Elements of Code of Corporate Governance: East Asia Perspective Prof. Stephen Y.L. Cheung Department of Economics & Finance City University of Hong Kong

Code of Corporate Governance (I) Comments: Board issues Board issues  Separation of the positions of chairman and CEO, especially for the relationship-based family-controlled Asian companies  Background and qualification of the independent directors

Code of Corporate Governance (II) Comments: Board issues Board issues  Election: participation of the institutional investors and public shareholders in any form, e.g. / letter

Code of Corporate Governance (III) Comments: Board remuneration Board remuneration  Disclose remuneration of each director in the annual report  Disclose details of options granted/ sold to directors  Provide of executive remuneration policy

Code of Corporate Governance (IV) Comments: Financial reporting, transparency and audit Financial reporting, transparency and audit  Set up audit committee  Strengthen risk management  Independence of internal auditor/ accountant  Inform the authority once discovering the misconduct of the board

Code of Corporate Governance (V) Comments: Stakeholders Stakeholders  Strengthen their protection  Adequate information disclosure  Credit rating system

Duties and responsibilities of the Board (I) Maximize investors’ wealth in the long run Maximize investors’ wealth in the long run Achieve the corporate goal Achieve the corporate goal Determine the strategy and policy for the firm Determine the strategy and policy for the firm Point out the potential risk factors Point out the potential risk factors

Duties and responsibilities of the Board (II) Comply with the rules and regulations, together with the codes of best practice Comply with the rules and regulations, together with the codes of best practice Facilitate the effective communication channel with its institutional investors, stockholders and stakeholders Facilitate the effective communication channel with its institutional investors, stockholders and stakeholders

Duties and responsibilities of the Board (III) Evaluate the performance and effectiveness of the Board Evaluate the performance and effectiveness of the Board Appoint the senior management Appoint the senior management Delegate the power and authority properly, fairly and openly Delegate the power and authority properly, fairly and openly

Importance of the board in corporate governance in East Asia (I) Legal framework Legal framework  Under-developed  Severe corruption Corporate governance Corporate governance  Self regulation  Inculcate morals and ethics  Hold managements accountable

Importance of the board in corporate governance in East Asia (II) Separation of the positions of chairman of board and chief executive officer Monitor vs. the monitored Monitor vs. the monitored Dual roles are common in Asian countries Dual roles are common in Asian countries Problems: Problems:  Conflict of interests  Directors’ remuneration is not related to the firm’s performance

Importance of the board in corporate governance in East Asia (III) Independent directors Monitor the performance of the managements Monitor the performance of the managements  Avoid over-investment in non-productive and speculative activities  Avoid over-borrowing  Reduce corruption

Importance of the board in corporate governance in East Asia (IV) Independent directors Act in the best interest of the shareholders/ represent the shareholders Act in the best interest of the shareholders/ represent the shareholders  Strengthen minority shareholder protection  More transparent operations

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