IAIP – Corporate Governance – Lessons from Asia

IAIP – Corporate Governance – Lessons from Asia

May 24^th 2012

Mumbai

IAIP organized this Speaker Event on Corporate Governance (CG) at Mumbai on May 24^th 2012 wherein Mak Yuen Teen, a founding director of the Corporate Governance and Financial Reporting Centre (details below) and Lee Kha Loon, Head Standards and Financial Market Integrity Asia Pacific, CFA Institute, shared their findings and experiences in the Asian Region. The event was well attended and received by the members of the local society.

Mak Yuen Teen focused on the essential elements of CG viz. robust regulatory framework and enforcement, strong shareholder rights, regard for interests of other stakeholders, ethical culture, effective board of directors, effective risk governance & management, high standards of disclosure and transparency. Being skeptical of the effectiveness of self regulation and the dual role of exchanges as regulator as is the case in Singapore (SGX) he expressed the need of a separate and effective regulator like SEBI in India. On enforcement front it is very difficult and expensive for minority shareholders to get their concerns, grievances and issues resolved & redressed in most of the Asian countries. There are 20-30 scandals reported in the companies listed on SGX mostly foreign companies and it is very difficult to enforce rules on such kind of companies. Out of the 800 companies listed on SGX 40% are foreign and around 50% of the foreign companies are from China. Rules are evolving and SGX has made it is easier to sue people for insider trading etc. Australia on the other hand has strong corporate securities laws that really go after the directors of the companies. On the roles of independent directors Mak feels and is lobbying for the restriction on number of boards an individual can sit on. Most of such independent directors are either not aware of their duties or not adequately equipped to discharge their duties as directors. And as the AGMs bunch up during last few weeks of the deadline say the month of April in Singapore they just rush from one meeting to another one. And during the time of crisis or scandal they are ones to quit! Mak dwelled in details on the size, independence, competencies, diversity, commitments etc for the effective boards. Companies and boards need to develop strong whistle blowing policies, anti-corruption programs, risk management committee which will look into matters as complex as tax evasion, money laundering etc.

[slideshow]

Lee Kha Loon started with his customary slide on The Lee Family’s Samsung Dynasty and the complex holding structures which are common in the whole of Asian Region. Such large conglomerates have huge impact on the economy. For example Samsung Group contributes to 30% of the total corporate profits of S Korea. Philippines’ economy is dominated by 70 business families. Now in the hands of 3^rd and 4^th generation most of the companies face fights amongst the kin for control. Apart from Samsung this includes Gome Electrical Appliances listed in Hong Kong. What happens to the corporate governance, future of the company and rights of the minority shareholders & other stakeholders? What are the roles of Independent Directors especially in related party transactions (RPT)? India received a wake up call when Satyam’s Board approved merger of Maytas. This transaction, which should have sought shareholders’ approval instead of merely board approval, didn’t appear to be at arms length and was opposed by investors. To ensure fairness to the minority shareholders, countries in the Asian region like Malaysia, Singapore  and Hong Kong have made it mandatory for the  companies to take shareholders’  approval  through  voting  in  AGM  or  EGM  for  RPTs valued over threshold limit of 5% of the net total assets and not just rely on board approvals. Malaysia requires even deviations from the threshold levels to be announced to the stock exchanges. Apart from listed corporation, regulators need to look at the governance on structures like REITs. K-REITs recently acquired 87.5% of its holding in Ocean Financial Centre from its parent Keppel Land with just show of hands of shareholders for this important resolution instead of voting by poll.

Mak and Lee also responded to queries from the audience like how differential voting rights affected corporate governance, why they were generally apprehensive of companies with differential voting stocks, corporate governance issues at Facebook in face of acquisition of Instagram, David Sokol case raising question on corporate governance structure at Berkshire, how compensation system was implicitly encouraging REIT managers to conduct above market value real estate transactions to drive up net asset value thus indirectly affecting REIT unit holders and so on. They praised India for the ease with which minority shareholders could exercise their proxy votes.

About the speakers:

Mak Yuen Teen is founding director of the Corporate Governance and Financial Reporting Centre (CGFRC) and Associate Professor of Accounting at the NUS Business School, National University of Singapore. He holds a First Class Honors and Master degree in accounting and finance and a PhD in accounting, and is also a fellow of CPA Australia. Prof. Mak conducts training for regulators, directors and other professionals in corporate governance, speaks regularly in local and international conferences, and is a regular media commentator on corporate governance issues in Singapore and the region.

Lee Kha Loon is a Head, Standards and Financial Market Integrity Asia Pacific at CFA Institute. He has co -written research papers on related party transactions, REITS governance, executive compensation disclosures, role of independent non – executive directors, inter-corporate networks in Japan, shareholder activism in Asia and ethical practices relating to selling of financial products. Prior to joining CFA Institute, Kha Loon had fifteen years of work experience as a financial controller, auditor and treasurer in the financial services industry and worked for six years with a securities regulator. You could read Lee Kha Loons articles & views at http://blogs.cfainstitute.org/marketintegrity/author/leekhaloon/

Contributions: Chetan Shah, CFA, Sitaraman Iyer, CFA both IAIP Volunteers

Photographs by: Santosh Samal