(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Quentin Webb
HONG KONG, Sept 29 (Reuters Breakingviews) - Powerful owners hold back Asia’s corporate governance push. A flagship review of the region’s standards says it is gradually improving, despite frequent blow-ups. The assessment by regional brokerage CLSA and the Asian Corporate Governance Association urges institutional investors to speak up more. Fair enough - but unless outsiders get more say over independent directors, they remain at the mercy of majority shareholders.
The report recounts scandals from book-cooking at Toshiba to the crisis at Malaysian fund 1MDB. And it throws up arresting statistics. In Japan, India, South Korea and Indonesia, CLSA analysts doubt the cost of capital informs management thinking at a majority of companies - a worrying harbinger of future value-destruction.
Meanwhile, CLSA’s scribblers in Seoul, Jakarta and Bangkok reckon a majority of firms in those countries have undertaken harmful related-party transactions. Thailand is the only place where they think even a fifth of directors behave independently.
There are signs of light. Japan in particular is improving, after a broad push to make companies better-run and more profitable. Overall, CLSA and ACGA reckon regional governance is getting better, and suggest investors and company executives could take the baton from regulators to drive future improvement.
True: they could. It’s fair to say that money managers, especially domestic houses, often hesitate to call out bad behaviour, or vote against management. But a dose of realism is advised.
Corporate governance works best when ownership is diffuse and management is professional. However, many Asian companies remain controlled by powerful families, giant parent conglomerates or state actors. Sometimes outsiders get meaningful vetoes: as Hong Kong shareholders have for related-party deals, for example. But public grumbling and protest votes rarely work unless the board and the majority owner have enough conscience to be shamed into doing the right thing.
One useful idea floated in the report would be to let outside shareholders vote separately on independent directors. This already happens for controlled companies in Britain. Such a policy would surely encounter serious resistance from majority owners. All the more reason to support it.
On Twitter twitter.com/qtwebb
- “Asia is getting better” when it comes to corporate governance, brokerage CLSA and the Asian Corporate Governance Association concluded in a biennial report released on Sept. 29.
- CLSA’s “bottom-up” survey of companies covered by its equity analysts saw Japan move up the rankings to second place behind Australia, as domestic reforms “tangibly improve behaviour.” Third, fourth and fifth place were taken by Singapore, Hong Kong, and Taiwan, followed by Thailand, India and Malaysia. The lowest scores in the CLSA survey, which covers 11 Asian nations and includes Australia for comparison, were awarded to China, the Philippines, Indonesia and South Korea.
- The ACGA’s “top-down survey” of overall market practice, which grades markets by their discipline, transparency, independence, responsibility, fairness and environmental and social responsibility, was led by Singapore and Hong Kong.
- “Reforms matter but how companies respond and deliver them is crucial. Investor engagement makes persistent improvement more likely,” the authors wrote. “Asia is getting better and will continue to do so if stakeholders, including agitators, remain engaged.”
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Editing by Pete Sweeney and Katrina Hamlin