Super funds need to understand corporate governance in Asia as they continue to invest in the region’s financial markets.
Responsible investing (RI) is now one of the fastest growing global investment trends, with global funds invested in RI strategies tripling from US$3.6 trillion in 2006 to US$11 trillion in 2010 (see figure 1).
Asia is now poised to be the next major RI growth market and Australia’s established A$1.3 trillion superannuation fund sector will be a key driver of this. However, Australian institutional investors seeking to invest in Asia face a raft of new corporate governance challenges given the particular cultural, regulatory and transparency characteristics of companies operating across the region. It is an entirely different context and something which Australian funds need to understand before they can overcome these challenges and maximise RI opportunities.
It is an attractive idea to have a global axiom of corporate governance especially since capital markets are increasingly global and integrated. The Organisation of Economic Cooperation and Development (OECD) Principles of Corporate Governance (2004) is a telling example of such approach. Recommendations from the OECD guidelines include active monitoring and oversight of management by non-executive directors, a significant number of independent non-executive directors and the separation of chairman and CEO functions. Yet there have also been a number of academic studies which debate the shortcomings of this approach so the question is which, if any, of the global governance principles can be considered relevant?
Context is paramount. It is important to consider that the evolution of business and financial systems in Asia has taken a very different path to that of the West.
There are several characteristics common to Asian companies, particularly in East Asia. The business system in the region can be characterised as a relationship-based system – this is where stakeholders have more voice and shareholders are in general less influential compared to the Anglo-American systems. The relationship-based system has resulted in the concentration of ownership, mostly in the hands of founding families, with support from governments in terms of industrial strategy and effective subsidisation.
This high family-based concentration of corporate ownership and control in the region has led to a governance structure that lacks appropriate independent board representation. This is key to ensuring the necessary checks and balances are in place to protect the interests of independent shareholders.
Corporate governance usually starts being the focus of regulatory and investor attention following a crisis period or market failure. The UK’s Stewardship Code after the global financial crisis is a good example of this. Similarly in Asia, corporate governance was not a typical topic of discussion before the Asian financial crisis hit in 1997.