High growth, high risk: advancing the corporate governance agenda in Asia
Advancing the corporate governance agenda in Asia
Audit committee chairs and investors discuss how far good governance has come in Asia.
The Asian region has long been seen as an area for high economic growth and investment. But there are risks — political, financial and also governance-related. In a roundtable discussion hosted by KPMG at the International Corporate Governance Network’s (ICGN) Annual Conference in Kuala Lumpur, a group of audit committee chairs and investors discussed what progress the corporate governance agenda has made in the region.
One of the first points to be drawn out was by Mun Kong Foong, Head of Audit at KPMG in Malaysia and moderator of the discussion, when he observed that the region has seen very diverse rates of growth and can’t be regarded as one homogeneous zone.
For example, despite the high growth in some parts of the region, one of its biggest economies — Japan — has found economic expansion hard to achieve. According to Takuji Kanai, Head of Audit at KPMG in Japan, this is leading Japanese companies to make investments abroad. “But even those companies with successful track records in the domestic market are not necessarily good at integrating their businesses between Japan and foreign countries,” he said.
What’s more, there are wider changes at play in the world, such as Brexit in Europe, the new administration in the US and “the emergence of China and India as major powers”, said Nik Hassan bin Nik Mohd Amin, chair of the audit committee at Country Heights Holdings.
“The center of global gravity politically, economically and financially is being changed and re-defined. We must factor this into account,” he said.
It is also true that in Asia public governance has a huge part to play. The standards and conduct of political authorities set the context within which companies operate.
Pru Bennett, Head of Investment Stewardship for APAC at BlackRock, said: “Public governance is very important from an investor perspective, and it does impact how foreign investors view this region. It is probably more important than the corporate governance of individual companies.”
But given that there is little companies can do to change the political structures around them, how has the corporate governance agenda in Asia been faring?
First, there is encouraging evidence of “an uplift in the corporate governance framework”, as Mun Kong Foong described it.
Dato’ Mohamad Idris Mansor, chair of the audit committee at Malaysian oil and gas corporation Petronas, described how the company strives to meet all the corporate governance and reporting requirements expected of a large international company: “We have to go the way things are moving globally because we are a global business. We have to adopt a system in which people have full trust in how we manage our activities. A lack of trust would be detrimental to our vision and mission to be a full global company.”
Similarly, Leslie Eu, chair of the audit committee at YTL Corporation, explained that: “As a group, we have paid very close attention to good corporate governance and risk management.” As with Petronas, the global perspective is important. “The majority of our earnings are derived from our overseas operations. Corporate governance has been internationalized.”
Ken Pushpanathan, audit committee chair at Bursa Malaysia, agreed that many of the biggest companies in the region are “world-class” and have “migrated up the value chain in corporate governance”. There are also strict codes in force in countries like Malaysia: through the central bank (Bank Negara), the Securities Commission, and other regulators.
However, the challenge is whether companies are following the standards in spirit as well as letter — and how far governance spreads down through the corporate chain.
As Ken Pushpanathan said: “We do have all the best-in-class practices, but whether and how it’s enforced and practised is the tricky bit.”
Dato’ Mohamad Idris Mansor echoed this point when he said that in some smaller companies in the region the board might only meet four or five times a year. “The perception of the shareholders is that the board members don’t do anything, just attend a two-hour meeting, approve the accounts in the morning, then submit … in the afternoon.”
Nik Hassan bin Nik Mohd Amin also drew attention to the phenomenon of very short board meetings “because everything is already decided by the chairman and a few others. And instead of saying ‘who agrees, raise your hand’, they will say ‘who disagrees, raise your hand’”.
In Pru Bennett’s view, governance is still viewed as a compliance issue rather than a strategic issue, and this needs to be turned around. “Our focus is more on competence as opposed to ticking the box for independence,” she explained. “We’re looking for boards with a diversity of skills and in thinking so that they can interact with management in a constructive, strategic way.”
Speakers in the video: Pru Bennett, Head of Investment Stewardship APAC, BlackRock; Datuk Dr. Syed Muhamad Syed Abdul Kadir, Audit Committee Chair, Malakoff Corporation Berhad; Leslie Eu, Audit Committee Chair, YTL Corporation Berhad; Mark Vaessen. Partner, KPMG in the Netherlands and Project Lead, Value of Audit.
There is also the issue of skills and training. According to Jamie Allen, Founding Secretary General of the Asian Corporate Governance Association (ACGA): “Whilst we have quite high standards of corporate governance on paper, we actually have quite low expectations of individual director skill and competence.”
“Another way of strengthening the hold of good corporate governance could be to create an index or benchmark,” said Roger Tay, Head of Audit at KPMG in Singapore, where a corporate governance index already exists for all publicly listed companies. “Having an index helps investors benchmark companies based on their corporate governance approach,” he said.
But another important element is the role of the auditor. According to George Iguchi, Head of Corporate Governance at Nissay Asset Management, “it is difficult to decide the quality of the external auditors,” and so having an extended auditor report (as has recently been introduced in Malaysia) might help to “change how we decide the quality from the investor’s viewpoint”.
Datuk Dr. Syed Muhamad Syed Abdul Kadir, chair of the audit committee at Malakoff Corporation, underlined the importance of external and internal auditors to “validate” information. He called on auditors to be very clear about their findings: “It is the responsibility of the external auditor to be very explicit in explaining to the audit committee members the weaknesses and areas for improvement.”
Speakers in the video: Leslie Eu, Audit Committee Chair, YTL Corporation Berhad; Datuk Dr. Syed Muhamad Syed Abdul Kadir, Audit Committee Chair, Malakoff Corporation Berhad; Mun Kong Foong, Head of Audit, KPMG in Malaysia; Mark Vaessen. Partner, KPMG in the Netherlands and Project Lead, Value of Audit.
With debate also about non-executive remuneration and differing views about whether it was adequate or could lead to conflicts of interest, there is still plenty to resolve on the governance agenda — but progress is being made.