Special Report

Where next for corporate governance in Asia?

by Charles Yonts, CLSA & Jamie Allen, ACGA / Dec 1, 2018


While much has changed since we published the first CG Watch 20 years ago, Asia’s governments and regulators have some tough decisions to make about the strategic direction of corporate governance reform in the next two decades. Will they continue to favour controlling shareholder interests or create more balanced, fairer systems? Can they foster truly world-class financial and corporate governance reporting? Can they balance the introduction of dual-class shares with stronger legal tools for shareholders?

As we have previously highlighted, we view the introduction of dual-class shares as detrimental to corporate governance in the region. Indeed, a striking feature of both the Hong Kong and Singapore approaches to dual-class shares was the lack of any plan to address systemic regulatory weaknesses and give shareholders more options for dealing with downside risk.

Investors need to act
But responsibility does not just lie with regulators. While opposed to dual-class shares in principle, institutional investors find it difficult in practice not to buy them. There are compelling and highly rational reasons for this – no fund is rewarded for underperforming their peers on matters of principle – yet such a dualistic approach undermines their standing. ‘Why expend political capital protecting an industry that is not protecting itself?’ has been the essence of the question we have received from regulators.

Investing dedicated resources in stewardship and engagement – and doing so consistently and with tangible results over the next two decades – would appear to be the most sensible response from investors. There is a need to show regulators and companies that, dual-class shares aside, the current focus on ESG and responsible investment is a strategic shift, not just a clever and short-term marketing ploy.

Governance monoculture
As for companies, one of their tough decisions is to work out whether the investment in good governance is worth it. Judging by the compliance mentality that most exhibit, their current answer would appear to be no — an attitude that is an unfortunate by-product of the way in which corporate governance reform has been managed in Asia over the past 20 years.

Despite promoting the “comply or explain” concept, regulators have given the impression in no uncertain terms that the key word is “comply”. Companies duly comply and stock exchanges carry out surveys showing high levels of compliance – as if this is a good thing. If the system were truly working, we would be celebrating diversity of company governance systems and excellent explanations. Instead, we have a governance monoculture where all listed companies look pretty much the same on the surface. No wonder the informational value of corporate governance reporting is so limited for most investors.

Finally, a tough question we are often asked: Has corporate governance in Asia truly improved? Looking at corporate governance from where it has come as well as where we would like it to go, we would say there has been tremendous change in Asia over the past 20 years, not only in regulation but also the quality of the work being done by the best companies, the most committed investors, the most thoughtful auditors, the sharpest journalists and many other stakeholders. We hope our CG Watch 2018 report provides some useful ideas for creating a stronger corporate governance ecosystem in Asia over the next 20 years.

For more insights, follow us on LinkedIn and click to subscribe to CLSA’s monthly newsletter.