Governance Association Ltd

Room 203, 2F, Baskerville House

13 Duddell Street, Central, Hong Kong

Tel: (852) 2160 1788 (general)

Tel: (852) 2872 4048 (direct)
Fax: (852) 2147 3818
Email: jamie@acga-asia.org
Website: www.acga-asia.org

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