Competitive Forces Driving Corporate Governance Reform in Asia

Transcription

1 Asian Corporate Governance Association (ACGA) Competitive Forces Driving Corporate Governance Reform in Asia Presentation by: Jamie Allen Secretary General, ACGA to the IQPC Australasian Corporate Governance Congress Sydney, IQPC Conference, Sydney 1

2 Topics 1. Regulatory change in Asia (the biggest catalyst of corporate governance reform) 2. Impact of the capital markets 3. Corporate self-discipline IQPC Conference, Sydney 2

3 Topic 1 Regulatory change in Asia: Rapid introduction of new rules following 1997/98 crisis Code convergence Form over substance IQPC Conference, Sydney 3

4 What they had then: Jan 1997 Country Official code of best practice? Mandatory independent directors? Mandatory audit committees? China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand IQPC Conference, Sydney 4

5 What they have now: Jan 2003 Country Official code of best practice? Mandatory independent directors? Mandatory audit committees? China Hong Kong (No) India Indonesia Japan In 2003? Optional Optional Korea () Malaysia Philippines Singapore Taiwan (No) Thailand IQPC Conference, Sydney 5

6 Independent directors: new rules China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Three/33% (by June 2003) Two (proposal for three) 30% (of Komisaris) Two external directors (optional) 25-50% Two/33% Two/20% 33% Two (+ 1 ind. supervisor) Three IQPC Conference, Sydney 6

7 Other reforms on the agenda Remuneration and nomination committees Quarterly and Internet reporting Disclosure of director compensation Focus on directors duties and liabilities (+ insurance) Director training and qualifications Statutory derivative actions Class actions Cumulative voting Voting by poll (not show of hands) Expansion of internal audit & risk management IQPC Conference, Sydney 7

8 Code convergence In other words, since the Asian financial crisis there has been a marked convergence towards global best practice in new corporate governance codes of virtually all major economies. US scandals have had a paradoxical effect: slowed the pace of change and undermined credibility of US standards, while also making governance reform more important. Sarbanes-Oxley is partially restoring US reputation. Code convergence continues. IQPC Conference, Sydney 8

9 Caveats: The broader context Convergence does not herald complete uniformity in legal and economic systems: Company and securities law, not to mention judicial systems, will continue to differ widely. Concept of the corporation its economic vs social/political obligations also varies. Differences in the structure of boards single vs two-tier vs dual boards remains. Style of enforcement: dictats vs recommendations, autocracy vs consultation. But global standards are being grafted onto these divergent systems. Will it work? IQPC Conference, Sydney 9

10 5-year progress report Strengths: Weaknesses: Awareness has risen Governance is firmly part of policy Reform underway in all major economies Higher standards (on paper) Emerging shareholder activism Depth of change shallow. A lot of window dressing Governance seen as a compliance issue, not a competitive one Regulatory will vascillates Shareholder activism still very limited. Significant disincentives exist IQPC Conference, Sydney 10

11 CLSA governance scores, Feb 2002 Country Country Score (%) CG rules (%) Enforcement (%) Company scores (%) Singapore Hong Kong India Taiwan Korea Malaysia China Thailand Philippines Indonesia IQPC Conference, Sydney 11

12 Topic 2 Impact of the capital markets: Who is concerned? How much activism? Is capital-market discipline working? IQPC Conference, Sydney 12

13 Who is concerned? More Foreign pension funds + small number of Asian govt pension funds Foreign asset managers + a few govt investors Certain mutual funds Market intermediaries, including brokers, ratings agencies, insurers Maverick retail investors Strategic investors *Note govt as catalyst IQPC Conference, Sydney 13 Less Domestic pension funds Domestic asset managers Most banks (commercial + investment) Most brokers Most bondholders Most retail investors

14 Focus funds Korea: IFC + Scudder launched a US$150m corporate governance fund in First dedicated governance fund in Asia. To invest in mid-cap Korean companies seeking to implement international standards. Japan: CalPERS + Relational Investors of the US to invest US$200m in a focus fund (announced Sept 2002). Managed by SPARX, a Japanese asset manager. To take big stakes in a small number of underperforming listed companies and use activism to turn them around. IQPC Conference, Sydney 14

15 Institutional investor survey 2002 How important is corporate governance compared to financial issues when evaluating Asian companies? 21% More important Equally important 61% 18% Less important Source: McKinsey survey carried out in April/May IQPC Conference, Sydney 15

16 Concerns of strategic M&A investors in Asia Others (4%) Contractual arrangements (7%) Deal pricing issues (25%) Transparency & reliability of information (26%) Quality of management (17%) Legal & regulatory framework (21%) Source: PricewaterhouseCoopers, 2002 IQPC Conference, Sydney 16

17 How much activism? Activism is mostly at the retail level: China: Attempts by small shareholders to go to court; Caijing magazine Hong Kong: David Webb (webb-site.com); shareholders linked to certain companies (eg, Beauforte, Boto) Korea: Jang Hasung, Participatory Economic Committee of the People s Solidarity for Participatory Democracy (PEC-PSPD) Singapore: David Gerald, Securities Investors Association Investor associations in Malaysia & Thailand IQPC Conference, Sydney 17

18 Private activism Institutional investors have mostly operated behind the scenes, on a one-to-one basis with investee companies: Pension funds: a couple of large foreign funds are applying internal governance principles to Asia; but not a lot of action among domestic funds yet, except certain state pension funds. Private equity: development of corporate governance screens. Intermediary services: growing market for company ratings (S&P, CLSA). Exceptions: Mark Mobius, Templeton; Yoshiaki Murakami, MAC Japan IQPC Conference, Sydney 18

19 Regulatory activism Definition: Where a regulator goes beyond enforcing the law and galvanises public activism. Malaysia: Minority Shareholder Watchdog Group formed in 2001; led by the Employees Provident Fund. Thailand: SEC & SET helped to form the Shareholders Association, a retail body (May 2002) Govt Pension Fund + other funds and insurance companies formed the Institutional Investors Club (July 2002) Taiwan: Securities and Futures Institute has facilitated quasi classaction law suits involving retail investors. Should regulators seed such activism? Can these groups ever act independently? IQPC Conference, Sydney 19

20 Is capital-market discipline working? More in some markets than others (eg, Korea vs Hong Kong vs Malaysia). Institutional investor efforts fragmented, not yet organised. Retail investors are more organised. Ratings and surveys do have an impact. Legal systems typically obstruct shareholder activism, yet number of court cases rising. Where are the banks? IQPC Conference, Sydney 20

21 Topic 3 Corporate self-discipline : Four main competitive drivers Case studies Will reforms become entrenched? IQPC Conference, Sydney 21

22 Competitive drivers Financial Lower cost of equity and debt capital Gain access to international capital markets Longer term investors + better relationships Risk management and internal controls Human capital Build trust with employees Preferred employer in global market for talent Commercial Preferred supplier (esp. in North American markets) Preferred partner (esp. in joint ventures with MNCs) Reputational Build a respected global brand Protect strategic or financial investments IQPC Conference, Sydney 22

23 Some of the companies responding Financial HSBC, CLP Holdings, SUNDAY, Bank of China, Petrochina, Huaneng Power, SK Telecom, Singapore GLCs, Siam Cement, Thai Union Frozen Products Human capital Good Morning Securities, Infosys, TSMC Commercial Li & Fung, IMC, Hsin Chong Construction Reputational Most PRC listed SOEs, most Singapore GLCs IQPC Conference, Sydney 23

24 but corporate behaviour varies widely ACGA 2000 Survey: We assessed the top 5-10 listed companies in five markets (Hong Kong, India, Japan, Korea, Singapore) and found a very wide variation in governance practices. S&P Transparency & Disclosure Study 2001: Assessed around 250 corporations in Asia. Range of scores from 1 to 7 (out of 10). IQPC Conference, Sydney 24

25 Case study: Japan 1 Board restructuring over the past five years among internationally focussed companies: Board size has fallen dramatically (50-60 to 10-15). Directors differentiated from executive officers Introduction of outside directors + committees Direct communication with minority shareholders Interestingly, many Japanese companies are ahead of the government in their thinking on corporate governance reform. IQPC Conference, Sydney 25

26 Case study: Japan 2 Shinsei Bank: Formerly the Long Term Credit Bank Taken over in 2000 by a consortium led by Ripplewood, a private equity house. Large number of outsiders on board and in senior management, including foreigners (eg, Paul Volcker and Vernon Jordan are senior advisers; and David Rockefeller is a director) Publicly attacked the retailer, Daiei, for not repaying its loans (despite making payments to other Japanese banks). IQPC Conference, Sydney 26

27 Case study: Korea KT Telecom recently: Increased the number of outside directors from seven to nine (out of a total of 15). The first foreign director has been appointed. He is Stuart B. Solomon, CEO of Met Life Korea. Introduced cumulative voting. Note: Individual company practices in middleranking countries can exceed their counterparts in higher ranking countries. IQPC Conference, Sydney 27

28 Case study: China Bank of China listing in Hong Kong and global offering (July 2002). Board of directors: Four independents, including Victor Fung of Li & Fung and Tung Chee Chen of Orient Overseas (Int l) Ltd. Senior adviser: Tony Neoh, former chairman of HK SFC. Note: PRC companies actively look outside mainland China for independent directors. IQPC Conference, Sydney 28

29 Will reforms become entrenched? We think so (over the medium to long term)! Capital-market discipline: still early days, but is gaining momentum (eg, proxy voting, law suits). Tangible change is starting to occur as a result of competitive forces, but remains quite limited. Mostly apparent among enlightened corporates, those experiencing crises, and those under scrutiny (note CLSA 2002 survey). At the same time: Persistent problem of rule design + enforcement; linked to weaknesses in regulatory and legal systems. Most listed corporates are resisting change or doing the bare minimum. Comply or explain not working. IQPC Conference, Sydney 29

30 Conclusion Reforms in Asia are moving quite rapidly, but remain superficial. Code convergence will not create identical economic systems, but international corporates are aligning. At present, regulatory reform is the biggest catalyst for corporate governance reform. Capital-market and other competitive pressures starting to have an effect, but limited. Institutional investors need to organise. (ACGA is one channel.) Competition, not rules, will drive substance over form. But rules set an important benchmark, signal regulatory direction, and dictate investor rights. IQPC Conference, Sydney 30

31 ACGA Website Go to to keep track of corporate governance developments in Asia, ACGA activities, and governance events. IQPC Conference, Sydney 31

32 Contact details Jamie Allen Secretary General Asian Corporate Governance Association Ltd Room 3403, Citibank Tower 3 Garden Road Hong Kong Tel: (852) (general) Tel: (852) (direct) Fax: (852) jamie@acga-asia.org Website: IQPC Conference, Sydney 32