Professional Documents
Culture Documents
Singapore
Hong Kong
India
Malaysia
Korea
Taiwan
Thailand
Philippines
China
Indonesia
7.5
6.7
6.2
6.0
5.8
5.5
5.3
5.0
4.8
4.0
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Although the top three corporate governance markets, Singapore, Hong Kong and India have not changed their position from the previous years ranking, there have been changes
further down the rankings as certain markets have improved
regulation. Most notably, Malaysia improved its ranking by
two places as a result of improved accounting standards, better
enforcement and a higher score for its political and regulatory environment, while the Philippines marginally leapfrogged China due mainly to its higher score for accounting and auditing. Indonesia remains firmly rooted at the
foot of the table.
First the good news
The CLSA/ACGA report also highlights a number of areas
of improvement across most markets. In particular, there
has been a push among regulators to improve corporate
disclosure. In Singapore, Malaysia, Indonesia and Thailand, for example, regulators now require companies to
report their annual results within two months of the fiscal
year end. Quarterly reporting is now mandatory in most
markets in Asia, with the notable exception being Hong
Kong where strong resistance to change appears to persist
among many of the territorys large companies.
Another sign of improved corporate disclosure is that all
markets except Taiwan and the Philippines now require
the disclosure of stakes in companies of 5% and more and
some markets also require the disclosure of individual director
compensation. Most markets insist on the disclosure of audit
and non-audit fees paid to external auditors too.
Other areas of improvement include enforcement, where
there is evidence in most markets of increased resources
being applied in this area, albeit far below what is necessary. Most markets have improved their accounting and
auditing standards that are now largely in line with international standards. Securities regulation in many markets
has also been updated and strengthened, especially in the
key areas of dealings in securities by directors and related
party transactions.
Now for some bad news
So much for what is good in Asian corporate governance
regulation. Despite appearances, as Spreading the Word
points out, there remain some continuing areas of weakness
among regulations in most markets in Asia. In particular,
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ernments alone, nor should the responsibility for implementing change in Asia rest solely on their shoulders.
Investors themselves need to take a more active role in
promoting good corporate governance practices in the region.
A top down approach from regulators will be far more
effective in achieving its aims if it is supplemented by a
bottom up approach from investors. Indeed, the promotion
of a corporate governance culture is arguably better and
more easily achieved by enforcing change through the simple
yet real threat of the withdrawal of capital, perhaps the
ultimate sanction for Asian companies, rather than the
imposition of rules that companies can find ways to
circumvent.
In Asia, the absence of independent investor pressure groups
remains a serious drag on achieving that bottom up pressure
on companies to change. More often than not, investors
faced with serious corporate governance issues in Asia cut
and run, simply selling investments, rather than staying
to fight abusive practices. While there are some notable
exceptions to this tendency, the ranks of corporate governance activists, especially among institutional investors,
are thin indeed.
Its the returns, stupid
While the absence of meaningful investor pressure for change
seems to suggest a bleak future for the promotion of corporate governance reform in Asia, there is some hope on
the horizon. Spreading the word has continued the work
of CLSAs and ACGAs previous annual reviews in gathering
data on the correlation between good corporate governance
and financial returns. As the report notes, there appears
to be a relationship between companies and markets with
strong corporate governance and superior returns over the
longer term. There is also a clear correlation between
investors risk appetite and market returns.
When markets are rising, says CLSA, as has been the case
in Asia in the last one to three years to mid-2004, when
the research was compiled, markets with lower corporate
governance standards tend to outperform as investors appetite for risk increases and the search for higher returns
intensifies. Correspondingly, when markets decline, as has
been the case with Asia in the last five years, the same
markets tend to under perform, while markets with higher
corporate governance standards tend to out perform.
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Another factor that explains the returns-governance correlation, is the shift away from dedicated country funds
that often found it difficult to avoid investing in poorer
corporate governance markets and stocks simply by virtue
of their limited investment objects, into global institutional
funds that have the financial muscle and the universe of
opportunities to reject poor governance stocks and even
entire markets. This globalization of the possible investment
universe has led to large investors being able to employ
corporate governance standards as a key measurement tool
in assessing market, sector and company risks.
The role of promoting corporate governance standards is
especially apparent in the longer-term focused funds, where
solid corporate governance principles play a more fundamental role in stock and market selection in driving investment philosophy than for institutional investors that
rely on momentum investing or mis-pricing opportunities
to drive policy, such as hedge funds or country-focused
funds.
Pushing the envelope
It is not just governments and investors playing a role in raising corporate governance standards in the region, however.
Despite a high degree of form over substance and ritualized
box ticking on the part of many companies in Asia, a small
but growing band of companies in the region is increasingly
setting its own corporate governance agenda and standards.
While these are often not the largest or most obvious companies, they do tend to share certain common characteristics. Businesses in banking and finance, technology and
with strong brand-dependent businesses (retail, fashion
etc.) almost irrespective of which market in Asia they operate,
often display a strong corporate governance culture and
many of these have adopted ethical and governance principles
that they practice far in excess of the rules and regulations
laid down in their home markets. The precise reason for
this corporate governance out performance by specific com-
Christopher Leahy is Asian Editor, Euromoney, a leading international financial magazine, and a contributing editor for Asiamoney.
Prior to embarking on a journalistic career, Mr Leahy enjoyed a successful business career as a stockbroker, CFO and investment
banker both in the UK and Asia with a number of leading financial institutions, including Warburg Securities (now UBS), BNP
Paribas Peregrine and Crosby. He has lived in Hong Kong for the past eight years.
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