Thematic Report

Asia’s path to better home-grown governance

by Shaun Cochran & JAMIE ALLEN / Sep 29, 2016

SHARE

CG Watch is a collaboration between CLSA and Asian Corporate Governance Association (ACGA) and this eighth joint report analyses and rates 1,047 Asian companies and 12 key Asia-Pacific markets* on their performance in corporate governance. For the first time since the launch of this bi-annual report, ACGA included Australia in its CG scores due to popular demand.

Governance matters and the ecosystems that deliver it are the key. No single stakeholder can drive the process. It’s the collective interaction of all parties that delivers better outcomes. Australia heads our bottom-up survey again and joins ACGA’s top-down survey in 2016 at number one. Japan has moved up to number two on our scores. Reforms matter but how companies respond and deliver them is crucial. Investor engagement makes persistent improvement more likely. Asia is getting better and will continue to do so if stakeholders, including agitators, remain engaged. Even the friction adds value.

Australia shows why ecosystems are crucial
If there is a single message from ACGA’s survey it’s that the corporate governance ecosystems in a market are the differentiating factor between long-term system success and failure. Hong Kong and Singapore do not consistently top their survey by accident, they have the best institutions. This survey’s inclusion of regional leader Australia brought that into sharper focus.

Better governance leads to better fundamentals
Bottom up, Australia retains the clear leadership position in our updated 2016 CG Watch survey. Japan jumps to second as local reforms begin to tangibly improve behaviour. Elsewhere, ranks do not materially shift. We still can’t confidently link CG and share prices but we can for proprietary metrics of governance and fundamental factors. The bottom line is better CG leads to better fundamental outcomes but is distinct from share-price action.

Investors are encouraged by improving engagement
To get a multi-stakeholder perspective we interviewed the Asian corporate governance head from a major passive house (BlackRock) and a leading Asian active manager (Aberdeen Asset Management); we also spoke to a proxy advisor (Glass Lewis) and a corporate consultant (ISS Corporate Solutions). Asia’s CG trend is improving, especially engagement levels. The interviewees suggest we should be optimistic about Asia’s governance future but realistic in the context of clear structural differences.

Powerful forces are converging for a better ESG outlook
Finally, environmental, social and governance (ESG) has moved into the investing mainstream over the past two years. Drivers include tightening regulations, improving data, the Paris climate deal and mounting evidence ESG can help investment returns. In our sister report Beyond the choir, we include the latest environmental and social company scores. They are nearly flat with 2014 but this masks wide ranges within key sectors.

*Markets covered in CG Watch 2016 include: Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.

Click here to read the media release.