APEC Currents - The Newsletter of the Australian APEC Study Centre at RMIT
Issue 1, Oct 2011

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Corporate governance in Asia — An Ongoing Challenge

Jamie Allenby Jamie Allen, Secretary General, Asian Corporate Governance Association

Foreign direct investment in the APEC region accounts for more than 50% of the world's total (1), with direct investment inflows in Asia amounting to $300 billion in 2010 (2). While the UNCTAD World Investment Report 2011 highlights moves by governments in Asia to improve investment regulations, corporate governance issues in the region are a concern and of growing interest to companies.

The most recent Corporate Governance Watch report from CLSA Asia-Pacific Markets (3) and the Asian Corporate Governance Association (ACGA) (4), called CG Watch 2010, reports improving standards of corporate governance in the three years to 2010, but notes that “even the best Asian markets remain far from international best practice”. The report is based on analysis by ACGA of each market and by CLSA (5) of governance practices at almost 600 listed companies. Published in late 2010, and discussed in seminars around the region through 2011, the report shows only limited overall improvement in corporate governance in Asia. It ranks Singapore and Hong Kong as having the best overall corporate governance performance, with Thailand, Japan, Indonesia, Malaysia and China showing the greatest improvement in scores over 2009.

The report ranks corporate governance in each country on the basis of five factors: corporate governance rules and practices; enforcement; political and regulatory environment; accounting and auditing; and corporate governance culture. Overall country scores are an average of scores on each factor. With 100% being a perfect score, Singapore ranks highest with 67%. Markets clearly have a long way to go to reach world-class standards, defined (admittedly somewhat arbitrarily) as a score of 80%. Within the factors considered by the report, lowest scores were in the ‘enforcement’ and ‘governance culture’ categories.

Quantitative research reported in CG Watch 2010 indicates that there is evidence to suggest that stocks of companies with a higher corporate governance score perform better that those with lower scores, to the benefit of shareholders and economies generally, and there is a need to make more investors aware of this. However, a snapshot across the region shows significant areas for improvement, with an overall average corporate governance score of just 52.7%. Large capitalisation companies tend to have better corporate governance systems in place. Among the highest scoring companies in the region are HK Exchanges, Li & Fung, TSMC, HSBC, Infosys as well as Nintendo, Sony, Sumitomo Metal and Tokyo Electron. Some medium sized companies also have high corporate governance standards including CapitaMalls Asia, Kasikornbank, Bank of Ayudhya, Konica Minolta, Nikon, Hynix and Manila Water.

In general, across key measures of good corporate governance, the picture is mixed in the region. CLSA’s data shows that, averaging by markets, just 19% of the companies sampled have an independent chairman. None of the companies scored in Indonesia have an independent chairman, and less than 10% of the companies in China, Hong Kong and India have chairmen who are independent. These results are hardly surprising, given the predominance of controlling shareholders (private or state) in most corporations in Asia; companies with dispersed ownership are in a minority. However, they do highlight the potential risks that minority shareholders face when investing in companies with a majority or dominant shareholder, and in markets that for the most part have weak regulatory controls over related-party transactions (Hong Kong and Singapore excepted to varying degrees).

This is not to suggest that all family companies in Asia mistreat their minority shareholders—some are excellently managed and fair to shareholders. But it does put the onus on investors to pick and choose. One useful metric is whether a controlling shareholder’s primary financial interest lies in the listed company or is dispersed among numerous listed and unlisted entities. If the latter, there is a greater likelihood that the listed company will be forced into doing value-eroding, related-party transactions with sister companies. Half or more of the companies CLSA sampled in the Philippines, China, Singapore, Korea, Malaysia, Thailand and India have controlling shareholders whose primary interest is NOT the listed company. Even for Hong Kong, Taiwan, Indonesia and Japan, there is a potential risk that the controlling shareholder’s interest is not aligned with other investors at 25% or more of the companies sampled.

For the same reason as above, few Asian company boards have a majority of independent directors and few independent directors are truly able to exercise effective oversight over management. Barely 5% of the companies surveyed have independent directors making up the majority of their boards in the Philippines, Taiwan and Japan. Only in Korea and Singapore do over half the companies have a majority of independent or “outside” directors—yet this picture is complicated by the fact that the definitions of “outside director” in Korea and independent director in Singapore are inadequate. For India, just under half of the companies surveyed have independent directors nominally making up a majority of their board—yet here again the effectiveness of these directors is often questioned. Asia is very good at form over substance.

ACGA’s criteria for a proper audit committee include having a chairman who is an independent director, that more than half the members of the committee should be independent directors and that at least one of the independent directors on the committee should have expertise in accounts or audit. As audit committees are not compulsory in Taiwan and Japan, only half of the Taiwan sample and less than two-third of the sample in Japan have a proper audit committee. In Indonesia, around one-fifth of the companies surveyed do not meet the full criteria of a proper audit committee. Similar issues on the composition of the audit committee affect approximately one-tenth of the companies covered in Korea and the Philippines, as well as approximately 5% of the CLSA sample in China, Singapore, Malaysia and Hong Kong.

Voting by poll, a litmus test for shareholder enfranchisement, requires all votes cast in an AGM/EGM by those present as well as by proxy to be tallied and the detailed results published soon after the meeting. This has been made mandatory in Hong Kong since 2009 (and extends to the Chinese companies listed in Hong Kong) and is also now the norm for Thailand. A few Singaporean companies are moving in this direction voluntarily. In Taiwan, only TSMC had voluntarily adopted voting by poll by the end of 2010, although a couple more companies are now doing so. For the rest of Asia, this practice is still largely non-existent, with meeting resolutions passed by a show of hands or acclamation. (Note: Some markets, such as Japan, require publication of the results of all proxy votes received. While not full voting by poll, this is a step in the right direction.)

This brief review of key corporate governance issues across the region shows that there remains much to be done in the future. Improvements were, on average, limited from the 2007 to 2010 surveys, and it remains to be seen how the current financial problems will affect the will and ability of companies to institute improvements in the next few years.

Since publication of the report there have been continued developments and improvements in corporate governance regulation within the region. For example, Malaysia, in December 2010, introduced a strong Code on Takeovers and Mergers improving disclosure provisions, and in January 2011 improved investor protection when companies dispose of assets. The Singapore Stock Exchange has also proposed mandatory voting by poll at shareholder meetings. Just as the last financial crisis initially stimulated action on improving corporate governance, it is to be hoped that the current difficulties will encourage governments, companies and shareholders to place a renewed focus on improving governance in the region.


  1. APEC Policy Support Unit (2011) APEC region exhibits strong recovery in investment levels, Press Release 2 Aug 2011, Singapore
  2. UNCTAD World investment Report (2011)
  3. CLSA is Credit Lyonnais Securities Asia, now part of the Credit Agricole group.
  4. ACGA's membership comprises more than 90 global and regional pension and investment funds, financial institutions, listed and unlisted companies, law and accounting firms, and educational institutions operating or involved in Asia
  5. Company data collated by CLSA

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