Corporate Governance Watch 2012
Cracks in Asian Corporate Governance reappear in recent years
19 September 2012
Hong Kong - Wednesday 19 September 2012 - CLSA Asia-Pacific Markets ('CLSA'), Asia's leading and longest-running independent brokerage and investment group, has released its Corporate Governance ('CG') Watch 2012, the 9th survey of corporate governance across Asia since 2000.
Produced in collaboration with the Asian Corporate Governance Association ('ACGA'), the report examines 864 listed companies across Asia-Pacific markets, including Japanese and Australian firms, to produce the most comprehensive assessment of corporate governance performance, issues and trends in Asia.
The report, entitled 'Tremors and cracks', finds that cracks in Asian corporate governance have become more apparent with corporate scores slipping since the previous CG Watch report was issued in 2010. Investors have faced issues ranging from relatively minor corporate transgressions to growing concerns about the reliability of financial statements and, at the extreme, outright fraud. Corporate Governance, once again, can no longer be taken for granted.
Among the market rankings, those with improved CG ratings are in Southeast and South Asia with Singapore remaining at the top in 2012 followed by Hong Kong and Thailand. Most of those with falling CG ratings are in North Asia, including Japan and Taiwan both down 2 percentage points ('ppts'), and China down by 4ppts. Korea is an exception and is up 4ppts this year while its overall score remains lower than Japan and Taiwan. The Philippines and Indonesia are once again at the bottom of the market rankings, with Indonesia coming last in 2012.
Author of the CG Watch 2012 market analysis, Secretary General of the ACGA Jamie Allen said: "There is no common reason as to why markets in the south are improving. Each country has been motivated by different factors. Singapore, for example, has rejuvenated its CG policies and is becoming more open; Malaysia produced a five-year "CG Blueprint" and its companies are performing better; and the Philippines has a new government that is making some progress in the fight against corruption and for better administration."
"Overall, we believe that the systemic quality of CG in Asia is gradually getting better, despite the appearance of numerous frauds and other market malfeasance around the region. Indeed, it is precisely such crises and challenges that spur regulators, investors, the media and others to take governance more seriously," concluded Allen.
In this year's survey, the governance scoring of corporations has been streamlined and the focus of the main CG questionnaire was narrowed from 46 to 30 main issues, covering five core areas: discipline, transparency, independence, responsibility and fairness. Corporations from Australia lead in CG scoring, while Singapore and Hong Kong remain among the better markets for corporate standards. Marketplace perceptions of CG are typically coloured by the very worst companies. With China, Korea and Indonesia generally seen as locations where CG is a major issue.
Commenting on the overall analysis of companies, CLSA Head of Asia Research, Amar Gill said: "Asian corporations fare worst on the independence of boards. The composition of the audit committee is a genuine test that most companies fail. Few have an independent chairman, and not many have a majority of independent directors. The potential for conflict of interest is a major issue."
As with the previous report, we have included a Clean & Green and Corporate Social Responsibility score and find that scores are down slightly from 2010, albeit on a sample size that has nearly doubled. CLSA Head of Sustainable Research, Charles Yonts commented: "For investors pitfalls remain as companies are forced to deal with issues that previously would have been swept under the rug. Reporting standards are improving, driven by both stock exchanges tightening disclosure standards, and rising subscription to global environment, social and governance reporting standards."
Concluding on the overall findings, Gill said: "Corporate governance is largely about checks and balance; it can be seen as like the braking system of a car. While essential for handling a track safely, the fastest cars around a track are not necessarily those with the best braking system - although they should be! Investors will need to swerve and get a tighter grip when dealing with the cracks in governance and the tremors in Asian investing."
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Authors of the report, CLSA Head of Asia Research Amar Gill, Secretary General of the ACGA Jamie Allen and CLSA Head of Sustainable Research Charles Yonts are all based in Hong Kong and will be available for media interviews upon request.