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Serious Governance and Regulatory Risks in Asia

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Stockholm (NordSIP) – At a lunch event hosted by East Capital, Jamie Allen (pictured, right), Secretary General, and Nana Li (pictured, centre), Senior Research Analyst of the Asian Corporate Governance Association (ACGA), gave some fascinating insights into the world of corporate governance in China and the rest of Asia.

“One of the major reasons behind the Asian crisis in the late 90 ties was lack of governance”, Jamie Allen explains. “After that, we felt Asia needed an independent agency doing research on corporate governance, producing comments, analysis and reports. So we founded ACGA to do just that as well as advocacy work with regulators and also education. A lot of the work is done behind the scenes since we need to develop a level of trust”. The organisation also publishes several reports, one of which is the yearly “CG Watch” where ACGA ranks 12 markets in Asia according to their corporate governance systems. In ACGAs ranking Australia comes first, then, after a big gap, Hong Kong and Singapore.

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Asia, of course, is a very diverse region and so corporate governance systems are very different.

“In some ways, governance is going backwards in Asia, but overall we definitely feel that progress is being made”, says Jamie Allen.

ACGA focuses more on the quality of public governance and how the regulatory system is set up. How effective financial regulators are, depends a lot on how much independence and funding they are given by the government, so it varies a lot.

“Governance is viewed as a compliance issue”, says Allen, “and they are still not embracing it as a business development tool to create a better organisation. A lot is still box-ticking,” he says. Except for ACGA’s members, not many shareholders are asking companies questions about corporate governance and sustainability. “The quality of audits in the region varies substantially, and unless you happen to know the auditor, there is no way of knowing how good the audit is,” Allen remarks.

The routines around AGMs have gotten better, but in many cases still leave a lot to be desired. Information about the Directors to be elected is sometimes missing, often only names are given, without a bio. Voting is sometimes done by showing of hands with no weight given to how many shares different voters hold. If an institution votes against a resolution in China the vote will be rejected, several members of ACGA have reported. “If the institutions ask why their vote was rejected, the answer will be that they didn’t give enough information as to why they were voting against,” Allen says.

Rules and guidelines on ESG reporting are starting to develop. Some companies are following international standards. Australia and Japan have no guidelines but are the countries where most companies produce ESG reports in the region. “There is not a great understanding of materiality, not a lot of focus on climate change, and no focus on the role of the board. Reports are often produced but not read or discussed by the board. Most reports are not relevant for investors, who in most cases use data from data providers,” Allen states. In Malaysia, Thailand, Singapore and Taiwan regulators have been pushing reporting and have improved their corporate governance reporting. In general, quite a lot of money, time and effort are being put into improving sustainability reporting but very little into corporate governance.

Recently ACGA also published a report on the system of corporate governance in China, where they try to explain what is unique about the Chinese system, how it works, the role of the party government in enterprises, the role of party committees et cetera.

“There is a lot of geopolitical concern about China in Asia. Since the term limit was dropped for the Presidential system, China has become even more autocratic and totalitarian than it has been for years. Hong Kong is still a unique place, but there is an erosion of freedoms,” Allen explains.

Party committees now have to pre-approve material issues. “The newly enforced rules will probably have the largest impact on the private sectors where party committees are now being set up, also with western multinationals such as Loréal, for example,” says Nana Li. She explains how the party committees have always been a part of the state-owned enterprises (SOEs) and were doing some meetings and some decision making, but now “If the party committee has made a decision, the board has no right to reject it”, Li clarifies. The composition of the committees and how they function is not disclosed, so it is difficult to fully understand. It’s difficult for some companies to understand how the process should work and what to do if there is a conflict between the party committee and the board. “Each company has to come up with its own solution”, she says. It’s clear, however, that instructions for the party committees come directly from senior government, Li clarifies.  The whole decision process becomes more bureaucratic. It’s also “important to remember that the core loyalty of the party members is to the party and not to the company. This is something investors need to think about.” as Jamie Allen points out.

When Xi Jinping came to power, he decided that the SOEs had been too inefficient. Nana Li explains. The anti-corruption campaign was introduced as a way to monitor these companies and make them more efficient. Allen stresses that X when he came to power, extended his control of Chinese society in many aspects and the increased monitoring of the SOEs was a part of this. The SOEs are an important part of the political infrastructure in China and getting more control over them is critical, Allen explains. “Xi is trying to ensure the longevity of the current political system in China. He is very afraid of liberalisation”, says Allen. “It was one thing to extend control over the state enterprise sector, but to go and reinforce it in the private sector and the western multinationals are something different. This is what is happening now. They are trying to push party organisations into western multinationals, which the Germans and the European Chambers of Commerce got very upset about. Fundamentally the actions are about control.”

In Japan, “Shinzo Abe has for years been focusing on structural reform to revitalise the Japanese economy, but also to strengthen Japan against China”. In Japan, government policy leadership on corporate governance has been relatively strong (in regional terms), and the revised Stewardship and Corporate Governance Codes mark a step forward. Yet, shareholder rights remain weak in many areas, Allen says.

Most companies in the region have a sustainability policy and produce a lot of reports and data but very little on how this information will change their business or how they will reduce their impact on the environment. Some companies are starting to realise that investors want more relevant information. Jamie Allen sees the area develop quite rapidly and look forward to what the scores of ACGA’s survey next year will be.

“You take a lot more investment and governance risk in Indonesia, the Philippines, Korea and China than you would in Hong Kong and Singapore. If you’re an active investor, you can be selective and find good companies in any market. If you’re a passive investor you’re exposed to government, market and regulatory risks that really affect you in the poorly ranked countries”, he concludes.

Picture courtesy ACGA

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