1. 1 April 4, 2001 3rd Asian Roundtable © ACGA Ltd ASIAN CORPORATE GOVERNANCE ASSOCIATION (ACGA) “Recent developments in corporate governance in Asia.” Presentation by Jamie Allen, Secretary General, ACGA to The Third Asian Roundtable on Corporate Governance OECD/World Bank/ADB Singapore April 4, 2001

2. 2 3rd Asian Roundtable © ACGA Ltd A common view on Asia “My impression is that the prospects for CG are rather gloomy, that it will take a long, long time (decades) and right now all these activists and forums are just working on the form but not the substance. Where do you stand?” -- A question recently asked of me by a foreign journalist in Asia.

3. 3 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Two questions n Where have substantive changes or improvements occurred in Asia in recent years? n How can we facilitate the creation of substance in addition to form?

4. 4 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Competition for capital n Listed companies becoming more transparent –Improved disclosure among international companies (HSBC, Infosys) and local/regional companies (CLP Holdings, Kerry Properties, Good Morning Securities, DBS Bank). –Study after study indicates a clear demand from institutional investors for better financial data, improved auditing, and more board independence. n Private companies restructuring their boards –Preparing for IPOs. –In response to demands of a new private equity investor. n Partially privatised state enterprises (?) n Technology start-ups/second boards (?)

5. 5 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Behaviour of intermediaries n Growing interest among investment banks, brokers, and analysts in the commercial relevance of corporate governance: –Goldman Sachs: “Asia Restructuring Scorecard”, a quarterly survey that includes corporate governance. –CLSA: Began ranking Asian companies in October 2000. –S&P: Developing a new company rating service. n Expansion into Asia of US and European consultancies: –Proxy voting/advisory: Institutional Shareholder Services (ISS), Investor Responsibility Research Center (IRRC). –Company surveys: Deminor.

6. 6 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Voting of shares n Japan: –Pension funds are starting to vote their shares following years of poor returns from companies. Participation is becoming a necessity. n Korea: –Elections of outside directors are being contested. Eg, PSPD nominated a candidate for a seat on the board of Samsung Electronics in March 2001. They garnered 16.07% of the vote. Although most support came from foreign institutional investors, it was significant that several large Korean public pension funds also backed the PSPD. All private Korean institutional investors, except one, supported management.

7. 7 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Shareholder action n Korea: –People’s Solidarity for Participatory Democracy (PSPD) n Malaysia: –Malaysian Investors Association (MIA) n Singapore: –Securities Investors Association (Singapore) n Hong Kong: –Proposed HK Association of Minority Shareholders (HAMS) n Litigation: –Malaysia: Palmco, a listed oleochemicals maker. n Marking down shares: –UBS Warburg: Market cap of certain Malaysian companies fell significantly due anti-minority proposals in last two years.

8. 8 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Educational infrastructure n New training programmes: –For accountants, directors, company secretaries, internal auditors, lawyers and investment analysts. –Being offered by private training firms. –Being undertaken by corporations for their staff. n New organisations: –Institutes of Directors: Singapore, Thailand, Philippines, Indonesia. Revamped in Hong Kong. –Non-profit organizations: Indonesian Institute for Corporate Governance, Malaysian Institute of Corporate Governance. –Academic centres: Asian Institute of Management, City University of HK, Chinese University of HK (planned). n New networks –Institutes of Directors of East Asia Network (IDEA.Net)

9. 9 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Better quality information n Media reporting: more nuanced (eg, SCMP in Hong Kong) n Conference materials: OECD, APEC, ADB, Shanghai Stock Exchange n Professional journals/magazines: –Corporate Governance International (CGI), Company Secretary magazine, Hong Kong Society of Accountants magazine n Webb-site.com n ACGA regional report and articles n Japan Investment Forum (www.japaninvest.com) n International newsletters –Global Proxy Watch (US) –Governance (UK)

10. 10 April 4, 2001 3rd Asian Roundtable © ACGA Ltd 2nd question How can we facilitate the creation of substance in addition to form?

11. 11 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Focus on the banking sector too n Banks are a neglected element in much discussion of corporate governance in Asia, yet clearly they have a role to play in influencing the vast majority of (unlisted) companies. n Banks may face competitive limitations in promoting corporate governance to their borrowers, but could start by improving their own governance standards. n This probably needs to be done as a group, and initially under the guidance of a regulator. For example: n Hong Kong Monetary Authority new guidelines, May 2000: –The board should ensure that the bank properly manages risk (8 types of risk are specified). –The board should ensure that provisions on connected lending are fully understood, and the bank sets a policy on such lending. –The board should receive the external auditor’s management letter, with comments from management. –Higher number of independent directors (3), + possibility of more. –Etc

12. 12 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Public-private partnerships n Few would dispute there was a need for greater investor involvement in corporate governance reform in Asia. Yet costs continue to outweigh the benefits for most funds. n A useful interim mechanism may be programme partnerships between private groups and public bodies, such as: –Research into strengths and weaknesses of local governance regimes, especially as they affect different types of companies. –Plain-language summaries of governance rules confusingly spread across company and securities laws, various regulations, listing rules, and codes of best practice. –Joint training programmes among officials, directors, etc. –Joint litigation (in extreme cases, as in Taiwan). n The assumption here is that governments will remain the main drivers of governance reform for some time, hence it makes sense to work with them in “strategic” ways.

13. 13 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Examine procedural rules n Most government effort in Asia in recent years has been focussed on developing new codes of best practice, amending laws and listing rules, and drawing up new policies. n But it is also important to ensure that procedural rules do not stymie the exercise of minority shareholder rights--either by making it too difficult, too expensive or too risky. n Issues to consider: –Simpler mechanisms for derivative suits. –Class-action suits with contingency fees. –Lowering arbitrary limits on the right of minority shareholders to call a meeting, nominate a director, file a shareholder proposal, and so on. –Methods of voting at annual meetings (eg, the show-of- hands vote). n Taiwan has evolved a unique solution: “simulated class action”

14. 14 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Balance quantity with quality n Much corporate governance discussion focusses on increasing the: –Number of independent directors and independent board committees; –Fees paid to independent directors; –Space devoted to corporate governance in annual reports and other public documents. n All of this is important, but: –What is the use of more independent directors if they are of poor quality? Ditto for board committees. –What is the point of more words in annual reports if the language is largely formulaic or full of jargon? n Quality may count for more.

15. 15 April 4, 2001 3rd Asian Roundtable © ACGA Ltd Where I stand “My impression is that the prospects for CG are rather good (over the medium to long term), that it will take a long time (two decades), and right now we are all still working on the foundations. But progress is rarely linear or evenly paced: reform will go forwards and backwards, and periods of apparent inaction could be followed by bursts of activity following external shocks.”