What's troubling the region?
As the Asia-Pacific region grows in global importance, the way its businesses are run is also becoming a significant issue.
So what do stakeholders in our region think about governance standards in their country? CPA Australia
has conducted a trailblazing survey to find out.
People around the world agree on the importance of good corporate governance, even if their assessment of it diverges widely due to the economic, legal, social and cultural characteristics of their own country.
A new report by CPA Australia identifies such differences by measuring the views of key stakeholders in eight markets across the Asia-Pacific region.
Dr Eva Tsahuridu, CPA Australia’s team leader for accounting policy, and policy adviser for professional standards and governance, says the CPA Australia Asia-Pacific Governance Survey
may give policymakers an insight into which market and corporate governance areas still need to be improved.
It also provides an overview of the perceptions of key stakeholders, which help identify areas where communication and engagement may need attention.
“We sought to go beyond the company level and look at the country level in terms of the regulatory frameworks, compliance and enforcement of those frameworks as well as corporate level behaviours: how do certain elements of the population understand corporate performance in relation to governance?”
The report surveyed more than 1200 stakeholders – split between shareholders, professionals and business owners, and management executives – across Australia, China, Hong Kong, Indonesia, Malaysia, New Zealand, Singapore and Vietnam.
“It’s looking at the bigger picture and gaining an insight into the perceptions of respondents in a number of markets about governance.”
Australia is considered to be a well-governed democratic country, which complies with global accounting standards and operates under a rule of law enforced by an independent judiciary.
However, the CPA Australia survey found relatively higher concerns about shareholder protection and auditing standards, with management executives in particular far less positive about the country’s laws and regulations.
Veronica Taylor, a director of the Regulatory Institutions Network
at the ANU College of Asia and the Pacific’s School of Regulation, Justice and Diplomacy, says such results reflect the high standards that professionals hold.
“The better your system, the more likely it is that you won’t hit those high marks and the more likely it is that the well-informed market will be sensitive to those standards not being met and also very sensitive to scandals or problems that erupt … there’s a heightened expectation when systems are of very high quality,” she says.
Australia shares much in common with its trans-Tasman neighbour New Zealand, although the CPA Australia survey again exposed how stakeholder perception can vary.
Respondents in New Zealand were relatively more negative on several measures: accountability, laws and regulations, shareholder protection, reporting standards, and auditing standards, although both Australians and New Zealanders held few concerns about corruption and fraud.
In terms of trade, Asia is one of the more open regions of the emerging markets, with China (including Hong Kong) accounting for almost one-fifth of the emerging market index.
Citi Research financial analysts have pointed out that companies in emerging markets are no longer enjoying higher earnings margins than rivals operating in developed markets due to the impact of World Trade Organization (WTO)agreements, which have helped improve standards.
“The greater availability and relatively cheap access to information through the internet allows the populations to push for greater accountability by both their politicians and also the corporates,” Citi analysts said.
“We view this as a good thing, not the opposite.”
Citi economists assessed 28 countries’ ongoing structural reforms including labour, regulatory and business improvements, and ranked China as the third most positive followed by Malaysia.
Indonesia was ranked seventh, Singapore ninth, while Hong Kong was ranked negatively. Their assessment was borne out in contrasting ways by respondents in the CPA Australia report.
Respondents in China rated certain aspects significantly lower than in other markets in the areas of political interference, corruption and fraud, accountability, reporting standards, auditing standards and company compliance. (Hong Kong, although run as a special administrative region of China since 1997, garnered significantly more positive responses about corporate governance standards, potentially reflecting the more open economy fostered under the former British rule.)
Corruption and political interference in business and the judiciary were major concerns in China, with many of the largest companies in the country still run as state-owned enterprises. However, more than two-thirds of respondents believed that the government was serious about tackling corruption and almost half of respondents believed that market governance had improved over the past two years.
While growth has slowed in China, policymakers are still pressing ahead with regulatory reforms aimed at loosening controls on markets as well as meeting concerns about shadow banking, local government debt and the inflated housing market.
It is a similar landscape in Malaysia, where respondents perceived problems with corruption and fraud, political interference, accountability, laws and regulations and company compliance. While more than 80 per cent of respondents cited corruption in business as the most serious problem, followed by corruption in government and interference with the judiciary, about half also believed that there are appropriate institutions, laws and regulations to foster good governance.
Benny Tabalujan, an associate professor at Melbourne Business School, says perceptions that corruption and fraud are a significant problem in China, Malaysia, Indonesia and Vietnam are consistent with other surveys, such as Transparency International’s Corruption Perceptions Index.
By contrast, there are few issues raised by people about the quality of the actual laws and regulations.
“Enforcement is always a problem in Asia in the sense that legislators put out the rules and it’s all on paper,” he says.
“The question is: is it being enforced? Is it being implemented?”
The Asian Corporate Governance CG Watch report, which looks at the macro corporate governance quality across 11 Asian markets, has found similar issues, ranking laws and regulations higher than actual compliance.
The CPA Australia report found a different result in Indonesia, despite strong corporate governance concerns raised in other reports. Corruption was ranked as a major issue by respondents – a concern that outranked any other country surveyed – but the bulk of other governance areas were assessed positively.
However, Tsahuridu believes that a sense of optimism had coloured local governance perceptions.
“Optimism and positive sentiments are not contained,” Tsahuridu says.
“They spill over in the way we understand the world we live in so if there is general optimism and positive sentiment in the respondents to the survey, I think that would have coloured how they understand their market and corporate governance at present and what they expect to develop in the future.”
Last year, Indonesia posted strong economic growth: GDP rose 5.8 per cent although that pace is expected to slow to 5.3 per cent, according to the World Bank. The poverty rate in Indonesia, which is home to the world’s fourth largest labour market, was halved to 12 per cent between 1999 and 2012 and the country’s development is being strongly supported.
The World Bank approved a US$500 million loan in July to help the government implement policies aimed at bolstering the stability and reach of the financial system.
Key stakeholders in Vietnam also cited significant concerns regarding corruption and fraud but were relatively positive about the level of political interference and accountability, according to the CPA Australia report.
However, Tsahuridu cautioned that the development of capital markets in countries such as Vietnam remain at a nascent stage, which can sway perceptions of governance.
“The results need to be understood in relation to the context and the country in which participants come from … the characteristics of a shareholder in Vietnam, for example, will be very different to a shareholder in Australia or in Singapore.”
ANU College of Asia and the Pacific’s Veronica Taylor says countries such as Vietnam, Indonesia and China have been direct recipients of bilateral and multilateral technical assistance aimed at uplifting their corporate governance.
For example, Vietnam received significant support ahead of its entry into the WTO in early 2007, which included reforms such as abolishing discriminatory legislation between domestic and foreign investors and reducing the number of state-owned enterprises.
“Admission to the WTO is now quite difficult and the accession requires you to essentially rebuild your companies and securities law,” Taylor says.
“The Asian financial crisis was an impetus for that and the IMF [International Monetary Fund] and World Bank were very active in promoting modern corporate governance for places like Indonesia. Malaysia was a bit more resistant to multilateral prescriptions because it wasn’t as badly affected by the financial crisis.”
The Malaysian economy is heavily focused on the export of electronic goods – more than half of its goods and services are consumed abroad – while the country has the added corporate governance complexity of a strong Islamic financial services sector, where monitoring and evaluating Shariah compliance often relies on internal company arrangements.
By way of contrast, Singaporeans held significantly more positive views on their governance compared to major trading partner, Malaysia.
Respondents in Singapore cited relatively higher positive views on political interference, accountability, corruption and fraud, and laws and regulations.
There remains a gap between corporate governance standards in the region, even as the understanding about the role of corporate governance continues to grow, Taylor says.
“In very highly networked societies and business and political circles it’s been routinely the case that a measure of your power and prestige is the number of positions you can occupy simultaneously,” she says.
“So in countries like Indonesia, if you’re a person of substance it would be unthinkable that you wouldn’t have at least four or five directorships or their equivalents running at the same time across the corporate and public sector. The notion that these might potentially conflict or you might have to recuse yourself from decision making hasn’t really gained much traction.”
Countries such as Australia have recognised the negative impact of conflicts of interest and largely weeded out the worst excesses. The proportion of the top 100 publicly listed board seats held by independent directors increased from just under two-thirds to almost three-quarters between 2008 and 2012, according to a survey by advisory firm Ownership Matters.
It is an ongoing transformation, one which is likely to continue across all countries in the CPA Australia report.
“We find general agreement that good governance is good for a society and it enables growth and prosperity,” Tsahuridu says.
“I don’t think we are finding that people differ in what they consider is good governance – the differences lie in how well they assess the governance that they have in the country in which they are.”
This article is from the August 2014 issue of INTHEBLACK.