Corporate governance refers to the body of rules and processes through which a corporation is directed. This system of formal rules and policies must address practices that are often influenced by regional traditions and socio-cultural conventions. Thus, the interaction between governance principles and local practices becomes a concern as governance policies are implemented globally.
For an investor entering a new market area, cultural contexts can create many challenges. This week’s focus will be on the various governance changes occurring throughout Asia, as well as some of the challenges that countries face during this period of restructuring and re-fitting into the global financial market.
New Corporate Governance Reform Efforts in China
China’s recent ramp-ups in corporate governance efforts are critical for the country’s economic restructuring and interactions with foreign investors. For instance, government efforts are aimed at promoting more diverse boards, and integrating more independent directors on boards. Simultaneously, the government plans to take a step back and allow for a more managerial approach to state supervision of listed entities. The general consensus is that reducing market abuses will attract more overseas investment capital.
On the other hand, there are concerns that some of the recent crackdowns on securities fraud in China may be motivated by personal political interests. Thus, as governance principles take root in China, one main challenge will be to avoid using new enforcement measures as a means to “even out” political conflicts. As a major player in the global financial system, China’s changing governance approaches will be closely watched and monitored.
Promising Clarity in Taiwan
Similarly, Taiwan has taken formal steps to integrate governance, and has instituted a Corporate Governance Evaluation System that has been in place for three years now. The Evaluation System measures indicators such as:
- Protection of Shareholder’s Equity
- Equitable Treatment of Shareholders
- Board Composition and Operation
- Information Transparency
- Protection of Stakeholder Interests and Corporate Social Responsibility
The Evaluation System also includes analyses of companies ranked in the top 50% among TWSE/TPEx listed companies. In addition, TWSE and TPEx have already begun holding a series of seminars to educate listed companies regarding the Evaluation System. These are very important for promoting awareness of governance principles, which can lead to more effective shareholder meetings. Taiwan has recently been ranked #10 by ACCA and KPMG in terms of “Clarity and Completeness of Corporate Governance Requirements.”
Unique Corporate Governance Challenges Arising in Japan
Japan has been facing some challenges in light of its Corporate Governance Code, instituted recently in spring of 2015 by the Tokyo Stock Exchange (TSE). Japan is the classic example of how difficult it can be to implant Western principles and governance styles onto traditional Eastern business practices. Many are questioning whether Japan’s governance reform has worked so far.
Several dimensions of Japanese business practices have already posed unique governance challenges. These include:
- A lack of board members who are independent from management
- Low diversity ratings for boards, both in terms of international input from outside countries as well as gender representation
- A high percentage of academics and bureaucrats on boards as opposed to finance professionals
- Overall slow national economic growth and change
One can see how these factors can affect the implementation of Japan’s new governance code. For instance, if bureaucratic leaders in powerful positions remain resistant to retirement and turnover, diversity of the boards may continue to present an issue. South Korea also faces similar challenges in terms of board diversity and women’s roles in corporate decision making. On the other hand, it may still be too early to understand the extent to which Japan’s new code has been effective.
Gerhard Fasol, an independent board director at a publicly listed Japanese company, advises board members and shareholders alike to focus first on building trust and gaining acceptance before seeking to influence other members. He highlights the importance of learning the culture, social conventions, and if possible, the language of the country where one is operating in. Attaching oneself to a peer who can provide enlightenment on these nuances is also helpful. These are some basic steps to take that will facilitate contributions to business achievements.
Many agree that it is probably too early for some countries to begin seeing notable changes in their governance metrics. For now, perhaps the focus should be for directors and shareholders to be mindful of international diplomacy, and to be aware of differences when transplanting systems onto entities that may be accustomed to their modes of business operation.
Corporate governance is a key aspect for the financial stability and growth of businesses, and in turn, entire countries. If you have any specific inquiries or concerns regarding governance issues, contact us today at Kessler Topaz. Our team of attorneys is dedicated to increasing shareholder value and preventing fraud through effective governance change.