Asian roundtables discuss corporate governance challenges
The Chinese dining tradition of a large, circular table with a rotating platform in the middle helped turn three recent dinner parties into true roundtable discussions. Last December, on the eve of IR magazine’s conferences and awards luncheons in Singapore, Hong Kong and Shanghai, small, select groups of local investor relations officers and other senior executives gathered to share good food – and good ideas.
Ipreo, a market intelligence provider with a growing governance advisory business in Asia, hosted the dinners and local experts on the capital markets were invited to help kindle the discussion.
‘Yes, Singapore is an incubator for good corporate governance. But does that mean we have really achieved good governance?’ began Kala Anandarajah, partner at Singapore law firm Rajah & Tann. She described how Singapore had responded to past corporate scandals and financial crises by improving governance rules. But rules won’t prevent future scandals. ‘Ultimately good governance depends on the individual, and the individual is generally motivated by greed,’ said Anandarajah.
The crux of her message was that Singapore should not respond to the current financial crisis the way it responded to past problems, from Pan-Electric Industries in 1985 to Barings’ collapse a decade later and the 1997 Asian financial crisis. ‘We don’t need more regulations,’ she stated. ‘The more regulations you introduce, the more the lawyers and accountants will find loopholes.’
A small-cap IRO at the dinner suggested investors should be more involved in advancing governance. ‘Governance is increasingly up for discussion with our investors,’ he said. ‘But at our AGM, from a shareholder register of around 1,000, perhaps just 30 vote.’
‘One problem with the governance debate is that it’s always aimed at firms,’ agreed Justin Reynolds, Ipreo’s Asia-Pacific managing director. ‘In some countries, like the Netherlands, for example, they’ve started to push responsibility back onto investors.’
The discussion moved to Hong Kong and remarks from Frank Gong, JPMorgan’s chairman of China diversified industry clients and vice chairman of China investment banking. ‘It has been an incredible year,’ he said. ‘It’s hardly 12 months since China’s RMB4 tn stimulus package was announced, since a once-in-a-century financial tsunami.’
Gong said the ongoing bull market for stocks was being supported by a ‘fundamental liquidity story’ that may dry up in the second half of 2010 as investors see beyond the above-trend growth major markets are now enjoying. ‘When the time comes, IR will be quite busy as investors become genuinely interested in individual companies’ stories – when stock-picking comes back,’ Reynolds added later.
Gong said stocks would continue to be boosted in the near term because companies are increasing production but not costs. ‘Consumers have been doing better on the back of government stimulus, so companies have to add production,’ he pointed out. ‘But they’re holding costs down, so any increase in production and revenue goes right to the bottom line. It’s a nice cyclical recovery, but for it to be sustainable, unemployment must come down and wages must go up.’
In this environment, Gong said, investors are asking bottom-up questions: are you rebuilding your inventory? Are you starting to hire people or raise wages? He added that investors’ shift to a balance sheet focus is permanent: ‘They don’t want highly leveraged growth. They want growth built on a strong balance sheet.’
Power to the people
After Gong’s briefing on capital markets, the discussion moved back to governance in Shanghai, where the dinner included some of China’s most highly esteemed companies. With a practice made up mostly of US-listed Chinese companies, keynote speaker Woon-Wah Siu, counsel in the Shanghai office of Pillsbury Winthrop Shaw Pittman, focused on US governance. She described 2001 as the dividing line between the pre-Enron and post-Enron eras. ‘Shareholders used to have limited power over the corporation. Over the past eight years, however, some decision-making power has been transferred from boards to shareholders,’ she explained.
Shareholder power continues to grow: witness the SEC’s May 2009 proxy access proposal. Majority voting and the rights of shareholders to call special meetings are also significant advancements. ‘After the Enron scandal, investors cared a lot more about improving governance than before, and not only in the US. It is a global movement,’ Siu said.
For example, Hong Kong responded to investor demands with higher corporate governance standards. Now the China Securities Regulatory Commission is working on major improvements and pushing for better implementation of corporate and securities laws.
An IRO asked Siu if she expected the SEC to strengthen rules for foreign private issuers. ‘I often meet with investors who are annoyed that they can’t get all the information they want from foreign companies,’ he said. Siu responded that while the SEC has tightened rules for foreign companies by shortening the 20F filing deadline from six months to four, she sees the broad trend going the opposite way, for example with the plan to move from US GAAP to IFRS. In the meantime, many non-US issuers have pleased US investors by adopting domestic disclosure norms.
Reynolds agreed the US is generally moving toward the comply-or-explain system. ‘There are more shareholder rights built in, and a much more engaged process between the board and shareholders, rather than the confrontational process the US has traditionally had,’ he concluded.
Thank you to Ipreo for hosting these dinners.