Since the Asian crisis there have been continuous corporate governance-related legislation reforms. While this might sound promising, it’s important to keep in mind that reforms have been oriented and driven by Western investors during the crisis, so corporate governance rules have not adopted endogenously in the region.
The culture of corporate governance also needs to be considered. If local companies and investors consider corporate governance to be a legal or compliance box-ticking issue, there will be no value for global investors to look at corporate governance numbers. It is only when a genuine corporate governance culture is cultivated that progress will be made.
Transparency & reporting
Transparency serves to assist in ensuring good corporate governance. Typical agency problems such as moral hazard or conflict of interest are due to an asymmetry of information between shareholders and management. In Asia this impacts the relationship between controlling and minority shareholders whereby controlling shareholders pursue self-interest at the expense of corporate performance and the interest of minority shareholders.
In many Asian countries, using annual reports is not yet a common practice and they stick to local reporting formats in the local language. Even when companies do issue annual reports, the quality of the information may not be comparable to that which is disclosed in those in Western countries. This is partly due to the fact that they are not yet required to do so. Asian companies could significantly increase their corporate governance scores by improving their disclosure practices (see figure 2).
The most effective tool for Australian and other global investors to address corporate governance issues such as discrepancies in information and transparency is shareholder engagement. Despite the fact that controlling shareholders and managers are not yet as familiar with engaging with minority shareholders as their Western counterparts, it would make a difference if investors established appropriate engagement objectives and chose proper tactics.
Generally, engagement is recognised as a tactic that focuses on building a relationship with the company through dialogue in an attempt to encourage it to “change or improve on” the issues of concern. Given the characteristics of Asian markets, engagement should be focused on mitigating problems and transparency issues by enhancing shareholder communication with companies. Ultimately, all shareholders – no matter what the size of their holdings – should be acknowledged as important stakeholders.
What’s more, beyond fulfilling fiduciary duty to clients, engagement activity can in and of itself be of great value to investment managers. Although engagement, especially by minority shareholders, may not yield the desired result (particularly in the short term), investors should seize the opportunity to understand companies better – which will by definition improve their overall understanding and analysis going forward. Given the differences that exist across Asia, such rules cannot guarantee good or better corporate governance. Instead, investors should look to corporate governance in the region with more qualitative and judgemental approaches, and assess the issues that have the greatest impact on shareholder value.