The AASC is very pleased to welcome its new newsletter editor, Dr. Errol Muir. He is an Adjunct Professor in the RMIT School of Management; Deputy Chairman of Conservation Volunteers Australia; and a member of the Adult, Community and Further Education Board of the Victorian Government.
He has held numerous public policy, economics and senior executive roles in the Trade and Primary Industry Departments of the Australian Federal Government and in the mining industry.
In this edition we look at:
Plus we report on:
We encourage your feedback: firstname.lastname@example.org
This edition of 'APEC Currents' extends the discussion on Public Private partnerships raised in the March 2010 edition, with a report by Ken Waller on recent Asia Pacific Infrastructure Partnership (APIP) meetings in Peru and Asia Pacific capacity building initiatives organised by the RMIT APEC Study Centre.
Economist John West discusses the re-balancing of the growth agenda in Asia and reviews the establishment by G20 and APEC leaders of a framework for strong, sustainable and balanced growth.
On trade, Jeff Rae from ITS Global writes on de minimis regimes in the APEC region. He was the author of a report on this topic for a recent APEC meeting in the US. It is an issue of topical interest in many of the APEC economies – witness the debate in Australia about on-line retailing (where consumers can buy overseas and not incur Goods and Services Tax on items less than $1,000) leading to arguments about protection for the domestic retail sector, though the debate is really about efficiency in import regimes.
Corporate Governance has been an important agenda item for APEC member countries from at least the APEC Finance Ministers’ Meeting in 1998. The APEC Leaders' meeting in 2004 established Corporate Governance as a key plank in regional structural reforms and this was re-affirmed in 2008 at the Lima Ministerial meeting. The issue remains current as shown by a 2010 PECC survey of 400 opinion leaders which firmly put corporate governance as the prime element in the structural reform agenda, particularly in Asia and South America. This edition of APEC Currents provides an insight from Jamie Allen of the Asian Corporate Governance Association into the current state of corporate governance in Asia. Taking a micro view, Dr Xueli Huang and Dr Ling Deng from RMIT University add to this perspective with a discussion of Chinese approaches to corporate governance in their investments in the Australian mining industry. Both perspectives confirm there is considerably more to be done in this area.
Feedback on the articles in this edition is welcome, as are suggestions for future articles of relevance to the APEC agenda.
APEC Initiatives to Increase Investment Flow Into Infrastructure — Public Private Partnerships
By Ken Waller, Director of the Australia APEC Study Centre
APEC forums have identified the need to increase investment flow into infrastructure as a critical development challenge. Estimates of the sums required over the next decade to meet needs in physical and social infrastructure run into trillions of dollars. Adding another couple of zeros to any of the numerous estimates is somewhat less relevant than are finding ways to stimulate private investment in infrastructure.
APEC is engaged in a number of initiatives aimed at encouraging private investment into meeting this major development need in emerging economies in the region. These include efforts to promote common best practice standards in the design of contracts which involve regional public sector agencies with private investors, to mentoring schemes where private sector specialists support specific public sector agencies in their work to develop and administer infrastructure planning, implementation and administration.
The APEC Business Council Advisory Group (ABAC) on APEC financial system capacity building is deeply engaged in the PPP process and is establishing the Asia Pacific Infrastructure Partnership (APIP) which involves private sector specialists with deep experience and knowledge of the various functions that are involved in infrastructure projects; for example, project promotion and construction, legal and administration, financing – banking, investment banking and equity investment (pension and mutual funds), project management, strategic development and academic analytical specialists. Associated with the APIP are relevant international multilateral development banks, including importantly, the World Bank, the ADB and the Inter-American Development Bank.
APIP now comprises nearly 30 representatives of such specialisations who form panels available to hold dialogues with Ministers, senior public sector agency advisors and policy makers on critical matters that governments face in promoting investment in infrastructure. The value of APIP resides in the impartiality and objectivity that APIP bring to the table and in identification of issues that are of relevance to Ministers and their advisors.
A meeting of a panel of APIP was convened in Seoul in late April. The panel and a representative of the World Bank, discussed the infrastructure needs of Japan following the devastation caused by the earthquake and tsunami in March. Experiences, good and bad, in recovery from major disasters and the prioritisation and the logistics of effective planning were drawn from experiences following the 9/11 terrorist attacks in the US and from hurricane Katrina. Issues relating to national and sub-national governmental responsibilities and coordination for Japanese reconstruction were discussed, as were the modes of financing.
The first formal APIP dialogue occurred in Lima, Peru, on 24th August , when an APIP panel met with the Minister of Finance and Economy of Peru, and senior government and national agency representatives of both Peru and Mexico.
The dialogue noted the importance of public private partnerships as vital aspects of national development in both Peru and Mexico. Both economies have implemented national funding arrangements to support public involvement in partnerships and to guarantee elements of private finance in PPPs. Peru has a scheme in place to provide tax offsets to investment in social infrastructure in remote areas of the country.
Mexico has completed many PPPs and is a leader in Latin America in this form of development and with vast experience in road, transportation and ports and logistics. The capacity of Mexican public agencies to provide guarantees for risks that may arise as a consequence of force majeure events and geological faults are factors in mitigating private sector risk. Important views were exchanged on innovative ways of involving the private sector in social infrastructure projects such as schools and hospitals and the inclusion of non-core income generating schemes in such projects.
Private sector financiers outlined the roles they would play in project financing. Banks and investment banks commonly finance the construction phase of a PPP project while pension fund managers prefer to finance long-term operational aspects of projects where long-term income streams arising from the provision of services are guaranteed by governments.
The dialogue was particularly valuable in providing the opportunity for the private sector representatives drawn from across the APEC region to exchange views with Peruvian and Mexican public and private sector PPP specialists. An important observation is that individual APEC economies have much to learn from the experiences of other economies.
In various ways, PPPs have evolved under somewhat different forms and structures and in response to national needs, institutional developments and legal forms. While this is not surprising it does mean that APIP can an important role in bringing together the rich and varied experiences of economies as they develop and exploit ways to develop PPPs in infrastructure in the region's development processes.
The chair of APIP is Mr. Mark Johnson AO, Australian ABAC member and its present membership includes representatives of the private sector and academics from the US, Australia, Japan, Philippines, Malaysia, Hong Kong,
New Zealand, Thailand, Chile, Mexico and Peru. The coordinator of APIP is Dr. J.C. Parrenas of the Bank of Tokyo-Mitsubishi UFJ Ltd. and supported by the Australian APEC Study Centre at RMIT University.
This Centre has supported capacity building initiatives in PPPs in the Asia Pacific region. Most recently, it organised the involvement of 14 specialists from some APEC economies and from Brazil, India and Pakistan in an AusAID funded under the Australian Leadership Awards Program and supported by the Victorian government through the Melbourne APEC Finance Centre.
This was implemented over a three week period in July and involved the participants in a one week-specialist training course in management and leadership designed by RMIT University experts, a one week placement at public and private sector agencies in Australia involved in PPPs and a week in Melbourne on site visits to PPP projects, a dialogue with academic specialists from engineering, construction and design faculties and a two-day policy round table discussion with participants from those agencies that had accepted fellows, official Australian Commonwealth and Victorian government agencies and the World Bank.
The program was intensive and highly interactive. All participants learned from each other and it provided the opportunity for fellows to gain deep experience in the way in which Australian public and private agencies view the role of PPPs, plan, implement, finance, contract, manage and monitor projects, including through the role of the Auditor General of Victoria, over the life-cycle of a project. Importantly, it provided insights into strategic concepts and how PPPs fit into broader societal development. In return, Australian participants gained insights into how major economies such as Brazil, Mexico, India and Pakistan deal with the challenges they confront in national economic and social development. Details of the program and those agencies and private sector institutions and academics involved can be found on the Centre's website.
Time for the Asia Pacific Region to Lead
PERSPECTIVE: by John West, economist, formerly with Australian Treasury, OECD, ADBI
Rapid recovery from the 1997 Asian financial crisis, and China's 2001 membership of the World Trade Organisation presaged a period of very strong economic growth in the Asia-Pacific region. This was underpinned by important policy reforms in Asia's emerging economies and the "great moderation" in the developed OECD countries.
Optimism was so high that even when the first signs of the global financial crisis appeared, some observers believed Asia would be little affected. It was argued that regional economic momentum was so strong that Asia could "de-link" itself from the negative effects of the crisis.
This was not to be. Asia was struck by the "great trade collapse" with exports falling dramatically in most countries in 2009. For example, the People's Republic of China recorded a decrease of 16 per cent, while similar falls were experienced by countries like Indonesia, Korea, and Singapore.
It became evident that East Asia's export-oriented growth was unbalanced. Much of the strong intra-regional trade was in reality in parts and components of the final goods that were ultimately destined for Western markets. The clear conclusion was that developing Asia should "re-balance" its growth.
In the immediate aftermath of the Lehman shock, world leaders convened the first-ever Summit meeting of the G20, in November 2008, to tackle the still unfolding crisis -- rather than calling on the G8. This was recognition of the importance of giving emerging economies an equal seat at the table for managing the world economy.
While only one Asian country, Japan, is a member of the G8, five Asian countries (PR China, India, Indonesia, Japan and Korea) are members of the G20, along with other countries of the Asia-Pacific, notably Australia, Canada, Mexico and the United States. At their September 2009 Pittsburgh Summit, G20 Leaders "designated the G20 to be the premier forum for our international cooperation".
Asia responded impressively to the G20 calls for concerted fiscal expansion to save or create jobs and restore economic growth. Thus, while regional growth weakened in 2009, and was even negative in economies like Hong Kong, Malaysia, Thailand and Singapore, economic growth rebounded very strongly in 2010. Emerging Asia became virtually the main source of economic dynamism in the global economy. Asia's strong fiscal expansion also softened the effect of the crisis in developed OECD markets. Another key factor supporting growth was the commitment of both G20 and APEC leaders to open markets and resisting protectionism.
Looking beyond the short term, G20 and APEC leaders have established a framework for strong, sustainable and balanced growth. This agenda is most critical of all to Asia's emerging economies because, while pre-crisis growth was very strong, it was unbalanced in several respects:
The agenda for achieving strong, sustainable and balanced growth is vast, but the stakes are high. There are already many positive signs of progress on the rebalancing agenda:
- First, in most economies, income inequality between rich and poor has widened substantially. This reduces the poverty reduction impact of a given rate of growth. Unequal societies can also pose a threat to social and political stability.
- Second, Asia's environment has suffered greatly from air and water pollution, degraded natural resources and threatened ecosystems, worsening water stress, natural disasters, and increased generation of wastes, including hazardous waste. Climate change is exacerbating these problems, and threatening the region's future well-being and that of the environment, and the world.
- Third, Asia's growth has been excessively dependent on US and European export markets. Such exports have been implicitly subsidized through artificially low wages, interest rates and exchange rates, and also low prices for land, oil, water, gas and electricity. In addition, a large share of exports is produced in special economic zones which also receive other favorable conditions. It is imperative to unwind these distortions and promote greater domestic and regional demand.
The fact most of the leading emerging economies of the Asia-Pacific region are members of both the G20 and APEC is very significant. It recognizes that the global economic power shift taking place should be matched by commensurate changes in the system of global governance. These countries are better placed to express their interests on the international stage and shape the global agenda, notably regarding the policy reforms that developed OECD countries must also make for achieving strong, sustainable and balanced growth.
- Many countries in the region recognize the importance of improving social policies in the areas of health, pensions and education. It is however necessary to make greater efforts to fight corruption and bribery, which is another important factor driving inequality.
- As emerging Asian economies become more prosperous they have more financial wherewithal to address environmental problems, and citizens also demand policy makers to address environmental problems more seriously, especially for water and air quality. Asia's economies have a double incentive to reduce fossil fuel consumption by improving the energy efficiency and using alternative energies. The dual benefits are minimizing their dependence on imported energy and thus exposure to insecurity of energy supply, as well as reducing carbon emissions which contribute to global warming.
- There are several factors which are already boosting domestic and regional demand. For example, markets are now opening substantially through free trade agreements, and domestic regulatory reforms. In addition, the region's growing middle class is also a growing source of demand across a wide range of areas including tourism.
De Minimis in APEC
by Jeff Rae, Chief Economist, ITS Global
A de minimis regime provides streamlined border clearance and exemption from customs duties and other taxes. These features generate economic benefits by reducing the costs borne by importers, accelerating the delivery of imports and refocusing public revenue collection on more efficient revenue sources.
Most APEC economies have de minimis regimes but the thresholds range from less than US$1 to more than US$1,000, and eligibility varies. These features affect the balance of economic benefits and costs that a de minimis regime produces.
As APEC Leaders have committed to achieving a 10% improvement in supply chain performance, APEC is examining commercially more useful de minimis thresholds. To assist the process the Conference of Asia Pacific Express Carriers (CAPEC) engaged ITS Global Asia Pacific (ITS) and the Centre for Customs and Excise Studies (CCES) at the University of Canberra to assess the current de minimis arrangements in APEC, the reasons for their adoption, and the net economic benefit from higher thresholds.
The study assessed the de minimis regimes of Canada, Indonesia, Japan, Malaysia, the Philippines, and Thailand – the APEC-6 economies for ease of reference. They were chosen as broadly representative of APEC in geography and economic development. The study estimated the net economic benefit of four alternative de minimis thresholds – US$50, US$100, US$150 and US$200 .
The US$200 threshold generated the largest net economic benefit – around US$5.9 billion a year for the APEC-6, equivalent to about US$30.3 billion for all 21 members or 0.086% of their combined GDP.
Resource savings in government administration are the largest benefit. Under all scenarios, such savings accounted for 76% of all benefits, while savings in business compliance were the virtually all of the rest. The latter are particularly important for small and medium-sized enterprises (SMEs) as they generally face disproportionate burdens in completing customs formalities.
The longer products take to get to market, the more likely they will perish, become outdated, be displaced by superior alternatives, or lose the interest of potential buyers. Previous research has shown that a 10% cut in transit time will, other things being equal, expand exports of time-sensitive manufactures by over 4%. For low value consignments, however, the transit time savings are small compared to the others.
A notable characteristic of the results is the relatively small impact that an increase in threshold has on government revenue. The loss of tariff revenue is less than 1% of the savings under the US$200 scenario and only 0.7% of those under the US$100 scenario. Although the loss of VAT revenue is more difficult to estimate, at worst it is no more than 4% of the savings under the US$200 scenario and less under the rest.
The revenue loss is much lower than many may have expected. The potential revenue base has been substantially eroded by preferential tariff rates under Free Trade Agreements and the existing de minimis exemptions. This is true even for those economies that have relatively high applied MFN tariff rates.
The composition of the results is broadly the same for each of the scenarios and reflects the basic economics of this category of imports – relatively large numbers but relatively low aggregate value. Hence the volume-based impacts, such as those on customs and business processing costs loom larger than the value-based ones, such as those involving transit delays and tax collections.
The study found that most, if not all, APEC economies would benefit by increasing their existing thresholds by a substantial amount. APEC could assist this process by agreeing to recommend a minimum threshold level to its members with the option of a higher level to better suit individual circumstances. This would leverage the benefits from unilateral action.
These conclusions have been strongly reinforced by recent research. For example, the Productivity Commission, the Australian Government's independent economic advisory body, is currently reviewing Australia's de mimimis regime. Although Australia has the highest de mimimis threshold in APEC and a substantial rate (10%) of GST, the Commission has found that any reduction in the threshold would impose a substantial net cost on the economy.
The study also found that any increase in de minimis thresholds need not jeopardize border security as advance cargo reporting is required by most countries, irrespective of the declared value of the imports. A higher de minimis threshold can free up the resources to address the more pressing security issues.
The study therefore concluded that the public policy implications of its results were straight forward. A commercially attractive de minimis arrangement makes sound economic sense. While the optimal level of the threshold remains an open question, the direction of economically beneficial change is quite clear.
Corporate Governance in Asia — An Ongoing Challenge
by 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, with direct investment inflows in Asia amounting to $300 billion in 2010. 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 and the Asian Corporate Governance Association (ACGA), 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 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.
Click for article with footnotes included .
Sustaining Chinese Outward FDI in Australia: The Vital Role of Corporate Governance
by Dr. Xueli Huang and Dr Ling Deng RMIT University, Australia
Chinese outward foreign direct investment (ODFI) has surged since 2003. In 2010, China's OFDI reached US$68.1 billion, and accounted for over 5% of global FDI in 2010 (UNCTAD, 2011). Australia has become one of the largest destinations for Chinese OFDI since 2007 (Ministry of Commerce, 2010).
Compared with FDI in Australia from the US, UK, and Japan, China's OFDI is relatively small, only accounting for about 2.71% of the total FDI stock in Australia by the end of June 2010 (Australian Bureau of Statistics, 2011), and heavily concentrated (81.6%) in the resources sector (Ministry of Commerce, 2011), rather than spreading over major industries, such as manufacturing, services, and agriculture, as US, UK and Japanese firms do.
China's OFDI in Australia seems to slow down after 2009 with most OFDI being in those approved projects, rather than new mergers and acquisitions (M&A). In fact, there have been no major new M&A made by Chinese firms that involved more than $1 billion in Australia since Yang Coal acquired Felix Resources for $3.4 billion in October 2009. One of the reasons is the reduced demand for global capital by Australian firms, coupled with the stimulation monetary policy of governments in many countries. Indeed, the availability of capital in Chinese firms was considered as a major factor for their investment in Australia during the Global Financial Crisis (GFC). Another reason is that the financial performance of Chinese OFDI has not been satisfactory. Although some Chinese OFDI has been very successful, such as Minmetals' acquisition of most assets of OZ Minerals and Yang Coal's acquisition of Felix Resources, many project investments by Chinese firms in Australia have incurred substantial losses, cost blowouts, or project delays, such as Sinosteel Midwest, CITIC Pacific Mining, Karara, a 50-50% JV between Gindalbie Metals and Anshan Iron and Steel Corporation (Ansteel).
In response to the rapid growth of Chinese OFDI, particularly those made by state-owned enterprises (SOEs), and the poor performance of OFDI globally, the State-owned Assets Supervision and Administration Commission (SASAC) of China has recently released two interim regulations on the supervision and management of ODFI by SOEs, tightening the supervision and control of investment decision-making and management. SASAC also clarified the responsibilities of OFDI for the SASAC and SOEs and clearly stated that penalties and disciplines will be applied to those responsible for the loss of state-owned assets overseas according to relevant laws and regulations.
These two Regulations have covered many areas, such as risk management, decision-making, and accounting. To some degree, they can be regarded as those internal policies, systems and procedures that are part of the responsibilities of the board of directors in a large corporation.
Indeed, the board of directors is the brain of a company (du Plessis, McConvill, & Bagaric, 2005) and responsible for establishing the systems by which companies are directed and controlled" or "corporate governance", as defined by the UK Cadbury Report (Cadbury, 1992), in a company. Broadly, the board should "direct, govern, guide, monitor, oversee, supervise and comply" (du Plessis, et al., 2005).
Corporate governance in China is still developing although much progress has been made since its first Corporate Security Law was promulgated in 1998 (Ho, 2008). However, corporate governance in China is not well implemented and many problems still remain, including "intervention and expropriation of firm assets by controlling shareholders, weak regulatory enforcement, lack of independent board and effective controls, low corporate transparency and disclosure quality" (Ho, 2008 p. 234).
Corporate governance, particularly its legal and regulatory framework, and implementation, in Australia is very different from that in China. Such differences can impose many challenges on the competence and behaviours of Chinese directors working in Australia. For example, corporate governance has rapidly expanded in the past decade with a shift of focus from shareholder primacy to stakeholder primacy (du Plessis, Bagaric, & Hargovan, 2010). This has been well reflected by a series of amendments on the Corporations Act and the release of the Principles of Good Corporate Governance and Best Practice Recommendations by the ASX Corporate Governance Council in March 2003, and revised in 2010 (Australian Securities Exchange, 2010). Listed companies need to follow these recommendations, although they are not compulsory. Otherwise, they must explain why not. Some recommendations have become more prescriptive after the Corporate Law Economic Reform Program (Audit Reform & Corporate disclosure) (CLERP 9) came into effect on 1 July 2004, which has been regarded as a hallmark of major change in Australia's corporate governance from a "disclosure-based" approach to an "interventionist" one. One of the consequences of these changes in corporate governance is a high demand on the knowledge and competence of board of directors in an Australian company, particularly those which are listed.
For non-listed companies, Standards Australia published a five-part set for corporate governance standards (Standards Australia, 2003).
Besides the Corporations Act and Corporate Governance Principles, there are many other legal requirements that affect the way business is conducted, including trade practices and fair dealing laws, consumer protection, respect for privacy, employment law, occupational health and safety, equal employment opportunities, superannuation environment and pollution controls. In several areas, directors and officers are held personally responsible for corporate behaviour inconsistent with these requirements, and penalties can be severe (Australian Securities Exchange, 2010).
Company directors can be personally liable by virtue of their position as directors under a range of Commonwealth and State/Territory legislation. A recent case is the financial penalties or barring company directorship for 2 former directors of Centro Properties for breaching their duties when they approved financial statements for 2006-07 which did not disclose that Centro was required to repay billions of dollars of debt within a matter of months (Danckert, 2011; Wood, 2011).
Our recent research on how Chinese MNCs control their subsidiaries in Australia (Huang, 2011; Huang & Austin, 2011) has shown that corporate governance in many Chinese subsidiaries in Australia is not well developed, particularly in terms of recruiting board of directors and appointing senior managers. For example, an overwhelming proportion of Chinese subsidiary directors appointed by their headquarters are insiders. Chinese MNCs appointed directors largely according to the proportion of ownership for exercising their ownership control. Most of them are qualified in science, engineering, accounting, and finance, but lack experience in international management. This appointment pattern raises questions about the effectiveness of the companies' corporate governance, given that the independence and competence of the board are crucial for effective control.
Moreover, Chinese MNCs prefer appointing insiders as CEO/MD to their subsidiaries; this is partly due to the weak role the subsidiaries' board of directors plays, and a high level of trust valued by Chinese culture. Consequently, the strategic responsibilities often rest with the CEO/MD of the subsidiary. However, the preference for appointing insiders to senior management positions in the subsidiary is moderated by two things: the role's task complexity at the foreign subsidiary, and the Chinese MNCs lack of competent elites and staff experienced in international management and operations. As a result, top management positions at the subsidiary are often filled on acquisition by non-Chinese managers with local experience. Nevertheless, some of these local managers have been replaced by Chinese expatriates shortly after acquisition, particularly in subsidiaries that are in the early stages of resource development and smaller in size. This is due to the relatively low level of complexity involved in managing these subsidiaries. The lack of experienced executives and middle managers, coupled with potential language and cultural issues, has limited the number of expatriates sent from Chinese MNC headquarters to their Australian subsidiaries.
Finally, the overall pattern that can be drawn from our research is that Chinese MNCs extend the way they control their domestic subsidiaries to those in Australia, a strategy that relies heavily on ownership and personal control, and is largely reliant on on-the-ground staff monitoring and reporting (informal control).
There are at least two implications from our research findings. Firstly, Chinese MNCs need to use corporate governance more effectively and efficiently in aligning the interest of its subsidiaries to that of corporate headquarters. In this regard, the role played by the board, and the behaviours of directors, needs to be explored, particularly its engagement or delegation in strategic decision-making. If the board would like to be engaged in the subsidiary's strategic decision-making, then the independence and competence of the directors become crucial. These two areas can be improved through appointing directors with relevant knowledge, experience, and expertise from both within and outside the corporation. Moreover, improving the quality of the board can also enhance subsidiary's reputation and investors' confidence in the organisation (Ho, 2008). If the board would like to delegate the strategic decision-making responsibilities to the subsidiary's top management, then, the system, structure, and process of corporate governance, as well as the recruitment and remuneration of senior managers, become vital to the subsidiary. This is an area stressed much by the SASAC's two interim Regulations. Given the importance of strategic context for some Chinese MNCs to use Australia as a spring board for its growth in international operations, and the quality of the Australian legal and regulatory framework, Chinese subsidiaries in Australia with well-established corporate governance can play a role of strategic leader for the whole corporation in this area.
Secondly, given the huge gap between the demand for experienced elites and their shortage in Chinese MNCs, Human Resources development is of strategic importance for enhancing the governance and management of foreign subsidiaries at both strategic and operational levels. This could be done through developing HR policies in management recruiting, training, and remuneration. On-the-job training (including sending managers for international assignments) may be an effective approach to developing human resources. Recruiting competent managers outside the MNC from within China or other countries could be another effective approach.
Click for article with references attached .
APEC Conference — Is Australia Managing?
The Impact of the Global Financial Crisis and the Outlook for Australia's Trade and Competitiveness
To be held from 9am - 7pm, 17 November 2011, at ZINC @ Federation Square, Melbourne
Registration Now Open
International and Australian experts and business leaders will review the key drivers and trends affecting Australia's trade and competitiveness. The Hon. Dr. Craig Emerson, Federal Minister for Trade, will deliver the 2011 Australian APEC Lecture to conclude the conference.
The conference will address the following issues:
- Is US trade policy stalled? – hear Dr. Sallie James from the Cato Institute in Washington, DC
- Where is the minerals boom heading? – hear Melinda Moore, Singapore-based mineral commodity expert
- Trade in a two-speed economy – hear Paul Howes, AWU National Secretary, and Professor Sinclair Davidson, RMIT University discuss the critical issues
- How will developments in Europe affect global markets? – Dr. John Edwards, RBA member
- How risky is China? – John Larum from Lowy and Richard Martin, from IMA in Singapore.
- Why does APEC rate Australia's supply chain costs so poorly? – Jeff Rae will report on APEC's latest assessment
- Is Australia getting its fair share of the Asian boom? – John Denton, the Business Council of Australia will report on a new study
- Why is Japan investing more in Australia than China?
- What do we do to fix flagging competitiveness? – hear from the Productivity Commission and the RBA.
Rowan Callick from The Australian, Terry McCrann from the News Limited, Mark Johnson AO and Dr. Ziggy Switkowski will moderate key sessions.
Registration Now Open
For more information, contact Briony Wood-Ingram at email@example.com