FACTS AND FANTASIES
Progress in corporate governance in Asia
By Cesar Bacani

Corporate governance activists, take heart. According to the latest fact-filled 32nd Annual Board of Directors Study by executive-search firm Korn/Ferry International, board directors of leading Asia-Pacific companies “are making changes once considered unthinkable.” Among them: holding sessions without the chief executive, conducting full-board, individual-director, and CEO reviews, and taking a formal approach to management succession.

But the survey, conducted last year, also shows that the changes are not universal. In Australia and New Zealand, for example, 62% of respondents say their board typically holds regular executive sessions without the CEO present. Only 7% in Japan say the same, with the proportion in Asia ex-Japan at 20%. In Australia, Japan, and New Zealand, the majority of respondents say the entire board’s performance is formally evaluated on a regular basis. But only 26% of those surveyed in non-Japan Asia say their board’s accomplishments are formally scrutinized.

So what is really going on? The Korn/Ferry report offers an answer. Board directors in the Asia-Pacific, it theorizes, face the challenge of synthesizing “diverse business and cultural traditions with best practices that have been established by other governments and endorsed by activist foreign shareholders.” Translation: while the region’s companies are open to changes in promoting good governance, they want to make sure that the mainly Western ideas fit into their organization’s “specific economic, political, and regulatory situation.”

Jamie Allen, secretary general of the Asian Corporate Governance Association (ACGA), has no quarrel with that. It is a fantasy, he says, to think that “global standards” of corporate governance can be implemented as they are in Asia. While ACGA believes that global governance principles apply as much to Asia as to any other region, their implementation should take into account the region’s concentrated state and family ownership structures, insider traditions, generally weak compliance culture and legal systems, and untrained board directors and managers. (Is there a share price upside for good governance practices? See “By the Numbers”)

Another fantasy, says Allen, is the notion of an “Asian model” of governance. Which country or system would that model be based upon? Asia is not one homogenous cultural, ethnic, and linguistic bloc. Its constituent economies have differing legacy legal systems – common law or civil law – and differing philosophies and approaches toward regulatory regimes. “Asian regulators need to be innovative in developing implementation rules and training systems suited to their own markets,” says Allen. For example, they can go further than global best practice in allowing minority shareholders a greater say in nominating and electing independent directors.

Like Korn/Ferry, ACGA is also seeing changes on the ground. In 1997, the year of the Asian financial crisis, only Hong Kong, Malaysia, and Singapore required an independent director on the board of listed companies. Today virtually all markets have such a requirement, along with audit committees and a national code of corporate governance. ACGA’s surveys, however, try to go beyond just “facts”. The form may be there, contends Allen, but the substance is often lacking.

Are audit committees, for example, really functioning independently in Asia? ACGA’s 2005 study of corporate governance in ten countries unequivocally answers “no” in the case of China and the Philippines, “somewhat” in the case of Hong Kong, India, Malaysia, and Singapore, and “marginally” for Indonesia, Korea, Taiwan, and Thailand. ACGA’s approach is a mix of quantitative and qualitative measures; it asks not only whether a company has an audit committee, but also whether the chairman is perceived to be a genuine independent director. Its 60-item questionnaire was answered by ACGA researchers and the country research heads of investment bank CLSA.

It’s the kind of approach that appeals to corporate governance experts like Chandran Nair, founder and CEO of Hong Kong-based Global Institute for Tomorrow. He thinks quantitative measures are fine, such as asking how many directorships a board member holds. (It should be no more than three, says Nair). But he urges qualitative benchmarks as well, such as those measuring the level of disclosure, transparency, and openness of the board of directors. He concedes that surveys can help promote governance, but they must ask the right questions. Even then, they can do only so much. “We will see improvements only when regulators really crack the whip and, more important, investors and shareholders demand good governance,” says Nair. “Unfortunately, we still see little of either in Asia.”