Syren Johnstone on Improving Corporate Governance in Asia (IFLR)

"COVER STORY: Asia raises the bar"
International Financial Law Review (IFLR)
28 Aug 2018
Asia is improving corporate governance. But some companies aren’t jumping at the opportunity.

Market success hinges on many things, not least strong corporate governance standards. As Asian

markets open up to foreign investment, the need for tougher governance is encouraging reform in financial centres across Asia. On the one hand, Asian businesses are facing pressure as domestic investors who have historically been passive when it comes to their investments become more

engaged. On the other, foreign investors expanding their portfolios into Asia look for more transparency and accountability.

    But cronyism is a common feature in family-owned businesses, and the separation of ownership and management is an aspect Asian businesses still need to work on. Figures show that 85% of Asian businesses are family-owned, and out of the world's largest 500 family- owned businesses, nearly 20% are located in the region.

     Recent regulatory changes in a number of Asian countries have tried to target this issue though much more work is needed.

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     Syren Johnstone, executive director of the LLM in compliance & regulation at the University of Hong Kong, and the principal author of the HKICPA report along with Say Goo, professor of law at the University of Hong Kong, says progress in this market has focused less on truly innovative changes and more on creeping changes to existing codes. Other areas of progressive change have focused on the role of the industry regulator in relation to the listed market, and an increasing willingness to consider stronger means of enforcement such as through the courts.

     "In the HKICPA report, we have queried the extent to which this succeeds in moving fundamental behaviours away from box-ticking compliance, and have made a series of recommendations we consider will be more effective and efficient," says Johnstone. "The most notable change affecting governance regulation is of course Hong Kong permitting weighted voting rights, subject to some safeguards, though it's too early to tell whether those safeguards will be adequate." 

     Other than the enforcement problem, which is a system design issue, the two biggest issues remain the role of INEDs and abuse by controlling shareholders. "How well the independent director concept really works in Asia, given the different context from its point of origin in the US, remains uncertain," explains Johnstone. "There is a growing recognition that an INED's understanding of their expected role and perception of liability, and their remuneration, need to be better aligned for the concept to have a chance of working properly."

     There have been suggestions that the approach in the UK to empower INEDs should be followed, ie through dual voting and the requirement that the controlling shareholder enters into a relationship agreement that gives INEDs special powers. The HKICPA analysis considered the different mechanisms by which independence is determined or understood, the justification for altering the voting rights attached to shares, and concluded that there are more appropriate mechanisms for empowering the INED concept. Click here to register to read the full text.