The coming year is shaping up as key for corporate governance in Asia – a region where there is a high proportion of family-run firms – on the back of a recent bribery trial in Hong Kong.
The high-profile case saw the imprisonment last month of Thomas Kwok, former co-chairman of Sun Hung Kai Properties (SHKP), and Rafael Hui, the Hong Kong government’s former chief secretary, after they were convicted of bribery. Kwok has appealed against his conviction. Ex-SHKP executive director Thomas Chan and ex-stock exchange official Francis Kwan were also jailed.
The trial heard how eldest borther Walter Kwok had been ousted from the $43 billion firm's board amid claims he suffered from bipolar disorder and of the concern of his mother, Kwong Siu-hing, the matriarch who effectively controls the company via a trust, about the influence of his mistress.
The case served to underline investor difficulties in putting money into family-run businesses. SHKP has consistently underperformed the Hang Seng Property Index since 2012, when the Independent Commission Against Corruption first arrested the Kwok brothers – Walter, Thomas and Raymond.
Between March 29, 2012, when the first arrests were made, and December 19 before sentencing was announced, the Hang Seng Property Index returned 9%, versus SHKP’s 6%.
While not commenting on the case directly, Ross Long, chief legal officer in Asia for Nikko Asset Management, noted that investors particularly in Asian firms faced corporate governance risks given that the region had such a high number of family-run firms.
“It means that issues of independent directors and governance of companies are by necessity a higher level of concern compared with other jurisdictions,” he told AsianInvestor.
Long noted the question for family-run companies was about how well a jurisdiction’s legal and social framework dealt with corporate governance rather than the simple act of enacting laws.
“Conflict of interest arises every single day in corporate environments, and investors need to know and be assured there are robust checks and balances for competing stakeholders, including independent directors,” said Long.
But Long also stated that this year could see improvements in corporate governance in Asia, singling out Japan. “There is definite recognition here over the need for independent directors and other elements of corporate governance,” Tokyo-based Long said. “I see a distinct trend across the Asian jurisdictions where this is becoming more palatable for governments to promote.”
Japan has had its share of governance issues, with camera firm Olympus making headlines in 2012 when then-president and CEO Michael Woodford blew the whistle on the firm’s accounting fraud.
But the incident also acted as a wake-up call for Japan. Last June the government launched a stewardship code and 175 institutional investors had signed up as of last month, pledging to take a more active role in the running of portfolio companies they invest in.
The code calls on shareholders to disclose how they vote at annual general meetings and engage more actively with company management.
The move prompted the Asian Corporate Governance Association (AGGA) to upgrade the country to third place in its latest 2014 market rankings, from fourth. Hong Kong and Singapore placed joint-first.
The code means fund managers will need to develop their own policies and standards and incorporate those into internal processes when investing, noted Long. Issues such as the impact on value and long-term sustainable growth, together with the exercising of shareholder voting rights, would be scrutinised.
But he pointed to the difficulties fund managers may have when trying to act in the best interests of investors, particularly regarding inherent conflict of stakeholder interests and the challenge to resolve them objectively.
Some asset managers may wish to take an active position and be a stronger advocate, for example on the ecological side of business, while others may see a more passive role as being appropriate and yet others may strive for a middle role, Long said.
“As an asset manager, whether for a broader retail base or institutional, you have to be cognisant in terms of fiduciary and other legal and social responsibilities and weigh each decision carefully in an objective and transparent manner. In the digital age we and other industry participants will be seen and judged very quickly.”
At the same time AGGA has also stated that Hong Kong is “struggling to balance ‘international standards [on corporate governance] with market competitiveness".
One of the biggest issues last year was the city’s rejection of the listing of Chinese e-commerce giant Alibaba, which had asked Hong Kong's securities regulator to allow it to nominate the majority of board members, in violation of the city’s rule on “one share, one vote”.
Charles Li, chief executive of Hong Kong Exchanges and Clearing (HKEx), had previously hinted at ditching the “one share, one vote” concept to encourage new companies from China to list in the city, in particular technology groups.
HKEx published a concept paper last August that sought opinions on whether weighted voting rights should be allowed. The conclusion is expected in due course, potentially making 2015 a significant year for corporate governance.