Best Practices in Asian Corporate Governance
Best Practices in Asian Corporate Governance
Best Practices in Asian Corporate Governance
The responsibility for opinions and factual matter as expressed in this document
rests solely with its author(s), and its publication does not constitute an
endorsement by the APO of any such expressed opinion, nor is it affirmation of the
accuracy of information herein provided.
This report has been edited by Dr. Eduardo T. Gonzalez.
The opinions expressed in this publication do not reflect the official view of the APO.
For reproduction of the contents in part or in full, the APO’s prior permission is required.
ISBN: 92-833-7056-2
CONTENTS
Foreword
This book, written by corporate governance experts in seven APO member countries,
is both a sequel to and explores a range of best practice experiences uncovered by its
predecessor, Impact of Corporate Governance on Productivity: Asian Experience,
published by the APO in 2004. The collection of papers in this book seeks to answer the
question of how to understand and manage best practice approaches in corporate
governance, which too often remain unarticulated. The book illustrates how praxis, i.e.,
translating theory into action, has shaped and reshaped the corporate sector in the Asian
countries covered in the essays, making these countries the best they can be in specific
corporate governance fields. The APO decided to publish this book to further the cause of
corporate governance as a productivity instrument in its member countries. The basic
premise is that generating best practice yardsticks by which corporate governance can be
gauged helps promote good corporate governance principles and practices.
Corporate governance is not only a method firms use to discipline themselves while
remaining profitable. It is also one of the principal ways they “make the society” in which
they operate and which in turn “makes” them. If this relationship is obscured, it is because
the existing policy and regulatory environment confronts firms with an apparently
readymade and opaque organization of means and ends, in which compliance is necessary
but over whose purpose the majority of organizations, whether companies or civil society
groups, have little or no control. In their individual ways, most of the papers in this
publication reflect attempts to regain the power to direct or determine the objectives of
business, make the administration of means and ends more transparent, raise the bar of
corporate standards, and put restraints on the power of the state to erect needless barriers
against the freedom of corporate action.
In Asia, with its complicated business practices, no one country can claim superiority
in all facets of corporate governance. But a number of Asian countries have made steady
strides in specific aspects, and these are highlighted in this compendium of best practices.
The book includes significant advances achieved by the following countries in key
corporate governance areas: Malaysia, the general regulatory and institutional
environment; India, public enterprise management; Japan, board effectiveness and
ownership structure; Singapore, transparency and disclosure; Republic of China, network
organizations; Vietnam, equitization; and the Philippines, corporate social responsibility.
Considering the context in which the corporate governance efforts of the APO have been
formulated―firms are the centerpiece of interventions, but backed up by strong
government policies―the essays demonstrate that good governance laws and regulations,
on the one hand, and good firm practices, on the other, both result in better performance
and higher productivity.
It is impossible to cover more than a fraction of the good corporate governance
practices that an increasingly complex Asian corporate sector requires. Readers will note
that certain topics are not included: dilution of ownership, ready availability of voice and
exit options for shareholders, good creditor and debtor relations, credible insolvency
mechanisms, and better productivity and quality management, among others. Similarly, as
noted in the introductory essay by the chief expert, it is hard to ignore the make-or-break
role of institutions in shaping good governance practices. Each significant absence
suggests a gulf between theory and practice, indicating the need to widen the research
agenda on corporate governance.
The APO wishes to thank all the contributors to this book. We are grateful to Dr.
Eduardo Gonzalez, the chief expert, for coordinating the research effort and editing this
volume. Finally, while not all the contributors share the same views or agree with the
inferences drawn from their essays, in a sense the significance of this publication lies not
in any particular viewpoint, but in the agreement to discuss a topic common to all Asian
countries.
Shigeo Takenaka
Secretary-General
Tokyo
May 2007
“BEST PRACTICE” BENCHMARKING
IN ASIAN CORPORATE GOVERNANCE: A REVIEW
Dr. Eduardo T. Gonzalez
University of the Philippines
The Philippines
INTRODUCTION
Until quite recently, corporate governance in Asia has been a “soft” concept, regarded
by many as having little impact on a company’s financial picture or its present cost of
doing business. Until recently, there have been few know-hows of benchmarking
corporate governance and what they would mean for investors and governments.
Yet experience shows that failings in corporate governance practices have caused
financial crises to be blown up at the expense of lenders, investors, and customers. Poor
practices and lack of transparency have provided a carte blanche for companies to rob
their financial stakeholders (shareholders and creditors) of their fair share of the
company’s earnings and assets. Indeed, as a direct consequence of the recent spate of
corporate excesses, governments have stepped in to offer stakeholders long-term relief.
In Asia, voluntarily or not, governance reform in key areas such as performance
criteria, internal processes and measurements is taking place. Companies are having their
internal control processes closely checked out. Long-term productivity gains outweigh
upfront costs associated with repairing or modernizing internal systems. Process-driven
approaches have started to yield benefits in terms of greater value and better business.
Making the shift is not easy. And doing it right still is a vexing problem. Sound
corporate governance, after all, is more than about simple compliance with “universal”
standards―economic and financial decisions are entrenched in an array of relationships
that ties company directors, senior executives, shareholders, money managers, stock
analysts, and government regulators. Discovering the right combination of features that
can yield high investment returns and robust growth is an elusive quest.
In part, this is due to the fact that reforms are many-sided and call for a mixture of
legal, regulatory, and market measures, according to Claessens (2003). This makes for
difficult and sluggish progress, as efforts may have to be organized among many
constituents, including foreign stakeholders. Changes along legal and regulatory lines must
take into account a particular country’s enforcement capacity, which is often a binding
constraint. Even as firms face competition and adapt themselves, they must operate within
the limits given by the country’s institutional framework.
Claessens further notes the overriding importance of the origin of the country’s legal
system in analyzing prospects for reform. What a country started with or acquired as a
result of colonization some century or more ago may still have systematic impact on the
characteristics of its legal system today, the functioning of its judicial system, the
regulation of labor markets, entry by new firms, the evolution of its financial sector, state
ownership, among others. Both the origin of its legal systems and a country’s initial
endowments are important determinants of the extent of shareholder rights protection.
In short, existing national institutions are rarely sufficient to guarantee the
accountability of corporations in designing and implementing corporate governance
measures. Indeed, many unresolved issues lie behind catchwords such as global standards,
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Best Practices in Asian Corporate Governance
terms of the degree to which shareholders are protected and judicial decisions are
enforced.
2. Micro-level – best practice standards for governing individual firms or clusters of
firms. The best practices include those conventionally associated with board
effectiveness, disclosure, leverage, and minority shareholder rights.
This book puts together seven APO member countries’ highly positive experiences in
corporate governance reforms, specifically on the general regulatory and institutional
environment, public enterprise management, ownership structure and board effectiveness,
disclosure, management of networked firms, equitization, and corporate social
responsibility. A host of measures that, when deftly combined, adapted to institutional
contexts, and made responsive to cultural subtlety, should produce what governments,
executives, directors, and stockholders, analysts, and regulators all want. Best practices
take different forms as they take place within various countries of the region. The essays in
this book identify and discuss particular governance issues, clarifying which ones
represent good practices. As empirical investigations, they are not expected to clear up the
channels through which institutional features alter corporate governance over time, and
how these features change. As such, these papers represent only the beginning of a broad
research agenda.
answers to issues of firm performance and productivity. The Asian crisis has prompted a
switch to the arm’s length model. Markets are now eroding the past dependencies between
banks and industry, increasing pressures from shareholders and requiring greater labor
mobility. Shareholdings by banks and affiliated firms have been declining. At the same
time, foreign ownership in Japanese firms is on the rise. Japan's institutions are making a
labored effort to adapt to greater openness to these market pressures and threats of
takeovers, being so rooted in mutually reinforcing firm-specific commitments rather than
politically-constructed rights and responsibilities. Whether Japanese corporations like it or
not, capital markets are changing rapidly to push them toward shareholder-oriented
corporate governance practices. And it is foreign ownership that seems to be nagging them
toward that direction. The example of the takeover of Nissan by Renault of France
illustrates the positive impact of foreign ownership on the performance of a major
Japanese car maker, and in a way suggests that it is external forces which would likely
force desired changes in Japan’s relationship-based system.
resources to preventing alteration that threatens their survival.” Path dependence occurs
because transaction costs associated with institutional change are non-trivial and typically
serve as deterrents to rapid or jarring change (La Croix and Kawaura, 2005).
But the tables can be turned. Institutions can be effective weapons to deconstruct old
ways. The adherence by Vietnam to equitization illustrates North’s notion of a “self-
reinforcing mechanism”: Initially, there were large setup or fixed costs: start-up costs were
appropriated to make the system operational. The second stage had to do with the learning
effects: government agencies became more adept at giving state enterprises more freedom
of action. Then the coordination effects kicked in: both the party and the government
fostered the same equitization rules and regulations. Finally, adaptive expectations made
the change permanent: the initial reform efforts led to precedence, which reduced
uncertainties about the rules. Once policies are in place, events are more likely to take the
form of incremental changes that follow the same trajectory. Policies create constituencies
with an interest in their perpetuation (italics provided) (Wilson, 2003).
Patterns of transfer are thus mediated by local institutions and governance
arrangements which in turn are affected by the country’s political, legal and social context.
Existing institutions and governance quality (“context” as used here) have a profound
impact on reform efforts. They shape the way the interests of actors are aggregated and
shaped. Context also determines the degree of complementarity between new and existing
institutions, which ascertains how likely effective and sustainable the institutions will be
(Fritzen, 2005).
A common platform of reform ideas could only be translated into common practice if
governments were not only functionally equivalent but equally autonomous (Freeman,
1999). Best practices can be “fungible” and can be expected to travel across jurisdictions
effortlessly only if they fulfill the following conditions (Page, 2000):
• They are less context-dependent;
• The organizations for service delivery are substitutable;
• The resources available to develop the program are similar;
• The mechanisms by which the program works (the “cause and effect structure of a
program”) are simple;
• The scale of change the program produces are small;
• The program covers areas of interdependence between importer and exporter
jurisdictions; and
• The values of policy makers are relatively consensual.
Best practice exporters and best practice importers may not be as different as apples
and oranges, but the radically different historical backgrounds of public policy
development in the countries in the region have shaped varying approaches to corporate
governance reform. The structures may be dissimilar: unitary states like the Philippines
cannot borrow without great alteration models based on federalism (like those in
Malaysia) where devolved powers contrast with the strong authority of a central
government and are crucial to the successful functioning of the model.
It is noteworthy that all the essays suggest that even good practices may be flawed
instruments―the more reason why importing jurisdictions need to be extra careful about
what they are copying or mimicking. Corporate giving and philanthropy in the Philippines
do not measure up to the standards of corporate social responsibility. Malaysia’s
regulatory standards are world-class, but the country’s “average only” enforcement
capacity makes the system vulnerable to regulatory capture. A market-friendly disclosure
regime, like the one found in Singapore, may leave not much elbow room for government
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Best Practices in Asian Corporate Governance
to maneuver, in cases where breaches of rules occur (as happened in the China Aviation
Oil case). India is still struggling to derive value for money for its public enterprises,
despite a half-century headstart. Japan could not rely on domestic reformers and needed
external forces (illustrated by Renault’s takeover of Nissan) to shake up its lethargic
corporate governance structure. The recurring theme in the Republic of China is that cross-
holdings and stock bonus system are transitional instruments designed to stabilize the
system. The same applies to Vietnam’s equitization drive, which is seen as an act of
passage to full privatization.
Benchmarking allows firms to judge the worth of various aspects of their processes in
relation to best practice, usually within their own sector, according to Wikipedia. In
practice, benchmarking involves, in stepwise fashion, comparing aspects of performance
(functions or processes) with best practitioners; identifying gaps in performance; learning
the lessons that those comparisons bring about; looking for fresh approaches and new
methods to improve performance; following through with implementing improvements;
and following up by keeping tabs on progress and reviewing the benefits. Benchmarking is
often treated as a continuous process1 in which organizations continually seek to challenge
their practices.
Of course, approaches are constantly evolving and being updated, in a manner that fit
local circumstances and institutions. If done right, benchmarking helps crack through
resistance to change by demonstrating the adaptability of other methods of solving
problems that can replace poor practices. But important aspects of best practice knowledge
are tacit. Translations of concepts into action are held largely in people’s minds and are
not often easy to document, even in the most codifiable cases. Because tacit knowledge
comes about as a result of informal institutions, best practice advocates may not be able to
bring in from abroad all the major factors needed for lesson-drawing. Therefore, most best
practice programs that are sensitive to institutional dynamics mix together two key
elements: explicit knowledge (providing practitioners with solid information, often written
down), and methods for sharing tacit knowledge such as communities of practice. A
potential user of the best practice can make use of documents to find out if adopting the
example is worth pursuing. Then, he or she can engage others who have been involved in
instituting changes in the model firms or organizations. Because quality of institutions
matters, best practice initiatives are most suitable in organizations where processes have
evolved quite well and where a substantial amount of knowledge and experience has been
accumulated (NeLH, 2005).
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A Review
1. Identify users’ requirements. This step looks easy, but it is not unusual for
someone given the task of capturing best practices to start by searching for
models abroad, when clearly this is a case of putting the cart before the horse.
Start by considering where the effort can really add value to the firm. Know
specifically what the company’s problems are. Check which areas need attention
because of poor performance or difficult challenges. Discovering the company’s
troubled aspects may require a range of research methods that Wikipedia lists
down as informal conversations with staff, customers, or suppliers, focus group
discussions, surveys, reengineering analysis, process mapping, analysis of quality
control variance reports, among others.
2. Discover good practices. Look for organizations in similar fields or in other
industries which are known to perform highly and produce excellent results, and
are thus likely to be sources of good practices. Consult customers, suppliers,
internal auditors, financial analysts, and trade associations to determine which
organizations are worthy of study. After zeroing in on possible “models”,
ascertain which parts of their overall approach or methods being used are in actual
fact good practice and may be the answer to the company’s problems. At this
stage it is not necessary to describe the practice in great detail. But the
information assembled should allow the company’s managers to decide whether
the approaches being investigated match the company’s needs.
3. Document good practices. Best practice descriptions should be recorded in detail.
A typical template might include the following:
• Profile – outline the processes and functions of the best practice organization.
• Context –here, supply-side analysis would be critically important. How did
the program component to be taken up as one's own come about? How does it
work in actual practice? Under what particular circumstances has it succeeded
(or failed) in similar settings? How might its likely effectiveness in a different
context be assessed? Are there differences in the policy environment of the
best practice organization that need to be taken into account? More nuanced
departures, such as political and cultural variables, should not evade the
adopters.
• Resources – what resources and skills are needed to carry out the best
practice? This is another supply-side aspect that should be documented, as the
said resources and skills may not be available in the adopting firm.
• Improvement measures – are there performance yardsticks associated with
this practice?
4. Validate best practices. A practice is only “good” if there is a demonstrable “good
sense” that (other things being equal) significant parts of the innovation being
adopted are capable of accommodating the circumstances of the “borrowing”
company. In areas where conditions are different, demand-side analysis would
shed light on the contextual nature of the proposed best practice transfer. The
questions that are important at this juncture include the following: To what degree
does its situation differ from the sources of innovations in terms of its
organizational/institutional setting, its socio-economic and policy environment, its
cultural setting and its financial, human and administrative resources? How
significant are any differences are likely to prove? What implementation
difficulties will be encountered? It is critical to organize a panel of reviewers
comprising internal and external subject experts and peers, who will evaluate a
potential best practice against their knowledge of local circumstances.
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Best Practices in Asian Corporate Governance
To accelerate the rate of best practice transfer over time, the urgent need is to endow
local firms the capacity to analyze their own situation and tailor the program to fit the
domestic context, rather than simply apply standard models. A few suggestions to make
best practices more capable of adapting to the particulars of each Asian country’s situation
are in order.
smaller countries have not done badly either in recent years. A particular reason to look for
a good model in smaller entities is that domestic firms can shape it more than they will be
shaped by it, and be less attached to the uncertainties that scale breeds.
Mossberger and Wolman (2001) point out that assessing variations in policy
environment can be a formidable challenge, requiring extended knowledge and analytic
thinking. To “bound” the need for knowledge and analysis, there is a need to pay attention
not just to the state-of-the-art models but to “most similar” ones. It is obvious that in
searching for promising approaches it is critical to look beyond the large western nations
(Mulgan, 2003). Furthermore, there often is an enormous gap between a company’s
practices and those that represent the absolute best. It would take a quantum leap to reach
their level. It would be better to make incremental changes (Feltus, 1994).
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Best Practices in Asian Corporate Governance
There is no substitute for the right method of interpreting experience from abroad.
Asian corporations should subscribe to a systematic approach that will assist them
make sense of experience in foreign countries, understand what factors have made a
program successful in its place of origin, and deal effectively with differences in social,
economic, political or institutional conditions that might stand in the way of successful
adoption. Of course, it goes without saying that companies should also have the right
disposition―an inclination to look abroad as a natural and automatic part of the best
practice process; and the right knowledge as well, of where to find relevant and reliable
information about good initiatives abroad, and links to the appropriate communities of
practice. It is axiomatic that good formulation requires achieving an optimum balance
between innovation and learning lessons, from observation of what others do (Wyatt and
Grimmeisen, 2002).
The figure at the right suggests a good method for investigating foreign innovations
that have the potential to be emulated. Taken from Wyatt and Grimmeisen (2002), the
steps to be followed are described below.
Phase 1: Mixed scanning
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A Review
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Best Practices in Asian Corporate Governance
REFERENCES
Bomberg, Elizabeth and John Peterson (2000). Policy Transfer and Europeanization.
Europeanization Online Papers, Queen’s University Belfast, No. 2/2000.
www.qub.ac.uk. Accessed 25 November 2006.
Centre on Regulation and Competition (2005). Regulatory Policy Transfer. CRC Policy
Briefs, Number 6. Institute for Development Policy and Management, University of
Manchester.
Claessens, Stijn (2003). Corporate Governance and Development. Global Corporate
Governance Forum. World Bank: Washington, DC.
Cliff, Julie, Gill Walt and Isabel Nhatave (2003). What’s in a Name? Policy Transfer in
Mozambique: DOTS for Tuberculosis and Syndromic Management for Sexually
Transmitted Infections. Journal of Public Health Policy, Vol. 25, No. 1.
Dolowitz, David. and David Marsh (1996). “Who Learns What from Whom: a Review of
the Policy Transfer Literature”, Political Studies 44, 343-357.
Feltus, Anne (1994). Getting Benchmarking off the Bench. Continuous Journey,
April/May.
Freeman, Richard (1999). Policy Transfer in the Health Sector. European Forum
Conference Paper WS/35, Florence: Robert Schuman Centre for Advanced Studies,
European University Institute, February.
Fritzen, Scott (2005). The “Misery” of Implementation: Governance, Institutions and Anti-
Corruption in Vietnam. Corruption and Governance in Asia. Routledge, New York.
Helpman, Elhanan (2004). Institutions and Politics, in Helpman, The Mystery of Economic
Growth, Cambridge, MA: Belknap Press.
International Monetary Fund (undated). Manual on Fiscal Transparency.
La Croix, Sumner J. and Akihiko Kawaura (2005). Institutional Change in Japan: Theory,
Evidence and Reflections. East-West Center Working Paper No. 82, Economic Series,
June.
National electronic Library for Health (2005). Identifying and Sharing Best Practices, 24
May. www.NeLH.com. Accessed 10 December 2006.
North, Douglass (1990). An Introduction to Institutions and Institutional Change, in North,
Institutions, Institutional Change and Economic Performance, Cambridge, UK:
Cambridge University Press, 1990.
Mossberger, Karen and Hal Wolman (2001). Policy Transfer as A Form of Prospective
Policy Evaluation. Future Governance Paper 2, November.
Mulgan, Geoff. (2003). Global Comparisons in Policy-Making: The View from the Centre.
Published by openDemocracy Ltd. UK, 6 December. www.opendemocracy.net
Accessed 1 October.
Page, Edward C. (2000). Future Governance and the Literature on Policy Transfer and
Lesson Drawing. Prepared for the ESRC Future Governance Programme Workshop
on Policy Transfer (28 January, Britannia House, London).
Schick, Allen (2000). Book Review - Managing Public Expenditure in Australia by John
Wanna, Joanne Kelly and John Forster. Allen & Unwin. Australian Journal of Public
Administration. Volume 60, Issue 3, 113-119.
Skyrme, David J. (2002). Best Practices in Best Practices. David J Skyrme Associates.
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A Review
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NETWORKED FIRMS IN THE REPUBLIC OF CHINA:
TOWARD A HYBRID SHAREHOLDER MODEL
INTRODUCTION
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Best Practices in Asian Corporate Governance
need for substitutive institutions in cases where formal rules are new and cannot be routinely
enforced. For firms requiring quick response time, conventional practices achieve what
formal institutions are designed, but are slow, to achieve, or where new corporate
governance structures are weak or lack authority (Helmke and Levitsky, 2004). Taiwanese
hi-tech firms, the lynchpin of ROC’s economic progress, illustrate this case. As
Woo-Cumings (2001) suggests, such unofficial conventions may postpone system
convergence toward plausible rule-of- law practices, but that does not necessarily mean that
they cannot evolve toward effective norms of transparency and accountability.
In this paper, we examine two corporate practices in ROC that have helped foster the
growth of hi-tech firms: employee stock bonus and stock cross-holdings. The stock bonus
option helped solidify positive relationships with Taiwan, ROC’s labor force, while
cross-holdings tided over Taiwanese companies as they tried to survive in a
highly-competitive IT global market. Both conserved precious capital for most firms. Both
are necessary but flawed instruments. The purpose of this paper is to substantiate and
explore the reasons behind these findings in the context of the institutional environment in
Taiwan, ROC, so that other member economies can draw some lessons. They will be
scrutinized against the backdrop of Taiwan, ROC’s transition to a knowledge-based
economy.
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Republic of China
At the same time, Zhang also indicates the need for scaling down excessive government
interventions in order to further the self-sustainable development of knowledge-based
industries which are dynamic and responsive to market conditions and which are developed
in line with Asian comparative advantages. Corporate governance is at the heart of these
changes.
Yet while there is a felt urgency to rethink corporate governance, an equally compelling
need is to accommodate a middle way that will not compromise entrepreneurship and stall
the growth of SMEs, which form the backbone of the KBE. As we shall see, Taiwanese
firms, most of which are small-scale and family-based, are being shaped by historical
legacies as much as by a new legal framework that carries the “at arms’ length” model being
sponsored by OECD and other multilateral bodies.
1
The competence needed to produce capital goods was mechanical, and involved skills in metal-working
(e.g., the working of iron and steel). The advent of electrical technologies did not require a skill shift: they
remained closely related to mechanical technology. It was normal for machines to have electro-mechanical
components. Electronic technologies of course grew out of electrical technologies, and in due course began
to replace electro-mechanical controls on machinery. It was a natural chronological succession for
late-developing countries to move from mechanical, then electrical sectors (combining both) and lately,
electronics. The technologies are also alike in certain circumstances. Machines and consumer durables are
all made up of a number of components which need to be assembled. They are thus highly responsive to a
division of the production process among a rather large number of producing firms (Miozzo and Tylecote,
2001).
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Best Practices in Asian Corporate Governance
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Republic of China
Small is beautiful
In all these, it should be remembered that the network features of innovation and
production in Taiwan, ROC have been the product of political circumstances. It was the
singular Taiwanese ethnic politics and the ruling Kuomintang party’s ideological views on
restraining private capital that promoted the bias against big private business firms in
Taiwan, ROC (Kim and von Tunzelmann, 1998). Generally, domestic firms in Taiwan,
ROC would have been bigger were it not for government resistance. Large-scale enterprises
are state-owned. State-owned enterprises continue to dominate the capital-intensive sectors,
like steel making, which were, in any case, too large-scale for family capitalism to handle
(Miozzo and Tylecote, 2001).
Public enterprises have served to consolidate the power of the Mainlander bureaucracy
from the beginning. But it has a positive flipside: nurturing large-scale capital in Taiwan,
ROC would have endangered the fragile but broad distributive coalition encompassing
SMEs, farmers, state-sector employees, labor, and broadly defined consumer and household
savers. The outcome of this unique ethnic politics involving the Taiwanese business
community and the Mandarin-dominated Kuomintang political elite, according to Kim and
von Tunzelmann (1998) was the creation of a multitude of extra-firm, industry-wide support
organizations, as well as public bodies that conduct research, disseminate technology and
provide market intelligence to the private sector. This investment in linkages and network
organizations evened off the frailness caused by the small size of companies. State policies
fostered a decentralized, predominantly SME-based industry structure and the beefing up of
ties and networks by subsidizing public R&D and network organizations (Kim and von
Tunzelmann, 1998). Whilst specializing in one segment of the value chain or another, IC
firms in Taiwan, ROC are interconnected through social and business networks (Chen,
Chen, Liu, 2001).
The speed of diffusion of market and technological knowledge in inter-firm networks
was greatly enhanced by the considerable coming and going of people among firms of
different sizes and ownership structures in Taiwan, ROC, creating informal inter-firm
linkages. The geographically concentrated networks likewise encouraged a “virtual
just-in-time system” of supplier relations to emerge, characterized by arm’s length and
constantly shifting “spot contracting” among suppliers who enter and exit firm networks
easily. These compensate for the usually fragmenting competitive forces of pure markets.
Otherwise, Taiwan, ROC’s system might easily have been overwhelmed by its
hyper-competitive and hyper-entrepreneurial system. The exchange of information about
needs, techniques, and technology among buyers, suppliers, and related industries has
happened at the same time as active rivalry was being maintained in the industry (Kim and
von Tunzelmann, 1998).
Corporate governance-wise, Taiwanese firms are loosely knit, with no unified
management structure. In lieu of a formal system of command, a highly flexible
management arrangement in each business group relies on networks generated by personal
and trust-based relationships. Typical of this kind of corporate governance is the Acer
Group which adopts a client-server management organization structure similar to computer
networking models. This grants Acer the power to source valuable high-tech components
and peripherals internally and externally, lowering costs and raising efficiency, while
supplying leading-edge products to a strong worldwide distribution network at competitive
prices. Modular manufacturing within the network has led to a very fast inventory turnover,
which gives firms like Acer a substantial advantage for market competition in the PC
industry, where time-to-market speed and cost-competitiveness count for so much. It can be
said that Taiwanese firms compete on the collective basis of the industry network (Kim and
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Best Practices in Asian Corporate Governance
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Republic of China
why employees in general prefer to have stock bonus, instead of cash bonus, for a growing
economy such as Taiwan, ROC. Table 1 also indicates that stock bonus will not be preferred
by the employees when the stock price of a company is lower than its face value.
In 1993, the value of cash bonus was NTD2.1 billion but the market value of stock
bonus was NTD8.8 billion (i.e., four times of cash bonus); in 2002, the value of cash bonus
was NTD7 billion but the market value of stock bonus was NTD72.4 billion (i.e., ten times
of cash bonus) (Commercial Times, 2004). This shows how popular the stock-bonus system
is in Taiwan, ROC.
Table 1. A comparison among stock bonus, cash bonus and stock options
Stock bonus Cash bonus Stock options
Type of reward 2000 shares NTD20,000 10,000 shares
NTD10 per share Exercising price:
NTD10 per share
Market price NTD 12 Irrelevant NTD 12
(1)Per share
Total cost Irrelevant Irrelevant Buying with
NTD100,000
Total revenue Selling for Irrelevant Selling for
NTD24,000 NTD120,000
Net gains NTD24,000 NTD20,000 NTD20,000
Market price NTD 8 Irrelevant NTD 8
(2) Per share
Total cost Irrelevant Irrelevant NTD 0,
no action
Total revenue Selling for Irrelevant NTD 0,
NTD16,000 no action
Net gains NTD16,000 NTD20,000 NTD 0
Source: Securities and Futures Institute
What serves to distinguish the stock-bonus is that the Taiwanese GAAP (Generally
Accepted Accounting Practices) requires companies to expense only the par value (usually
NTD10) of such shares in the income statement. The employee bonus shares do not entail a
lock-in period and are subject to virtually no capital gains taxation. So the employees can
(and probably most of them do) sell these shares soon after they receive them, pocketing the
difference between the market price and par value (Singhai, 2002).
This system of stock-bonus is different from that of stock option adopted by American
firms. In the stock-bonus system, employees receive stocks by paying face value of stocks
and usually the face value is much lower than the market price; in the stock-option system,
employees can decide either exercise options or not and the price of options reflect the true
value of stocks, to some extent. Issuing stocks to employees with lower prices shows the
willingness of a firm to share profits with employees and the concern of a firm for its
employees. This creates the loyalty to a firm and strong identity with a firm (Hung, 1997).
The stock-bonus system is a widely accepted innovation by Taiwanese firms. In the
1980s, Acer Computer Inc. was the early adopter of the system because Stan Shih, the
founder, is a firm believer of sharing stocks with employees. Other firms then followed suit:
United Microeconomics Inc. adopted the system in 1984 (Huang, 1998); most firms
planning to get listed at the stock exchange market implemented the system to keep key
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Best Practices in Asian Corporate Governance
employees and to create the identity of employees to firms (Chen, 2002). It has been argued
that the salaries in Asian firms were too low to attract high caliber employees and the
stock-bonus system effectively provides incentives to attract them (Chen, 2002). However,
some foreign investors and analysts question this practice. First, it dilutes the equities held
by investors, mainly the public. Singhai (2002) calls the stock bonus as excellent example of
managers exploiting specific loopholes in accounting practices to expropriate shareholders.
Second, it is not required to report the practice in the income statements and thus investors
are not able to assess the impact on investors. International pressure has pushed some
Taiwanese firms to modify this practice. On the other hand, the merits of the stock-bonus
system seem to be appreciated by some foreign firms. For example, American Express and
Amazon.com stared to distribute stocks to employees as bonus (Yang, 2003).
To firms, giving bonus by stocks, instead of cash, has its reasons. First, cash can be kept
within a firm for further investment. The cost is lower than raising capital through other
means. Second, it can be an effective means to retain employees and recruit new employees,
especially when competing with other firms. During the booming of high-tech industries,
issuing bonus stocks is popular among high-tech firms in the RO.C. Some executives even
claim that it is a must for motivating employees and innovations.
Mediatek’s case, however, took the practice to an extreme. In April 2002, the Mediatek
management announced that it would be granting 18 million shares (4.1 percent of total
outstanding shares) to employees at the par value of NTD10 apiece as bonus for the past
year. This price reflected a 98 percent discount to the prevailing market price of NTD447
(NTD626 adjusted for a 40 percent stock-dividend announced simultaneously). The
NTD8.1bn imputed value of the employee bonus shares was 1.25 times the entire net profit
of NTD6.7bn earned by the company in FY2001. However only NTD180 million (18
million x NTD10) required to be expensed. Before the October 2001 listing of Mediatek,
employees had already been granted 12.3 million shares in 2000 and 12.5mn shares in 1999.
That effectively diluted the owners every year to pay executive compensation, the
excessiveness of which was highlighted by the high market value of the compensation
relative to the profit-after-tax for the company.
The Mediatek employee share bonus issue brought to everyone’s attention a practice
that had long existed across the whole breadth of the local electronics sector. The investment
community, particularly the foreign institutional investors and brokers, began focusing on
the practice very closely, generating a slew of analyses on its dilutive impact. The theme has
constantly come up as a key concern about the market in recent months (Singhai, 2002).
In the context of agency theory, however, Sheu and Yang (2005) suggest that insider
stock ownership relates positively to firm performance. They used total factor productivity
as the relevant performance measure and classified insiders into executives, board members
and blockholders. Using a five-year (1996–2000) panel data of 333 Taiwanese listed
electronics firms, they observed that total insider ownership remains steady while the
executive-to-insider holding ratio increases significantly. In terms of the effect on total
factor productivity, neither the total insider ownership nor the board-to-insider holding ratio
shows any influence on productivity. However, productivity first decreases then increases
with the executive-to-insider holding ratio, forming a U-shaped relationship. The results
indicate that stock ownership of top officers in high-tech firms should be encouraged to
enhance productivity.
In a more recent study by Chen (2006), using a switching simultaneous-equations
model, evidence indicates that the patterns of the relation between managerial ownership
and firm performance are markedly different across ownership regimes. The model includes
a multinomial logit for the firm's choice among three regimes of large-block ownership,
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Republic of China
In terms of the total investor accounts kept by securities brokerage firms, bearing in
mind that the population was about 22 million, the numbers over the years are (TSEC, 2005):
12,869,344 in 2002; 13,053,178 in 2003; and 13,720,461 in 2004. Excluding those who are
under 20 and over 65 years of age, the population was 14,389,248 in 2003. Comparing this
number with the number of the investor accounts, it implies that most adults participate in
the stock exchange market and some adults like employees probably own several accounts
with different securities brokerage firms for stock transactions.
Apart from the law permitting share subscription among employees, two other sets of
laws explain the large number of individual investors in Taiwan, ROC.
The laws that require public listed companies to distribute equity holdings include:
• The Securities and Exchange Act, which stipulates that firms may be required to
disperse their shares when issuing new shares to raise capital.
• The Taiwan Stock Exchange Corporation Criteria for Review of Securities Listings
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Republic of China
which stipulates that, when an issuing company applying for the listing of its stock,
the company has to satisfy the following condition: “Dispersion of shareholdings:
The number of holders of registered share certificates shall be 1,000 or more.
Among them, the number of shareholders holding 1,000 shares to 50,000 shares
shall not be less than 500, and the total number pf shares they hold shall be 20
percent or greater of the total issued shares, or at least 10 million.”
This regulation has motivated companies to increase the number of stockholders before
going to be public.
The laws regarding stock exchange markets also contribute to the phenomenon. For
stock transactions the government only levies transaction tax on the sale side of each
transaction (i.e., 0.3 percent of traded value) and capital gains are exempted from tax.
Investors can gain by stock transactions frequently and thus increase the turnover rates of
stocks. Investors can also transact through pecuniary financing and securities financing.
Pecuniary finance represents loans to investors for the purchase of securities and such loans
are secured by the securities purchased by the investors; securities finance represents
securities lent to investors by securities brokerage firms and the investors’ deposits for
borrowing securities are held by these firms as collateral.
Although there are many types of securities, such as bonds, warrants, Taiwan
depository receipts, etc., transaction in stocks accounted for the lion share of trading value.
For example, stock transactions accounted for 98.75 percent of the trading value in 2004
(TSEC, 2005). Brokerage commissions, charged from investors for stock transactions, are
the major source of revenues for stock brokerage firms.
Security brokerage firms make it very convenient for individual investors to buy or sell
stocks. Investors have to open accounts personally at security brokerage firms. However,
security brokerage firms usually have branches conveniently located close to investors.
Securities brokerage firms, by setting up branch office nation-wide (154 firms with 1048
branches in 2003), are the main intermediaries for stock transactions (accounting of 94.0
percent of total trading value in 2003) (TSEC, 2005). People can trade at the main or branch
offices, through phone calls or fax, or trade on-line.
Because the bonus of brokers at security brokerage firms is usually based on the volume
of businesses conducted through them, to increase their bonus, brokers tend to encourage
their clients to engage in more transactions.
Individual investors conduct stock transactions by themselves and, if they buy mutual
funds, they prefer to buy foreign mutual funds, instead of local mutual funds. Although over
40 securities investment trust enterprises sell mutual funds, which theoretically provide a
better choice to individual investors for risk diversification, the expertise and
professionalism of these firms are questioned by investors. The feeling of the public is that,
these firms sometimes manage mutual funds not for the interests of investors, but for
earning commission. Individual investors trust more of their own capabilities and judgments,
instead of relying on institutional investors.
In addition, investors in the ROC have two characteristics:
1. Love of betting: Gambling is very much part of Taiwan, ROC's culture. People
gamble on anything and everything -- outcomes of baseball games, the fluctuations
of the stock market and the results of elections, including which candidates and
parties will win and also the margin of victory (Taipei Times, 2004). The
fluctuations of the stock prices generate excitement to investors (Lee, 2005) and
they prefer to experience the excitement by themselves.
2. Discretionary investing: The securities investment trust enterprises and securities
investment consulting enterprises were permitted to accept consignment for
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Best Practices in Asian Corporate Governance
In ROC, cross-holding and pyramid linkages are allowed but now require mandatory
disclosure (Singhai, 2002). Cross-holding of stocks between firms is a sensitive issue for
corporate governance. But for firms, cross-holding generates some advantages managerially
and strategically. First, cross-holding can alleviate the threat of take-over so that the
management can focus on running of firms (Chen and Hong, 2003). Second, cross-holding
can be a way to form alliance with upstream or downstream firms so that stable relationships
can be maintained and competitiveness can be enhanced (Huang, 1999). In a largely
networked agglomeration of firms, cross-holding can provide a solidarity instrument. Third,
cross-holding can stabilize the stock prices of involving firms when needed. Some
executives felt that it makes business sense to own the stocks of subsidiaries but have to be
careful for subsidiaries to own the stocks of parent firms (Huang, 1999).
As discussed above, Taiwan, ROC’s industrial structure is organized predominantly
around small and medium-sized family enterprises. SME-based systems of production are
frequently regarded as being pliant but often constrained by deficiencies in one or other
functional respect―sometimes in finance, sometimes in technology, sometimes in
marketing, and so on. Yet Taiwan, ROC’s success equals that of South Korea, whose
industrial growth was built almost entirely on large, horizontally diversified and vertically
integrated business conglomerates (chaebols) (Kim and von Tunzelmann, 1998). Absent
economies of scope, small firms can only retreat to very particular niche markets (Chen,
Chen and Liu, 2001), indicating reliance on inter-firm financing.
Another advantage of cross-holdings is, by investing in subsidiaries which are in
emerging or growing industries, or operating in new geographic markets, parent firms enjoy
higher returns and eventually benefit to the stockholders of parent firms (Huang and Chou,
2004). For example, Deutsch Bank reported that the consolidated income increased by 158
percent and the return on assets increased from 5.8 percent to 9.1 percent for the 20 largest
investing Taiwanese firms in China. However, the same report also indicated that the
consolidated debt ratio also increased from 29 percent to 44 percent. This shows that, by
diversifying into new businesses or areas, firms may incur higher risks and thus lead to even
poorer performance. Therefore, firms with many subsidiaries may either perform highly
above or below market average (Hong, 2003).
Hi tech industries often have a greater level of risk than other industries, particularly
enterprises in the start-up phase, which needs seed capital to finance product development
and marketing. R&D expenditures account for a high percentage of their total funding
requirements. Consequently, newly established enterprises have difficulty securing loans
from traditional financing institutions, including banks, and they often depend on personal
capital (Yang, 2002). Arguably, cross-holdings take on this greater risk, but they also have
the prospect of earning higher returns. Also, financial institutions in Taiwan, ROC are not
competitive and capital markets are underdeveloped. Most SMEs, which dominate Taiwan,
ROC’s industrial structure, lack the liquidity and economies of scale to list on either the
Taiwan Stock Exchange or the OTC. Hence, SMEs usually cannot use capital market funds
to expand the scale of production or improve competitiveness (Yang, 2002). The
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Republic of China
government has been studying the "Second Board Market" system for smaller firms,
especially high-tech and small and medium firms (SMEs), to be traded on the OTC
Exchange so that they can raise funds more easily and efficiently. It has asked the OTC
Exchange to relax listing procedures and requirements for such companies.
Notwithstanding the benefits, cross-holding of stocks between firms generate some
problems for corporate governance. For example, in Taiwan, ROC, under certain conditions
(such as less than 50 percent of ownership), firms need not report the operations of affiliated
firms and submit consolidate financial information (Hong, 2003). This may mislead the
public in making investing decisions.
Type 1
Investing
Firm A Firm B
Type 2
Investing
Firm A Firm B
Type 3 Investing
Investors
Investing Investing
Firm A Firm B
Yu’s study examined Type 2 relationship only and Types 1 and 3 were not included.
Yu’s study (2004), which found no mutual holding of stocks between the firms examined
and their affiliated companies, needs to be interpreted with caution. There are three ways
two firms can be related (Figure1):
• Type 1: one firm owns the equity of another firm, i.e., two firms having controlling
and subordinate relationship between them;
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Best Practices in Asian Corporate Governance
• Type 2: two firms own the shares of each other, i.e., two companies having made
investment in each other; and
• Type 3: one firm’s major investors own significant shares of another firm, i.e., two
firms are related due to common investors.
The discussion in this section will take a more comprehensive view and include all of
three types of relationship in Taiwan, ROC. As it stands, the regulations are more clear for
Types 1 and 2 relationships and vague for Type 3 relationship.
The regulations on cross-holding of stocks in Taiwan, ROC are different for the
financial sector and other sectors. The financial sector in Taiwan, ROC has been engaging in
a series of reforms. To consolidate the sector the Financial Holding Companies Act was
passed in 2001. This Act allows financial institutions to form holding companies, which are
not permitted for manufacturing firms, and to own controlling share of other firms in the
financial sector (i.e., Type 1 relationship). Firms have reacted actively to the Act and, as a
result, more than ten domestic financial groups have obtained approvals from the Ministry
of Finance and have already listed on the Taiwan Stock Exchange. Thus, the Act requires
and encourages financial institutions to own controlling stocks of other firms in the financial
sector. However, the regulations for firms in other sectors on cross-holding are more
restrictive.
For non-financial companies, the Corporate Law specifies the following for Type 1
relationship:
“A company which holds a majority of the total number of the outstanding voting
shares or the total amount of the capital stock of another company is considered the
controlling company, while the said another company is considered the subordinate
company.”
“If a company has a direct or indirect control over the management of the
personnel, financial or business operation of another company, it is also considered the
controlling company, and the said another company is considered the subordinated
company.”
“Where two companies are holding one half or more of the total number of the
voting shares or the total amount of the capital stock of each other’s company, or
having direct or indirect control over the management of the personnel, financial of
business operations of each other’s company, they shall have the status of the
controlling company as well as the subordinate company to each other’s company.”
“ In case a controlling company has caused its subordinated company to conduct
any business which is contrary to normal business practice or not profitable, but fails
to pay an appropriate compensation upon the end of the fiscal year involved, and thus
causing the subsidiary company to suffer damagers, the controlling company shall be
liable for such damages” and “if the responsible person of the controlling company has
caused the subordinated company to conduct the business described in the preceding
paragraph, he/she shall be liable, jointly and severally, with the controlling company
for such damages.”
“A subordinate company of a listed company shall, at the end of each fiscal year,
prepare and submit a report regarding the relationship between itself and its
controlling company indicating therein the legal facts, funds flow and loss and profit
status between the two companies” and “The controlling company of a listed company
shall, at the end of each fiscal year, prepare for submission a consolidated business
report and consolidated financial statements of the affiliated enterprises involved.”
The Law regulates more stringently for controlling-subordinate relations than for share
mutual-holding relationships. For Type II relationship the Corporate Law specifies that:
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Republic of China
“Where a company and another company have made investment in each other’s
company to the extent that one third or more of the total number of the voting shares or
the total amount of the capital stock of both companies are held or contributed by each
other, these two companies are defined as mutual investment companies.”
Regardless of share ownership, the voting power of mutual investment companies is
limited to 1/3 (Wang, 2003) and mutual investment companies are required to reveal the
relationships in financial statements. However, if the mutual ownership is less than 1/3 of
the equity, both firms have more freedom of operations and face less reporting requirements.
Cross-holdings create governance challenges. In recent years, several public listed
companies in Taiwan, ROC went bankruptcy to the surprise of the regulators and investors.
A typical arrangement blamed for this works as follows (Figure 2) (Chou, 2005):
1. A Taiwanese firm sells products to foreign firms, with or without its ownership.
2. The Taiwanese firm receives payments in the form of account receivables.
However, in reality, no deal was done between the two parties.
3. The transaction increases the revenues of the Taiwanese firm and may lead to
higher stock prices. Furthermore, the firms can use account receivables as collateral
to borrow money from banks
A more sophisticated arrangement than that depicted in Figure 2 is the case of Procomp
Informatics Ltd., a maker of chips used in communications and networking equipment. The
top management of Procomp was found to have illegally manipulated the company's stock
while leveraging NTD6.3 billion in frozen assets to raise more capital. Procomp had used
part of the funds as collateral for bank loans granted to its foreign associates, which agreed
to buy euro convertible bonds issued by the company. Procomp had also authorized these
banks to use the funds to buy financial derivatives while selling fake account receivables to
banks. The banks later froze Procomp's savings since its receivables could not be realized.
The Financial Supervisory Commission (SFC) accused that Procomp had worked with five
of its Hong Kong-based sales agents, suspected were paper companies, to increase its
account receivables so that its stock prices could be boosted (Huang, 2004). Four of the five
agents had never registered in Hong Kong and the other had been making deals with
Procomp two years before it became a Hong Kong-registered company in 2003. Therefore,
the top management might have violated article 171 and 174 of the Securities Transaction
Law, which carry a maximum penalty of 10 years and seven years, respectively, as well as
civil and criminal laws.
This kind of arrangement makes it difficult for accountants to audit. Accountants have
to clarify the nature of paper companies or real companies which companies are doing
businesses with. Though publicly listed companies are required to report the information
about overseas subsidiaries with controlling ownership, it is difficult to check the validity of
the information submitted. In addition, firms need not incorporate the operations of
affiliates with non-controlling ownership. No wonder Mr. Wei of Deloitte Taiwan, a
member of Deloitte Touche Tohmatsu, claimed that “From now on we will be more cautious
in selecting our clients….We may turn down clients with low stock prices, high debt ratio
and those clients whose management teams have questionable decisions” (Lin, 2005).
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Best Practices in Asian Corporate Governance
ROC Abroad
(1)
Parent Subsidiaries or
Firm Paper companies
(2)
(3)
Bank
Bank
*Explanation in the text
1. The major investors of a firm (i.e., the parent firm) set up an investment company
and the main activity of the company is investment.
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Republic of China
2. The investment company buys the stocks of the parent firm which boosts up the
stock prices of the later.
3. Using the stocks of the parent firm as collateral, the subsidiary (i.e., the investment
company) borrows money from banks.
4. The money can be used for investment or buying more stocks of the parent firm. If
the parent firm runs well, the stock prices can be maintained high; if the parent firm
does not run well, the stock prices will go down and, when the prices fall to certain
levels, the banks will ask for loan repayment from the investment company. The
banks may sell the stocks of the parent firm to get the payment and this leads to
further reductions of the stock prices. Eventually the stock prices of the parent firm
will go down to the extent that the parent firm and the investment company both file
for bankruptcy.
For the problems created by cross-holding, depicted in Figures 2 and 3, in addition to
demanding accountants to be more thorough in auditing, there are several suggestions
(Chou, 2005):
• Hold management responsibilities for unlawful or cheating behaviors;
• Set up hotlines by government agencies for tips for cheating behaviors, typically
from investors or inside-employees;
• Implement better corporate governance (e.g., setting up audit committee and
appointing independent directors) so that more efforts can be devoted to the
clarifying of the needs and nature of setting overseas subsidiaries, and examining
the transactions between parent firms and their affiliates; and
• Implement more effective internal control systems and make reports to appropriate
bodies, not to CEO.
Basically more effectively in designing and implementing corporate governance, which
relies on boards and management teams to perform their duties and the government to
provide a better legal framework, is demanded to protect the interests of the investors.
Cross-holdings breed the agency problem, which occurs when the desires or goals of
the principal and agent conflict, and it is difficult or expensive for the principal to verify that
the agent has behaved improperly. For example, in a firm with dispersed ownership (cash
flow rights) and control (voting rights), managers may over-diversify to reduce their
employment risk and increase compensation. However, owners can mitigate such indirect
expropriation by instituting an effective and responsible board of directors as a monitoring
mechanism and by entering into incentive-based performance contracts with the managers
(Singhai, 2002).
However, the agency problem tends to be far more complicated when control of a firm
is concentrated in the hands of a single shareholder (individual, family, or business group).
The threat of expropriation is further exacerbated when such large shareholders manage to
gain control disproportionately higher to their ownership. Control in excess of ownership
can be achieved with the help of cross holdings between companies, through pyramidal
holding structures, or by issuing more than one class of shares with differential voting rights
(Singhai, 2002).
In light of the situation, the government amended relevant regulations to restrict
companies from creating investment vehicles to hold the shares of the parent companies.
The government has also strengthened mechanisms to monitor the usage of funds by listed
companies obtained through cash offerings.
Clearly, these are only small victories, and leave plenty of scope for follow-up measures
like an indirect deterrent like inter-corporate taxation to discourage pyramids and
cross-ownership (Singhai, 2002). All things considered, the progress of hi-tech firms in
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Best Practices in Asian Corporate Governance
Taiwan, ROC should lead them to pathways that would eventually end up in hybridization:
networks that will incorporate the best features of employee share subscriptions and “at
arms length” shareholding.
CONCLUSION
Existing legal systems, business cultures and corporate structures are formed in different
contexts and may effect how corporate governance systems are designed and implemented
in different countries (Gonzalez, 2004). The evidence provided in the paper suggests that the
institutional environment seems to be a major factor in explaining the rise of networked
firms in Taiwan, ROC.
Countries differ in their institutions and cultural orientations. Institutions, including
both formal rules (e.g., laws and regulations) and informal rules (e.g., conventions and
norms) (North 1990), affect political, social and economic behaviors and relationships in a
country. Studies have shown that culture affects the behaviors of human, such as attitude
towards work, social capital and management dynamics (Isobe, et al., 2004).
The basic premise of the institutional theory is that firms’ tendencies toward conformity
with predominant norms, traditions, and social influences in their internal and external
environments lead to homogeneity among firms in their structures and activities, and
successful firms are those that gain support and legitimacy by conforming to social
pressures (Oliver, 1991, 1997). From an institutional view, firms operate within a social
framework of norms, values, and assumptions about what constitutes appropriate or
acceptable economic behavior. Therefore, economic choices are constrained not only by the
technological, informational, and income limits but also by socially constructed limits
(Oliver, 1997).
Institutional context refers to rules, norms, and beliefs surrounding economic activities
that define or enforce socially acceptable economic behavior (Oliver, 1997). Similar to
firms, the behaviors of individuals are influenced by both formal and informal institutions.
The investing behaviors in the stock exchange markets in Taiwan, ROC and the
cross-holding of stocks between firms reflect the influence of institutional factors, either
directly or indirectly. Specifically, the paper dealt with two by-products of the institutional
environment, namely the stock bonus given to employees and stock cross holdings among
hi-tech firms. In the process, the paper found that share subscriptions are but part of the
regulatory structure that favors individual investors. The other laws regarding public listed
companies, stock exchange markets, and issuing stocks to employees, the characteristics of
stock brokerage firms and behaviors of individual investors all contribute to the wide
distribution of stocks by individual investors. Cross-holdings are, to put it bluntly, a
necessary instrument, and that is why the government has allowed the practice, although the
laws are designed to regulate the cross-holding of stocks between firms so that misbehaviors
can be avoided. Some firms have developed several mechanisms (e.g., setting up paper
companies and investment companies and faking transactions) to manipulate the legal
framework. Continued improvement of the laws and implementing practices related to the
corporate governance system is a must.
The ROC government has implemented a number of reforms (such as amending the
Company Law to further regulate cross-holding of shares) and measures (e.g., requiring
firms to strengthen internal audit and internal control systems) in recent years to strengthen
corporate governance in Taiwan (Yu, 2004). In late 2003, the government further adopted
the recommendations of the Task Force for Reforming Corporate Governance to strengthen
corporate governance (Executive Yuan, 2003). For example, Securities Investors and
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Republic of China
Futures Traders Protection Law has been enacted to protect the interests of investors. Public
awareness as well the initiation of the government on corporate governance will lead to a
better investing environment for investors and more responsiveness to stakeholders by firms
in the ROC. But in the end, it must be said that institutions as well as their history matter,
and corporate governance in Taiwan, ROC, whether we like it or not, would evolve in a
manner that takes tradition as a modifiable given, not as a convention that could readily be
discarded.
REFERENCES
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Best Practices in Asian Corporate Governance
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Republic of China
- 41 -
CORPORATE GOVERNANCE IN INDIA:
LESSONS FROM THE PUBLIC SECTOR
R. C. Monga
Heartware Incorporated
India
PERSPECTIVES
The debate on corporate governance in the public sector is of recent origin. Much of
what governments do in delivering public services involve running major businesses, the
operation of public utilities for example: water, electricity, roads, transport. In India,
various forms of businesses managed by state-owned enterprises have total assets that run
into billions, and they are not insignificant by any standard. Indian taxpayers, as the
ultimate owners of these businesses, have the right to expect them to perform to best
practice. That requires having good corporate governance systems in place.
However, as Whitfield (2003) points out, governments do more than simply operate
utilities. If private sector businesses bear upon the community and the economy, many
public sector activities have a more direct and immediate influence. Health, education,
social welfare, and the justice/legal systems all redound directly to the community’s and
society’s benefit. Governments are trying to achieve through a variety of public sector
corporations a complicated array of political, social and economic objectives. Much more
so than the private sector, the public sector is faced with the challenge of reconciling
service and accountability with commercial decision-making.
Corporate governance in the public sector is much more complex because it also
raises important questions about government monopoly, ownership concentration,
regulatory capture, redistribution and the wide scope of public sector activities in India,
among others, which would need to be considered for evolving a suitable corporate
governance framework and practice. The Standing Committee on Public Enterprises, the
apex organization of public corporate sector in India took the initiative in the mid-nineties
to encourage debate and focus attention on these issues, particularly those affecting central
public sector enterprises, that is, firms owned by the central government of India (SCOPE,
2004).
The tradeoffs are increasingly important in the context of liberalization where
government is expected to relinquish its control over a wide range of public sector
activities. The clamor for the privatization of SOEs has gained ground in the last decade,
although its success has rather been episodic, marked by gradualism throughout the 1990s
and acceleration in more recent years. As Karayalcyn (undated) notes, it is not easy for the
state to simply give up control of the SOE sector because of its major role as an instrument
of redistribution, especially for countries undergoing adjustments induced by IMF and
World Bank policies.
Indeed, given this institutional vacillation, there are economic reasons (in addition to
political reasons) for government control in corporate governance as a second-best
response in developing countries like India. As Qian (2000) argues, state ownership and
control may have comparative advantages over private control in an imperfect institutional
environment, such as when there is ineffective rule of law in securing property rights,
poorly functioning capital market, and a lack of acceptable taxation and fiscal institutions.
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India
Likewise, even if government ownership and control are inefficient, there are still
economic arguments for delaying privatization of existing state firms, such as a lack of a
social safety net, inadequate legal framework for corporate governance, and the absence of
regulatory institutions for special industries. Arguably too, where the private sector s
reluctant to invest its energy and resources (true in many cases for public goods and in
areas where there are large externalities), SOEs are the only implementing instruments
available to governments. Seen this way, SOEs and private enterprises are complementary
to each other.
This paper attempts to examine corporate governance issues in the context of
challenges peculiar to the public sector in India and draw lessons that could be of use in
similarly situated countries. It discusses the broad trends of initiatives that are in progress
in the central public sector enterprise, keeping in mind the basic principle enunciated by
the Organization for Economic Cooperation and Development: the legal and regulatory
framework for state-owned enterprises should ensure a level-playing field in markets
where state-owned enterprises and private sector companies compete in order to avoid
market distortions (Isaksson, 2005). The chief aim of the public enterprises is to maximize
productive exploitation of the valuable resources invested in them with effective
governance and transparency (Jain, 2004).
There are two views of corporate governance that prevail in various settings today. A
narrow view is particularly prevalent in the USA and UK and is largely focused on
promoting and protecting the interests of shareholders. It is tilted towards complying with
legal and other rules and practices prescribed for the purpose of preventing any
wrongdoing and presenting the correct picture to the shareholders. The major focus of this
view is on enhancing shareholder value. Its key concepts―disclosure, transparency,
accountability, audit, among others―are geared toward protecting the rights of minority
shareholders. Because it considers the outside market as its source of discipline and its
corrective mechanism, this particular view is very internally-focused: its principal chore is
to define and delineate relationships amongst the company’s management, the board of
directors, its shareholders, and auditors so that no conflict of interest arises. The principal-
agent relations provide a broad governance framework for formulating company policies
and monitoring performance. However, experience has shown that maximization of
shareholder value alone may place undue emphasis on achieving results that benefit a few
at the cost of other stakeholders in society.
The broader view treats corporations as socially embedded organizations servicing the
needs of multiple stakeholders in the context of varying governance structures. It is a non-
utilitarian approach to explaining the successes and failures of Asian firms. It modifies the
standard principal-agent model by recasting the agency problem in terms of more explicit
societal objectives. This way of seeing matters, according to Gonzalez (2004), has several
ingredients: extent of control by majority shareholders, rights of stockholders, contractual
covenants and insolvency powers of debt holders, and government regulations. The key
players are not simply the inside controlling agents (owners and top management) but
external agents (financiers such as banks and majority shareholders, government
regulators) as well. The agency problem is how to line up their interests, to avoid
divergence and ensure the growth of both the firm and the economy.
Mere compliance with the existing legal and regulatory framework and protecting the
majority shareholders’ interests exclusively is not a guarantee of long-term corporate
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Best Practices in Asian Corporate Governance
survival (Monga, 2004). It is a necessary, but not a sufficient, condition. The very first
order of business for corporate governance is the commitment of people in the
organization (Vittal, 2002). The values of transparency and integrity must percolate down
within the organization to enhance employees’ belongingness, and outside it. The broader
view therefore is to consider the best interests of wider set of stakeholders including
employees, customers, and the community. Building trust with both internal and external
stakeholders that is essential for achieving holistic better performance. This view regards
companies as a social institution rather than merely a vehicle for shareholder value
creation.
That does not mean that countries like India should be entirely on their own in crafting
their corporate governance principles, even granting that these principles must pass the
“localization test”―the extent to which they could imbibe India’s legal and political
systems, business cultures, and corporate structures. The reforms, in the context of the
broader stakeholder perspective, can adapt the principles laid down by the OECD without
losing sight of peculiar needs of the nation. Although India should move towards the
stakeholder model, it can still have major points of convergence with OECD standards and
policy directions as well as those developed in the Cadbury Report in the UK and the
Sarbanes-Oxley Act in the US. Many of these shareholder model features, like open
disclosure regimes, broad ownership, stock exchanges, accounting standards, risk
management and regulatory mechanisms are in place already in India. Most companies are
honoring the rights of shareholders to participate, question, vote and influence decisions,
as Reddy (2004) points out, but in a departure from the US-UK model, they are engaging
stakeholders more intently.
In the end, what matters is that India is able to get the best out of these two
approaches. Both shareholder and stakeholder values must be entrenched in the
organizational culture, and supported by appropriate mechanisms and systems.
Soon after independence, India, like most underdeveloped economies, was caught in a
low-income-level trap, which occurred at low levels of physical capital, both productive
and infrastructural, and was maintained by low levels of accumulation and by Malthusian
population growth. That implied a powerful case for government activism as a way of
breaking out of the trap. Accordingly, the Government of India adopted a model of
economic development that could be best described as “mixed economy”. The state
operated from the “commanding heights” and aimed at the highest level of socio-economic
good for the largest number (Dewan, 2004a).
This development paradigm, a “big push” of sorts, accorded a strategic position to the
public sector in the economy. It was in line with the first Industrial Policy Resolution of
1956 which sought to achieve a self-reliant economic and social growth. The private sector
was also encouraged to prosper, but played second fiddle to the public sector.
It was the policy of mixed economy that initiated the creation of large number of
SOEs. The policy was to address the aspiration of a new nation towards quick
industrialization. The basic argument has been that Indian industrialization has to be
anchored on the core sectors that were highly capital intensive with long gestation periods.
Since the private sector of the nascent economy was not strong enough to invest in such
sectors, state initiative was imperative. Later, the policy got mixed up with trade union
pressure for nationalization of many enterprises. By the last decade of the last century
SOEs in India were spread over from core sectors like steel, power, and machinery to
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India
many consumer goods that included even bakery products (Nath, 2004).
The reversal of fortunes for SOEs occurred in the eighties, which saw a gradual
opening up of the Indian economy. But it was in 1991 when the Government of India
decided to give a further impetus to accelerate the process of liberalization and opening up
of the economy, which boosted the chances of private enterprises. Yet, according to Nair,
although India’s growth accelerated, this performance could not be sustained in later years.
The average growth rate during the five-year period 1997-02 was only 5.4 percent as
against the targeted 6.5 percent (Nair, 2003). However, economic growth rate picked up
later, to more than 8 percent during the years 2004-05 and was expected to slow down to
around 6.5 percent beginning 2006. The erratic economic behavior suggested that the
reform was not simply about “getting the price right” but “getting the institutions right”.
Realizing that good governance plays a crucial role in developing an efficient
economy, the Indian government embarked on a course that put emphasis on corporate
behavior. A 2004 study of the World Bank recognized this effort and acknowledged a
marked improvement in corporate governance in India (Economic Times, 16 May 2005).
Several major corporate governance initiatives have been launched in India since the
mid-nineties. The first was by the Confederation of Indian Industries (CII), India’s largest
industry and business association, which came up with the first voluntary Code of
Corporate Governance in 1998. The confederation was driven by the conviction that good
corporate governance was essential for Indian companies to access domestic as well as
global capital at competitive rates. The code focused on listed companies. While this code
was well received and some progressive companies adopted it, it was felt that under Indian
conditions a statutory rather than a voluntary code would be more purposeful.
Consequently, the second major initiative in the country was undertaken by the Securities
and Exchange Board of India (SEBI) which envisaged that corporate norms would be
enforced through listing agreements between companies and the stock exchanges. In early
2000, the SEBI board incorporated new regulations into Clause 49 of the Listing
Agreement of the Stock Exchanges. This clause has been further revised in 2002, and
again, in 2004. Clause 49 lays down guidelines for composition of the board including the
number and qualities of independent directors, remuneration of board members, code of
conduct, and the constitution of various committees (including audit), disclosures, and
suggested contents of annual reports.
Likewise, the government has taken initiatives to rationalize and simplify the
Companies Act. The objective was to make the law more business friendly, bring greater
clarity and accountability to roles of directors, strengthen penal provisions against fly-by-
night companies and safeguard the interests of shareholders. Proponents of the
amendments also toughened the eligibility criteria for independent directors: having a
relative with pecuniary or material relationship with the company is a disqualification,
which is not the case with the listing agreement; and the number of independent directors
was set at one third of the total size of the board. Recognizing the advent of high
technology, the government recommended allowing board meetings by electronic means
such as video conferencing. The reforms are expected to reduce compliance costs and raise
the levels of transparency in corporations. Also launched was an e-governance project
which seeks to put all information on the website that can be accessed by companies
anytime.
These actions were to be applicable to both private and public sectors, but it was left
to SCOPE to examine issues relating to central public sector enterprises. SCOPE initiated
studies on the role of government directors and non-government directors on boards of
public sector enterprises, action strategies for sick central public sector enterprises, and
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Best Practices in Asian Corporate Governance
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India
year, or a growth of about 11 percent. The dividend payout ratio went down to
28.74 percent from 42.50 percent in the previous year.
• Export earnings were Rupees 34,893 Crores (USD81 billion)―a growth of 21
percent from Rupees 26,296 Crores (USD67 billion) earned the previous year.
The earnings played a major role in easing the balance of payments by promoting
import substitution and exports.
Given the scope of economic activities that they cover, it was inevitable that some of
the public sector enterprises would be saddled with excess manpower, which resulted in
low productivity. Some 242 CPSEs employed about 1.766 million employees in 2003–04
as compared to 1.866 million in the previous year. Government had initiated a voluntary
retirement scheme in public sector enterprises during 1998 to help them shed excess
manpower and to improve the age-mix and the skill-mix of employees. At the same time,
training and retraining of employees were strengthened to bring about overall productivity
improvement. By 31 March 2004, more than half a million employees have availed of the
voluntary retirement scheme which was initiated in 1998. The compensation per employee
was Rupees 248,691 (USD578) in absolute terms.
To their credit, the public enterprises have helped in development of backward
regions, the provision of public utilities, technological development, the development of
managerial competencies, and the generation of jobs. As an instrument of development,
the SOEs helped in reducing poverty, narrowing regional disparities and building the
foundation of a strong industrial base. They have been the forerunners in trying out and
implementing superior management practices in the Indian environment, namely strategic
management, total quality management, ISO9000, knowledge management, productivity
management, quality circles, and so on (Khader, 2004).
However, counterfactual evidence suggests that the state enterprises could have done
more, were it not for inefficiencies inherent in the public bureaucracy. Scholars are agreed
that state firms were stymied by diverse and often contradictory expectations from the
very beginning. While the CPSEs were expected to run on commercial lines, in practice
they functioned as a policy tool of the government. Due to the very nature of the
relationship between the CPSEs and the government, inefficiencies crept into their
functioning, leading to a spate of criticisms on count of time and cost overruns in project
implementation, lack of modernization and technology upgrading, overstaffing, low
efficiency, and profitability (Dewan, 2004b).
Governance-wise, SOEs paid little attention to opportunity costs of investment (the
moral hazard problem). They were burdened with insider governance; direct monitoring
(and meddling) by line ministries; administratively determined or politically negotiated
prices, inputs, and production levels; and poor, idiosyncratic, and opaque accounting.
Finance-wise, SOEs underperformed (shirking) because of soft budget constraints, direct
state financing, and state control over domestic savings and capital markets. As an
industrial organization, each SOE existed as a monopoly or single franchise, viewing
competition as wasteful, and mistaking firm interest for public interest. It was like a social
contract embedded within the firm. From a policy standpoint, SOEs were a confused lot,
supplying multiple functions (social safety net, job generator, supplier of public goods). It
was therefore difficult to measure and enforce compliance (Victor, 2003).
It is no surprise that today, there appears to be a sea change in public expectations
over SOEs. Current thinking now heavily tilts toward commercial results and long-term
viability.
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Best Practices in Asian Corporate Governance
In July 1991 the central government announced a new industrial policy, which
included a serious of measures to unshackle Indian industry from myriad administrative
and legal controls, limit the role of the public sector to eight core areas and selectively
open the rest for private participation. The core areas included arms and ammunition and
other defense equipment; atomic energy; coal and lignite; mineral oils; mining of iron ore
and other minerals; atomic energy and railway transport. Since then, many measures have
been taken that included abolishing of industrial licensing, de-reservation of some items
manufactured by small industries and the public sector, advancing foreign direct
investment, wider access to foreign funds and technology, removal of restrictions on
imports, financial sector reform, introduction of product patents, increased focus on
building infrastructure, and corporate governance. However, many bottlenecks remain.
The reform process still continues and issues relating to infrastructure development,
rightsizing the government, reorientation of the civil service, fiscal deficit, labor markets,
and public sector reform are being addressed.
As regards public enterprises, starting with the idea to sell public sector equities, the
government has considered various approaches that included restructuring, disinvestment
and privatization. The broad components of the new policy are as follows:
• Investment through strategic sale and privatization
• Selling shares to the public
• Restructuring and reviving potentially viable SOEs and closing down poorly-
performing ones
• Giving workers protection through labor reform
• Empowering boards and stakeholders
• Promoting mergers and acquisitions.
The new United Progressive Alliance (UPA) was established in 2004 and issued a
Common Minimum Program (CMP) containing the following specific points:
• Commitment to a strong and effective public sector whose social objectives are
met by its commercial functioning. This is to be tempered by the need for
selectivity and strategic focus.
• Full managerial and commercial autonomy to successful, profit-making
companies operating in a competitive environment.
• Generally, profit making companies to be retained in the public sector. All
privatization will be considered on a transparent and consultative basis.
• Retention of existing Navaratna companies in the public sector, while these
companies raise resources from the capital market.
• Revitalization of somewhat sick public sector companies. However, chronically
loss-making companies will be sold off or closed after all workers have received
their legitimate dues and compensation. The UPA will induce the private sector to
take care of turning round companies that have potential for revival.
• Resistance to the re-emergence of any monopoly that only restricts competition.
• Use of privatization revenues for designated social sector schemes.
• Public sector companies and nationalized banks to be encouraged to enter capital
market to raise resources and offer new investment avenues to retail investors.
The government has also announced the establishment of a Board for the
Reconstruction of Public Sector Enterprises to guide the government policy with regard to
SOEs. The Board will advise government on measures to be taken to restructure central
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Performance contracting
In an attempt to bring the right balance between accountability and autonomy, the
government of India carried out a system of performance contracting by entering into a
Memorandum of Understanding with each SOE that has not been referred to the Bureau
Industrial Finance Restructuring and is not insignificant in size, beginning in 1988. The
MOU defines clearly the relationship of the SOE with the government and delineates their
respective roles. It is a freely negotiated performance agreement between government as
owners of public enterprises and the SOEs. The enterprises commit to meet the targets set
in the agreement at the beginning of the year. The performance targets are measured on a
five-point scale for all crucial parameters like production, sales, profits, among others. The
MOU covers both financial performance as well as non-financial ones. The contents of
these MOUs include the agreed mission and objectives of the SOE, commitments, the
level of assistance to be given by the government, monitoring and evaluation parameters,
and rewards for good performance. Starting with four CPSEs in 1987–88, the number of
SOEs covered by MOUs has gone up to 96 in 2003–04, out of which 53 were rated as
excellent and 23 as good.
Specifically, the MOUs lay down procedures based upon the guidelines issues by the
Department of Public Enterprises. These guidelines are refined every year and for the year
2005-2006 cover the following:
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Best Practices in Asian Corporate Governance
• Mission and objectives: SOEs should take note of new opportunities that may
have emerged during the year. The objectives should be comprehensive and
related to the mission of the enterprise and listed in order of priority, and include
both quantitative and qualitative aspects, commercial and non-commercial
aspects, static as well as dynamic aspects of the operations and approved by the
SOE Board.
• Exercise of autonomy: SOEs can exercise self-direction through the delegation of
financial powers relating to capital expenditure, joint ventures, strategic alliances,
organizational restructuring, creation and winding up of posts, and human
resource management. SOEs can specify other areas in which further autonomy
and financial powers are desired, but they have to justify how these additional
powers will stimulate the growth of the enterprise.
• Performance appraisal: The MOU lists down performance evaluation parameters
and targets that keep in mind strategic objectives, profitability, productivity and
growth. Critical aspects such as modernisation, technology upgrading, mergers
and acquisitions, diversification, organizational restructuring, manpower
rationalization, employee skilling and others having bearing on the long term
competitiveness of the SOE are considered. Due emphasis is placed also on
project implementation, R & D, occupational safety, environmental protection,
customer satisfaction, quality improvement, and corporate plan updating.
However, criteria relating to any “social (or, non-commercial) obligation” unless
it is mandated by the government are not to be included. The weights for static
financial parameters such as profitability, and for dynamic parameters such as
quality are 50 percent and 30 percent, respectively. Sector specific parameters that
include macro factors that are beyond the control of the enterprise, and enterprise
specific parameters which are important from the viewpoint of the society (such
as environmental protection) are given 10 percent each. However, these
parameters and weights would vary depending upon the nature of the enterprise.
The guidelines also specify that the targets should be realistic, growth oriented
and significantly higher than targets and achievements of the previous year.
• Government commitments: The assistance requested of government should be
relevant and related to agreed performance targets. These obligations should have
direct bearing on the functioning of the enterprise and their impact must be
measurable.
• Action plan: The implementation plan should indicate timelines for meeting the
SOE objectives, frequency of monitoring to be done by the Board and the
Administrative ministry, and parameters for the annual evaluation to be done by
the Department of Public Enterprises.
Since the SOE budget has implications on performance targets, the negotiation
meetings are deliberately scheduled after the budget presentation to central authorities.
The appropriateness of the parameters and weights and the soundness of the targets, as
well as the commitments of the government are examined in detail at the negotiation
meetings. The MOUs are finalized thereafter. After approval, these are signed by the
CEOs of the SOEs and the Secretaries of the supervising ministries.
The evaluation of the MOU-covered enterprises is done at the end of the year. When
the performance exceeds the targets, the enterprise is ranked as “excellent” and when the
targets are just met, the enterprise gets a “very good” rating. When the targets are not met,
the enterprise is rated either “fair” or “poor”.
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India
Category I firms) and 150 Crores (USD345 million) (for Category II firms). Their Boards
have also been delegated powers to establish joint ventures, subsidiaries in India and
overseas offices subject to certain ceilings. They can also enter into technology joint
ventures/strategic alliances, obtain technology know-how by purchase or other
arrangements, structure and implement schemes relating to personnel and human resource
management, and rationalize the SOE through voluntary or compulsory retirement
schemes.
Mini-Ratnas can exercise enhanced delegation of powers after broad basing the board
by inducting at least three non-official directors in the board while ensuring that the
number of non-official directors is increased to one third of the total strength of the board
at the earliest time. These non-official directors are selected through a search committee
whose members include the SOE chairperson, the Secretary of the Department of Public
Enterprises, the Secretary of the administrative ministry, and some eminent non-official(s).
Navratnas are higher category SOEs which Mini-Ratnas can graduate into. Mini-
Ratnas Category I which obtained “excellent” or “very good” MOU ratings in three of the
last five years and a “composite score” of 60, are eligible for the Navratnas status. The
composite score is based on six performance indicators that include net profit to net worth,
manpower cost to cost of production/services, PBDIT to capital employed, PBDIT to
turnover, earning per share, and inter-sectoral performance (net profit to net worth)
relative to the sector to which the SOE belongs.
The Government has enhanced the autonomy and the delegation of powers to
Navratnas to support their effort to become global giants in line with the Common
Minimum Program. The CMP stipulates that the Navratnas would be retained in the public
sector with freedom to raise resources from the market. Navratnas can incur capital
expenditure without any monetary ceiling, enter into technology joint ventures, create and
wind up all posts including and up to those of board level directors, undertake human
resource development and training, develop voluntary retirement schemes, raise debt from
domestic capital markets and from borrowings from international markets subject to
government guidelines, and establish financial joint ventures and wholly owned
subsidiaries in India and abroad subject to ceilings of Rs.200 Crores (USD470 million) in
any one project limited to five percent of their net worth and 15 percent of the net worth of
the SOEs in all joint ventures put together.
Navratnas are required to have a transparent and effective system of monitoring and a
firmly established audit committee. They must seek no financial support from government
or have contingent liability. Their new powers can be exercised only after they restructure
their boards. Four non-official directors of an impeccable stature and background must sit
on each SOE board. This number should be higher for those SOEs which have more
functional directors. The number of non-official directors must be equal to at least one
third of the Board.
An apex committee headed by the Cabinet Secretary in the case of Navratnas and an
inter-ministerial committee headed by the Secretary of the Department of Public
Enterprises in the case of Mini-Ratnas would undertake the performance review of the
performance of the SOEs, including whether to elevate, or divest them of, their current
status. So far experience suggests that consistent improvements in the overall performance
of the SOEs amply demonstrate the fact that further grant of operational autonomy could
only be beneficial to the economy (Dewan, 2004a).
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India
Clearly the antecedent conditions relating to the functioning of the Central Public
Sector Enterprises (CPSEs), on account of both internal and external factors, do not exist
any longer (Dewan, 2004b). CPSEs have to be prepared for meeting the challenge of
global competition and achieving commercial goals, more than ever before. They must
respond proactively to the market dynamics by making decisions faster and taking bona
fide commercial risks. More changes are necessary in the following areas: public sector
management; intergovernmental relationships, particularly involving Parliament and
regulatory agencies; and internal organizational management.
that they report on their relations with stakeholders. In this respect, the government, the
coordinating or ownership entity and SOEs themselves, in their pursuit of important public
policy objectives, should recognize and respect stakeholders’ rights established by law or
through mutual agreements (Isaksson, 2005). To be more transparent also means there
should be mechanisms by which enterprises are forced to debate openly, directives or
choices that affect shareholder value or the long-term sustainability of the public sector
enterprises. While the dominant shareholder (government) will have its rights in pursuing
its thinking, decisions have to be cleared through the authority of the shareholders (Reddy,
2004). In this regard, the state and state-owned enterprises should recognize the rights of
all shareholders and ensure their equitable treatment and equal access to corporate
information. They should develop an active policy of communication and consultation
with all shareholders, and facilitate the participation of minority shareholders in
shareholder meetings in order to allow them to take part in fundamental corporate
decisions (Isaksson, 2005). Externally, the aim of performance information is to aid
stakeholders and management in drawing informed conclusions about operations from
what is provided in published documentation, thus providing a sound basis for decision-
making (Whitfield, 2003).
Thus, a clear, stable and conducive macro-policy environment is the felt need of the
hour. SOEs embody national assets that should not be subjected to a particular political
party’s policies and programs. Therefore, the government should come out with a policy
paper that includes among others (a) areas in which the public sector enterprises would be
allowed to function based on commercial grounds, (b) laying down clearly the social
objectives and functions of SOEs, (c) establishing clearly the rules for privatization,1 and
(d) ensuring fair treatment of SOE shareholders and stakeholders.
1
A recent Federation of Indian Chambers of Commerce and Industry (FICCI) survey on disinvestment
concluded that 75 percent of restructuring required for repositioning SOEs could be achieved without
privatization (Khader, 2004).
2
Interestingly, Jawahar Lal Nehru, who was responsible for making the public sector a pillar of Indian
economic strength, presaged the dilemma to be faced by Indian SOEs when he said after independence:
“The way a Government functions is not exactly the way that business houses and enterprises normally
function…When one deals with a plant and an enterprise where quick decisions are necessary, this may
make a difference between success and failure. I have no doubt that normal governmental procedure
applied to a public enterprise of this kind will lead to the failure of that enterprise”. But the essence of this
message seems to have been lost over the years and was never translated into practice.
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India
where SOEs are treated as an extended arm of the government, is the core issue.
Bureaucrats exercise oversight powers without any accountability while the Chief
Executive Officers are held responsible for the SOEs’ poor performance. (In truth, if all
major decisions by SOEs require prior approval, advice, guidance or concurrence of the
government, management cannot be held accountable for the results.) The long-term
interests of the enterprise are sacrificed in favor of vested interests of entrenched
politicians. The influence of government over management is often subtle and not
transparent: it is generally expected that wishes or “orders” are complied with without
question. Such meddling occurs on top of explicit restrictions found in the SOEs’ articles
of association, issuances by the Bureau of Public Enterprises, central government
guidelines and directions, the procedures for scrutinizing investment funding, choice of
projects, wage policy, and all other regulations which are common to both the public and
private sectors.
That Government is a major shareholder in public sector enterprises raises typical
issues of control that are also prevalent in private firms which do not have diversified
ownership. But there is a crucial difference. In SOEs, the representatives of government as
the dominant owner are only fiduciaries with relatively short tenures that could hamper
accountability. In both the cases the structure and practice of monitoring, control, and
superintendence seem to go beyond the typical corporate governance mechanisms, to
direct control over management (Reddy, 2002). This contravenes what OECD suggests:
The state should act as an informed and active owner and lay down a clear and consistent
ownership policy, ensuring that the governance of state-owned enterprises is executed in a
transparent and accountable manner, with the necessary degree of professionalism and
effectiveness (Isaksson, 2005).
Arguably, government as major shareholder has rights which cannot be denied. But
the state as an active owner should exercise its ownership rights according to the legal
structure of each company. Its prime responsibilities, according to OECD, include
• Being represented at the general shareholders meetings and voting the state
shares;
• Establishing well structured and transparent board nomination processes in fully
or majority owned SOEs, and actively participating in the nomination of all
SOEs’ boards;
• Setting up reporting systems allowing regular monitoring and assessment of SOE
performance;
• When permitted by the legal system and the state’s level of ownership,
maintaining continuous dialogue with external auditors and specific state control
organs; and
• Ensuring that remuneration schemes for SOE board members foster the long-term
interest of the company and can attract and motivate qualified professionals
(Isaksson, 2005).
Khader (2004) contends that what is more important is not who owns the company but
how much freedom is given to the management. The separation of management from
ownership can be achieved by restructuring the existing practice of handpicking the
chairman, and by empowering the boards with more authority and withdrawing
government intervention. This is consistent with OECD’s prompting that the government
should not be involved in the day-to-day management of SOEs; instead it should allow
them full operational autonomy to achieve their defined objectives. The state should let
defer to SOE boards and respect their independence (Isaksson, 2005).
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Best Practices in Asian Corporate Governance
De-linking SOEs from the control of the Ministry officials and functionaries would
create enough space for the SOEs to function effectively and focus on performance rather
than “conformance”. Stronger measures must also be adopted. For instance, there should
be a clear separation between the state’s ownership function and other state functions that
may influence the conditions for SOEs, particularly with regard to market regulation
(Isaksson, 2005). Article of 12 of the constitution, is fundamentally wrong and is
inconsistent with the principles of the setting up SOEs as corporate entities (Ahluwalia,
2004) and should be amended. To really free the SOEs from government control, this
anomaly has to be set right and public sector employees should be categorized separately
from the government employees.
Empowerment of boards
Given the need and importance of corporate governance, the debate has shifted to
more substantive issues that include board constitution and empowerment. As the OECD
maintains, the state should let SOE boards exercise their responsibilities and respect their
independence (Isaksson, 2005). A focus on board composition makes the board
autonomous with powers to take critical financial and strategic decisions requiring real
time response (Dewan, 2004c). To give a good example, Ramchandran (2004) narrates
that Indian Oil Corporation, with an independent, competent, and educated Board at the
helm, was able renegotiate the terms of setting up two prominent projects, Paradip and
Panipat Refineries, when it was learned that they were not yielding reasonable returns.
A truly effective board with sufficient independence and competent directors could act
as cushion and insulate the SOE from the vagaries of ministry officials and political
functionaries. Restructuring the relations between the government and the SOEs would
create the needed space for the boards to balance the “performance” criteria better with
“conformance” requirements (Reddy, 2002). The board and the CEO must articulate the
concerns of the SOEs from a long-term perspective. The government for its part should
limit itself to policy formulation and evaluation, and devolve the desired autonomy in
order to empower boards. Such devolution should cover all areas that are necessary for the
board to respond proactively to the changes in the market place. The time has come to go
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India
beyond the CPSEs and bring the other public sector corporations in the ambit of corporate
governance.
3
If employee representation on the board is mandated, mechanisms should be developed to guarantee that
this representation is exercised effectively and contributes to the enhancement of the board skills,
information and independence (Isaksson, 2005).
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Best Practices in Asian Corporate Governance
No. 4 of 2003 (SOEs)). It appears that many board members do not find the work of the
board stimulating enough or take it part of their routine job. In such a situation, a board
would find it difficult to take an independent view and render sound decisions, which may
put at risk the long term interests and viability of the SOE.
Public enterprises have argued that the government’s representatives be declared as
part of the independent directors. But these official directors represent the dominant
shareholder and they are in any case full-time salaried bureaucrats. Fortunately, the SEBI
has rejected such arguments. As a result, all well known SOEs (among them, the Oil and
Natural Gas Commission, the Indian Oil Corporation, the Gas Authority of India, and the
National Thermal Corporation―all Navratnas) have started looking for independent
directors. Yet in the final analysis, a key issue is not the number of independent directors,
nor their affiliations, but their quality. The appointment of independent directors who have
the requisite experience, attitude, and knowledge of the market place is essential to make
an objective assessment of the strategies and performance of the SOEs.
At present most of the central SOEs are managed by a CEO designated as chairperson
and managing director, which violates the tenet that there should be a separation between
board and management. Ideally, the boards of SOEs should be composed so that they can
exercise objective and independent judgment. Good practice calls for the Chair to be
separate from the CEO (Isaksson, 2005). But it has been a practice that has evolved in
order to avoid a worse result―political nominees being appointed as chairperson. The
government has earlier rightly decided that Members of Parliament cannot be appointed to
the boards of the central SOEs. To attract talent and right kind of people, the compensation
system along with a credible scheme of reward and punishment for the board members
needs to be overhauled. Capacity building of board members would be crucial for the
effective functioning of the board. SCOPE is in an excellent position to take this course of
action. Besides training, accreditation of board members would help in the process of
choosing the right board members. While waiting for a good accreditation system, a
national roaster of qualified candidates could be considered.
management and remuneration. SOE boards should carry out an annual evaluation
to appraise their performance (Isaksson, 2005).
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Best Practices in Asian Corporate Governance
CHALLENGES
In view of the significant contribution of the public sector and the dominant role it
would continue to play in the Indian economy, improving corporate governance in SOE s
has assumed a sense of urgency. Considering the values at stake, it is only reasonable that
governments develop their expertise as owners and improve the governance of their
enterprises. But while the gains are apparent, practicing corporate governance of state-
owned enterprises is a complex task. One paramount challenge is to find the right balance
between the government´s duty to be an active owner, while desisting from making undue
political interference in the management of the company. Another challenge is to make
sure that the government does not distort competition in the way it uses its regulatory and
supervisory powers (Isaksson, 2005). Given those contexts, what are the lessons to be
learned in the Indian public sector?
Considering the various forms, nature and levels of performance of public sector
enterprises, a selective, gradual and flexible approach for implementing corporate
governance practices is prudent. Besides, even if there are “universal” elements present in
various codes and standards, what is more important is how to develop broad policies into
more specific outcomes and outputs. The conditions “on the ground” in which the SOEs
operate need to be taken into account in formulating an effective corporate governance
framework. In all cases, corporate governance must pass the localization test.
Sector characteristics and past performance ought to be considered in determining
which SOEs can be granted more autonomy. Devolution of powers may be considered in
areas such as capital expenditure, strategic alliances, joint ventures, and internal
operations. The key is to find out which ones have an impact on the competitiveness of
SOEs even while the role of government is to be confined to policy making. A level
playing field can result from restructuring the relations between government and SOEs.
The formulation of a clear and stable policy environment would create condition for
exercising such devolved powers.
The ownership rights of the government should be exercised with caution so that the
capacity of SOEs to function along commercial lines is not impaired, even while they meet
the public policy objectives of the government. The government should limit its role to
policy formulation and laying down strategic objectives. The government’s influence over
the SOE should be exercised through a transparent board nomination process.
Legal instruments such as the Company Law should be repealed to make them more
market friendly. Initiatives for accelerating use of information technology such as allowing
board meetings by video conferencing should be strengthened. These reforms would
reduce compliance costs while enhancing the SOEs’ effectiveness and level of
transparency.
Besides complying with the legal requirements, the board should focus on developing
a work culture based on the fundamental values of corporate governance and an
understanding of the expectations of various stakeholders. Formulating and enforcing a
code of ethics and conduct is another area that deserves attention of the board. This code
should encompass areas that include conflict of interest, responsiveness to workers,
concern for value of public assets, non-abuse of official position and continuous
improvement through professionalism.
Performance indicators should be developed. The government must require both
outcome indicators (measures of effectiveness, in terms of the contribution of the relevant
SOE outputs to the achievement of both commercial and social outcomes) and output
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India
indicators (measure of efficiency, in terms of the price, quantity and quality of the final
output).
If properly carried out, these recommendations should go a long way to ensuring that
SOEs behave in an accountable and professional manner that enhances value creation.
REFERENCES
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CORPORATE GOVERNANCE IN JAPAN:
FLEXIBLE ADOPTION OF SHAREHOLDER-
ORIENTED PRACTICES
Toru Yoshikawa
McMaster University
Canada
INTRODUCTION
Before the 1990s, corporate governance in Japan had never received much attention
from a public policy or managerial perspective. One of the reasons for this lack of interest
is that Japanese firms adopted the “stakeholder” model of corporate governance in which
shareholders were simply treated as one of the stakeholders and their interests were not
given priority. This stakeholder model is based on the Japanese industrial system that has
been characterized by its tight network of suppliers, buyers, and financial institutions,
which is often called keiretsu. Many networks exist in Japan, and are known for their
extensive cross-shareholdings among group members, affiliated firms and banks
(Abegglen and Stalk, 1985; Gerlach, 1992; Sheard, 1994).
In addition, large portions of Japanese stocks have been, and continue to be, owned by
“stable” shareholders. These investors own the stocks of affiliate companies not just to
gain financial returns (Abegglen and Stalk, 1985). Rather, because these Japanese
institutional shareholders are a company’s business partners, cross-shareholdings and
stable ownership are expressions of business goodwill, information exchange and mutual
monitoring. They provide the foundation for formalizing long-term business relationships
(Clark, 1979). Gerlach (1992) reports that as high as 70 to 75 percent of shares owned in
Japan belong to the “affiliated stable investors” category, defined as long-term, keiretsu-
or business- affiliated holders of shares. Consequently, managers of Japanese firms have
not paid much interest to the concerns of financial investors who bought, sold, and held
shares purely for financial purposes (Charkham, 1994).
Further, investors in Japanese stocks had enjoyed higher returns from their stock
investments than they would have gained from other investment alternatives because of
the high performance of the Japanese economy which pushed up the stock markets.
Investors in Japanese stock markets achieved a nominal return of 17.9 percent or a real
return of 11.7 percent during the period between 1962 and 1986 (Aoki, 1989). Thus,
despite the lack of priority given to the financial interests of stock investors, there was no
strong motivation for those stock investors to care much about how Japanese firms were
“governed.”
During the 1990s, however, this situation began to change. Corporate governance
started to figure more conspicuously in private sector dealings in Japan for several reasons.
First, it became apparent that the traditional governance system in Japan, which was based
on main bank monitoring, was no longer effective (Aoki, Patrick, and Sheard, 1994). In
the past, Japanese banks played an important monitoring role for their client firms. But due
to their own problems as well as to changes in the external environment, Japanese banks
ceased to play an effective governance role, especially for large corporations. Second, it is
now widely believed that the risky and unwise investment decisions made by many
Japanese firms during the “bubble” economy period in the late 1980s were due to the fact
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Best Practices in Asian Corporate Governance
that Japanese managers were not properly monitored by anyone, including banks. After the
bubble economy burst, many stock investors suffered huge investment losses. Investors
blamed poor governance practices of Japanese firms for the significant drop in share prices
(Watanabe and Yamamoto, 1992).
Third, as the growth rate of the Japanese economy “stabilized” at relatively low rates
compared to those in the boom years (the 1970s and 1980s), Japanese firms needed to shift
their focus on growth and market share to in order to achieve higher profitability and
returns (Yoshikawa, 1995). This shift now requires Japanese firms to change their policy
on the distribution of interests among the stakeholders. That is, they have to value more
highly their own shareholders. If a firm tries to please all stakeholders, whose interests
often clash, the outcome is sub-optimal allocation of resources which leads to the sacrifice
of firm profitability. Since the corporate governance system affects how senior managers
make their resource allocation decisions, there is a growing interest in how Japanese firms
should be governed. Today Japanese firms are under strong pressure to shift their focus to
shareholders’ interests and firm profitability.
In reaction to these challenges, there have been some changes in corporate governance
practices of Japanese firms as well as in regulations. But an important question here is
whether these changes are appropriate or adequate to deal with the current governance
crisis that Japanese firms are facing. Indeed, many Japanese companies are resisting the
shift. In their favor, there persists a skeptical view that this changeover to shareholder-
oriented corporate governance is not desirable for Japanese firms (e.g., Itami, 2000). It is
often argued that the competitive advantage of Japanese firms lies in their employees’
commitment to their employer firms and in firm-specific know-hows. Hence, there is
apprehension that switching to a shareholder model may erode Japanese firms’ long-term
competitiveness. This chapter discusses how Japanese firms have responded to these
challenges.
This chapter is organized in the following order. The first part presents the traditional
corporate governance system based on main bank monitoring in Japan. The discussion
touches on the characteristics of the main bank system and its current problems, and
canvasses the key findings of a number of empirical studies on the effectiveness of main
bank monitoring. The second part reviews recent changes in the ownership structure of
Japanese firms, to the extent that they affect corporate governance practices. The third part
examines the recent boardroom self-improvements initiated by Japanese firms. The
impacts of such ownership changes and corporate-led governance reforms on firm
performance are considered in Part 4. The fifth part appraises critically the recent changes
in Japan’s commercial code that pertains to corporate governance. Part 6 goes over the
practical implications of these changes to other countries. Finally, the case of Nissan is
presented in the concluding part. This case is selected to show some best practices that
have emerged from the changing environment since the 1990s.
intervening in the management of these firms if required (Aoki, et al., 1994). The main
bank’s surveillance role unquestioningly has been taken for granted for decades in Japan.
A key feature of the main bank system is that the bank and its client firms share
information intensively. This implies that the bank is often intimately involved with
strategic and financial planning of its client firms, a situation which provides the bank with
unique access to its clients’ critical information that other investors usually do not have.
Further, through their cash management accounts, the main banks can monitor their client
firms’ cash movements. According to Sheard (1989), the main bank is able to play the
screening and monitoring functions that credit rating agencies or investment analysts
usually play in the US context.
These monitoring and information-screening functions are also facilitated by directors
dispatched by banks to their client firms. Because of its status as one of the largest
shareholders as well as debt providers, the main bank often has representation on the board
of its client firms. A bank-dispatched director is frequently one of a few outside board
members in Japanese firms (the board is usually dominated by insiders and former
employees). Sheard (1997) reports that about a quarter of board members of listed
Japanese firms are outsiders, of which 20 percent are dispatched by banks and about 64
percent are transferred from non-financial firms. Hence, on top of regular contacts, the
main bank enjoys board-level access to critical information of its client firms.
Main bank monitoring is largely a confidential matter between the bank and its client
firms. The exercise of the bank’s control rights due to its shareholdings and loan exposure
becomes visible only when its client firm is in deep financial trouble. Since the bank can
detect its client firm’s problems at a relatively early stage by constantly keeping an eye on
the firm’s credit profile and cash management practices, it can deal with financial troubles
before they become more serious. When the main bank catches sight of the firm’s
financial woes, it can devise a series of steps to rescue the firm, often in consultation with
the firm’s management. As much as possible, the main bank tries to prevent a situation
where the firm’s financial crisis is open to easy view. But if public exposure is
unavoidable, the bank oftentimes dispatches its senior executive(s) to keep tabs on the
management and board of the firm. Banks, especially main banks, have a strong incentive
to allow their client firms to recuperate quickly and without much fanfare because of their
large loan exposures. If its rescue effort does not help the firm to recover, the bank
sometimes finds a merger partner.
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Best Practices in Asian Corporate Governance
found that the director’s appointment was highly correlated with these poor performance
measures.
Kang and Shivdasani (1995) looked at the relationship between non-routine executive
succession and firm performance and found that those firms with the strong main bank ties
were more likely to experience executive succession when a firm experienced poor
performance. Morck and Namamura (1999) investigated the director transfer from banks
to their client firms under poor firm performance. They found that banks were more likely
to dispatch directors when their client firms had cash flows and liquidity problems if these
firms had no main bank relationship. When the firms borrowed under a main bank
relationship, the creditor banks tended to send in directors not only when the client firms
had cash flows and liquidity problem, but also when their stocks were performing poorly.
In terms of firm restructuring, however, they found that banks tended to impose greater
pressure on firms that were outside any main bank relationship. This suggests that the
main bank might not play an effective disciplinary role when their client firms needed
restructuring.
The findings of these studies generally suggest that the main banks did their job
(adequately or even excessively) of monitoring their client firms. However, these studies
used data in the 1970s and 1980s when the main bank’s monitoring power was still
relatively strong. The studies’ findings may no longer be relevant to the 1990s’ situation.
In fact, the evidence today suggests that the main bank no longer plays an effective
governance role.
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Japan
Japanese banks vis-à-vis their client firms. These changes in corporate finance practices of
Japanese firms led Japanese main banks to lose their power to monitor their client firms.
In addition to the increasing bargaining ability of Japanese firms, Japanese banks were
weakened by moral hazard problems. After the burst of the bubble economy, large
amounts of loans extended by Japanese banks turned into bad debts because their
borrowers spent those loans on inefficient and unprofitable projects. These non-
performing loans have impaired the balance sheet of Japanese banks substantially. This
problem led some banks to go bankrupt and others to merge with their competitors.1 AS a
result, Japanese banks could not easily provide financial recovery support to their client
firms that are in financial distress. At the same time, large amounts of bad debts suggest
that Japanese banks did not play a proper screening and monitoring role when they
extended these loans. This raised a credibility problem on the banks’ ability to play an
effective governance role.
Further, the recent accounting change, which requires Japanese firms and banks to use
market value rather than book value in disclosing the extent of their long-term
stockholdings, forced them to report unrealized capital losses when the stock prices of
their holdings declined. Because of this, corporate and bank shareholders have started to
reduce their shareholding positions in other firms (Nihon Keizai Shimbun, 22 September
2000). For example, stable shareholdings by banks in total outstanding shares in Japan
decreased from 15 percent in 1987 to 5.9 percent in 2003 (NLI Research Institute, 2004).
Also, cross shareholdings between banks and other firms have been declining. In fact,
since the mid-1990s, the banks’ stable and cross-shareholdings have steadily decreased
(Figure 1). Smaller shareholding positions should also reduce Japanese banks’ bargaining
power vis-à-vis their client firms.
At the same time, the corporate scene began to see the rising importance of market
investors as a monitoring mechanism due to the changing share ownership structure in
Japanese firms. While the monitoring power of Japanese banks has declined, it appears
that some stock market investors, especially foreign ones, have started play a more active
role. In other words, market investors in stock markets may have started to fill the
governance gap left by Japanese banks. How does the changing ownership structure since
the 1990s impact on corporate governance in Japanese firms? The next section provides
some answers.
As discussed earlier, many Japanese firms have been linked through extensive cross-
shareholding arrangements with their main banks, business partners, and client firms. Also,
a large portion of Japanese stocks are owned by “stable” investors (Sheard, 1994). It is
often argued that stable investors own their shares primarily to cement and grow stable
business relationships rather than to earn a return on their stock investments (Charkham,
1994; Kester, 1991). It is also suggested that they own shares in other firms to ensure
constancy in earnings and sales so that they can protect the interests of important
stakeholders including employees, management, business partners such as banks, suppliers,
and other affiliated firms (Caves and Uekusa, 1976; Nakatani, 1984). Because of these
characteristics, Japanese corporate governance is often seen as stakeholder-oriented as
1
In fact, major Japanese banks have been consolidated into the four major financial groups (i.e., Mizuho,
Sumitomo-Mitsui, Tokyo-Mitsubishi, and UFJ), and it is expected that there will soon be only three major
groups if UFJ is successfully merged with Tokyo-Mitsubishi.
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Best Practices in Asian Corporate Governance
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bank
BankShareholdings
shareholdings Bank Cross-Shareholdings
Bank cross-shareholdings
Nagoya) in Japan (Table 2). 4 These data indicate that the foreign investors’ relatively
smaller stakes are traded very many times at short intervals. Since foreign investors
attempt to reduce their investment risk through international portfolio diversification, they
2
Kabushiki Bunpu Chosa (Stock distribution survey), 2004.
3
Bank of Japan, 2004.
4
Fact Book, 2004. Tokyo Stock Exchange.
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Japan
need to constantly adjust their shareholdings according to any changes in the global capital
markets.
2 5. 0 0 %
2 0 .0 0 %
15. 0 0 %
10 . 0 0 %
5. 0 0 %
0 .0 0 %
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Foreign investors are those who buy, sell, and hold shares primarily for investment
purposes, as opposed to business relationship purposes. The main investment objective of
foreign investors is a high investment return because, unlike stable domestic investors,
they only have arm’s-length financial relations with firms in which they own shares
(Kikuchi, 1999; Sheard, 1997). This means that they are under no constraint, unlike
domestic stable investors, to reduce their expectations for maximization of investment
return in order to maintain business relationships with firms in which they hold shares.
Another noticeable trend in ownership structure since the 1990s, corollary to the
emergence of foreign owners, is the decline in stable ownership and cross-shareholdings
among affiliated firms and banks. Table 3 shows that stable shareholdings among listed
Japanese firms went down to 24.3 percent of the market value of all outstanding shares in
2003, from a high 45.6 percent in 1990 (NLI Research Institute, 2004). During the same
period, cross-shareholdings decreased from 18.1 percent to 7.6 percent.
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Best Practices in Asian Corporate Governance
These changes in ownership structure suggest that Japanese firms are under greater
pressure to accommodate the needs of more return-oriented foreign investors. Because of
their arms’-length relationship with firms in which they own shares (which motivates them
to look for higher investment returns), foreign investors are more likely to demand that
Japanese firms disclose more corporate information. Unlike affiliated domestic investors,
they do not have other means to gather such information. In order to maximize their
investment returns, foreign investors need as much information as possible to assess the
investment prospects of a firm (Yoshikawa and Linton, 2000). In addition, internationally
active institutional investors may pressure Japanese firms to adopt global standards of
corporate disclosure (Useem, 1998). Hence, those Japanese firms that have sizable foreign
owners may have to place greater focus on shareholders’ interests.
Indeed, more recent evidence indicates that an increasing number of Japanese firms
are slowly adopting more shareholder-oriented practices―such as a greater number of
outside directors on the board and greater information disclosure to investors. They are
intended to serve the interests of shareholders, rather than satisfy important stakeholders’
varied concerns (Yoshikawa and Phan, 2001). A key factor that drives these firms to adopt
more shareholder-oriented policies is a shift in ownership structure. The effects of these
ownership changes on performance and corporate practices are discussed later.
In Japan, as in many other countries, the board of directors is legally responsible for
the management of the corporation. The Japanese board, however, does not delegate its
management duties to executive officers (Heftel, 1983). In part, this is because Japanese
boards are often composed of only executives and former employees (Abegglen and Stalk,
1985; Charkham, 1994). Unlike an American board, the Japanese board does not define its
primary role as that of monitoring top management (Charkham, 1994; Heftel, 1983).
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Japan
In recent years, however, the rising view that a more shareholder-oriented approach to
corporate governance should be adopted in Japan (Kikuchi, 1999; Wakasugi and Yanai,
2000; Watanabe, 1994) has put more pressure on Japanese boards to consider changes.
Moreover, falling profits and rising public demand from such interest groups as domestic
pension funds and the Japan Corporate Governance Forum emphasize the need for the
Japanese board to play a more effective monitoring role of management (Nihon Keizai
Shimbun, August 14, 2001; Nikkei Business, October 25, 1999; Watanabe, 1994). The
widespread call to improve the effectiveness of board monitoring continued after the 1997
Asian economic crisis, which exposed the weaknesses of corporate governance in Asian
countries. Newspaper and journal articles demanding corporate governance reforms are
now quite common. Further, as discussed earlier, foreign owners have mounted pressure
on Japanese firms to improve their corporate governance practices as well (Useem, 1998).
Facing these changes in business environments, some Japanese firms started to reform
their boardroom practices. The first such boardroom self-improvement was initiated by
Sony Corporation in 1997. Sony reduced the number of board members and separated the
roles of executive officers and directors. This practice has gradually been adopted by many
other Japanese firms. From the late 1990s to 2000, for example, Orix Corporation, Toshiba,
Nissan Diesel, and NEC restructured their board by reducing the number of directors and
allowing the CEOs to part ways with the directors. A survey conducted by Nihon Keizai
Shimbun in 1999 reported that 36 percent of the respondents in the survey had made the
roles of the board members and executive officers distinct from each other. The separation
often results in the reduction of the board size since many directors are also executive
officers (Nihon Keizai Shimbun, June 13, 1999). Many firms reportedly adopted this
practice in order to improve the quality of decision-making and the effectiveness of
monitoring (Aoki, 2004).
A number of firms also started to appoint outside directors on their boards. For
example, the same survey reported that over 38 percent of Japanese firms had outsiders on
their boards in 2001 even though they were not legally required to do so (Nihon Keizai
Shimbun, 16 June 2001). However, many outsiders on the Japanese boards are not
independent but affiliated directors who often come from banks, associated firms, and
government agencies. While these changes in boardroom practice may show the increased
emphasis on corporate governance in the Japanese boardroom, less clear is their impact on
shareholder wealth creation.
5
http//www.mof.go.jp/singikai/henkaku/top.htm
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Best Practices in Asian Corporate Governance
Hence, while we have some empirical evidence to show that foreign ownership is
positively associated with firm performance, we still need some caution to conclude.
Another reason why the reforms did not improve firm performance is that many
Japanese firms may have been using the separation of directors and executive officers as a
means to present a cosmetic change. From an institutional theory perspective, attempts to
reform corporate governance can be seen as a way to gain undisputed credibility in the
eyes of the shareholders and the public. The institutional theory framework argues that
organizations will try to incorporate norms in their institutional environments so that they
can gain legitimacy, resources, stability, and enhanced survival prospects (DiMaggio and
Powell, 1983; Meyer and Rowan, 1977). This organizational behavior can be described as
a process of isomorphism, which is induced by institutional pressures and expectations.
Theory suggests that such pressures and expectations force organizations to demonstrate
conformity because organizations compete not only for economic resources but also for
political power and institutional legitimacy (Dacin, 1997; Suchman, 1995). Conversely,
breach of such an expectation would damage legitimacy and even deny the organization
access to resources needed for survival.
It appears then that Japanese public expectations on corporate governance practices
changed after the collapse of the bubble economy and the continued poor performance of
Japanese firms throughout the 1990s. During this period, there has been growing demand
for greater transparency and more attention paid to the interests of shareholders from such
groups as domestic and foreign institutional investors, shareholders’ rights groups, and the
stock exchanges (Watanabe, 1994). The rising institutional pressures to improve corporate
governance practices can be seen from numerous developments as follows:
• 1993: The Japan Investor Relations Association was established to promote better
information disclosure to investors and shareholders by listed Japanese firms.
• 1994: The Japan Corporate Governance Forum (JCGF) was created by
businessmen, scholars, and media to promote a stockholder-oriented corporate
governance system in Japan.
• 1995: Keidanren or the Japan Federation of Economic Organizations issued a
statement that stressed the importance of improving information disclosure by
Japanese firms to stimulate the growth of equity transactions in the domestic stock
markets.
• 1998: JCGF issued the Corporate Governance Principles. The revised JCGF
principles were issued in 2001.
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Best Practices in Asian Corporate Governance
• 1999: OECD issued its own Corporate Governance Principles. The revised OECD
principles were issued in 2004.
• 2003: The Tokyo Stock Exchange (TSE) required all listed firms to disclose their
policies on corporate governance. TSE also issued the Principles of Corporate
Governance for Listed Companies in 2004 (see Appendix 1 on the responsibilities
of board of directors, auditors, board of corporate auditors, and other relevant
group(s)).
From an institutional theory perspective, it can be argued that Japanese firms started to
pay more attention to their corporate governance practices because of the rising public
expectation for corporations to deal with the governance issue. Thus, recent boardroom
reforms may be motivated not primarily by economic necessity but by mounting
institutional pressures. If that is the case, those boardroom reforms initiated by the
corporate sector are not likely to improve firm performance because they are being
implemented to conform to institutional expectations.
However, along with the changing ownership structure, these shifts in institutional
expectations have been nudging Japanese firms to switch over from a stakeholder-centered
model to a more shareholder-oriented governance framework (Figure 3). In order to
provide more flexibility to push for a shareholder model for Japanese firms, the
Commercial Code was revised in 2002.
Change in
Capital market
ownership
pressures
structure
Shareholder-
oriented
corporate
governance
Change in Institutional
institutional
pressures
expectations
The most recently revised Commercial Code, which took effect in April 2003,
provides large Japanese firms with two choices in terms of their internal corporate
governance structure. They can either go for the auditor system or the committee system.
In the auditor system (which is the traditional system), the board of directors
(torishimariyaku-kai) and the board of statutory auditors (kansayaku-kai) call the shots for
Japanese firms. Statutorily, the board of directors is responsible for strategic policy
making and overseeing top management decision-making. The board of statutory auditors
is responsible for monitoring the board of directors. That is to say, “they guard the
guardians.” However, a majority of board members are insiders come from the ranks of
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Japan
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Best Practices in Asian Corporate Governance
Others contend that since directors can concurrently serve as executive officers, the
functions of strategic decision-making and execution of strategy may not be clearly
separated. Hence, at least in this regard, the new system is not much different from the
traditional governance system in Japanese firms. The independence of outside directors is
another issue that is often raised as a problem (Yano, 2004). According to the Commercial
Code, outsiders are defined as those who have never worked for a company or its
subsidiaries for which they serve as a director. This means that those people who have
business or professional relationships with a firm as well as managers and employees of
the firm’s parent company are seen as outsiders. In fact, most of the outside directors of
Japanese firms are from banks and affiliated or parent firms. Thus, it is argued that
independence needs to be included in the criteria to select outside directors to avoid any
conflict of interest (Yano, 2004).
In addition to these problems, the most important reason why the committee system
has not become popular among Japanese firms lies in the reluctance of Japanese
executives to let the outsider-dominated committees to decide their appointment/
termination as well as remuneration and also to monitor their strategic decisions. As long
as the corporate sector shows strong resistance, it would be extremely difficult to impose a
system in which outside directors have the authority to decide the fate and perquisites of
directors and top executives. Hence, if Japanese executives have an option not to use this
system, it is likely that many of them will not choose it. Company executives cannot be
expected to initiate good corporate governance practices because they do not always have
a strong incentive to do so. What makes it possible then for Japanese firms to adopt good
corporate governance practices?
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Japan
Weakening “Gap” in
main bank corporate
system governance
Rising Commercial
Corporate-led
foreign Code
board reforms
ownership revision
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Best Practices in Asian Corporate Governance
To recap, the declining effectiveness of corporate governance based on the main bank
monitoring has been in part “solved” by rising foreign ownership, boardroom reforms
initiated by the corporate sector, and the recent change in the Commercial Code (Figure 4).
However, although many Japanese firms have adopted some reform measures, such
measures have not led to improvements. Further, the monitoring of management by
outside directors has not been deeply established among Japanese firms. In order to
improve the internal monitoring mechanism of Japanese firms, there must be further
advances in key areas. Table 5 shows the concrete reform measures implemented by and
available to Japanese firms and the problems associated with each measure.
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Japan
by establishing cooperative relations with those stakeholders.” 6 The Fund has likewise
positively assessed the corporate governance system based on the outsider-dominated
committees.
The guidelines also emphasize the following characteristics of the board:
• Executive and monitoring functions should be separated; the role of the board is
the monitoring of management for the interests of shareholders.
• The board should have the appropriate size that allows effective discussion and
efficient decision-making.
• At least one third of the board members should be “independent” outsiders.
• The CEO and chairman of the board should be separated.
Since institutional investors are managing other people’s (customers or other
beneficiaries) money, they need to be made responsible for monitoring governance
practices of firms in which they hold shares. Without an enhanced vigilance by
institutional investors, good corporate governance may not be easily achieved.
Another issue is regulation. The new Commercial Code should have disallowed the
auditor system and enforced only the committee system. As long as Japanese executives
are given a choice, it is only natural that many of them would opt for the system that
requires less stringent monitoring. To make Japanese firms adopt the committee system,
enforcement will have to be done either by a relevant government agency or the stock
exchanges. If there is apprehension about the availability of suitable outside directors, it
may be possible to be flexible on the requirement at the initial stage. At the same time,
some infrastructure development efforts may have to be done in terms of director training
and education.
well developed and ownership is highly concentrated in family owners or affiliated group
firms, many potential candidates for outside directors may be connected with such owners
and firms. Hence, outside directors are to be a strong monitoring force, the training of
current and potential directors is essential in order to increase the pool of qualified,
independent directors. Without this pool, it is not possible to establish a good committee-
oriented board.
Notwithstanding the slow progress of corporate governance in Japan, there are
worthy examples of good practices that have emerged through all the difficulties that have
characterized the period of reform. One such case is Nissan Motor Corporation which
experienced a major change in its ownership structure after it faced financial crisis in the
late 1990s. How does a corporate giant in distress restructure its operation and restore its
profitability? Nissan is an exemplar when it comes to answering this question.
One of the best cases in which a sea change in ownership structure, mostly by foreign
investors, brought about best practices in corporate governance and management involves
one of Japan’s biggest automaker, Nissan Motor Corporation. Nissan was experiencing its
largest ever losses in the late 1990s. Its domestic market share, which peaked at 34 percent
in 1974, declined to below 19 percent in 1999. Nissan’s global market share also declined
from 6.6 percent in 1991 to 4.9 percent in 1999. Between 1991 and 1999, the company had
just one profitable year. There were several factors, both environmental and firm specific,
that could be attributed to Nissan’s historically poor performance.
Corporation, Japan’s number 1 automaker. Thus, close relationships with its suppliers
became a liability to Nissan. However, it was extremely difficult to break the keiretsu ties
in Japan as the companies in the same group were implicitly bound to support each other.
As a consequence, Nissan had to incur $22 billion in debt and higher supplier costs.
In addition to Nissan’s close ties with its suppliers, the company’s cozy relationship
with its banks allowed it to pile up a huge amount of bank debts. Because of its historical
ties with the main banks and its huge presence in the Japanese automobile
industry―Nissan used to be second only to Toyota―it was relatively easy for Nissan to
borrow bank loans despite its poor performance (Nikkei Business, 2000). This led to a lack
of financial discipline and large interest payments. The core of the internal problem Nissan
was facing then was, in part, due to traditional Japanese business practices.
Another source of difficulty, which also stemmed from one of the characteristics of
Japanese management, was that employees tended to concentrate on their narrow
responsibilities within their own department or section (Nikkei Business, 2000). Cross-
departmental communication rarely took place at Nissan. This situation created a lack of
coordination among different departments and little sense of responsibility for overall
corporate performance. Further, there was little sense of crisis among Nissan’s employees
despite the fact that the company’s problems were widely reported by the media in the
1990s.
Ironically, the Japanese production systems were still superior and many of their
vehicles were ranked ahead of the competition in quality and reliability, despite recent
progress in quality management by automobile manufacturers in the US and Europe. But
Nissan’s senior executives could not make good use of superior quality management to
respond to the crisis. Because of the tradition of lifetime employment and seniority based
system, Japanese firms found it difficult to remove managers and employees who were not
up to par in maintaining Japan’s total quality management system.
Finally, there was a lack of focus on profitability. Nissan had been selling its products
at low prices to maintain market share, which led to low profit margins. In other words,
sales figures were more important than profitability. When Nissan’s market share was
declining, it relied on incentives to entice customers to purchase their products. In the US,
for example, leased vehicles were often given artificially high residual values so that
customers could lease their cars at lower monthly payments. Although this put more
Nissan vehicles on the road, the company could not make much profit from this practice.
and hence avoid any negative effects that might arise from a full merger. Renault was very
careful not stage its alliance with Nissan as a French takeover of one of the major Japanese
automobile companies.
In this alliance, Renault injected $5.4 billion cash in exchange for 36.8 percent equity
stake in Nissan and 22.5 percent stake in Nisan Diesel, Nissan’s close truck manufacturing
affiliate. Renault also acquired Nissan bonds with detachable warrants that could increase
Renault’s equity stake to 39.9 percent after four years, and 44.4 percent after five years.
This was a significant move for Renault as its investment in Nissan was huge, but it was
also a quiet critical decision for Nissan as it chose to have a foreign firm as its largest
shareholder.
In addition to its cash infusion, Renault also appointed three executives to Nissan’s
board of directors. Carlos Ghosn, executive vice president at Renault was appointed as
Nissan’s chief operating officer (COO). Patrick Pelata, senior vice president, vehicle
development of Renault, was appointed as Nissan’s executive vice president of product
planning and strategy. Thierry Moulonguet, senior vice president, capital expenditure
controller of Renault, was named managing director and deputy chief financial officer of
Nissan. Nissan personally requested Renault to transfer Carlos Ghosn to the Japanese
carmaker, as he believed that Ghosn was the right person to restructure Nissan.
Nissan’s ownership structure once consisted of shareholders who were its business
partners, suppliers, and banks. Its board consisted of mostly insiders with a few outsiders
from the company’s main banks. Through this alliance, the ownership and board structure
of Nissan changed dramatically.
While Renault was providing all the financial resources to Nissan initially, Nissan was
given the option to hold equity stake in Renault at a later date. Renault and Nissan set up
the cross-company teams to investigate additional synergies that could result from the
alliance between them in areas such as joint manufacturing and purchasing.
TURNAROUND STRATEGY
Cross-functional teams
After Ghosn took over as COO at Nissan, the cross-functional teams (CFTs) were
formed. The mandate of those teams was to identify Nissan’s internal problems and make
recommendations that could solve these problems. The CFT’s proposals went directly to
Ghosn and a newly formed executive committee. The CFTs were designed in such a way
that employees from different departments and sections could work together so that
different perspectives could help to solve problems. The CFTs at Nissan were empowered
by senior executives of the company and given wide-ranging and yet very specific tasks.
The formation of the CFTs was based on Ghosn’s strong belief that “the solutions to
Nissan’s problems were inside the company.” The CFT concept was implemented because
it would force employees from different departments to overcome narrow departmental
boundaries and encourage information sharing with people in other departments. Ghosn
selected middle managers from different departments and operational regions, such as
North America, Europe, and other overseas markets, in order to break functional and
geographical barriers (Magee, 2003).
Ghosn formed nine CFTs, each team consisting of approximately 10 members. These
team members were selected from Nissan’s middle management group, usually with
specific line responsibilities such as marketing and finance. While the size of the CFTs
varied from 10 to 50, it was expected that there would be varied inputs from different
perspectives, yet each team was not so large to prevent active interactions among team
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Japan
members and move the project forward rather quickly (Nikkei Business, 2000). Although
the CFTs had no direct decision-making authority, they operated directly below the
executive committee. And the executive committee had responsibility to decide which
CFT recommendations to accept and implement.
The nine CFTs had the following focus areas: business development, purchasing,
manufacturing and logistics, research and development, sales and marketing, general and
administrative, finance and cost, phase-out of products and parts complexity management,
and organization (Magee, 2003). The first specific mandate assigned to the CFTs was to
review Nissan’s overall operations and develop recommendations within three months on
how Nissan could restore profitability and ensure future growth.
Based on the recommendations proposed by the CFTs, the Nissan Revival Plan (NRP)
was announced in October 1999. The main objective of this plan was to cut costs
immediately and thereby save a large amount of expenses and also to establish long-term
growth opportunities which would allow Nissan to regain profitability. The NRP aimed to
(1) reduce operating costs by 1 trillion yen in global purchasing, manufacturing, and
general administrative costs, (2) cut numbers of parts and materials suppliers in half, (3)
reduce net debts from 1.4 trillion yen to less than 700 billion yen by FY 2002, (4) create
new product investment and rollout, (5) reduce the number of employees globally by
21,000, (6) reduce the number of assembly plants in Japan from seven to four, and (7)
reduce the number of manufacturing platforms in Japan from 24 to 15 (Magee, 2003; 85).
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Best Practices in Asian Corporate Governance
longer purchased from uncompetitive suppliers just because they were Nissan group
members.
To enhance its designing capability, Ghosn hired Shiro Nakamura as Nissan’s chief
designer from another Japanese automobile manufacturer, Isuzu Motor. After the new
chief designer joined Nissan, Ghosn approved the renovation plan to completely remodel
the company’s technical center in Japan despite Nissan’s poor financial position as he
believed that new product launches would help revive the company’s profitability.
Focus on profits
Ghosn made it very clear that Nissan should never strive for market share at the
expense of profitability and that its products should be sold profitably or not sold at all.
Nissan had been offering large incentives to customers to sell its products for long periods
of time, because the company cared more about market share. The company’s new
initiative was aimed at establishing market presence with attractive new products and clear
brand identity, which would enhance profitability. However, sales figures are also
important in automobile industry as a company with large sales can enjoy the economy of
scale. Hence, Nissan started to focus on market presence with its attractive products,
which in turn should lead to a bigger market share (Magee, 2003).
7
All the financial fugues were collected from Nissan’s annual reports.
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Best Practices in Asian Corporate Governance
from 146 percent in 2000 to 99 percent in 2001 and lastly 84 percent in 2003. It suggests
the company’s conscious effort to reduce its heavy reliance on debt financing.
1.52% 489
-0.01%
-0.34% 290
199
87 110 83 -11.92%
38.4%
30.2%
22.5% 36.4%
0.0% 9.5%
7.5% 4.5% 5.0% 9.4%
1.4% -1.7% -11.5%
0.0%
-0.3%
1996 1997 1998 1999 2000 2001 2002 2003
%
-126.4%
Ye ar
- 86 -
Japan
% of Growth
7,429
6,659 6,565 6,580 6,829
5,977 6,090 6,196
10.21%
8.80%
Billions of Yen
-1.42% 0.23%
1.75%
1.88%
-9.16%
294%
% of Equity
145% 146%
123% 124%
99%
89% 84%
The case of Nissan presents one of the good examples of how a striking change in
ownership structure and top management and the board could bring about various best
practices in corporate governance and management. Nissan was suffering from declining
sales, rising losses, and poor brand image during the 1990s. It had problems in its
relationships with suppliers, financial cost control, human resource management, and
organizational focus. Yet, it had not been able to resolve these problems on its own until it
formed an alliance with Renault.
Once the alliance was formed, however, the company quickly implemented various
restructuring measures in areas ranging from purchasing, finance, product design and
human resource management. Such measures, now the wellspring of good practices,
include cross-functional interactions among different departments to identify company
wide problems, centralized and performance-oriented supplier relationships, consolidated
global treasury operation, more efficient new product development operation with a
smaller number of platforms, performance-based employee pay, and clearer lines of global
management responsibilities with less hierarchy. Surprisingly, Nissan managed to
implement all these changes in three years after the NRP was announced in 1999. And
various financial indicators showed immediate improvement.
Nissan’s best practices mentioned above may never have emerged without the
compelling changes triggered by its French connection. However, it also implies that for a
firm to implement best practices during a relatively short period of time, drastic changes in
corporate governance is needed. An incremental change in corporate governance may not
be able to overcome resistance from stakeholders who will be the losers in the reform.
Hence, the case of Nissan provides both optimism and pessimism in terms of the ability of
Japanese firms to implement best practices.
What lessons can the corporate sector in other countries learn from Nissan’s
experience? One instructive lesson is that to push through best practices within a company
requires a strong impetus, especially from top management. While all the changes Nissan
implemented under the NRP appear to be quite reasonable, the company failed to
implement any of them before it formed an alliance with Renault. Its old corporate
governance structure did not force top management to make tough decisions and follow
through such decisions. It is easier, if not easy, to come up with good measures. It is much
more difficult to actually implement them. And that requires strong support from and
commitment by the top management team and the board. Therefore, the implementation of
good management practices requires a strong corporate governance structure.
In the end, it should be emphasized that a firm does not always need to find a strong
alliance partner in order to carry out desired changes. But it will need all the courage it can
muster in order to utilize the power of institutional and foreign investors to initiate
corporate governance reform.
REFERENCES
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Books.
Ahmadjian, C. L. and P. Robinson (2001). Safety in numbers: Downsizing and
Deinstitutionalization of Permanent Employment in Japan, Administrative Science
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Aoki, H. (2004). Boardroom reform in Japanese business: An analysis of the introduction
of the executive officer system and its effects. Asian Business & Management, 3, 173–
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Best Practices in Asian Corporate Governance
Nakatani, I. (1984). The Economic Role of Financial Corporate Grouping, M. Aoki, ed.,
The Economic Analysis of the Japanese Firm. Amsterdam: North–Holland, 227–258.
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Nikkei Business (ed.). (2000). Ghosn ga Idomu 7-tsu no Yamai: Nissan no Kigyo Kaikaku
(7 Ills that Ghosn Challenges: Corporate Restructuring at Nissan). Tokyo: Nikkei BP.
Nitta, K. (2000). Cross Shareholdings and Business Management: An Empirical Analysis,
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Sheard, P. (1994). Interlocking Shareholdings and Corporate Governance. In M. Aoki & R.
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Sheard, P. (1997). Mein Banku Shihonshugi no Kiki (Crisis of Main Bank Capitalism).
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Useem, M (1998) Corporate Leadership in A Globalizing Equity Market, Academy of
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Wakasugi, H. and H. Yanai (2000). Good Governance, Good Company. Tokyo: Chuo
Keizaisha (in Japanese).
Watanabe, S. (1994). ROE Kakumei (ROE Revolution). Tokyo: Toyo Keizai Shimposha
(in Japanese).
Watanabe, S. and Yamamoto, I. (1992). Corporate Governance in Japan: Ways to Improve
Low Profitability. NRI Quarterly, 1(3), 28–45.
Weimer, J. and J.C. Pape, (1999). A Taxonomy of Systems of Corporate Governance,
Corporate Governance: An International Review, 7, 152–166.
Yano, T. (2004). Koporeito Gabanansu No Kakuritsu O Mezashite – Nenkin Ga Kitai Suru
Koporeito Gabanansu (Toward the Establishment Of Corporate Governance:
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Hi:Koporeito Gabanansu ga Nihon o Kaeru, Tokyo: Shoji Homu, 183–224 (in
Japanese).
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Influences of globalization, Business & the Contemporary World, 4, 15–27.
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Wage Intensity in Japanese Corporations, Journal of Management, 31, 278–3.
Appendix 1
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CORPORATE GOVERNANCE IN MALAYSIA:
REGULATORY REFORM AND ITS OUTCOMES
INTRODUCTION
Malaysia is ranked number 1 in Asia for having the most rules and regulations for
corporate governance, on the basis of a survey conducted by independent brokerage and
research house CLSA Ltd. The survey conducted in 2005 took into account three factors:
adaptation to international generally accepted accounting principles, political and
regulatory environment, and international mechanism and corporate governance culture
(StarBiz, 07/July/2006). Malaysia also scored well in 2004, according to a corporate
governance survey of blue-chip companies, which ratings agency Standard & Poor’s
helped conduct. Hong Kong’s leading newspaper, The Standard, said moreover that good
governance rankings only told part of the story. The majority, if not all, of the publicly
listed companies have complied dutifully with regulations and requirements judging by the
amount of disclosures, adopting non-independent directors and faithfully reporting their
corporate governance practices every year (ACCA, 2004).
In a research conducted for Nottingham Business School's Malaysia campus in 2003,
researcher Zalila Mohd Toon indicated that Malaysia seemed to be making a great deal of
progress promoting the development of sound corporate governance systems and practices,
and had in fact stolen a lead over the US in its drive for higher standards of corporate
governance (IR on the Net.com, 2003).
Reportedly among the Malaysian firsts in corporate governance are the following:
• First to have a comprehensive code for corporate governance in March 1999
• First to have mandatory training for directors of listed companies
• First in the region to set up an accounting standards board, the Malaysian
Accounting Standards Board (MASB)
• First to revamp listing requirements in the region
• First in the region to set up a Minority Shareholders Watchdog Group
• The establishment of the Malaysian Institute of Integrity (Bursa Malaysia, 2006).
But, as Zalila also suggested, even if there exists a good regulatory framework, an
even stronger enforcement regime is required (IR on the Net.com, 2003). Malaysia did
better than Thailand, the Philippines and Indonesia in terms of enforcement, but needed to
do more to improve compliance with corporate governance (StarBiz, 07/July/2006).
Overall, however, regulators seemed to have driven reform well in emerging markets,
including Malaysia, Brazil and China (McKinsey, 2001).
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Malaysia
uncovered gaps between rule and compliance: the existence of clearly defined governance
framework did not causally bring about effective practice. Various stakeholders were
unconvinced that their participation would bring about net benefits over their abstention or
over the costs of disregarding it. To bridge the gap, corporate governance not only entails
greater transparency and market discipline; it must also induce a proper balance in the
regulatory framework that acts as a stick as well as a carrot, i.e., inflicting disincentives for
deviation from norms and bequeathing incentives for compliance.
Good regulations are needed to prevent the expropriation of shareholders by managers
and to ensure the efficient management of companies. They are necessary too in order to
attract the capital for large and worthwhile projects. Malaysia was among those countries
which succeeded in building up many large firms that their countries needed for economic
development funded by many economic agents; however, in the years leading to the Asian
crisis, it failed to put in place a sound governance mechanism that could effectively solve
the problems that were associated with ownership and control (Nam and Nam, 2005).
Accordingly, reform has focused on advancing the acceptance of such practices as
greater disclosure, improved shareholder rights, and board reform. McKinsey (2001)
warns, however, that the corporate context should be viewed as part of a much wider
governance model that relies heavily on an institutional context that considers efficient
equity markets and dispersed ownership as key elements. Together, these circumstances
frame the “market model” of corporate governance with which international fund
managers are most comfortable. Such arm’s length model depends upon checks and
balances between management, boards, majority and minority shareholders and the
enforcement of shareholder and creditor rights.
The change has not been easy for Malaysia. The corporate and institutional context in
emerging markets differs in a clearly noticeable manner. Typically, corporate governance
practices are made to fit the needs of core shareholders. Equity markets are less developed
and consequently ownership is more concentrated. A distinct—and internally consistent—
“control model” of corporate governance is in operation (McKinsey, 2001). In this
“relationship model”, governance is exercised by controlling block-holders. Minority
shareholder rights are frail. Independent board directors are only nominally independent.
Relationship-oriented companies and markets lack effective risk oversight, have
ineffective means for shareholders to evaluate or influence management, and may be
perceived as brushing aside outcomes of firm underperformance. But the Malaysian
government made the decision to shift to a more open model early on.
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Best Practices in Asian Corporate Governance
Corporate law in Malaysia is primarily set out in the Companies Act 1965 (Act 125)
which is based on the British Companies Act 1948 and the Australian Uniform Companies
Act 1961. Major subsidiary legislation of the Companies Act 1965 includes the
Companies Regulation 1966 and the Companies (Winding-Up) Rules 1972. In respect of
publicly listed companies the following legislation and also regulatory directives apply:
the Securities Industries Act 1983 and the Securities Commission Act 1993.
The Companies Act, administered by the Registrar of Companies sets out the
fundamental rules governing procedures for incorporation, the basic constitutional
structure and the cessation of existence of companies. The Companies Act imposes
minimum requirements on the way in which corporations are incorporated consistent with
the Malaysian contractualist system of company law where the control structure is left to
be determined by the promoters and the company through the Memorandum and Articles
of Association of a company.
processes by the banks. It was against this backdrop that the Malaysian government
ushered in the Malaysian Code of Corporate Governance in 2000. The Code was the
product of an elaborate study and recommendations made by the high level Finance
Committee which was formed in 1998 precisely to improve corporate governance
practices in Malaysia (Khoo, 2003).
A good feature of codes is the evolutionary way in which they influence the
aspirations and expectations of society that are eventually reflected in the country’s legal
doctrines. The attention generated by the various Codes of Best Practices has had an
impact on evolving judicial interpretations of directors’ duties.1 As it is, the Code acts as a
valuable guide to boards by clarifying their responsibilities and providing prescriptions to
strengthen the control exercised by boards over their companies.
The Malaysian Code espoused a hybrid approach, navigating between prescriptive and
non-prescriptive models. The prescriptive model sets standards of desirable practices for
disclosure of compliance. The London Stock Exchange, for instance, sets best practice
benchmarks against which compliance by listed companies are measured. The Non-
prescriptive model requires actual disclosure of corporate governance practices. The
Australian Stock Exchange adheres to this model. This approach goes against the grain of
letting Individual companies determine their own set of objectives based on their needs
and those of the directors’ (Khoo, 2003). The Code, according to Khoo, allows for a more
creative and pliant manner of raising standards in corporate governance in contrast to the
more conventional “black-and-white” regulatory response. The idea, as the Code itself
indicates, into allow companies to apply these flexibly and with common sense to the
varying circumstances of individual companies. The Code essentially aims to encourage
transparency through timely disclosure of adequate, clear, and comparable information
concerning corporate financial performance and corporate ownership (World Bank, 2005).
That way, the investing public can make informed decisions on the performance of the
companies.
Steps have also been taken to achieve transparency of ownership. Amendments to the
Securities Industry Central Depositories Act in October 1998 now prohibit persons from
hiding behind their nominees by introducing the concept of authorized nominees and
prohibiting global accounts (an authorized nominee may only hold securities for one
beneficial owner in respect of each account) and by requiring a beneficial owner of
securities to make a declaration that he is the beneficial owner of the securities (Koh and
Soon, 2004).
On corporate governance itself, the Code aims to set out “principles and best practices
on structures and processes that companies may use in their operations towards achieving
the optimal governance framework. These structures and processes exist at a micro level
which include issues such as the composition of the board, procedures for recruiting new
directors, remuneration of directors, the use of board committees, their mandates and their
activities” (Khoo, 2003). As a reform instrument, the thrust of the Code should lead to the
following outcomes: fair treatment of all shareholders and protection of shareholder rights,
with particular focus on the rights of minority shareholders; increased accountability and
independence of the board of directors; better regulatory enforcement, and promotion of
training and education at all levels to ensure that the framework for corporate governance
is supported by adequate resources (World Bank, 2005).
1
See for example the Australian case of Daniels v Anderson (1995) 37 NWSLR 438 which is a clear
instance of directors being increasingly held to a higher standard of care.
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Best Practices in Asian Corporate Governance
2
The need to promote certain special interests also led to the use of this regime. The fixing of new issue
prices often at levels well below market prices, led to massive over-subscription, harmed issuers and in
fact restricted the size of new issue activity.
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Malaysia
• The printed annual report together with the annual audited financial statements as
well as the auditors’ and directors’ reports (issued to the shareholders) within a
period not exceeding four months after the close of the financial year of the listed
company.
• Explanations for any differences between the audited accounts and any forecasts,
projections previously made.
In addition, the company must issue the Directors’ statement on internal controls (in
effect since 2001), disclose the Directors and CEOs interests in PLCs, and report on the
extent of its compliance to the Code (also in effect since 2001). The last is a mandatory
disclosure requirement. Companies are required by the KLSE listing requirements to
include in their annual report a narrative statement of how they apply the relevant
principles to their particular circumstances. The disclosure makes it possible for investors
and others to adequately assess the companies’ performance and governance practices and
respond in an informed way (Khoo, 2003).
Under the Bursa Malaysia’s continuous disclosure requirements, a listed company is
required to make immediate public disclosure of all material information concerning its
affairs, except in exceptional circumstances. The company is required to release the
information to the public in a manner designed to ensure fullest possible public
dissemination.
A listed company is likewise to make disclosures, in particular to the Bursa Malaysia
Securities Berhad and the market, whenever it
• receives notices of substantial shareholders or changes in substantial shareholders;
• changes directors, company secretary, chief executive officer or auditors;
• proposes to amend its Memorandum & Article of Association;
• acquires shares in an unquoted company which results in the latter becoming a
subsidiary or disposes shares in an unquoted company which results the latter
ceasing to b a subsidiary;
• acquires more than 5 percent of the paid up capital of another listed company;
• sells any shares in another company which would result in the latter ceasing to be
a subsidiary, or where its shareholding falls below 5 percent if the other company
is a listed entity;
• any application filed with court to wind up the company or any of its subsidiaries
or major associated companies;
• undertakes a revaluation of its assets and/or those of its subsidiaries (unless it is in
the ordinary course of business and in accordance with the Guidelines of the SC);
• proposes an acquisition or disposal whether involving the issue of new securities
or otherwise where the percentage ratios are equal to or exceed 25 percent;
• purchases or sales of securities within the preceding 12 months, being equal to or
exceeding 5 percent of the consolidated net tangible assets;
• proposes to allot shares to its directors or to implement an employee share option
scheme; and
• registers any deviation of 10 percent or more between the profit after tax and
minority interest stated in a profit estimate or the announced audited or unaudited
accounts.
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Best Practices in Asian Corporate Governance
3
A transaction is deemed as material if its value exceeds five percent of any one of a select set of
variables such as profits, equity, market capitalization and assets.
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Malaysia
• A statement by the directors (other than any director who is a related party in
respect of the transaction) that the transaction is fair and reasonable so far as the
shareholders are concerned, and that, if applicable, the directors have been so
advised by an adviser; and
• A statement that the related party will abstain from voting on the relevant
resolution.
Transactions with associated enterprise accounted for under the equity method are not
eliminated and therefore, require separate disclosure as related party transactions.
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Malaysia
No regulatory capture
A key failing that surfaced during the 1997 financial crisis was the equivocalness over
the autonomy of regulators, jurisdictional boundaries and the transparency of the
regulators. To address this problem, the SC has been made the sole regulator for the fund
raising activities and the corporate bonds market in the Capital Market master plan and
with the amendments made to the SCA in July 2000. As a consequence of the efforts to
streamline the regulatory structure, there are now five principal authorities involved in
regulating the capital market. They are the SC, BNM, Registrar of Companies (ROC),
Foreign Investment Committee (FIC) and Ministry of Trade and Industry (MITI) (Khoo,
2003).
Under the reformed setup, SC is the regulatory authority on all matters in relation to
the securities and futures market. Its functions include ensuring enforcements of securities
and futures laws; licensing, regulating and supervising the conduct of market institutions
and licensed intermediaries, and encouraging and promoting the development of the
capital market. On the other hand, BNM takes care of the regulation and supervision of the
financial institutions which are exempt dealers under the SIA, as well as approval of issues
of securities by financial institutions licensed under BAFIA and control of the
shareholding in licensed financial institutions. ROC handles substantial shareholding
reporting requirements, and the enforcement of offenses under the CA which relate to the
securities industry. The FIC provides recommendations to the SC on national policy
aspects of an acquisition for the purpose of exemptions from the provisions of the
Malaysian Code on Takeovers and Mergers. Relatedly, it administers the FIC guidelines
mainly pertaining to the regulation of merger and acquisition activities. MITI is in charge
of regulatory approval for the issuance of securities by companies regulated by MITI such
as manufacturing companies (Khoo, 2003).
The most recent example of measures to improve corporate governance is the
strengthening of the Code on Take-overs and Mergers brought into effect on 1st January
1999. The Code now requires higher standards of disclosure and corporate behavior from
those involved in mergers and acquisitions. The principles that under girds the Code is the
creation of a level playing field and ensuring that there is, at least normatively a
framework for level playing field for improvement of governance process by facilitating
battle market control (Koh and Soon, 2004).
The master plan also reinforces the SC’s enforcement capacity on a continuous basis.
Enforcers will be constantly equipped with up-to-date knowledge and information on
financial transgressions which increasingly are becoming more complex and dynamic. To
complement the enforcement role, the SC will develop front line regulators (FLR) like the
KLSE and self-regulatory organizations (SRO) such as professional bodies. They are
expected to play an increasing role in policing their respective segments of the market.
This will pave the way for better surveillance. Applying effective and efficient
enforcement in a timely and consistent manner will assure market participants of the
fairness, efficiency and integrity of the capital market (Khoo, 2003).
So far, the SC’s work has been well-supported by a team of professional staff. Its
leadership in shaping various corporate governance initiatives leading to enhanced
disclosures, and enhanced penalties for defaults against securities legislation, has been
recognized both regionally and internationally.
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There has been perception about the lack of autonomy of the SC. This widely-held
belief stems from the lack of prosecution of offenses and the SC’s apparent failure to
enforce the requirement for general offers as per its takeover code. The criticism is not
totally fair as some confusion has been caused by the overlap in jurisdiction between
different regulators. An example is the UEM Renong debacle. In the eyes of the public the
decision to waive the requirement for a general offer ought not to have been granted. The
grant of waiver to extend a mandatory general offer was made by the Foreign Investment
Committee (FIC) and not the SC and yet the SC took the brunt of the criticisms. In the
wake of this the Minister of Finance invoked the Securities Commission (Amendment)
Act 1995 which makes the SC the sole authority to grant exemptions from provisions of
the new Code.
Some amendments to securities laws have introduced duplication in regulation. For
example, the Securities Industry Act 1983, introduced in early 1998, imposes duties on
chief executives and directors of publicly listed companies to disclose their interests in the
company or any associated company to the SC. The SC now has the power to apply to
court for disqualification of chief executives and directors of listed companies who have
been convicted of offenses under securities laws or have had a civil action taken against
them for breach of Listing Requirements or of the insider trading or market manipulation
provisions. But while these amendments have introduced some overlap in company
regulation, the amendments may be justified on grounds that they facilitate the SC’s
enforcement of securities laws.
In the past the requirements for disclosures in prospectuses are found in the
Companies Act 1965 despite the fact that every company issuing securities would have to
seek approval of the SC under section 32 of the Securities Commission Act 1993. This
fragmentation in regulation has now been rationalized. The amendments deleted from the
Companies Act provisions relating to raising of funds and vested in the SC exclusive
jurisdiction over prospectuses.
to whom minority shareholders can direct concerns (IR on the Net.com, 2003). The Bursa
Malaysia Securities Berhad/Price Waterhouse corporate governance survey indicates a
reasonably proportionate mix of independent non-executive directors, non-executive
directors and executive directors. Almost all (90 percent) of companies have at least in
name, two independent directors of which half (49 percent) have two independent
directors and nearly a quarter (23 percent) have three independent non-executive directors.
The term independence in the Listing Requirements refers to two crucial aspects: first,
independence from management and second, independence from a significant shareholder.
Bursa Malaysia Securities Berhad has introduced an expanded definition of independence
to exclude substantial shareholders.4
According to the Code, the board of every company should appoint a
committee―exclusively of non-executive directors of which the majority must be
independent―charged with the responsibility of proposing new nominees for the board
and for assessing the performance of the directors on an on-going basis. The final decision
is still the responsibility of the full board after considering the recommendations of the
committee. Again from the respondents of the survey received, it appears that such
committee has been set up and the suggested composition has been followed. While
broadly speaking the companies have abided by the Code, it will be very hard to ascertain
whether the spirit of the Code is being observed. In principle, the committee should be
free of any influence from the controlling shareholders or the executive directors. In
practice, there is evidence that they are.
The survey results also indicate that the independent directors do actively participate
in the discussions at board meetings but rarely or if not never add, alter or disapprove
board meeting agendas. Some 36 percent of the respondents state that Independent
directors sometimes convene formally or informally without management to discuss
corporate matters (Khoo, 2003).
On access to information, most respondents including independent directors indicate
that they have full access to the firms’ business records. Do they have access to
independent professional advice if required and to the services of the company secretary?
All the survey respondents except one indicate that there is a contact person designated to
support the independent directors. Yet, while access is given, independent directors only
rarely have discussions with managers of the company who are not board members.
Plausibly, this can be due to a number of reasons, such as:
• Independent directors have their own full-time job or commitment;
• Remuneration given to independent directors are inadequate to justify offering of
more time than is necessary;
• Access to the managers may merely be just a lip service; and
• Managers do not provide full disclosure to the independent directors for fear of
being reprimanded by the executive directors.
Any of the above, if is true for a large proportion of the cases, would seriously impair the
effectiveness of independent directors in discharging their duties (Khoo, 2003).
Both the CEO and independent directors by and large agree that the following tasks
enhance the effectiveness of the board (Khoo, 2003):
• Selecting more of better qualified, truly independent directors;
• Separating the CEO from the board chairman;
4
Substantial shareholding is a defined term in Malaysia and recent revisions to the Companies Act 1965
(Companies (Amendment No.2) Act 1998 now specify a “substantial shareholder” as a persons who has
interests in at least two percent of the voting shares in a company.
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Representation
No answer
About half
Majority
Minority
None
Financial professionals 20% 17% 37% 21% 5%
5
Danaharta can appoint Special Administrators (SA) that would have a legal mandate to manage and
oversee all operations of the distressed enterprise. On the appointment of the SA, a moratorium for a
period of 12 months (which can be extended if necessary) will take effect over winding-up petitions,
enforcement of judgments, proceedings against guarantors, repossession of assets, and applications under
Section 176 of the Companies Act.
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“their professional opinion” constitute a breach of the Companies Act 1965 thus providing
the auditors an objective standard on which to base their decision to or not to report.
Environment stewardship
Open disclosure practices on sustainable development are already in place among the
leading resource-based companies. Petronas crafted a corporate sustainability framework
that is committed to seven broad areas: sustaining shareholder value and energy resources;
committing to health; safety and preserving the environment; product stewardship;
respecting human rights; limiting greenhouse effects; and sustaining biodiversity. It is
hoped that Petronas will extend this commitment and bench strength to its supply chain,
stakeholders and competitors.
Connecting to community.
Both Microsoft Malaysia and Maxis Communications have carried out programs to
narrow the digital divide in the rural communities. Maxis’ Bridging Communities targets
rural children who learn to use computers and surf the Internet at cyber camps. The project
involves 500 Maxis employees in volunteer brigades. Similarly, Microsoft Malaysia has a
community technology support network to help rural folk to keep up the technology
advancement. DiGi has an ongoing Yellow Mobile program, which makes stopovers in
various states where its staff volunteers teach young, disadvantaged orphans to appreciate
the country’s history of music and culture.
quality of AGMs, not unlike those developed by the Institute of Chartered Secretaries in
the United Kingdom which basically establishes and defines best practices for the conduct
of AGMs and the rights of shareholders in relation to them. Nevertheless there may be
scope for statutory intervention in critical areas, such as members’ resolutions, and the
right to ask questions at AGMs.
The Malaysian Code on Best Practices proposed that companies should use the AGM
to communicate with private investors and encourage their participation. Private investors
are able to make little contribution to corporate governance. The main way of achieving
greater participation is through improved use of the AGM, e.g., the Chairman should
provide reasonable time for discussion at the meeting and encourage shareholders to ask
questions.
Malaysia has and complies with many best practice standards, e.g., all shareholders
are entitled to attend AGM and vote or appoint proxies. Generally there are no stringent
constraints on the eligibility of proxies as evidenced by the replies from the survey where
most ticked “yes” to the question if anybody can serve as a proxy. A shareholder is
entitled to attend and vote at the general meetings of the company if his name has been
entered into the register of members not less than three market days before the general
meeting, based on the KLSE listing rules (Khoo, 2003).
The principal right of shareholders in respect of their right to vote is their right to vote
on the election of directors, on amendments to the constitutional documents of the
company, and on key corporate transactions which include transactions where an insider
has an interest in the transaction, sale of all or a substantial part of a company’s assets,
mergers and liquidations. This limits the discretion of the insiders on these key matters.
In this respect the one-share-one vote rule with dividend rights linked directly to
voting rights is taken as a basic right in corporate governance. The one-share-one-vote rule
is entrenched and observed strictly in Malaysia. Section 55 of the Companies Act 1965
provides in the case of public companies and their subsidiaries that each equity share (and
this includes preference shares with voting rights) may carry only one vote thereby
prohibiting the existence of both multiple voting and non-voting of ordinary shares and
does not allow firms to set a maximum number of votes per shareholder in relation to the
number of shares he owns. The idea behind this basic right is that, when votes are tied to
dividends, insiders cannot appropriate cash flows to themselves by owning a small share
of the company’s share capital but by maintaining a high share of voting control.
The CA ensures the shareholders’ right to participate in the decision making process
involving some of the key corporate governance issues (Khoo, 2003) such as:
• Appointment and removal of directors. Board appointees retiring at the
forthcoming Annual General Meeting (AGM) are eligible for reappointment by
the shareholders. Directors can be removed from office by the shareholders under
Section 128 of the CA, requiring a resolution with only a simple majority but with
28 days notice. Shareholders can nominate candidates for appointment as director.
From the survey replies, 82 percent indicated that minority shareholders could
nominate candidates for directorships. In practice, effectively directors are
nominated and appointed by the controlling shareholders. This is evident from the
replies to the survey question where most respondents indicated that it is rarely or
unthinkable that director candidates proposed by management failed to be elected.
• Approval of directors’ fees. Under the CA, directors’ remuneration is subject to
shareholders approval. However, the Act is silent on what constitutes
remuneration. In practice, most companies only table directors’ fees at the AGM
for the shareholders’ approval as required by the KLSE listing rules.
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• Appointment and removal of company auditors under Section 172 of the CA.
• Declaration of dividends. However, interim dividends can be declared by the
directors provided they are franked out of profits of the company.
• Approval of the acquisition of an undertaking or property of substantial value or
the disposal of a substantial portion of the company’s assets.
• Approval of the issue of new shares of the company and amendments to the
company’s Articles.
• Approval of substantial property transactions involving the directors. The reform
is in the direction of ex-ante approval of the transaction to replace the current
practice of ex-post ratification.
• Approval of related party transactions. This requirement has been further
enhanced by the new KLSE listing rules. For related party transactions exceeding
5 percent of the given percentage ratios in the guidelines, the company must issue
a circular to the shareholders providing full details of the transaction and appoint
an independent advisor to advise the shareholders on the transaction. If the
transaction exceeds 25 percent of the given percentage ratio, the company must
appoint a main advisor to ensure that the transaction is carried out in fair and
reasonable terms, and not detrimental to the minority shareholders. Such
approvals must be obtained prior to the transactions taking place. Interested
parties to the transaction and persons connected to them must abstain from voting
on the resolution to approve the transaction.
Voting may be by show of hands or by poll. In general practice, voting by poll is very
rare unless there are disputes between substantial shareholders. Each member is entitled to
one vote on a show of hands unless the articles of a company provide otherwise. But on a
poll, a member will have as many rights as his shareholding entitles him. The right to
demand a poll is therefore an integral right as a member has then the opportunity to realize
his full voting power. The chairman is also not permitted to refuse a demand for a poll nor
can he exercise his power in a manner that protects the control of management power by
the incumbent directors.
The Companies Act 1965 provides for a statutory right for the appointment of proxies.
The statutory provisions are aimed at curbing undue restrictions that may be inserted in
articles of associations against voting by proxy. Voting by mail currently has not been
legislated yet. Voting by mail certainly makes it easier for shareholders to cast their votes.
It overcomes several practical difficulties associated with having to attend general
meetings. The objective of broadening shareholder participation suggests the law should
consider favorably the enlarged use of technology in voting, including electronic voting.
Cumulative voting is also currently not in the law yet. The SC is presently studying the
matter (Khoo, 2003).
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an extraordinary general meeting under section 145(1) of the Companies Act 1945 which
essentially provides that two or more members holding not less than1/10th of the
company’s issued share capital may call a meeting of the company.
Shareholders can propose resolutions to be put forth in the general meeting for
consideration if they own 5 percent of the voting rights or the requisition is made by at
least 100 shareholders each owning not less than RM500 fully paid up shares in the
company. From the survey replies 82 percent indicated that minority shareholders could
request the company to disseminate relevant information prior to the shareholders meeting
(Khoo, 2003).
In addition, all shareholders have a right to obtain a copy of the audited annual reports
(under Section 170 of the CA) and circulars issued by the company. The annual reports
include the audited financial statements of the company and statutory disclosures as
required by the CA under section 169 and the Ninth Schedule and the KLSE listing rules.
The statutory disclosures include both financial and non-financial information as well as
directors’ declaration and statements. Other rights to information include the following:
• Under the new KLSE listing rules issued in 2001, the directors must give
supplemental statements on the state of the internal controls in the company and
the extent of compliance of the Malaysian Code of Corporate Governance.
• Beginning 1999, publicly listed companies must make quarterly announcements
on their financial results and financial position. These announcements are made
available to the investing public and must be made by the end of the second
month after the quarter end.
• Under the amendments to SICDA in 1998, shareholders can identify the amount
of equity ownership of the major shareholders. Companies are required to list the
top 20 shareholders of the company together with their shareholdings in the
annual report. In the survey results, most respondents “strongly agreed” to the
statement that it is not difficult to know how much equity ownership the major
shareholders control.
• The CA accords the shareholders the rights to inspect certain statutory records and
registers of the company such as the register of members, register of directors,
register of substantial shareholders, register of charges and others. The
shareholders have also the right to inspect the minutes of AGMs (Khoo, 2003).
6
The law permits free transferability of shares with some exceptions. If the sale and transfer of shares
involved that of a corporation that requires the approval of a Minister then there could well be inhibitions
as to free transferability or even sale by private treaty. In private companies the problem arises as to the
directors being vested with a right to refuse to register a share. Also it would appear that if directors
refused to register a transfer on grounds that such refusal is done primarily to endorse the government's
policy of encouragement of active.
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Relief for abuse of minority by reverse takeovers and back door listings
At the height of the boom years in the 90s a number of corporate players utilized the
mode of reverse takeovers as a means of gaining a back door listing. In so doing a huge
premium was paid for mere listing status whilst the existing business was hived back to
the previous controllers. Under existing Malaysian law which follows the English position,
the controllers owed no direct fiduciary duty to the minority. In so far as they act as
vendors of their controlling block and are not also involved intentionally in abetting any
offense under the take over legal regime, the minority shareholders are left in the cold in
event the new controllers are not able to inject fresh assets or businesses into the company
that can justify the premium paid. In such a circumstance the price of the share will suffer
a severe fall to the detriment of the remaining shareholders.
There is no rule or principle that prohibits the controllers as common law does not
impose a fiduciary duty on the controlling shareholder qua shareholder. The Securities
Commission in response to the abuse of back door listings now requires, under Chapter 18
of Policies and Guidelines on Issue/Offer of Securities, prior permission before a back
door listing can be effected. The idea is to minimize abuse of the minority. The law also
makes clear that there is a case for recognizing the fiduciary duty of the controllers to the
minority in situations where there is a change of control.
7
The references for the court rulings and cases cited in this section and in the next can be supplied upon
request from the author.
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The court has wide powers to award the appropriate relief under section 181(2). The
section provides that the court “with a view to bringing to an end or remedying the matters
complained of” may make such order as it thinks fit:
• Direct or prohibit any act or cancel or vary any transaction or resolution;
• Regulate the conduct of the affairs of the company in future;
• Provide for the purchase of the shares or debentures of the company by other
members or holders of debentures of the company or by the company itself;
• In the case of a purchase of shares by the company, order a reduction accordingly
of the company’s capital; or
• Order that the company be wound up.
In exercising it discretion to award the appropriate remedy, the court will consider the
matter at the time of the hearing and not, for example, at the date of the presentation of the
petition. The reliefs rank equally and it is not correct to say that the primary remedy under
this section is winding up. The court hearing a section 181 petition is empowered to grant
a winding up order even if it is not prayed for. The Court in exercising its discretion to
wind up a company under section 181(2)(e) will have in mind the drastic character of this
remedy, if sought to be applied to a company which is a going concern; it will take into
account (a statement which is not exhaustive) the gravity of the case made out under
section 181(1); the possibility of remedying the complaints proved in other ways than by
winding the company up; the interest of the petitioner in the company; the interests of
other members of the company not involved in the proceedings.
The courts have a wide and an unfettered discretion as to the reliefs they may grant
which are in no way limited to those listed in section 181(2)(a) to (e). In Automobiles
Peugeot SA v Asia Automobile Industries Sdn Bhd the High Court allowed an application
to amend the petition by adding another prayer that sought to make the second respondent
personally liable to pay damages to the first respondent (the company) for alleged
breaches of his fiduciary duties as a director of the company. One of the contentions of the
second respondent was that the petitioner had no locus standi as the proper party in an
action of any alleged wrong done by the second respondent to the company should be the
company itself. The High Court expressed the view that:
“The injured party in this action is (the company) and s 181(1) and (2) of the
Companies Act 1965, under which this petition is presented and relief sought, is
specially enacted to overcome the problem posed by Foss v Harbottle, and to
strengthen the position of the minority shareholders in limited companies. Since there
is statutory sanction for a shareholder with a minority interest in a company to
institute proceedings against directors from conducting the affairs of the company in a
manner prejudicial to the company, there is no longer any need for a derivative action
to be filed by the petitioner in the manner suggested by the second respondent for that
would amount to a duplicity of actions relating to the same subject matter.”
As regards abuses by controlling shareholders in connection with related party
transactions, revisions in the KLSE Listing Requirements made in 2001 now require a
company, if a threshold is reached in respect to value, to appoint an independent corporate
adviser to advise minority shareholders as to whether the transaction is fair and reasonable
and whether or not that transaction is detrimental to minority shareholders (Koh and Soon,
2004).
Malaysia has a number of other provisions designed to curb abusive behavior by
interested, related or connected parties, which range form provisions requiring shareholder
approval upon disclosure to absolute prohibitions in some cases:
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Held: The matters alleged in the petition, if true, may in law amount to oppression or
unfairness. Mismanagement is not an essential element in the concept of oppression.
Therefore, an allegation of mismanagement does not have to be pleaded in every case of
alleged oppression to make the petition an acceptable pleading.
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Where a petitioner has been deliberately excluded from the management of a company
in contravention of an understanding that he will be allowed to participate in managing the
company, it may be just and equitable to wind up the company.
Ebrahimi v Westbourne Galleries Ltd. A company was incorporated to take over the
business of a partnership. The partnership business had been carried on by E and N as
partners, equally sharing the management and the profits. Both of them became the
shareholders holding equal shares and they were made the first directors of the company.
Soon after the formation, N’s son, G, was made a director and each of the original
shareholders transferred to G 10 percent of the shares. Therefore, N and his son G had a
majority control of votes in general meeting. The company did not distribute dividends but
the directors were paid remuneration. Subsequently, a resolution was passed removing E
as director.
Held: Winding up order to be granted. E, after a long association in the partnership,
during which he had an equal share in the management, joined in the formation of the
company. The inference must be indisputable that he and N did so on the basis that the
character of the association would, as a matter of personal relation and good faith, remain
the same.
Derivative action
A derivative action is taken where a minority shareholder is desirous of enforcement
of the company's rights against the majority. A Court's judgment or ruling would be given
in favor of the company. The Company is made a party to the proceedings. It should be
noted in this respect that the director’s fiduciary and statutory duties as well as their
common law duties of care, skill and diligence are owed to the company and not the
individual shareholders. Also, the power to institute action in the company’s name
generally rests with the board. It is practically very difficult to cause the company to
commence action against the defaulting director especially where he controls the board. So
it is not uncommon to find that a company commences action after there has been a
change in management or where the defaulting director has left the company. The avenue
for minority shareholders to institute action in the company’s name is through a derivative
action. But to do so the minority shareholder would have to fall within one of the
exceptions to the rule in Foss v Harbottle. Malaysia recognizes the exceptions―if there
are ultra vires acts or illegality, fraud on the minority, and there has been a denial of
individual rights of membership.8
There has been some debate whether a statutory derivative action should be provided.
The Singapore Companies Act9 has introduced provisions to that effect in 1993 but has
excluded the operation of such a statutory remedy from listed public companies. It is
evident that shareholder litigation is costly and involves a fair amount of monies. If the
action is derivative in nature the benefit resides with the company. The incentive to engage
in such litigation is minimal whilst the disincentives are prohibitive.10The Corporate Law
8
There has been suggestion of another exception, that is, “in the interests of justice”. It is unclear that
such an exception is an independent one and whether Malaysian Courts recognize it.
9
See sections 216A and 16B of the Act.
10
There is a judicial attempt in Malaysia to forge a solution to the costs issue in respect of a derivative
action. It is clear that a grant of indemnity is seldom available. For example, if the suit is representative in
nature or to seek remedies against an abuse of fiduciary powers then it would not be proper to apply such
an indemnity.
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Economic Reform Program in Australia (CLERP) argues for the introduction of a statutory
derivative action.11
Section 155 of the Securities Commission Act 1993 now provides that the
Commission may recover loss or damage by reason of the conduct of another person who
has contravened any provisions or regulations made under this Act, whether or not that
other person has been charged with an offence in respect of the contravention or whether
or not a contravention has been proved in a prosecution. This new provision enables SC to
take on derivative action against malfeasant officers and third parties which has caused
loss and damages for the company.12
Entrenchment of rights
The Companies Commission of Malaysia Act 2001 (“CCMA 2001”) came into force
on April 16, 2002. The Act establishes the Companies Commission of Malaysia (CCM),
provides for its function and powers and for matters connected therewith. The CCM is a
merger of the Registry of Companies and Registry of Business. In contrast to the
memorandum, the articles of association may, subject to the Companies Act 1965, be
freely altered or added to. This power of alteration by special resolution can affect the
pattern of rights and duties to the prejudice of a member’s rights. In practice, there have
been a variety of devices which have been employed to entrench member’s rights and
duties. Shareholder agreements and voting arrangements can be entered into providing
various procedural and substantive arrangements that delineate the lines of power and
entitlements.
In certain companies the use of special voting rights entrenches certain rights under its
constitution. For example the Projek LebuhRaya Utara-Selatan Berhad (PLUS), the
corporate vehicle that is part of UEM which implemented the North–South highway
concessionaire has a Special Share that may be held only by or transferred only to UEM or
any wholly owned subsidiary of UEM. Basically the Special Share entitles the holder of
the share to exercise a negative veto over any resolution tabled.
In certain Government Linked Companies (GLCs), the Government also holds a
Special Share. For example, the national electric corporation, Tenaga Nasional Berhad
(TNB) has a Special Shareholder i.e., the Minister of Finance Inc. (MOF Inc.). MOF Inc.
as Special Shareholder has the right to appoint “any person to be director…so that there
shall not be more than six (6) Government Appointed Directors at any time”. The Special
Shareholder has clear veto rights over a number of matters. This type of Special
shareholder rights is a device used for privatized government corporations, e.g., the
national airlines (MAS) and the national telecommunications company (Telekom). This
golden share holding may be utilized as a disciplinary measure for recalcitrant controllers,
which the government is displeased with. It also alters and impacts the governance process.
There are nevertheless some restrictions to the power to alter articles. First, when voting to
alter the articles, a member must act “bona fides for the benefit of the company as a
whole”.
11
Its introduction is viewed, not as imposing a new form of liability on directors, but rather as removing
uncertainty and therefore providing for a more effective means by which the director’s duties to a
company may be enforced. This would increase private enforcement in the long run and reduce the need
for public or regulatory interference. In this respect, CLERP does look at the statutory derivative action as
a valuable tool to enhance corporate governance and maintain investor confidence.
12
See Australian equivalent: ASC v Deloitte Touche Tohmatsu (1996) 138 ALR 655;21 ACSR 332.
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company’s business plans or strategies by the board to the shareholders during the AGM
(Khoo, 2003).
A number of developed economies have focused efforts on increasing the quality of
shareholder communications, namely through the AGM, for it gives all shareholders,
whatever the size of their shareholding direct and public access to boards. The idea should
be to increase its effectiveness so institutional shareholders see value in attending the
meetings.
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distant subsidiary is three, nonetheless it still makes for a significant divergence between
control and cash flow rights of the controlling shareholder.
A large investor may be rich enough that he prefers to maximize his private benefits
of control (including investments in unrelated activities, whether for diversification or for
the purpose of empire building), rather than maximize his wealth. Unless he owns the
entire firm, the large investor will not internalize the cost of these control benefits to the
other investors. This will then be reflected in the failures of large investors to force their
managers or companies to maximize profits and pay out the profits in the form of
dividends.
An examination of the foreign controlled companies, especially those which have a
clear majority shareholder, shows that these companies have been paying out a high
proportion of their profits in the form of dividends (and not reinvesting the profits in
diversified or empire-building activities). Such high dividend payout ratios may have been
facilitated by the more healthy relationship between the control rights of the majority
shareholder with its cash flow rights.
In the case of locally-controlled companies, the control rights were usually well in
excess of the cash flow rights of the controlling shareholder, usually because of the
pyramid structure of companies in the same group. This could explain their much lower
dividend payout ratios and their greater propensity to reinvest their profits even in
unrelated activities, at least in part to maximize the insider’s private benefits of control.
The Malaysian corporate sector has shown high ownership concentration. The largest
five shareholders accounted for more than half the voting shares or stocks in an average
company. The largest shareholder held, on average, about 30.3 percent of the shares of an
average company. That suggests that minority shareholders are all but powerless to
prevent large shareholders from dominating company decision-making (Samad, 2002).
With this structure being widespread, the agency problem between the controlling
shareholders and the minority shareholders is potentially serious and the threat of
expropriation of minority shareholders’ rights becomes very real. Expropriation can be
avoided only if management is separated from ownership or the appropriate corporate
governance mechanisms are in place to check any abuse of power. Current corporate
governance reforms do not come up to this issue. However, the current reform initiatives
do attempt to put proper corporate governance mechanisms in the management of such
organizations (Khoo, 2003).
The exclusion of substantial shareholders from independent participation on boards,
(especially if a substantial shareholder is defined as one with a shareholding of 5 percent
or more), can have the effect of disenfranchising a significant group of persons with a
strong incentive (as a result of their large shareholding) to ensure that their rights are not
aggrieved by the conduct of the controlling shareholder. Collective action problems
preclude effective monitoring by small shareholders. But large shareholders, in defending
their own self-interests will often defend the interests of small shareholders as well.
Therefore to exclude these persons or their nominees from the definition of independence
and thereby from the various board committees that mandate the presence of an
independent majority seriously erodes the ability of large outside shareholders to make it
harder for the insiders of a company to ignore or deceive a minority shareholder.
Given ownership concentration in Malaysia, the basic rights and improvements
suggested above will not sufficiently address minority shareholder protection concerns and
their fair treatment. Investor confidence that the capital they provide will be protected
from misuse or misappropriation by controlling shareholders, managers and directors is an
important factor in capital markets.
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13
Sections 90 and 90A of the Securities Industry Act 1983 now provide for the recovery of losses caused
by insider trading, by way of civil actions instituted either by the Securities Commission or the investor.
Contrast the general power given to the Australian Securities Commission under the Australian Securities
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Malaysia
Commission Act 1989, which allows the Commission to take action in a person’s name for recovery of
property of the person.
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Best Practices in Asian Corporate Governance
empowered under the new Listing Requirements, to take action against the directors
personally, where they commit a breach of the Listing Requirements. This will serve as a
wake-up call that they have been put in positions of trust and that they must honor this
trust and act in the best interests of the company. To assist the directors in discharging
their duties, Bursa Malaysia has also mandated them to attend training programs on a
continuous basis. This mandatory attendance at CPD has attracted both commendations
and criticisms.
Protect whistle-blowers
The SC has also introduced whistle blowing protection legislation. This is a laudable
measure to engender and foster a milieu which will permit disclosure of corporate
wrongdoings without concomitant penalties of victimization and dismissal visited upon the
witness. There has been some work done in areas of statutory derivative action and
improvement of proxy voting mechanisms in SC. This has yet to completed or
promulgated.
14
Shareholders may be dispersed all over the country, not to mention foreign institutional investors, who
may not be based in the country, so that attendance at general meetings would be difficult and costly.
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Best Practices in Asian Corporate Governance
right to require information, rights of search and seizure that would make its
enforcement exercise more effective.
The provisions on related party transactions in the Companies Act only requires the
transactions to be disclosed and approved by shareholders but the interested parties are not
required to abstain from voting. The Listing Requirements do not suffer from the same
deficiency. Therefore, the Companies Act should be amended to require the interested
parties to abstain from voting on a connected party transaction.
With the recent amendments to the Securities Industry Act, penalties for insider
trading have been increased to three times the insider’s gain. The new civil penalties also
allow investors to seek full compensation for loss from the offenders. As substantial and
connected party transactions have the potential to inflict more harm on minority
shareholders then even insider trading, as amply demonstrated by recent events, the
penalties for the breach of legal provisions with respect to such transactions should be
reviewed and substantially increased. There is also a pressing need for improving the
quality of legal enforcement against the breaches of such provisions.
hear out the directors and to judge for themselves the future profit prospects of the
company. It will also give them an added reason to attend the AGM, not so much as to
vote, but to hear the directors’ briefing. They won’t feel it is an absolute waste of their
time to attend when their votes will not materially affect the passing of resolutions.
Reform GLCs
The government is currently implementing a series of reform to enhance the
performance of government-linked corporations (GLCs). In this context, the government
should review the organization of ownership function of the state in order to ensure that
the policy/regulatory functions are clearly separate from the ownership function, in line
with international good practice (World Bank, 2005). As Qian (1996) points out, unlike
private owners, the government does have political and social objectives other than the
asset value of the firm, which could be very costly to economic efficiency. Maintaining the
government's control over firms entails high political costs because of political
interference, and expanding managerial autonomy also induces high agency costs when
government managers tend to experience a lack of accountability. Government control of
SOEs also brings about credible commitment problems, especially in carrying out its
announced policy and imposing hard budget constraints. Government control may
likewise well overload the government. The government has many other things to do, such
as regulate and provide public goods, and therefore, control of firms is likely to
overburden it. The "core competence" of the government is regulation and provision of
public goods, not corporate governance.
Introduce a scorecard
The Malaysian government can consider and expedite the introduction of a corporate
governance rating for all publicly listed companies. Private investors looking for
performance indicators can at least rely on the ratings to know the degree of corporate
governance practice in the company and to make their own conclusions from there.
Investors recognize the improvements made by government, regulators and
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REFERENCES
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BREAKTHROUGHS IN CORPORATE SOCIAL
RESPONSIBILITY IN THE PHILIPPINES
Magdalena L. Mendoza
Development Academy of the Philippines
Philippines
INTRODUCTION
The old idea is that the duty of firms is to produce profits for their shareholders. Their
job is to focus on the core business. The quest for improved competitiveness, higher
productivity, and good corporate governance is important only to the extent that it makes a
positive contribution to the firms’ business objectives. Accordingly, research has focused
on the links between corporate rules and practices, on the one hand, and profitable
outcomes, on the other.
It is no surprise that despite great differences among Asian countries, the Asian
Productivity Organization (APO) study of Asian corporate governance in 2004 found a
“common ground” among Asian firms: a consensus to adopt principles of corporate
governance that hew more closely to generally accepted global benchmarks in order to
improve returns on assets or investment. Whether widely-held or closely-held, Asian firms
are heading toward a “convergence” of corporate practices that are going to make them
better equipped to make their way in the global capital market (Gonzalez, 2004).
In the Philippines, the APO study suggests, the government has instituted reforms to
improve board governance, enhance disclosure and transparency of corporate activities,
ensure diligence and independence of audits, and increase protection of minority
shareholders―all in the name of greater firm performance.
This article of faith among Asian corporations is still holding ground firmly. But of
late, Asian firms have allowed themselves to be “infected” by a new thought: the idea that
it is not enough for firms to make money for their owners. Today, there is a widely-held
view that a globalizing company needs―as The Economist puts it―to take account of
social problems in its new markets, or that social responsibility will be its own reward, in
happier employees, lower legal costs and improved productivity (The Economist, 25 June
2004). In the past, this emerging view is what would be expected of environmentalists,
social activists and civil society organizations. Now many corporate owners and CEOs
have embraced it. Interestingly, even the APO study indicates that a majority of Asian
firms share the conviction that the interests of the community are as important as those of
shareholders and stakeholders.
Indeed, many corporations have gone further: corporate social responsibility, or
simply, CSR, does support the business goals of the company. As Baker (2001) points out,
if the process of managing social responsibility leads a corporate CEO to take her eye off
the core business, her problem is not that she is doing it at all, but that she is doing it
badly. Well-managed CSR holds up the profit objectives of the company, builds
relationships with key stakeholders whose opinion will be most valuable when times are
hard, and should reduce business costs and maximize its effectiveness.
It is in this context that the Philippine corporate sector is examined in this paper.
Interestingly, even under a business policy environment that has its large share of mishaps,
the Philippines has managed to dominate the Asian corporate social responsibility
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Best Practices in Asian Corporate Governance
1
The Asian CSR winners in the last two years include the following Philippines-based firms:
2006
Category: Support and improvement of education
Winner: Text2Teach, Globe Telecom in cooperation with Ayala Foundation, Chikka Asia,
Department of Education, International Youth Foundation, Nokia, Pearson Foundation, PMSI
Dream Cable, SEAMEO Innotech and UNDP Philippines
Merit Awardee: Little Red Schoolhouse Project, Coca Cola Foundation
Category: Environmental excellence
Merit Awardee: Project Eliminate, Unilever Philippines
Category: Poverty Alleviation
Winner: Pier One Seaman's Dormitory
Category: Best workplace practices
Winner: Developing the Modern Water System Manager, Manila Water
Merit Awardees: Embracing Diversity @ IBM, IBM Philippines, Inc.; Go for Gold Program,
Chowking Foods Corporation
Category: Concern for health
Merit Awardee: Training & Employment of Deaf and Hearing - Impaired Persons in Jollibee,
Jollibee Foods Corporation
2005
Category: Support and improvement of education
Winner: Knowledge Channel, SKYCable
Runner-up: Sitio Agusuhin Development Program, Shell Philippines Exploration B.V.
Category: Environmental excellence
Runner-up: Bantay Kalikasan Program, ABS-CBN Foundation, Inc.
Category: Best workplace practices
Winner: Department of Surgery, Ospital ng Maynila Medical Center
Source: www.asianforumcsr.com
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Philippines
carrying out their social responsibility (see footnote 1). Only a few home-grown firms of
the supply chain get into the act as a result of the pressure of multinational firms. Of
course, it is hard to gauge whether this is truly representative of the situation on the
ground, since few small and medium companies are hardly represented in the Asian
Forum.
Business response to societal obligations, either out of volition or by force of
circumstances, is a long-standing practice in the Philippines. Interestingly, Filipino
corporations tend to project their social obligations onto auxiliary associations. Filipino
companies, for example, have long funneled their CSR resources into the Philippine
Business for Social Progress, a long-running non-profit group that absorbs the burden of
social responsibility of member companies. Membership in this body, where top
executives get personally involved in corporate citizenship projects, is a measure of a
firm’s responsiveness to the country’s social problems. PBSP itself has won a special
achievement Asian CSR in 2003 (Baker, 2003). PBSP also was cited as “one of the world
leaders in corporate citizenship” by the London-based Prince of Wales International
Business Leaders Forum (IBLF) in 1996 (Nuguid-Anden, 2003).
The widely held belief of Philippine firms is that corporate social responsibility is
about “business giving back to society”. Thus, social investment, otherwise known as
corporate giving (which has a long history in the Philippines), is seen as a common
demonstration of good corporate citizenship. It can be said that Filipino firms have closed
the profit-cum-responsibility circle: managing workplace concerns, community relations,
environmental protection, and other cross-cutting social issues as a business strategy to
enhance corporate reputation, in turn, profitability and, in the long run, continuity.
2
Clarkson, M.B.E. (1995), “A Stakeholder Framework for Analyzing and Evaluating Corporate Social
Performance”, Academy of Management Review, Vol. 20, pp. 92-117, cited in Moir (2001).
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Best Practices in Asian Corporate Governance
Economist (22 January 2004) argues that supporting good causes out of the managers’
own generous salaries, bonuses, deferred compensation, options packages and incentive
schemes would be praiseworthy; doing it out of income that would otherwise be paid to
shareholders is effectively, theft. Indeed, some laissez-faire advocates, according to Baker
(2001), have suggested that CSR deprives shareholders of their property rights. It should
be the shareholders who can decide social-policy priorities. CSR is philanthropy at other
people's expense.
In defense of CSR, Baker (2001) contends that its detractors miss the point. If CSR is
seen as a process by which the business manages its relationships with a variety of
influential stakeholders who can have a real influence on its license to operate, the
business case becomes obvious straight away. CSR involves building relationships with
customers, attracting and retaining talented staff, managing risk, and protecting reputation.
Baker cites as an example the case of Coca-Cola, 96 percent of which is made up of
"intangible shares” which rests mainly on the reputation of the company. No one would
conceivably tinker with a company's reputation when it is so large a part of what the
shares represent. In any case, with rights comes responsibility. If shareholders are to be
accorded full property rights one would expect them to be balanced by the actions taken
by the enterprises they own. Since most shareholders are hardly conscious of any such
responsibility, it can only fall to the management, as the skippers of the company, to take
that responsibility on.
Moir (2001) recalls that the current thinking on CSR evolved from the notion of
corporations’ obligations to work for social betterment to corporate social responsiveness
or the capacity of a corporation to respond to social pressures. Implicitly, business is
expected to respond to societal issues, e.g., to enhance social cohesion, not simply out of
charity but because it has a social contract that obligates it to do so. Society grants power
to business but as part of the social contract, and it expects business to use this power
responsibly. Those who will not use the power in a manner which society considers
responsible will tend to lose it. The United Nations Conference on Trade and Development
(UNCTAD) also espouses the view that enterprises are responsible for job creation and to
do so, society grants them the “license to operate”. This license, which spells out rights
and duties in laws and regulations, sets the entrepreneurial terms in starting new firms,
extracting natural resources, introducing new products and technologies, and taking the
risks that are necessary in seeking out business opportunities.
Certainly, every country wants the firms that operate within its borders to flourish and
grow so that they can create wealth and improve standards of living. But in pursuit of
these objectives, a firm necessarily commands tremendous financial resources and exploits
natural resources. As it is, a firm has the power either to do good or to do evil. Of course,
firms are able to generate employment opportunities and are able to pay fees and taxes out
of their incomes but at the same time, firms can negatively affect the community where
they operate. Jurisprudence would show that even firms with vast operations are not
exempted from circumventing laws such as labor laws, product standards, environmental
laws, and the like, for the sake of profit.
Compliance with the law is the minimum expectation from firms. But a firm’s social
responsibility also includes obligations to protect and enhance the society in which it
functions. The scope of corporate social responsibility encompasses the direct impacts of a
firm’s activities as well as the spillover effects it may have on society. The UNCTAD
stresses that even in countries where legal obligations of firms are not spelt out in detail, it
is important that business still make an effort to meet societal expectations. As Gray, et al.
(1996) suggests, it is not always that business might act in a responsible manner because it
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Philippines
is in its commercial interest, but because it is part of the social contract or how society
implicitly expects business to operate. According to him, the macrosocial contract in the
context of communities would be an expectation that business provide some support to its
local community. The specific form of involvement would be the microsocial contract.
Corporate social responsiveness also translates to management decision-making that is
accountable and based on ethical foundation. Moir (2001) describes the scope of corporate
social responsibility to cover economic responsibility, public responsibility, and social
responsibility. This means corporate accountability for: (1) actions performed that go
beyond the corporation’s domain of authority or permissibility; (2) non-performance of
acts within the corporation’s domain of responsibility; and (3) inferior performance of acts
within the latter domain. He specifies the obligations of firms:
• To treat employees fairly and equitably;
• To operate ethically and with integrity;
• To respect basic human rights;
• To sustain the environment for future generations; and
• To be a caring neighbor in their communities.
Given these considerations, it is no accident that the World Business Council for
Sustainable Development has defined CSR as “the continuing commitment by business to
behave ethically and contribute to economic development while improving the quality of
life of the workforce and their families as well as of the local community and society at
large" (Baker, 2006).
Companies are answerable to both the internal aspect (the quality of management, in
terms of both people and processes) and the external aspect (nature of their impact on
society) (Figure 1). Of the various stakeholders, it is financial analysts who are
predominantly focused on quality of management as an indicator of likely future
performance. The rest look mainly to the outer circle―what the company has actually
done, good or bad, in terms of its products and services, its impact on the environment and
on local communities, or in how it treats and develops its workforce (Baker, 2006).
Table 1. How much do you feel that CSR initiatives contribute to your company’s
corporate reputation?
Significant
Moderate
Not at all
amount
amount
A little
NA
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Philippines
Table 2. What are the three most important business objectives that corporate social
responsibility helps fulfill?
Recruiting/ret
transactions/
public policy
partnerships
Support for
stock price
Enhancing
Promoting
Increasing
employees
Favorable
withstand
initiatives
impact of
coverage
aining
media
Other
Help
sales
But while it is apparent that business is taking voluntary actions to address its
competitive interests, the interests of the wider society should not be relegated to the
sideline. The other notion of corporate social responsibility is closely linked to the concept
of “sustainable development”. Many people think of industrial firms as the primary villain
in environmental damage. The 1987 Brundtland Report found that the current model of
economic development could not be sustained in the long term, as it depletes natural
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Best Practices in Asian Corporate Governance
Compact today includes nearly 2,200 companies from more than 80 countries. Of these,
301 are Asian firms.
Within Asia, the Philippines leads other countries in terms of the number of corporate
subscriptions to the Global Compact. When the Compact was launched in the Philippines
in 2001, more than 115 corporations immediately signed up. Since then, conformance to
the stated principles of the Compact has become the benchmark for measuring global
corporate citizenship for many Filipino companies.3
Filipino corporations are generally perceived across all areas, localities, social classes,
and gender and age groups to have “obligations” to their employees, the environment, and
communities in need.
This is gleaned from the survey conducted by the Social Weather Stations in 2003.
What is remarkable is that when asked about four prelisted things that private corporations
could do, majority of Filipinos expect private corporations to voluntarily: (1) increase the
wages of employees in proportion to the increase of prices of basic commodities (68
percent); (2) spend for cleaning or for restoring any damages in the environment (58
percent); (3) send volunteers from the corporation to a community to help in tree planting
and construction of houses or teach selected courses to out-of-school youth (57 percent)
and; (4) give substantial donations to the poor or communities in need (56 percent).
Ironically, the same survey revealed that only one out of 10 (12 percent) Filipinos is aware
3
After the initial enthusiasm and show of support, a number of subscribers failed to submit their
Communication of Progress (COP). Efforts are now being exerted to guide companies in the preparation
of COP and sustain efforts to align corporate programs, policies, and practices with the Global Compact
principles (Global Compact Office, 2005).
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Best Practices in Asian Corporate Governance
of the term corporate social responsibility or CSR. Knowledge of CSR is higher in the
National Capital Region (Metro Manila) and among the upper social classes, but remains
low across gender and age groups.
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Philippines
Similar concerns on corporate social obligations were cited in the most recent Social
Weather Station Survey, where 44 percent of Filipino adults consider a company's social
programs as very important in deciding to buy its products 4 (Figure 2). This figure is
higher compared to Europe, where an average of only 25 percent of the respondents in 12
major EU countries considers that a company’s social program is an important factor in
making buying decisions (SWS, 2005). To the public, among the corporate social concerns
that a firm is obliged to address are health and safety of its employees, job security, control
of harmful products, respect for human rights, and equal treatment of employees (Figure
3). Filipinos consider as less important the corporate obligations to help solve social
problems, invest in education and training, support charities and community projects,
ensure nonparticipation in bribery, listen/respond to the public, and make socially
responsible investment.
No matter how it is perceived, making social investment is the most common form
expression of CSR in the Philippines. The widely held view is that the long-term interests
of business are best served when its profitability and growth are accomplished alongside
the development, and the improvement of people’s quality of life (PBSP, 2002). Filipino
firms generally adhere to the philosophy that to the extent that business activities
“generate imbalance in society and create social tensions”, business must undertake
development programs to restore the balance. As one prominent Filipino executive puts it,
the business of business is business, as long as in doing it, it grows in its ability to help
society solve its problems of unemployment, income inequity, and maintaining its
competitiveness in the markets of the world (Tolentino and Luz, 1994).
0 20 40 60
Source: Social Weather Stations
What is remarkable is that Philippine firms tend to externalize these CSR functions
through auxiliary associations such as corporate foundations, the Philippine Business for
4
This result is part of a pioneering module on CSR, sponsored by the Coca-Cola Export Corporation,
included in the 4th Quarter 2005 Social Weather Survey of 1,200 Filipino adults nationwide.
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Best Practices in Asian Corporate Governance
Social Progress and the League of Corporate Foundations. CSR is not necessarily an
internal corporate function. Corporate social response is also channeled through business
associations and coalitions dealing with specific issues that are clearly outside business.
The following sections attempts to present some of these CSR best practices in the
Philippines.
One cannot but recall the beginnings of corporate philanthropy when discussing CSR
in the Philippines. Hasan (2005) traces back philanthropy in the Philippines to the Spanish
period in the 17th to 19th century as Catholic religious organizations created and
maintained orphanages, schools, asylums and hospitals, supported by contributions from
the political and economic elite. Hasan recalls that philanthropic work in the country has
been traditionally practiced within the family and kinship groups, and not through
organizations. As time went by, corporations got themselves involved in philanthropic
work. Such practice eventually evolved into a coordinated effort to what is known as
corporate giving today. Corporate giving involves the voluntary transfer of resources from
corporate budgets to non-business organizations, sectors and/or beneficiaries (Tolentino
and Luz, 1994). Corporate contributions either in cash or in kind often find their way to
charitable organizations.
320 4.5
310 4
Average/firm, in million pesos
3.5
300
Total, in million pesos
3
290
2.5
280
2
270
1.5
260
1
250 0.5
240 0
1992 1994 1999
total average
Source: Social Weather Stations
public rehabilitation organizations that were formed following World War 2 bolstered
support for private organizations undertaking philanthropic work. In the 1950s and 1960s,
private philanthropy gained more prominence as wealthy individuals and corporations
began spearheading fund-raising activities and campaigns to complement the work of the
church and the government. It was during this period when the Philippine Congress
enacted the Science Act of 1958 that recognized the important contribution of private
foundations in the scientific and social services arena. The renewed emphasis given by the
Catholic Church on social responsibility in the mid-1960s also gave further impulse to the
creation of philanthropic institutions. By the early 1970s, efforts to coordinate their work
resulted in the creation of organizations that today promote collective response to social
concerns Hasan (2005).
Corporate philanthropy is interpreted today as contributing to the public good in a
more strategic and focused manner. Corporate giving is manifested in different ways:
through corporate donation programs implemented by a company unit, a corporate
foundation, or other innovative mechanisms. There is no accurate accounting of the
amount of corporate giving in the Philippines. Nevertheless, local surveys of corporate
giving conducted in 1992, 1994 and 1999 give indications on its extent (Figure 4). Table 5,
taken from the 1999 survey, suggests how corporate giving is distributed among
Philippine-based firms.
In the 1992 survey, education, disaster response and community development were
the priority areas which were given assistance. Civic and community affairs, science and
technology, culture and arts, and youth and sports activities received less attention. There
were some indications of a shift from reactive to proactive forms of giving, and possibly
more developmental approaches over welfare-influenced dole-outs. Corporations
considered their involvement in disaster preparedness as a program of assistance more
than disaster relief. The use of non-cash assistance in the form of products, technical
expertise and services, and facilities was considerable. In specific instances such as
disaster response, technical expertise or donated services had as great value as capital
funds. The involvement of internal constituents (employees) of corporations in corporate
giving would be an important factor for corporations in the coming years. The size of the
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Best Practices in Asian Corporate Governance
corporate giving staff did not dramatically increase despite an increase in the size of the
assistance. Most assistance was channeled to existing organizations to minimize company
overhead expenses (Tan and Bolante, 1997).
In 2001, the Asian Institute of Management Report on Corporate Giving5 indicated
that monetary donations comprised 73 percent of the total corporate giving for 1999. In-
kind donations represented about 21 percent. The rest of contributions were in terms of
technical expertise and use of facilities. The financing, insurance and real estate sector had
the highest percentage share of cash donations, comprising nearly half of the total
corporate giving for the year. This was followed by the agriculture, fisheries and forestry
sectors. Manufacturing firms came third. As in previous surveys, commitment to education
continued to be the highest priority for the company respondents with 23 percent of the
giving directed to this sector (Table 6).
Schools and educational institutions remained the major channel of assistance utilized
by 18 percent of the company-respondents. These were followed by foundations and non-
government organizations (16 percent); trade, civic and professional organizations (14
percent); and community associations (11 percent).
The RVR-AIM results showed that companies tended to give closer to home (where
their operations were located). They were also strongly motivated to pursue gifting as a
reaction to the highly unstable political and economic situation in the Philippines at the
time the survey was conducted. At any rate, almost all of the respondents (97 percent)
believed in the significance of being viewed as a good corporate citizen when giving.
5
The RVR-AIM 2001 Report on Corporate Giving is primarily intended to establish baseline data on
corporate giving practices of Filipino and Philippine-based firms covering fiscal year 1999. The surveys
on corporate giving in 1993 and 1994 were conducted by the Center for Corporate Citizenship of PBSP.
RVR-AIM conducted the 1999 survey using the PBSP instrument.
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Philippines
The study also revealed that corporate foundations in the Philippines have
mushroomed as a way to sustain CSR programs (including corporate giving) in the past
few years. While some corporations give through channels distinct and independent of the
company, a growing number of firms have chosen to direct their charitable contributions
through their own corporate foundations. The survey results showed that 33 percent of the
company respondents considered funding their own corporate foundations as part of their
corporate giving for the year.
These surveys confirm the increasing practice of corporate giving as a vehicle for
providing the corporate donor a number of long-term benefits, including the production of
goodwill, enhancement of the company’s reputation (which in turn generates customer
loyalty), and corporate name awareness and product recognition. It likewise provides a
means for developing a continuing relationship with community officials and leaders. CSR
also improves employee commitment and productivity (PBSP, 2002). In addition, there is
an immediate benefit to corporate giving. The Tax Reform Act of 1997 provides for five
percent limited deduction from the taxpayer’s taxable income, computed after expenses
arising from trade, business, or profession, but before any deductions arising from
donations made. The 1999 survey noted that almost half (49 percent) of the company-
respondents claimed tax exemption.
6
The account on PSBP is largely based on Tan and Bolante (1997).
7
The Dividendo Voluntario Para la Comunidad is a development foundation organized by Venezuelan
industries in 1963. Corporate members of Dividendo contribute 1 percent of pre-tax income for the
foundation’s operations (Tan and Bolante, 1997).
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Best Practices in Asian Corporate Governance
Box 1
Origins of PBSP
“PBSP was conceived at a politically turbulent time when the country was in an economic crisis:
about half of the Filipino population were poor with very limited resources or opportunities to rise
above their poverty, while the less than five percent of the population held most of the country’s wealth
and the same were in control of the political establishment.
In the communist analysis, big business was essentially a part of the problem because it
continued to profit from the inequitable system. Therefore, society could not expect corporations to
support change or to provide the means to effect change. This situation is rapidly building up the
pressure on the political and economic institutions … and in the countryside, the Communist Party of
the Philippines is gaining ground since people have no alternative.
In the corporate sector, there was apprehension on the unraveling events but business people
were highly divided on the matter of addressing the social ills of the country. To some, business could
and should only be accountable if it failed to perform its primary function, which was to generate
wealth. But one of the PBSP founders attributed this tendency to laissez faire capitalism, which he
believed to be inherently wrong. According to him, “An economic system which operates solely on the
basis of maximizing economic profits cannot continue to prosper indefinitely. A system which achieves
the rapid growth of one sector while leaving the rest of the community far behind will sooner or later
encounter two grave problems; economic contradiction and social contradiction… And this anomaly
or contradiction was looking for a correction.
Even though business people were divided on the extent of their responsibility to society, it was
clear to all that the violence and the virulence of the protest action was infringing on the conditions of
doing business. In an atmosphere of discontent, business would not thrive. So it was the interest of
business to ensure that its environment continued to be peaceful and harmonious and that its economic
growth within society would not destroy its fabric. While the business is not responsible for the entire
society, it is responsible for its own unique social function.
Within the corporate sector, there were efforts to respond to the social concerns of the day. Many
businesses were driven into social action, principally, by fear – a fear that the country was on the
verge of revolution.
For several months during 1970, top businessmen gathered to discuss a new agenda for business,
given the worsening situation. While the common motivation was fear, there emerged an agreement
for business to undertake viable and self-sustaining social development programs. Fifty business
leaders agreed with this imperative and were moved to organize the Philippine Business for Social
Progress. The task is to steer the corporate sector’s response to the prevailing social unrest: to
provide a capitalist alternative to communist rhetoric.”
Source: PBSP, 1995
Like its Venezuelan counterpart, the members of PBSP are business corporations and
partnerships that are willing to give one percent of their pre-tax income to social
development.8 Not surprisingly, its 50 initial members include major business blocs in the
country. By 2004, PBSP membership, which ranges from single proprietorships to
multinational corporations, stood at 183 companies. In the past, most firms used to rely on
PBSP to perform their corporate obligations. Presently, on top of their PBSP
commitments, most members also have their own corporate social development activities.
Nevertheless, at any given time, at least 50 chief executives and representatives of these
members are directly and actively involved in the PBSP’s community activities and
programs.
8
In the early years, PBSP administered 60 percent of this contribution, and the remaining was left for use
at the company’s discretion. In 1989, the PBSP board reduced the amount it administered due to the
difficulty of collecting during the recession in the 1980s. Today, PBSP administers only 20 percent of this
amount.
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Philippines
Box 2
We believe:
First: Private enterprise, by creatively and efficiently utilizing capital, land and labor, generates
employment opportunities, expands the economic capabilities of our society and improves the quality of
our national life;
Second: The most valuable resource in any country is man. The higher purpose of private
enterprise is to build social and economic conditions which shall promote the development of man and
the well being of the community;
Third: The growth and vigorous development of private enterprise must be anchored on sound
economic and social conditions;
Fourth: Private enterprise must discharge its social responsibility towards society in a way which
befits its unique competence. It should involve itself more in social development for the total well-being
of the nation;
Fifth: Private enterprise is financially and technologically equipped to participate actively in
social development. In terms of scientific technology and managerial competence, private enterprise
can help provide the total approach for social development in our depressed communities;
Sixth: Private enterprise, together with other sectors of society, shares obligations and
responsibilities which it must discharge to the national community. The ultimate objective of private
enterprise it to help create and maintain in the Philippines a home worthy of the dignity of man.
Therefore:
We hereby pledge to set aside out of our company’s operating funds an amount for social
development equivalent to 1% of the preceding year’s net profit before income taxes, of which 60%
shall be delivered to, and for management and allocation by, a common social development foundation,
to be known as Philippine Business for Social Progress.
Today, PBSP is the largest grant making organization in the Philippines. Over the
same period, a total of USD17.5 million was contributed by its members. That in turn has
been leveraged to raise an additional USD32.5 million from private and bilateral donor
agencies (i.e., for every dollar raised from member companies, an additional dollar and
fifty cents was mobilized from other sources). The total grants assistance of USD50
million has supported 3,440 projects through 1,000 NGO partners benefiting some 1.78
million Filipinos (Velasco, undated).
PBSP’s CSR delivery strategy has evolved over time. Its records show that early
PBSP efforts were relatively simple and short-term. Projects centered on improving living
conditions such as community organizing, livelihood, social credit, basic social services
and environmental protection that intended to benefit landless rural workers, sustenance
fisherfolk, marginal upland farmers, urban poor and indigenous cultural communities.
Perhaps its unique contribution to development work is the application of business
management skills and hardheaded business sense in approaching social issues. In 1991,
PBSP established the Center for Corporate Citizenship to assist its member companies to
take part in activities that contribute to society's well-being, from corporate giving to
community relations, policy-formulation and networking. Two driving forces shaped the
establishment of the CCC: (1) corporations concerned with being profitable in the long-
term must be challenged to make equally long-term social investments in communities if
(local) economies are to grow and the quality of life to improve; (2) in a world of limited
resources, sustainable development is a challenge for corporations to be more critical of
business practices that are harmful to the environment and the community where they
carry out their business (Velasco, undated). The center promotes the practice of corporate
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Table 7. The four thematic areas and the corporate citizenship framework
Nuguid-Anden (2003) has compiled the Center’s leading edge corporate citizenship
programs, the most important of which are as follows:
• Benchmarking Corporate Citizenship Program: This is a four-year program
which developed the following: (a) a program management systems framework
that guides and enables companies to design effective CC programs; (b) a set of
indicators that helps CC practitioners measure the impact of CC initiatives to the
company, the communities and other stakeholders of companies; (c)
benchmarking tools to help companies improve their operations based on the
standards set by CC practitioners. The program has produced the Benchmarking
CC Practice Report (July 2003) which, along with the benchmarking self-
assessment tools, enabled participating companies to track their competitiveness
or leadership positioning in CSR as well as established performance indicators
and goals in pursuing strategic corporate citizenship programs.
• Business and Peace Program: The program works toward enhancing the capacity
of local companies to adopt and implement internal management policies that
promote peace, cultural diversity, and unity in the workplace. Furthermore, the
program aims to strengthen the competitiveness of business management
practices of Muslim SMEs through technology transfer by way of mentoring and
internship initiatives. At least two of the program components demonstrate the
overarching theme of the program: “Creating Peace Dividends through Corporate
Citizenship”.
• Young Muslim Professionals for Business and Peace or “YuPPeace”: This
internship engagement program provides an opportunity for young Muslim
professionals, currently employed in local business enterprises, to gain work
experience in Mindanao-based and Manila-based companies.
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9
By 2004, member companies had contributed PhP38.15 million for poverty alleviation projects
nationwide. About PhP171 million was received from donor agencies and corporate benefactors. From
2002 to 2004, some 20 companies funded over PhP2.6 billion worth of social investment. More than
PhP800 million represented the combined commitments of PBSP members (PBSP Annual Report 2004).
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10
The notes on LCF are based mainly on the paper prepared by Marilou G.Erni entitled “The League of
Corporate Foundations: A Case Study of an Association of Corporate Foundations”.
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Philippines
operating in the affected areas as channels of delivery. CNDR and its partner NGOs
(which previously organized themselves into the Inter-Agency Network for Disaster
Response) consciously developed a system separate from, but in conjunction with
government relief agencies (Velasco, undated).
The idea, according to Velasco, was to establish a quick-response central command
center which could ascertain basic needs at the community level once a disaster strikes and
set up an efficient system for relief operations. The scheme includes informing corporate
donors who would either send goods directly to the contact points or channel them through
the network, monitoring the timely delivery of goods and reporting back to the donors on
how the resources were utilized. To lessen the burden of sorting and the waste of
transportation resources, donors are encouraged to send only those things that are actually
needed, in the form that would be most efficient, e.g., cash in lieu of bulky relief goods is
the preferred form of assistance in far-flung areas where transportation could be a major
problem. Companies with branches near the disaster area are asked to mobilize their
employees for relief distribution. Banks are requested to open accounts for receiving
donations from the public.
Two years after the network was created, the country suffered a string of
disasters―floods, volcanic eruptions and lahar flooding. In 1993, CNDR decided to focus
its thrust on mitigation and preparedness. Seeing the cost efficiency of the effort (studies
showed that every dollar invested in preparedness is equivalent to USD20 in relief
operations), the network began to work closely with the regional command centers it had
organized to formulate a plan for disaster mitigation. After setting it up, CNDR
"devolved" the planning process to local government units, since under the law, it is local
jurisdictions which formulate and regularly update a disaster management program.
Localizing management efforts make the communities better able to prepare for disasters,
meet their immediate needs and begin the task of rehabilitation as early as possible.
CNDR also tried to adopt disaster mitigation within companies. After finding out that
very few companies have a fully updated and operational safety plan, much less a disaster
management plan, CNDR embarked on consciousness raising programs by tapping local
and international resource agencies it had worked with in the past. These programs also
became a means of raising additional income to support the network's operations (Velasco,
undated).
The major challenge now, for both PBSP and the corporate foundations, is how to
sustain the commitment of the corporate community to CSR and convince companies to
continuously invest in social development. This, all the more, emphasizes the need for
some measurements and benchmarks to gauge the level and impact of CSR activities.
corporate citizenship practice. That is, it would help managers to gauge the effectiveness,
and strengths and weaknesses, of their firms’ internal systems and processes. The second
one, called the Corporate Citizenship Impact Measurement and Assessment Tool, would
help in measuring the impact of the CSR programs on the company’s so-called triple
bottom line: financial, social and environmental outcomes.
The benchmarking tool assesses the quality of the companies’ corporate citizenship
practice in the context of the following: (1) leadership (i.e., the manner by which CEO and
senior leaders champion corporate citizenship through their actions and behavior); (2) the
alignment of the company’s policies with the company’s social and environmental agenda;
(3) the program’s strategic importance and responsiveness to the company’s social,
environmental, and governance agenda as well as to the needs of the community; (4) the
effectiveness of internal systems and procedures to carry out the corporate citizenship
agenda; and (5) the company’s ability to measure its programs’ results and impacts, and to
report these to its internal and external stakeholders (CCC, 2003).
The impact assessment tool, on the other hand, measures the level of impact and the
strength of evidence of a company’s corporate citizenship initiatives on its triple bottom
line. It is based on the following premises. Firstly, corporate citizenship activities are
driven by financial factors. A proactive effort to address social and environmental
concerns could avoid incurring costs that would have arisen if these concerns had
worsened. A company could leverage its corporate citizenship programs in enhancing the
company’s image, which in turn could result in attracting and retaining customer (and
employee) loyalty. Secondly, corporate citizenship programs foster the social objectives of
the corporation. A positive public perception of the company could maintain supportive
relationship with the community and encourage business-friendly policies and incentives
through legislation and local ordinances. Thirdly, corporate citizenship activities could
help address environmental concerns. A company that adopts environmentally sound
processes can reduce overhead costs as well as minimize whatever negative impact its
business operations may have. And by working through networks, companies can share
risks and expand reach of their resources (CCC, 2003).
In 2003, the PBSP-CCC asked 49 companies 11 to make a self-assessment of their
corporate citizenship programs using this framework. The results show that companies
managing stewardship and managing workplace concerns programs has the highest mean
rating at 4.30. Companies managing corporate community partnerships, on the other hand,
have the lowest mean score for almost all elements at 4.13. The mean score of system and
process index for the 49 companies is 4.17, which suggests that corporate practice in the
Philippines needs to be improved significantly.12
When company respondents were asked to name the specific area of corporate
citizenship expression in which the company had achieved considerable success and
maturity, 80 percent identified social investment as their main expression of social
responsibility; 61 percent were implementing programs in environmental sustainability; 76
percent were carrying out CSR programs in partnership with a community of their choice;
and 53 percent were managing employee-related services and processes in the workplace.
11
Of the 49 respondents, 80 percent are large industries, 15 percent are small and medium enterprises,
and five percent nonbusiness (CCC, 2003).
12
Each of the elements is assessed on a five-point scale. A rating of 5 means the indicator or standard
item is in place and effective. A rating of 4 means the item is in place but needs improvement. A rating of
3 means that the item still is being developed. A rating of 2 means that the item is of interest and a rating
of 1 means that the item is not applicable (CCC, 2003).
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Philippines
The survey also helped in finding out which among the impact indicators were of real
value to the business.13
The survey likewise showed that corporate citizenship activities, to a certain extent,
made positive contribution to the company’s financial bottom line due to employee
retention and customer loyalty. With 44 percent net rating, the majority of respondents
claimed strong evidence for their view that their employees were proud to be part of the
company because of its good corporate citizenship practice, and that their employees felt
that the social agenda of the company helped fulfill their personal social responsibility.
The majority of respondents claimed strong evidence that corporate citizenship helped
develop loyalty and commitment among the company staff. A large number of
respondents asserted that corporate citizenship practice begot customer loyalty to the
brand, and thereby placed their products in a better market position than the products of
companies without social involvement. But on whether the company’s security expenses
had gone down as a result of improved community relations, more respondents said they
had no evidence to show for it.
As to the social impact of corporate citizenship activities, more companies claimed
that good corporate reputation and social acceptability had a strong impact on their social
bottom line. (A net 23 percent rating indicates strong evidence for the claim that the
responsiveness of company leadership to development issues has a strong impact on its
social bottom line.) Likewise, respondents claimed to have strong evidence that
community participation in decision-making process empowered the communities where
their companies operated. Thus, the community’s dependence on the company was
lessened. However, a significant number of respondents cited only weak evidence that
companies communicated accurate and appropriate information to all their stakeholders.
On environmental concerns, company respondents claimed strong evidence for the
strong impact corporate citizenship technologies had on their environmental bottom line,
by improving their operational efficiency. It must be noted however that almost the same
number of companies stated that eco-efficient practices had either weak or no impact,
although they admitted weak or no evidence for this claim. Nevertheless, more
respondents said good corporate citizenship practices reduced negative media publicity.
Moreover, pickets and strikes were less frequent and in some instances had been
completely prevented. On risk management, however, there was weak evidence that
environmental programs of the company decreased the incidence of crime and insurgency.
The overall results of the study are shown in Table 8.
In interpreting the results, however, caution is needed. Like many other CSR studies,
the problem is in part the endogeneity of the relationships. As Claessens (2003) points out,
does good performance beget better social corporate responsibility, as the firm can afford
it? Or does better social corporate responsibility lead to better performance? He notes that
firms that adopt ISO standards, for example, might well be the better performing firms
13
Impact ratings are based on the following indicative points: strong and moderate positive impact –
indicates the program contributes significantly to business success; weak or no impact – indicates
corporate citizenship appears to have positive business benefits, but these are likely marginal and
insufficient for building a business case or, do not constitute direct financial or social returns. As to
strength of evidence, strong evidence means that the company uses a formal tool or mechanism to show
that the corporate citizenship program has impact on the company’s operations or its financial and/or
social bottomlines; weak evidence means that the company has inadequate measures or studies to show
that the corporate citizenship program has impact on the company’s operations. These measures are based
mainly on the observations or perceptions of key people in the company (CCC, 2003).
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Best Practices in Asian Corporate Governance
even if they had not adopted such standards. At the country level, a higher level of
development may well allow and create pressures for better social responsibility, while at
the same time enhancing corporate governance. The key lesson here is to be rigorous in
ascertaining cause and effect between firm performance and CSR.
of choice
Financial Driver
stakeholders
Clients support the corporate citizenship Strong Strong
Social Driver
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Philippines
All things considered, the CSR index introduced by the PBSP can be considered a
breakthrough. It allows subscribers to assess if their corporate citizenship programs are
meeting the financial, social or environmental objectives of their firms. Good results
would mean that the companies simply have to continue what they are doing. Bad results
would, however, give the companies the appropriate signals on whether it is time to
reinvent their CSR programs. Companies can also compare their scores with those of other
companies, and benchmark themselves against firms with the highest ratings.
It is easier to ignore, rather than practice, CSR. Apart from the specious view that
CSR is equivalent to stolen property rights, there are a number of excuses that companies,
especially those found in developing countries in Asia, can advance in order to brush aside
CSR. In closing, this paper summarizes the points made by Baker (2001) against
companies who keep finding excuses to defer CSR.
• Argument: The company is too busy surviving hard times to do CSR. It cannot
afford to take its eye off the core business. Very big companies have an arsenal of
resources at their disposal. Those fighting for survival cannot keep on spending
money on unnecessary actions, especially when they are laying people off and
morale is rock bottom. Employee volunteering will not make any difference when
they feel cynical and negative about how the company operates.
• Response: Managing social responsibility is like any other aspect of managing
business. If the process of managing CSR leads a company to stop paying
attention to core business, the problem is not that it is doing it at all―it is that it is
doing it badly. Well-managed CSR backs up the business objectives of the
company, establishes relationships with key stakeholders whose opinion will be
most valuable when times are hard, and should reduce business costs. Even when
times are hard, it is in the interest of any company to pollute more and run an
increased risk of prosecution and fines, not to mention attracting the attention of
environmental pressure groups. It is not in the interest of any company to lose
some of its most talented people―serving or potential―by erecting barriers on
the basis of race, gender, age or sexual orientation. It is not in the interest of the
company to ignore changing values in its customer base towards socially
responsible goods and services by producing goods just the way it always has.
Finally, it is not in the interest of the company to ignore the fact that local
communities around its plant are poor living environments, making the company
an island of prosperity in a sea of deprivation.
• Argument: It is the responsibility of the government (and the politicians) to deal
CSR. Business has traditionally been beyond social policy. The company will do
what it is permitted to do. It expects the government to provide the legal
framework that establishes what both business and society have to put up with.
• Response: Consider that of all the institutions which are currently getting more
powerful in the world, they are essentially the global players―multinational
corporations. The institutions whose power and influence are declining are those
linked to the jurisdiction of the nation-state―governments first and foremost. It is
politically correct therefore to look towards the multinationals to take a lead in
creating solutions for global problems where the governments seem incapable of
achieving co-operative solutions. In truth, many companies actually spend
considerable energy and money seeking to influence the formation of public
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Best Practices in Asian Corporate Governance
policy in their area of interest. And since that area of interest can range far and
wide―from international treaties on climate change, to domestic policy on health
(such as prohibiting smoking)―the fact is the lobbying activities of companies
show that they have a role, whether they like it or not. If that lobbying has
involved blocking legislation that serves a social end purely in order to continue
to profit in the short term, then the company is on very shaky ground. If CSR is
simply about obeying the law and paying taxes, then perhaps the above statement
is fair comment. But if it is about managing the demands and expectations of
opinion formers, customers, shareholders, local communities, governments and
environmental NGOs, if it is about managing risk and reputation, and investing in
community resources on which the firm later depends, then the argument is has no
intelligible meaning.
• Argument: CSR lowers the profit line.
• Response: The difficulty of buying into environmental protection has to be
acknowledged. For instance, “selling” waste minimization to managers who really
need to save money can run into serious obstacles, including the perception that it
will cut into the company’s fragile bottom line. Yet study after study after study
of just about any business one can think of, has shown that if waste minimization
is carried out for the first time, the company can shift one percent of its overall
turnover straight onto its bottom line. That is not an insignificant figure. And yet,
getting out and selling more products somehow remains more attractive for
business managers than making more profit through wasting less. It will take a
long time and a change in fundamental attitudes towards doing business before a
sea change can happen. But in the mean time, companies should keep looking at
the evidence of successes in CSR investments.
Philippine companies are reaping the benefits of their social investments but the
remaining challenge is how to widen corporate enthusiasm to make sustained social
investments and to raise the standards in observing their obligations to their various
stakeholders, not only because it is the profitable to do, but because it is the natural thing
to do. Filipino and Asian firms should recognize CSR as a business framework which
makes possible wealth creation as if people and the environment mattered.
REFERENCES
Asian Institute of Management (2006). The Asian CSR Awards. Asian Forum on CSR.
www.asianforumcsr.com Accessed 12 November 2006.
Baker, Mallen (2001). Arguments against Corporate Social Responsibility, Business
Respect, 2nd April. www.mallenbaker.net Accessed 10 December 2006.
Baker, Mallen. (2003). Corporate Social Responsibility in Asia – A Tale of Two
Conferences. Business Respect, No. 63, 23 September. www.mallenbaker.net
Accessed 10 December 2006.
Baker, Mallen (2006). Corporate Social Responsibility―What Does It Mean? Business
Respect, 4 December. www.mallenbaker.net Accessed 10 December 2006.
Baumol, William J. and Alan S. Blinder (1998). Economics Principles and Policy.
Harcourt Brace College Publishers.
Center for Corporate Citizenship (2003). Benchmarking Corporate Citizenship Practice
2003 Report. Manila: Philippine Business for Social Progress and The Ford
Foundation (Philippines).
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THE EVOLUTION OF THE DISCLOSURE REGIME
IN SINGAPORE
PRELUDE
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Singapore
and responsibilities of the board of directors are similar to those in England and in most
respects similar to those in most Commonwealth countries. It could be said that this
foundation of corporate law and regulations enabled Singapore to improve its corporate
governance with time, as there is much that is commendable in the English system of
corporate governance.
The need for better disclosure practices has become all the more urgent because of
recent reports of non-disclosure of various aspects of financials and shareholdings as well
as the issuance of profit warnings by several companies listed on SGX. Many of the
companies falling short of the disclosure requirements have been the smaller cap
companies, raising questions about whether independent directors are truly performing
their roles of oversight, and whether perhaps the regulators themselves need to be more
alert to the companies seeking listing on SGX and perhaps do more, including introducing
more stringent laws. Yet inadequate corporate governance and internal controls are
prevalent in companies of all sizes. Ironically, the apparent heightened lack of governance
controls in some companies could be a direct result of the good disclosure structure that
has come out in Singapore over the years. It has effectively prevented inadequate
disclosures and poor compliance practices from being concealed by companies
(Anandarajah, 2005).
In this paper, we explore the corporate governance framework in Singapore
highlighting what underlies the best practices in disclosure in Singapore. It is sound public
policy to adapt the best in disclosure practice for Singapore that partly accounts for
Singapore’s high ranking internationally. The underlying objective on the part of the
policy makers is to establish Singapore as an international financial center and a global
hub for commerce. To achieve this, Singapore must adopt standards and practices
international corporations are accustomed to and expect. This paramount objective shapes
the future of corporate governance best practice, especially in disclosure and transparency.
This paper begins by expounding on the need for good disclosure effort. It examines
the disclosure rules that occur as a compromise. Then we set the stage outlining a
background to the Singapore’s shift to a disclosure regime. Then it provides a brief
account of the current disclosure practices, the reforms and changes to the framework,
recent incidents involving Singapore corporations, before examining possible future
improvements.
companies’ relationships with the communities in which they operate (OECD, 1999).
Corporate governance has four pillars: (1) board processes, (2) disclosure and
transparency, (3) auditing and compliance, and (4) accountability to shareholders. It is
disclosure and transparency that relates to the effective and total communication between
the company, its shareholders and stakeholders within its sphere. In today’s competitive
global business landscape, many businesses are actively contending for their shareholders’
attention so that they can continue to rely on them for their financing needs. An effective
communication program is therefore critical to ensure that key company strategies,
directives and messages are relayed in a timely manner. Evidence suggests that investors
will pay a premium for better governance, which includes a powerful disclosure regime. In
an Investor Opinion Survey conducted by McKinsey, the World Bank and the Institutional
Investor magazine in 2002, 89 percent of respondents in Asia said that they would ante up
more for the shares of a well-governed company than for those of a poorly governed
company with similar financial performance (Donc, 2003).
Of the four pillars, corporate disclosure, doubtless, will have the most substantial and
direct effect on a company’s valuation. Business analysts may use various yardsticks to
value a company, but what is common to all the different valuation methods is the use of
an equity premium. The equity premium translates into an information premium if there is
a solid level of disclosure. Good disclosure practice will raise the company’s value, as it
lowers risk and uncertainty, and lowers the premium. Lower premium in turn leads to
higher value. A good corporate disclosure practice means prompt and voluntary disclosure
of information about the company’s financial performance and of transactions involving
the interests of directors, managers and controllers. PricewaterhouseCoopers recommends
the following actins as exemplary disclosure practice: disclosing material information in a
timely manner; avoiding selective disclosure during meetings with investors; providing
broad market information to all retail and institutional investors, both local and foreign;
and offering information above and beyond statutory requirements (Donc, 2003).
Empirical studies compiled by Donc (2003) clearly indicate the power of a good
disclosure regime. A study made by Catherine Schrand and Robert Verrechhia of the
Wharton School of the University of Pennsylvania indicates that greater disclosure
frequency in the pre-IPO period is associated with better and more reflective IPO pricing.
Furthermore, the evidence suggests that lower levels of disclosure resulted in higher cost
of capital, as found in the form of wider bid-ask spread and analyst forecast dispersion.
The study was conducted using US samples. In the case of Asian markets, Kevin Chen,
Zhihong Chen and John Wei (HKUST) find that disclosure practices have a significantly
negative effect on the cost of equity. Their findings also show that risks of expropriation
and unfair minority shareholders treatment are lowered if an unequivocal disclosure policy
is adopted. Finally, Janice How (Curtin University) and Julian Yeo (University of
Melbourne) provide a more specific research on the impact of forecast disclosure and
accuracy on IPO pricing. In their paper, they find that those companies which consistently
failed to forecast rightly experienced a higher level of price volatility.
THE TRADEOFFS
Too many cooks will spoil the broth. In a similar vein, too many rules and regulations
will stifle the entrepreneurial spirit. Yet at the same time, too few rules would leave the
investing public unprotected against unscrupulous business practices (Ling, 2004).
Tradeoffs are necessary to resolve this dilemma.
To be sure, there has to be a set of fundamental mandatory standards. On top of that,
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Singapore
companies are encouraged, in a voluntary way, to adopt a set of best practices as spelt out
in the Code of Corporate Governance (Ling, 2004). Mandatory measures are often
legislated or made part of the rules. Other standards are left to the market to enforce. In
certain instances, according to PricewaterhouseCoopers’ Banerjee, careful legislation
could bring out results at a pace quicker than market-driven solutions. Market-driven
practices may not always oblige voluntary compliance by companies. He cites as a good
example the non-mandatory Guide for the Operating and Financial Review (OFR) issued
by the CCDG, saying it remains to be seen how many companies would disclose the
information relating to the financial and non-financial drivers of a company’s performance
as envisaged by the OFR (Anandarajah, 2005).
On the other hand, as Tan and Tan (undated) argue, a flurry of management frauds
might tempt the regulators or advisory bodies responsible for good corporate governance
to overreact as they peer into the areas where abuse occurs. The regulators’ new guidelines
might require the corporate disclosure of board activities. Yet the link between the
activities, their intended results and the actual results might be tenuous or distant, leading
any overzealous auditors to rein in value creation activities.
Then there is the matter of the high start-up cost of transparency. The principal-agent
problem suggests that shareholders have less knowledge of the company and its operations
than the managers do. As a consequence, they often tag an information discount to a
company’s value. Various empirical studies have proven the existence of this discount. To
reduce the discount, companies have begun to put in place a governance framework that
will align shareholders’ and managers’ interests better. At the same time, company
managers also have started imparting sensitive information to their shareholders which
were once exclusively given to a select group of managers and analysts. However, these
practices come at a high price. In order to enjoy any incremental benefits, the increase in
value needs to be greater than the cost of putting the governing structure and disclosure
practices in place (Donc, 2003).
As a keen observer of Singapore’s corporate governance points out, the decision of the
regulators to introduce Sarbanes-Oxley types of interventions in the financial reporting
processes and controls, executive certification of financial statements and the processes
that generate them, while welcome, is not to be taken lightly as compliance may drive up
the cost of doing business. Too much intervention may also dilute the attractiveness of
Singapore to foreign investors, and its cost may far exceed the benefits of reining in only a
few rogues (Virtual Roundtable, Business Times, 18 December 2004).
Yet the OECD is optimistic that disclosure requirements are not expected to place
unreasonable administrative or cost burdens on enterprises. Nor are companies being
asked to give away information that may endanger their competitive position. The
minimum requirement, however is that the investor is fully informed of the investment
decision to avoid misleading him or her. The key concept that should be applied in
disclosures is materiality. Material information can be defined as information whose
omission or misstatement could influence the economic decisions taken by its users
(OECD, 1999).
Finally, as a top corporate insider calls attention to, the big question is whether
Singapore has the infrastructure to support the relatively pure disclosure-based regime that
is being instituted. Good infrastructure translates into sophisticated shareholder activism,
effective self-regulating organizations, capacity to enforce laws and regulations and the
like. Apparently, there is an expectations gap between regulators and investors
―regulators would like to see more market enforcement of rules and regulations, while
investors believe that regulators should do more. But it is difficult for investors to enforce
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Best Practices in Asian Corporate Governance
their rights. Shareholders face a costly collective action problem (Virtual Roundtable,
Business Times, 18 December 2004).
standards; and corporate governance. The Committee for Disclosure and Accounting
Standards (DASC) reviewed the process by which accounting standards were set,
maintained and regulated. It examined the approach, development and promotion of best
practices in disclosure requirements among Singapore’s publicly listed companies. The
DASC recommendations sought to improve the process of formulating and preserving
accounting standards in Singapore. They aimed to align Singapore's standards in the areas
of accounting and auditor independence with international standards (e.g., those laid down
by the International Accounting Standards and the US Generally Accepted Accounting
Principles), as well as promote good disclosure practices in Singapore (Donc, 2003).
The recommendations of the three committees led to the strengthening of the
corporate disclosure framework, the adoption of the Financial Reporting Standards
(modeled after the International Accounting Standards Boards), and changes to the
corporate law and regulations. Their idea was to implement a corporate governance regime
avoiding two extremes: a prescriptive approach under which companies must comply and
a non-prescriptive self-regulatory approach where every company is free to adopt its own
practices. Instead they adopted the balanced approach, which is similar to the system
existing in Canada and the United Kingdom (Donc, 2003).
To improve the standard of disclosure, the Companies (Amendment) Act 2000
brought in a “reasonable investor” test, which requires any issuer making a public offer to
include in the prospectus all material information that an investor would reasonably
require in order to make an informed decision on the securities being offered. Further, to
enhance accountability for prospectus disclosure, the new law holds an underwriter (in
addition to the issuer and its directors) liable for misleading or inadequate prospectus
information and requires an issuer to publish a supplementary or replacement prospectus if
a registered prospectus was found to contain false or misleading information or to have
omitted material details (Economic Research and Resource, 2001). The Companies
Amendment Act (2000) came into effect on 22 January 01.
A Corporate Governance Committee was subsequently set up to come up with a Code
of Corporate Governance, which was accepted by the Singapore Government in April
2001. The Singapore Code of Corporate Governance was introduced in 2001 and
implemented from January 2003. It was also included in The Singapore Exchange’s listing
rules. The Code sets out principles and best practices in four main areas, namely board
matters, remuneration, accountability and audit, and communications with shareholders.
The Code aims to encourage Singapore-listed companies to enhance shareholder value
through good corporate governance. All listed companies are required to include a
complete description of their corporate governance practices with reference to Code
provisions in their annual report and to provide adequate explanations when deviations
occur (Tan and Tan, undated; Sim, 2001). The Code is consistent with Singapore’s
disclosure-based regime for the capital markets. The intent is not just to mandate
requirements, but also to strengthen disclosure and promote fair dealing. In general, listed
companies have stood by the principles set out in the Code (Yam, 2003).
Besides the board and remuneration matters, the Code of Corporate Governance also
provides guidelines to improve the quality of corporate financial reporting. It spells out the
mechanism to safeguard the company’s assets and resources (accountability and audit;
internal controls) as well as accountability to shareholders through effective and
comprehensive communications. The accounting, audit, internal audit and accountability
to shareholders principles work towards strengthening companies’ corporate governance
practice. Through board monitoring, these changes will limit the discretion management
has on the nature and extent of information disclosed in annual reports.
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Best Practices in Asian Corporate Governance
to bring out the benefit of better disclosure. So far, the island state's government reports
that reaction from companies to MAS initiatives aimed at improving disclosure has been
positive, while investors have also been supportive (Farr, undated).
To supervise the areas of accounting standards and corporate governance review, the
Council on Corporate Disclosure and Governance (“CCDG”) was established on 16
August 2002. Its role is to:
• Prescribe accounting standards in Singapore,
• Strengthen the existing framework of disclosure practices and reporting standards
taking into account trends in corporate regulatory reform and international best
practices,
• Review and enhance the existing framework on corporate governance and
promote good corporate governance in Singapore whilst taking into account
international best practices, and
• Revise the Code periodically in compliance with international best practices (Tan
and Tan, undated).
One best practice that ought to be highlighted lies in the establishment of the Audit
Committee at the board level as the arena for oversight over management in terms of
financial and non-financial disclosures (MCGA, 2002). Singapore has imbedded the
provision in its Companies Act and in the listing requirements of the Singapore Exchange.
The Cadbury Report (1992) recommends that "(t)he board should establish an audit
committee of at least 3 non-executive directors with written terms of reference which deal
clearly with its authority and duties" (1992a, Article 4.3). Although the Cadbury Report
may not be applicable in Singapore, it must be noted that the requirement for audit
committees for publicly listed companies was introduced in 1989 even before the Cadbury
Report was published. This requirement is provided for in Section 201B of the Companies
Act. The Singapore Exchange Listing Manual reinforces this requirement for the audit
committee through its Best Practices Guide addressing corporate governance.
The audit committee is to be appointed by the directors. The committee is to comprise
no less than three members of the board of directors. Most of the listed companies
maintain audit committees meet this minimum requirement. The committee must be
chaired by a non-executive director who is not in the employment of the company or its
related companies. A majority of the committee must also be independent non-executive
directors. Thus if a company decides to adhere to the minimum requirement of three, two
of the members have to be independent non-executive directors and the third could be a
non-executive director or an executive director.
The oversight role presumes the adoption of a system of accountability and audit, the
principles of which were laid out in the Cadbury Report (1992) and strengthened in the
Hampel Report (1998).
• Financial Reporting. The board should present a balanced and intelligible
appraisal of the company’s position and prospects.
• Internal Control. The board should maintain a sound system of internal control to
protect shareholders’ investment and the company’s assets.
• Relationship with the Auditor. The board should establish formal and transparent
arrangements for considering how to apply the financial reporting and internal
control principles and for maintaining an appropriate relationship with the
company’s auditors (MCGA, 2002).
The Audit Committee thus serves as a part of the infrastructure for governance that
helps put order into the review of transactions of the firm, both within and with outside
parties, as a way of minimizing potential conflict which could threaten to undo or upset
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Singapore
In March 2002, MAS announced that it is compulsory for banks to rotate their
external audit firms every five years. Also mandatory for banks are audit committees
comprising of non-executive members of which majority have to be independent. All these
changes have to be implemented by 2006.
To look after the interest of shareholders, the Securities Investors Association
(Singapore), a non-profit organization, was established in June 19991. The SIAS continues
to periodically assess all listed companies on their disclosure performance. It has received
feedback that pinpointed some companies in the construction industry as being reluctant to
reveal information, and hoped this could be corrected. Its members were concerned with
issues like remuneration, benefits accorded to their directors, and details on their
investments.
The shift towards a disclosure-based regime has also been matched by the Singapore
Exchange’s exercise of its powers to halt trading of a company’s shares, suspend trading
or de-list a company’s shares. Under Article 14 of the Singapore Code, firms have an
obligation to provide accounting information and disclosure. Paragraph 1303 (3) (c)
permits for the SGX to suspend trading when there is an audit qualification or emphasis of
a matter in respect of the issuer (or significant subsidiary) that raises a going concern issue.
Paragraph 1303 (4) encompasses an even wider basis for suspension―when the listed
company is unable or unwilling to comply with, or contravenes a listing rule. The
Exchange occasionally has suspended trading as seen in the cases outlined in the
subsequent section.
In the end, it is proper disclosure and transparency which increases public confidence
in the credibility and objectivity of financial statements and of boards. This was a basic
failing that helped aggravate the Asian financial crisis. If done well and consistently, good
disclosure practices should help forestall another such crisis (MCGA, 2002).
COMPLEMENTARY DEVELOPMENTS
There have been other developments outside of the legal and regulatory framework
that promote a disclosure culture in Singapore.
1
The website address of the Securities Investors Association (Singapore) is www.sias.org.sg
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Keeping abreast of the times, many companies in the Asian region have taken it upon
themselves to increase the flow of information to the market. IRAsia.com is one firm
hoping to take advantage of the flourishing company information market. It has lately
opened new offices in Singapore and Sydney, reflecting the growing corporate interest in
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Singapore
Citiraya is a fully integrated electronic waste recycling and processing company, listed on the Singapore
Exchange since July 2002. It was a favorite amongst investors and was named as Singapore’s “Best
Newly Listed Company” in 2002 based on an annual poll conducted by Asiamoney, a leading financial
magazine in Asia (Edge, 2005).
In January 2005, the company came under public attention when the local press reported market rumors
of disagreement between the company and its auditor, Deloittle & Touche and the possibility of a profit
warning (Business Times, 2005a). Subsequently, the company announced that it was asked to assist the
Corrupt Practice Investigations Bureau (“CPIB”) with certain investigations. The company appointed an
independent investigator and financial advisor to carry out a through and comprehensive probe into the
transactions in question (Straits Times, 2005a). The investigations has since revealed that the firm’s key
employees were involved in the trading of electronic waste that was designed for recycling (i.e., to be
destroyed) as trading electronic waste was far more profitable than recycling (Straits Times, 2005c).
Shares of Citiraya have been suspended since 24 January, 2005, pending investigations over alleged
fraud. They were then traded at S$1.08 cents (Straits Times, 2005a). Late-breaking news (as of time of
writing) indicates that Citiraya is in deep trouble. The Corrupt Practices Investigation Bureau (CPIB) has
had a number of people charged with corruption and misappropriation of company funds. Citiraya has its
own probe going presided by an independent investigator and financial adviser. A key rescue effort by
Venture One, pulled out in May this year, saying the due diligence exercise had not worked out well.
Citiraya then obtained a court order to hold back any winding-up moves by creditors (Sabnani,
ChannelNewsAsia, posted 23 September 2005).
Besides the police probe, Citiraya faces legal suits from creditors, a dwindling cash reserve and the loss of
its customers to its competitors. Adding to Citiraya’s woes was a failed rescue plan by white knights and
the disappearance of former CEO, Mr. Ng Teck Lee (Business Times, 2005d; Straits Times, 2005b). Mr
Ng Teck Lee and Mr Raymond Ng, the siblings who founded the company, have a combined
shareholding (direct and deemed interest) of 46.41 percent in the company. The CPIB had stopped the
sale of Teck Lee’s bungalow, and Teck Lee is believed to have left the country (Straits Times, 2005b).
The pressure for improved disclosure was also evident in the regulators’ willingness to
act when breaches occurred. Brief accounts of two such cases, Citiraya and China
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Best Practices in Asian Corporate Governance
Aviation Oil, are provided as case vignettes below. It is evident from the corporate
incidents that the Singapore Exchange is prepared to act in relation to corporate
governance failures particularly in the area of disclosure. The Code by itself would not be
effective if the interests of the investing public were not assured through the willingness
and quick response on the part of the Exchange to suspend the trading of shares of
companies where there is reason to do so. This preparedness to act lends credibility to the
disclosure-based regime.
As the Code is adopted on a voluntary basis, the presence of sanctions to address the
lack of transparency and disclosure is an integral part of the overall framework. The
Singapore Exchange’s ability to act on the share trading of a defaulting company’s shares
has proven to be an important prong to the corporate governance framework.
Listed on Singapore Exchange in December 2001 with a registered capital of 3.6 billion Yuan (US$435
million), China Aviation Oil’s core business is the procurement of jet fuel from overseas markets for
distribution to China’s civil aviation industry through its parent company, China Aviation Oil Holding
Company (CAOHC). CAO was hailed as a leader in corporate governance when it won the “Most
Transparent Corporation” award endorsed by Securities Investors Association (Singapore) in 2002 (CAO
2002). Its board had five non-executives directors, one executive director and three independent directors.
The Chairman was a non-executive director and was not the CEO (CAO 2003). An Audit Committee was
tasked to assist the board in the identification and monitoring of significant business and financial risk.
In spite of a three-layered formal system of internal control 2 , CAO stunned investors and markets
regulators when it announced US$550 million losses from derivatives trading in the energy markets. It
was also seeking court protection from creditors. Trading of its shares has been suspended on 29
November 2004 after the shares dropped to below $0.60 per share.
The company is facing criminal investigation by the Commercial Affairs Department (CAD) for alleged
insider trading. Chen Jiulin, the suspended CEO, is currently assisting CAD in investigations of these
offenses under the Singapore Securities and Futures Act. In a statement to the Singapore Supreme Court
on 30 November 2004, Jiulin outlined the company's ill-fated venture into options trading. The first few
transactions were profitable. However, the worldwide increase in oil prices in 2004 caught CAO's trading
team unprepared. It made bets on the direction of oil prices and ran up losses as New York oil futures
surged to a record US$55.67 a barrel on 25 October 2004. Instead of leaving the market and accepting
losses of several million dollars, the company raised its bets until it faced losses that it could not meet.
The company was only authorized to trade crude oil futures up to a value of US$5 million, or 2 million
barrels. Instead, it transacted trades involving 53 million barrels, resulting in losses of about US$550
million.
The CAO case, in which the company failed to disclose huge losses on oil derivatives
trading, has triggered a debate in Singapore, normally a show-off as one of the best-
regulated financial markets in Asia. Attracting more foreign listings was seen as essential
for the SGX's growth because of Singapore's small corporate base. The SGX has focused
on wooing mid-sized Chinese companies, such as CAO, that might be ignored in bigger
bourses.
The issues being raised include whether the Singapore Exchange should tighten listing
requirements and whether independent directors are effective at all in supervising
2
Comprising of the respective heads of each divisions (who are responsible for supervising the daily
work of their division staff and held accountable for the proper compliance to stipulated work procedures
and limits daily), an independent Risk Management Committee and an Internal Audit Division.
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Singapore
companies. Critics blamed SGX's decision several years ago to relax entry rules by
switching from a merit system to a disclosure-based regime as the culprit in the financial
scandals among listed companies, including local ones. But the adoption of the principle
that listed companies should bear the onus of responsibility for disclosure―part of a
liberalization plan to make Singapore competitive against other regional centers such as
Hong Kong and Tokyo―remains sound, according to SGX executives. But the Monetary
Authority of Singapore, the main financial regulator, said it would review corporate
governance rules once investigations were completed. There have been calls for authorities
to impose tougher penalties for those who violate disclosure rules (WCFCG, 2006).
As the pendulum swings towards a disclosure-based regime in Singapore, the need for
continued progress along a wide front of concerns has become more urgent. The following
are some of the next steps that need to be made, if a middle ground is desired.
3
There are two bourses in Singapore. The Singapore Exchange Main Board and the secondary board,
SESDAQ (Stock Exchange of Singapore Dealing and Automated Quotation System), and as of 2005,
there are 638 companies listed on the two boards.
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Best Practices in Asian Corporate Governance
that companies be segregated along corporate governance lines, in the hope that the
resultant difference in the cost of capital for the various groups of companies would
establish the link more directly. He argues that the rewards for companies which make it to
the top of the lists (e.g., the Business Times’ Corporate Transparency Index, the corporate
governance ranking by Standard & Poor's and the Corporate Governance & Financial
Reporting Centre at the National University of Singapore) are still not that tangible (Ling,
2004).
Enforcing Sarbanes-Oxley
Some elements of Sarbanes-Oxley are worthy of adoption, according to Banerjee.
These include the following:
• A clear definition of the responsibility of management and auditors in the area of
internal control system and financial reporting. That means requiring auditors to
provide an independent report to the shareholders and board of directors on
management’s assertion on the effectiveness of the company’s internal control
over financial reporting;
• The inclusion of an internal control report by management in the company’s
annual report;
• Requiring management to document and test controls. This should provide
management with assurance on the financial numbers they are producing.
• Requiring sign-offs by CEOs and CFOs (Under section 302 of the Sarbanes Oxley
Act, CEOs and CFOs are required to attest to the accuracy of the quarterly
financial reports).
• Putting in whistle-blowing provisions provided by Sarbanes Oxley Act to protect
reporters of corporate wrong-doings.
Any progress along the disclosure front must emphasize that the overall responsibility
for the establishment and maintenance of an effective internal control and financial
reporting system rests squarely with management and the Board. The responsibility cannot
be delegated (Anandarajah, 2005).
Effective training
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Singapore
Stronger surveillance
The disclosure-based regulation does require surveillance and strong enforcement to
deter and penalize those who would bend or break the rules, according to Susan de Silva,
partner and head of corporate/commercial group, Alban Tay Mahtani & de Silva. She
suggests maximum penalties under the Securities and Futures Act (SFA) for those who run
afoul of the continuing disclosure requirements (The maximum fine is $250,000 and/or up
to seven years' imprisonment, and a civil penalty―payable to the MAS―at up to three
times the gain made or loss avoided.) (Virtual Roundtable, Business Times, 18 December
2004). On this score, MAS has to continue to build up its enforcement capabilities to
undertake investigation and civil penalty action. To support its enforcement activities,
MAS has acquired a market surveillance system to enhance its capability in detecting
irregular trading activities. (Economic Research and Resource, 2001).
Non-discrimination in listing
On the question of listed overseas companies, ideally, the same rules should apply to
all companies, without discrimination. Unfortunately, the SGX may want to be more
stringent with overseas companies seeking listing to ensure some quality control and not
risk putting Singapore's reputation at stake, according to Angela Tan, senior correspondent
of The Business Times. A fair amount of scrutiny may give local investors more assurance
and protection. But there is a tradeoff: more cumbersome rules may deter foreign
companies from choosing to list in Singapore, argues Ong Lien Wan, president of the
Association of Certified Fraud Examiners. But Mak Yuen Teen, co-director of the
Corporate Governance and Financial Reporting Centre at the NUS Business School,
counters that with Singapore relaxing rules for foreign companies, it may end up attracting
companies with lower corporate governance standards―attracting too many poor quality
companies may lead to a situation where the bad drives out the good. The key, according
to De Silva, is simply not to discriminate and apply the same rules to all (Virtual
Roundtable, Business Times, 18 December 2004).
Protecting whistle-blowers
Whistle-blowers are not paid informants, and the least that could be done is to protect
them from reprisals, points out Teen. According to Wan, a 2004 survey done by the
Association for Certified Fraud Examiners in the US has shown that almost 40 percent of
frauds are discovered from a tip-off; and that recent KPMG studies on fraud in Singapore
also supported the fact that almost 53 percent of fraud cases are uncovered due to
notification by external parties, informants or anonymous letters. That makes a whistle-
blowing program a most powerful tool in detecting management fraud. But there is little
incentive for top management to install a whistle-blowing program, since it is a cost item.
Wan argues that it is necessary for the government to pass a bill requiring listed companies
to have a whistle-blowing program, as the US has done in the Sarbanes-Oxley Act. The
Act must be coupled by very strong commitment from management to support whistle
blowing and trust in the people who implement the system, suggests Teen (Virtual
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Best Practices in Asian Corporate Governance
Final note
The Singapore government, based on the evidence presented, has undoubtedly taken
the right step in promulgating good disclosure practice through the introduction of a new
regime and regulatory reform. Will a higher proportion of investor funds seek safe
investment havens and more companies, even foreign ones, seek listing on the exchanges,
as Donc (2003) confidently predicts? Whether Singapore and the listing companies will
find the gains outweighing the costs, only time will tell. Yet as Anandarajah (2005)
remarks, good corporate governance is an evolving process and perfection will never be
attained. The journey, which will invariably be bombarded with constant criticisms of
insufficient steps being undertaken by regulators, will find corporations improving
themselves over time. Singapore has, on balance, done well for itself.
REFERENCES
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Singapore
World Council for Corporate Governance (2006). Singapore Waits for Regulatory Review.
www.wcfcg.net Accessed October 18, 2006.
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Best Practices in Asian Corporate Governance
Yam, Tony Tan Keng (2003). Speech at the SIAS’ 4th Investors’ Choice Awards 2003, 19
September at Orchard Hotel, Singapore Government Press Release, September.
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THE EQUITIZATION PROCESS IN VIETNAM:
MAKING A HEADSTART IN A LONG JOURNEY
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Best Practices in Asian Corporate Governance
monitoring the managers. From 1995 onwards, the capital and assets of SOEs have been
put under control of the Ministry of Finance, but the operation of SOEs is still overseen by
their respective line ministries or local governments. That is why the directors of SOEs are
still encumbered by regulations from many organizations (Tho, 2001). Neither is it clear
who represents the state as owner of SOEs and how their interests are aligned with those
of the companies.1 Arguably, the responsible bodies which are in charge of the SOEs have
little incentive to keep an eye on the managers for efficient operation.
SOEs also do not participate in the stock market, which plays an important monitoring
role through the movement of stock prices. Lacking this significant source of information,
the government as business owner has more difficulties in monitoring its managers than
private or publicly listed companies. Information on each SOE is almost undisclosed.
Nobody, including the government itself, is well informed about the financial situation of
SOEs (Tho, 2001). The diagram below indicates this agency problem.
Incentive/
information
Owner Manager
Mechanism Incentive/
clear direction
Efficiency
Monitoring
Executing
Information flow
1
According to the 2003 Law on State Enterprises, the following individuals and organizations assume the
role of representatives of state ownership in SOEs:
• The Prime Minister directly represents or mandates relevant ministries to represent state owned-
assets and to exercise the owners’ rights and obligations in special SOEs.
• Ministries and Provincial People Committees act as owners of SOEs which do not have a Board of
Management.
• The State Financial Investment Corporation (SFIC) acts as representative of enterprises whose
charter capitals are wholly invested by SFIC (Dzung, 2004).
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Vietnam
• The managers have no clear directions from the owner on what the primary enterprise
target is (each SOE has many agenda while a private company has only profit
maximization as goal). They will have no motivation to drive the company’s
performance levels.
• There is no clear indicator on how the company is performing. Even in cases where
there are initiatives for profit maximization, the information available to SOEs
owners/managers is limited as the enterprises which they oversee do not participate in
the capital market and has soft budget constraint. It should be noted that budget
constraints turned from “soft” to “hard”, but recently tended to return to “soft” again,
particularly in large SOEs. It is easy to see why. Beginning the latter half of 1997,
helped along by the adverse effects of the Asian crisis, many SOEs experienced
financial difficulties and the government has to bail out the large SOEs, on account of
their leading role in a socialist economy (Tho, 2001).
Due to these problems, many observers associated the collapse of the socialist
economies in the late 20th Century to the dysfunction of the centrally planned economic
system and its centerpiece, the SOEs. As the result, some transition economies have been
pushing hard for privatization in an effort to re-establish a market economy and improve
economic efficiency. Vietnam is one of those in the transition process toward a market
economy. The Doi Moi (Renovation) program started in 1986, initiated far-reaching
reforms aimed at introducing market mechanism into the economy, encouraging the
development of private sector and restructuring the SOEs (including the diversification of
ownership of factors of production outside of the government domain).
It should be emphasized at this point that SOEs in the capitalist system in the West
and SOEs in the socialist countries in the East (Vietnam in particular) operate under very
different economic structures. The SOEs in socialist countries function in a non-market
system and are under no obligation to achieve financial objectives. They exist merely as
units of production, and as tools to carry out centrally planed targets. Therefore
privatization in the transition economies not only represents the re-establishment of private
property rights, which underlie a market economy, but also provides incentives for firms
to rationalize their organization, change product lines and find market niches to meet the
new opportunities opened up by liberalization (of pricing, among others). Arguably, the
poor performance of the SOEs in Vietnam is an outcome of not only poor managerial
incentive (a corporate governance issue) but of constraints imposed by the economic
system. The reform of SOEs must be preceded by the reform of the economic system
through the introduction of market forces and price signals.
This paper concentrates on the impacts of the diversification of ownership
(equitization) in previously state-owned enterprises in Vietnam. It outlines the history of
SOEs in post-colonial Vietnam and the country’s subsequent economic reforms as the
backdrop for the SOEs restructuring programs, particularly the equitization process.
Finally it examines the impact of the diversification of ownership and the withdrawal of
the government’s role in the management of the enterprises.
After the war against the French ended in 1954, the new socialist government pursued
a Soviet style economic model, which was believed as the best framework for
development and the right path to socialism. Immediately, the SOE sector was established,
largely by nationalizing the existing privately owned enterprises. By the end of 1960, 100
percent of industrial establishments, 99.4 percent of commercial establishments, and 99
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Best Practices in Asian Corporate Governance
In December 1986, the Sixth National Congress of the Communist Party of Vietnam
decided to embark on a far reaching renovation program ‘the doi moi’ abandoning
centrally planning in favor of a market-based, multi-sector economy with a socialist
orientation (Leung & Riedel, 2002). Under the banner of doi moi, the SOEs were to be
restructured to be more efficient, enabling them to continue being the backbone of the
economy. The introduction of the market mechanism into the economic system triggered
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Vietnam
the first wave of SOE reform, which started to operate as business enterprises, where
financial targets began to matter. SOEs were given the autonomy to formulate and
implement their own operating plans based on socio-economic development guidelines set
by the government under a decision reached in November 1987. Price control was relaxed,
and companies purchased inputs via the market and could sell their outputs directly to
customers. SOEs’ profits were calculated based on real cost, and except for compulsory
transfers to the State Budget, profits were retained by the enterprises and used at their own
discretion. Along with the progress in doi moi policy, particularly since 1989, managerial
autonomy has been further accorded to SOEs, with freedom to set output target and prices,
disburse bonuses, and use retained profits to fund intra-firm social services (Tho, 2001).
In the initial stages of the reform program, many SOEs were not able to adapt to the
changes. At constant 1989 prices, the industrial output of the SOE sector in 1989 fell 2.5
percent compared with that of 1988 and it was estimated that by 1990 some 38 percent of
SOEs were generating losses. To tackle the problem, in 1991 the government required all
SOEs to re-register, and those judged to be inefficient or lacking capital or technology or
did not have sufficient market demand for their outputs were dissolved or merged. As a
result, the total number of SOEs dropped from 12,297 to 6,264 by April 1994. Most of the
changes came from small locally managed SOEs with less than 100 employees and capital
of less than VND500 million (USD45,000). Total assets of the liquidated enterprises
accounted for less than 4 percent of the total state enterprises assets and about 5 percent of
SOE turnover. The SOE sector was further reorganized into General Corporations with the
issuance of Decision 90 and 91 in 1994.
The State-Owned Enterprise Law, enacted in 1995, formalized the roles and functions
of SOEs and provided the first legal basis for their operation. This law (and other
subsequent policies), gave all SOEs legal status. They were now legally equal to each
other. They had the right to decide what, how and for whom to produce and where to
source inputs and market their outputs. They were allowed to do business freely with each
other and with non-SOEs (including foreign partners) in the form of a joint venture or a
business contract. They were also allowed to hire and fire employees and set wages, within
prescribed policy guidelines. All after-tax profits belonged to SOEs. They had almost total
freedom to use their capital. They could invest using their own funds to increase fixed
capital and dispose unnecessary fixed capital except for big projects or important
equipment where approval must be sought from the finance authority. The SOEs in
Vietnam became somewhat similar to those in the West―business enterprises (rather than
a policy tool) with financial targets and more or less financial independence.
The reform of the economic system and the restructuring of SOEs brought positive
impacts on the economy as the whole and on the industrial SOE sector in particular. The
yearly growth rate of SOE industrial output value became more stable at high levels
compared to the erratic pattern of the pre-1990 era (Figure 2).
The spectacular turnaround of the Vietnamese economy in the first half of the 1990s is
now well known. Between 1991 and 1997, real GDP rose to between 7 percent and 9
percent per annum; inflation stayed mostly in the single digits; exports grew at an average
rate of around 30 percent annually, and foreign direct investments arrives in great numbers
at a rapid rate. Almost all (about 98 percent) of FDI inflows went into the state sector,
chiefly in the form of joint ventures with the SOEs. This course was so striking that the
state sector was actually getting ahead of the non-state sector during this period (Leung
and Riedel, 2002).
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Best Practices in Asian Corporate Governance
25
20
15
10
Percentage
5
0
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
-5
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
-10
-15
-20
41
41
40
40
39
39
38
38
37
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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Vietnam
After the initial “shake up” (liquidation and mergers to eliminate the non-viable
enterprises; reorganization into general corporations), the SOEs continued to be the
linchpin of the economy, as Figures 3, 4 and 5 show. In 1992 the national assembly
reaffirmed the roles assigned to SOEs:
• SOEs are the instruments through which the government steer the national
economy in the direction of achieving socialist targets. SOEs are prominent in
important industries such as cement, electricity, steel, and petroleum, in the
process providing infrastructure, energy, inputs, and social services to the
economy in general.
• SOEs are the main engines of industrialization and modernization, which require
big investment, high risk and slow rate of return. SOEs also generate important
employment opportunities that help maintain social stability.
Entering the 1990s with a more viable structure, the SOEs however met new
challenges, as they had to compete with private and foreign investors. On average the
growth rate of SOEs compared to other sectors was always lowest and many SOEs are still
enduring losses. Statistics from Ministry of Finance shows that three-fifths of SOEs were
unprofitable as of the end of 1997. In 1999, only 40 percent of SOEs earned profits (Lao
Dong newspaper, 2000). According to the Vietnam Economic Times (1999), the ratio of
profits to total capital for the SOE sector decreased continuously from 1995 to 1997. GDP
share of SOEs in the 1990s was in a downward trend, reflecting its weakness in the new
era and the need for further reform. The government acknowledged that the weakness of
the SOEs sector could be resolved by shifting ownership to those outside of the
government domain, and by releasing important internal potential within the enterprises.
These two objectives found haven in equitization, which was therefore introduced in 1991.
The equitization program started cautiously and slowly in the early half of the 1990s and
started to accelerate thereafter as the government became more committed to withdraw its
influence in large parts of the economy.
State Private Foreign State Private Foregn
100% 25.00
90%
80% 20.00
70%
60% 15.00
50%
40% 10.00
30%
20% 5.00
10%
0% 0.00
1995 1996 1997 1998 2000 2001 2002 2003 1995 1996 1997 1998 1999 2000 2001 2002 2003
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Best Practices in Asian Corporate Governance
In the past, under the command economic structure, SOEs were in trouble not because
of poor corporate governance issue but because the system as a whole was dysfunctional.
SOEs were but policy means to socialist ends and passive production units. After the
introduction of market forces and the re-registration of SOEs as business enterprises
operating within a market structure, the corporate governance issues became prominent in
the 1990s. Equitization emerged as the primary governance instrument, subjecting the
management of SOEs to better monitoring and disciplining measures. A cautionary note is
provided by Fforde (2004), however, when he suggested that interests associated with
SOEs are expecting an extension of private economic power and thus blending the use of
state power to ensure favorable resourcing with an underlying maintenance of particularist
control.
In summary, the SOE restructuring program therefore can be categorized as follows:
• 1986–1990: Introduction of market forces and price signals, breaking up of the
centrally planned system, transformation of SOEs from passive production units
into active and autonomous business entities with financial targets.
• 1991–2001: consolidation of the new market economy with socialist direction,
SOE reform initiatives in the context of competition, and a new focus on the
problems of corporate governance in publicly owned firms. The government
started to experiment with co phan hoa or equitization.
Equitization is Vietnamese-style privatization, and is defined as the conversion of
SOEs into joint-stock companies. A large part of the shares in the company is sold to
private investors, mostly the firm’s workers and managers. That is, the preferential rights
of purchase are given to employees (Ngoan, 2003). Equitization differs from western-style
privatization in that it does not necessarily mean that the government loses its grip over the
firm. The government still holds decisive voting rights in many cases. The proportion of
shares transferred to insiders is quite substantial, however. The equitization process in
Vietnam took place in two stages―a pilot stage, from 1992 to 1996, and an expansion
stage, from 1996 onwards (Loc, Lanjouw and Lensink, 2004).
In 1991, a Party resolution decreed the “conversion of a number of eligible State
enterprises into joint stock which should be undertaken on a pilot basis and under close
guidance, and experiences should be drawn with utter care before divesture is conducted
on an appropriate scale”. The move was cautious and was on voluntary basis: the first few
enterprises were actually equitized late in 1993 and all of 17 converted by end of 1997
were small local SOEs. Equitization involved small SOEs from the transportation, shoes,
machine and food-processing industries. In most of those enterprises, the employees hold
the dominant portion of shares, while the government still owns nearly 30 percent of the
shares (Loc, Lanjouw and Lensink, 2004).
The equitization process accelerated between 1996–2001, as the government issued
decree 28 in 1996 abolishing voluntarism and strengthening the institutional framework by
identifying more clearly which types of SOEs were to be subjected to the process, asset
valuation measures, and new policies regarding employees after equitization. In 1998,
Decree 44 provided a new and comprehensive framework under which most of the
equitization was executed. It specified the sectors (including SOEs) where government
would retain full ownership, hold fewer but controlling stock, or relinquish all shares. The
new policy helped to increase the number of equitized SOEs to 25 in the years 1996–1998.
Since 2000, the speed of equitization has quickened because of pressure from international
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donors and the strong determination of the government in accelerating the pace of reform.
As a result, the number of equitized SOEs climbed up to 745 in the period 1998-2001.
The years 2002–2005 further confirmed that equitization was the primary means to
liberate productive forces and improve economic efficiency. The government overcame its
doubts over the political implications of the program and issued a series of decrees urging
Party members, government offices, and responsible bodies to push forward the process in
a transparent and effective way. The scope of equitization also expanded to include big
and profitable companies, in almost all sector of the economy (including SOEs previously
under the defense, health, and education ministries, as well as credit institutions, notably
the Vietnam Commercial Bank). The General Corporations, the most technologically
advanced business enterprises also underwent far-reaching restructuring, including
equitization of their subsidiaries. Figure 6 shows the big number of firms equitized
between 1998 and 2005. By early 2006, Vietnam had equitized 3,107 state-owned
enterprises (SOEs). Around 30 percent, however, retain state capital of more than 50
percent, which holds back development promised by the equitization process
(VietNamNet, 7 April 2006).
Equitization put particular emphasis on wide public ownership of shares, with insiders
(staff and managers) being the main beneficiaries. It tried to avoid ownership capture by a
small number of investors as in the case of other transition economies. Given the problems
SOEs were facing, the equitization process was supposed to:
• Improve incentives resulting from secure property ownership,
• Separate management and administrative/policy aspects, freeing the enterprises to
concentrate on doing business,
• Mobilized capital from the public, and
• Increase the role of the public as owner of means of production with the power to
monitor and evaluate the performance of management.
800
700
600
500
400
300
200
100
0
1998 1999 2000 2001 2002 2003 2004 2005*
Source: VN Economic Times (23 March 2005)
Figure 6. Number of equitized SOEs over the years
Despite the rapid pace of equitization, the majority of the companies which have been
equitized are small and in non-strategic sectors. The total amount of state capital involved
in the process was only 8 percent of the total capital in all SOEs (Figure 7). The total
amount of government capital in SOEs (VND214,000 billion or USD13.5 billion) is found
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Best Practices in Asian Corporate Governance
mainly in the General Corporations (80 percent). Of these, three sectors (petroleum,
electricity, telecommunication) have the lion’s share of VND113,000 billion (USD7.15
billion), accounting for 53 percent of the total. For the equitization process to have
substantial impact on the economy, it is important to push forward the equitization process
to involve corporations, a direction which the government is taking in recent years.
Surveys and studies conducted by different bodies on different groups of companies
show a very positive picture, with most of the equitized companies enjoying significant
16
13.5
14
12 10.8
Billion USD
10
6
4
2 1.08
0
Total In the corporations Equitized
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Vietnam
Survey results
In 2002, Center Institute for Economic Management (CIEM) conducted a survey of
425 companies which were equitized before 2000. It covered all companies with at least
one full year of post equtization results. The outcome of the survey confirmed what theory
suggests, and what empirical studies show, that the companies generally enjoy
improvement in their performance following equitization. When applicable, the CIEM
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Best Practices in Asian Corporate Governance
survey results are compared with another survey involving 121 equitized firms conducted
from March 15 to April 30 2004 by Loc, Lanjouw and Lensink (2004).
More specifically, the results indicated that 90 percent of the respondents claim that
financial performance was better or much better and only 3 percent say it was worse or
much worse.
Profitability Export
Labor productivity
Asset growth
Sales
Value added
0 5 10 15 20 25 30 35
0 5 10 15 20 25 30
In Figure 8, the chart on the right suggests that the equitized companies are expanding
with more investment on assets, generating more job opportunities, and increasing sales
both domestically and internationally. In the Loc study, to measure efficiency the
inflation-adjusted sales per employee and income before tax per employee were the
indicators used. Sales efficiency rose from an average (median) 1.02 in the pre-
equitization period to 1.26 in the post-equitization period. Similarly, income efficiency
rose from an average (median) 1.10 during the pre-equitization period to 3.21 after
equitization. These results suggest that the equitized firms use their resources with much
greater efficiency after equitization (Loc, Lanjouw and Lensink, 2004)
As an SOE transforms into a joint stock company, it loses the privileges it previously
enjoyed―subsidies, government procurement, cheap and easily accessed credit―which
would cause post-equitization difficulties to the business. It is impressive however, that
despite dropping off these advantages, sales of the equitized companies grew at almost 20
percent per year, reflecting strong competitiveness and better management. The expansion
of sales did not consume more resources as value-added grew considerably faster (26
percent). The firms actually enjoyed higher efficiency level as intermediate input
consumption rose less rapidly than output.
The expansion also reflected the increase in dynamism of the firms as more firms
went into export. Total exports in the year before equitization was approximately USD20
million involving 19 enterprises. By 2001 this had grown to USD61 million involving 31
firms. The growth in numbers of exporters may be more important as an indicator of
entrepreneurial fervor than the growth in value itself.
Profitability is the most important indicator to measure the performance of firms. The
chart on the left shows that overall profitability (profit over assets) increased slightly. This
might seem like a letdown at first but considering the large increase in assets, the figure
actually shows that profit increased at a rate higher than 19 percent annually, a very
impressive performance indeed. Total profits of the SOEs before equitization were about
VND80 billion (USD5 million), but had grown to VND425 billion by 2001. The survey
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Vietnam
Changes in incentives
There are clear sign of changes in incentives among the staff (workers and managers)
as performance-related bonuses and wages both changed significantly. Note that wages
rose 12 percent annually, suggesting that “spillover” changes were present in other
indicators. Where the share of workers is higher, the growth rate of wages is likewise
higher (Figure 9). Turning employees into stakeholders increases their incentive to
perform better and aligns their interest with that of the organization.
Another important indicator of incentive improvement for managers is the fact that
equitization gives the companies more/much more autonomy to pursue profit and
efficiency. The survey reveals that the manager’s autonomy to pursue profits and
efficiency has increased but the time spent dealing with state agencies only decreased
slightly, suggesting that the firms were still prey to the same level of bureaucracy, which
increases transaction costs and hinders the firms’ efficiency (Figure 10).
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Best Practices in Asian Corporate Governance
Performance based
salaries/bonuses f or
managers
Performance based
salaries/bonuses f or
w orkers
Wages/non-w age
benef its to w orkers
Motivation of w orkers to
w ork hard f or firm
success
Manager's
autonomy to
pursue profits and
efficiency
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Vietnam
1.5
0.5
-0.5
-1
Board of Director Workers Local Central Party cell
Management Government government
Source: CIEM 2002
Apart from the insignificant increase in the power of the workers after equitization, all
other changes are as expected and would theoretically have positive impact on corporate
governance. The small increase in the role of the workers should not be view as an
abnormality since workers in a socialist economy already have a significant voice. What is
most important here is the significant shift in the power structure away from government
bodies (which have primarily political agenda) to the board and directors (which are
primarily preoccupied with business agenda).
More specifically, in the appointment of a director, it is the board which has the most
power. The workers (the biggest shareholding group) are not far behind. Government and
the parent body are the two least influential in the decision making process. This is
consistent with good corporate governance, suggesting that equitization has the desired
impact by enhancing the power of the share holders, majority of whom are workers. The
government’s role becomes larger as government shareholding increases; the workers’
power likewise steps up as worker shareholding increases. These are all in line with good
corporate governance.
As expected, the Board has the biggest influence in major investment decisions and
the least influence in marketing and distribution (Figure 12). Still in accordance with good
management, the Director has the most influence in all cases. Participative management is
apparent, as workers and the Party have considerable say in firm decisions.
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Best Practices in Asian Corporate Governance
Parent body
Other government
Board of
Management
Workers
Other sharehoders
Figure 12. Who has the most influence on the selection of the director?
Entrepreneurship
Apart from increase in incentives, progress must also have been due to newfound the
dynamism of the firms which have maximized profit, while at the same time facing a hard
budget constraint. In this situation, entrepreneurship is expected to increase, reflected in
some changes in the product/market mix, production technique and technology and quality
of the product (Figure 13).
Product/market mix
Production
techniques/processes
Product quality
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Vietnam
Involuntary
Involuntary
Retirement
Retirement
No change
No change
Voluntary
Voluntary
departure
departure
Senior Management
change
change
Position
The awareness of the workers on ownership is low, and many do not recognize or
appreciate their roles as shareholders. In many instances, workers do not have the financial
means to acquire shares. Even if they do, they seldom exercise their right (as shareholders)
to choose and monitor the management team. Note that the concept of a hired managing
director is foreign to a socialist setup.
Variations in performance between different companies, the survey suggests, depends
only on size and the amount of share the state holds. The number of workers, geographical
location, date of equitization, and the parent organizations are considered irrelevant
factors. In the Loc survey, smaller firms reported greater rises in income efficiency and
employee income. Bigger firms showed greater improvements in real sales and sales
efficiency. Theory indicates that smaller firms are more flexible in adjusting to the new
environment, and this is validated by the survey (Loc, Lanjouw and Lensink, 2004).
Bigger firms seem to grow faster but those with government majority shares do better.
Size matters since economies of scale allow bigger companies more advantages to exploit
new possibilities and their own potential after equitization. It is not surprising to see
companies with assets valued higher than VND5 billion enjoying sales and growth rates 3
times higher than those with less than VND5 billion in assets value (Table 4).
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Best Practices in Asian Corporate Governance
Table 4. How does growth vary with capital and state share?
All things considered, the equitization process (which has largely been partial
privatization of previously state owned enterprises) gave birth to many joint stock
companies with government still holding substantial amount of shares. However the
majority shareholders are staff and managers whose incentive to perform has improved as
their goals are aligned to the firms’ objectives. In short, the equitization has resolved the
agency problem in these companies. The reduction in the power of the state to some extent
has helped the managers to focus more on financial targets, thus boosting the firms’ sales,
productivity and returns to the owners (including increased wages and bonuses for
managers and staff).
Although equitization so far has delivered some desirable results, they are far from
optimal. As regards the goal of improving corporate governance and reducing government
involvement in the operation of businesses, the equitization process is only at the
beginning stage.
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Vietnam
The government on average still holds controlling stakes in all the equitized
companies, which explains why many equitized companies are observed to behave as
though they are still SOEs. In 2004, it is reported that 46 percent of the total chartered
capital in all the equitized companies is still held by the government while staff held 38.1
percent and independent investors only held 15.4 percent (Figure 14). According to the
Vietnam Economics Time (March 2005), the proportion of companies where government is
holding majority shares is 82 percent, 29.5 percent of which has the government holding
more than 50 percent of the equity. Equitization reduced a significant amount of debts
from the public sector.
This increased the absolute size of the state sector. However, the transformation of the
SOEs has been simultaneous with the rapid growth of the private sector, which explains
the steady decline in the
relative size of the state sector
(Ngoan, 2003). Outsiders,
15.40%
The attractiveness of
equitized firms may be State,
compromised by the state 46.50%
CHALLENGES TO EQUITIZATION
Although the impact of equitization has been positive, curiously, the process has been
very slow and many SOEs seek ways to avoid it. So far no SOE has volunteered to
equitize; all claim that they are equitizing because of “order from higher authority”.
The most important reason for such slowness lies in the unwillingness of the SOEs’
managers to push forward the process. Numerous equitized enterprises, especially those in
which the State holds ruling shares, have not made changes in management and have
maintained old, and questionable, business methods (Quynh, 2005). Many rent seeking
managers are abusing their positions to extract personal benefits at the expense of the
companies. Public choice theory suggests that it is in their interest to entrench themselves
and the privileges they enjoy.
Many employees, on the other hand, worry about being laid off. In the sample just
examined, there was a general increase in employment but a detailed picture might show
that some firms might be shedding jobs while others were creating jobs through expansion.
A reality check would show that after restructuring, the number of redundant jobs or
positions has hovered above 20 percent (with some firms maintaining unneeded positions
at 30-40 percent). These redundant workers are not multi-skilled and find it difficult to
find other employment opportunities. For those who remain, many are not familiar with
their new role as stakeholders, and are likely to resist any changes introduced by the
restructuring programs.
The equitization process also faces obstacles due to the limited institutional capacity
in implementing the policy. Many government officials have not yet understood clearly
the market economy and what equitization means. Local government authorities only see
the conversion of SOEs into joint stock companies as a change of name and continue to
expect to have control over their business activities. Enforcement is a serious problem
because of poor capacity and the lack of experience in dealing with recalcitrant companies.
Studies on the process and its implications are few, with policy-makers finding little help
in lesson-drawing.
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Vietnam
The administrative process is time consuming and complicated, although the average
time taken to equitize a company has gone down from 512 days in 2001 to 437 days in
2004. The time required to set up an enterprise reform committee and finish its valuation
takes about 270 days, almost 62 percent of the total time needed for equitization. There is
enormous confusion over the valuation procedures and over problems related to land
ownership, liability transfer, policies regarding social welfare services and the
classification of different types of SOEs. The classification scheme is a bit self-serving as
the idea is to determine which one the government needs to hold onto its controlling stakes
and which one would be allowed to sell 100 percent of the shares to the public.
Following equitization, some enterprises have seen production and sales come down
due to a number of business troubles, obsolete equipment, lack of competitiveness, and
high costs in operation. Surveys indicate that 28 percent of enterprises experienced a fall
in revenue after equitization, with 10 percent of them actually incurring losses. A full 42
percent of them have been paying-in less to the State budget. This should probably be
interpreted to mean that unless the managers of equitized enterprises are actually dynamic
and creative, and are willing and able to attract shareholders to invest in and improve the
enterprises, equitizing will not be the way to success and profits (Quynh, 2005).
More than half of the assets of the state-owned banks were in the form of loans to
SOEs (admittedly down from 90 percent in 1990 to 55 percent by 1997). In a related vein,
the Law on Credit Institutions enacted in 1997 provided for preferential bank credit for
SOEs, cooperatives, and remote areas. Together, these generous provisions undermined
the commercial viability of Vietnamese banks and other financial institutions. The
financial sector was thus made vulnerable to the fluctuating fortunes of the SOEs (Leung
and Riedel, 2002).
Apart from firm-level problems, equitization in socialist context has large political
implications. Central government officials worry about institutional impairments to carry
out Party and government policies. Party cells believe that equitization will disturb the
Party organization and structure in equitized companies. Particularly bothersome to the
Party is the considerable power that will be vested on foreign investors.
All the above help to slow down the pace of equitization and present a serious
challenge to the government, which, fortunately has shown a credible commitment to
surmount current impediments. The experiences gained from the last decade will help
government refine the policies step by step to quicken the pace of the equitization
program. The Vietnamese authorities are well aware that equitization is, in their own
assessment, the most important solution to rationalize SOEs, renew management structure
and improve business efficiency, contribute to economic growth, and contribute positively
to the process of administrative reform and fighting corruption. Decision 04/2005/CT-TTg
requires periodic close assessments of the SOE restructuring in ministries, local authorities
and General Corporations. In the case of the General Corporation, equitization must be
carried out in the majority of the subsidiaries. Even the annual assessment of Party
members includes contents related to the restructuring and equitization of the SOEs where
they are active.
Reforms are underway to simplify the equitization process. The most time-consuming
phase is firm valuation. Valuation procedures must be openly and transparently carried out
by independent auditors, and the sales of the equitized companies’ shares must be
auctioned publicly. It takes between 423 and 536 days2, or more than a year, to complete
2
More precisely, 423 days for cities under central government administration, 437 days for ministries,
and 536 days for the General Corporation.
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Best Practices in Asian Corporate Governance
the process. The current plan is to complete everything in just 200 days. To do this,
valuation should take up no more than 100 days. That means drastically reducing the time
needed to complete the three phases of valuation: forming the committee of enterprise
renewal, valuation proper, and valuation-approach approval.
At the same time, proposed policies will further diminish state ownership of the
enterprises. The new unified enterprise and investment laws, which took effect 1 July
2006, clearly identify the sectors where government ownership is absolutely necessary,
while encouraging wider public ownership and foreign investor participation in all other
areas of the economy. To rationalize government representation and ownership in the
equitized companies (until recently, ministries and local governments represented state
interests in these firms), the State Capital Investment Corporation (SCIP) was established
recently. This is a measure to separate management from administration (akin to
separating the board and the CEO in typical western corporations) and make government
presence in these companies more business oriented. In a very confusing way,
government’s capital in privatized SOEs was managed by provincial authorities and
ministries. This resulted in overlapping ownership, which in turn reduced the level of
accountability and management efficiency in equitized enterprises.
Prime Minister’s office, asking 538 companies in which the government is still holding
controlling stakes, to enlist in the stock market immediately.
In July 2005, the Vietnam stock index measured around 250 points, increasing by only
150 points in five years. Out of more than 24,000 trading accounts, only 1,000 accounts, or
about 5 percent, actively traded in the last two years. With no new account registered, the
stock market seemed to be standing still, with average daily total transaction amounting to
only USD190,000). Yet by April 2006, the Vietnam Stock Index was up 60 percent
(Prasso, 2006).
Vietnam 0.63%
China 83.1%
Thailand 36.3%
Malaysia 155.2%
In March 2004, the Hanoi over the counter market―officially, the Hanoi Securities
Trading Center―opened to facilitate transactions involving small companies’ stocks, but
as of 2005, only 6 companies had registered. The low base of the HSTC had at least
doubled, with a foreign firm, Taiwan’s Tung Kuang Industrial Company being the 12th
enterprise (Vietnam Investment Review, 11 November 2006). The Asian Commerical
Bank, Vietnam’s fifth largest bank, is likewise set to join the HSTC (Vietnam Financials,
15 November 2006).
In spite of the steady progress of the two exchanges, the fact that equitization has
created more than 2500 joint stock companies, yet only 35 companies are listed in the Ho
Chi Minh exchange and 12 are registered in Hanoi, suggests that the capital market has not
developed in tandem with the equitization process. Ironically, in the Loc study, listed
companies greatly benefited from the stock exchange operations. The study recorded
higher increases in real sales, sales efficiency, and employment for listed firms as
compared to non-listed firms. Furthermore, there was greater decrease in leverage for the
listed firms than for non-listed firms. However, non-listed firms had higher profitability
improvements than listed firms. Yet even this finding is not a drawback: it meant that by
exploiting the benefits from listing, listed firms substantially expanded their business (Loc,
Lanjouw and Lensink, 2004).
The government has been eager to accelerate the development of the stock market but
the main obstacle is the disinterest of the joint stock companies, for many of which the
capital market is unfamiliar terrain. Many managers find it easier to operate in traditional
ways. As mentioned above, most of the equitized firms are behaving as though they are
still SOEs. Their organizational structure remains unchanged and they continue to enforce
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Best Practices in Asian Corporate Governance
SOE regulations especially on social security, wages and promotions. Of course, the stock
market is not something that requires little effort. Understanding the transparency
requirements for listed companies, for instance, takes time and energy. Most Vietnamese
managers are not familiar with publishing financial information about their companies’
operation.
Acknowledging the importance of the stock market as means of mobilizing capital and
disciplining firms (thus improving corporate governance), the government has actively
taken steps to promote the Ho Chi Minh stock exchange and the Hanoi OTC, encouraging
big and profitable equitized companies as well as small enterprises to seek listing. But the
task has not been easy. The OTC market has been delayed several times since few
companies showed interest in listing. A recent survey by the Center for Stock Market
Training shows that among 447 enterprises interviewed, only 217 (48.6 percent) had the
intention to register for trading in the Hanoi market, with only 12 businesses indicating
that they would register within 2005. The majority, indicated they would sign up later―34
within 2006, and 97 within 2007. However, current restrictions on foreign investors’
active participation in the market may also have something to do with the lukewarm
support for the stock exchanges. Such constraints have significantly reduced the liquidity
of the market.
In addition, the new Investment and Enterprise Laws will attempt to unify the
investment landscape for both foreign and domestic investors. Many business areas now
will be open freely to foreign investors. The new laws are still silent on the restriction on
foreign investors’ holding of domestic companies’ equity. The current 30 percent cap is
expected to be scrapped, however, when implementing regulations are formulated. Some
areas of the economy will remain restricted, but the new ceiling is expected to be increased
to 49 percent. This new regulation, if it materializes, will allow foreign investors to be
more active in the stock market. The unified laws are part of Vietnam’s effort to meet the
criteria for accession to the World Trade Organization. However, no truly common legal
framework has been achieved in all areas of the economy (Freshfields Bruckhaus Deringer,
2006).
The commitment to make big profitable equitized companies to be listed on the stock
market will help increase the depth and spread of the stock market, improve its liquidity
and it ability to perform more efficiently its monitoring, pricing and disciplining functions.
FINAL NOTE
The SOE restructuring program in Vietnam that started in the late 1980s has traveled a
long way and has achieved significant results. The reform initiatives, bannered by
equitization, have improved the efficiency of the firms without fully privatizing the
ownership. Measures to harden budget constraints and grant autonomy to management
have yielded benefits for the Vietnamese economy. However, there remains the urgent
need to reform the equitized enterprises further and to push for the socialization of
ownership as well as better corporate governance. Deeper reforms will help
• improve the performance of the government sector and increase its contribution to
GDP,
• increase the competitiveness of the equitized firms in the face of strong
international challenges and the growing visibility of the private sector,
• improve the utilization of capital resources more efficiently (which requires in
part the reduction of subsidies to SOEs), and
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Vietnam
• create favorable conditions for the development of the private sector (enhancing
the market aspects of the economy).
More positive impacts would be achieved if the ownership structure of the equitized
companies were allowed to be more diverse to include independent investors. The
government must have the political will to carry out more divestment. The most important
policy in term of raising the quality of corporate governance and getting the most of the
equitization process is the development of an active and effective stock market. The road
ahead is long and winding but Vietnam has a taken a few good steps forward.
REFERENCES
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LIST OF CONTRIBUTORS
Chief Expert
National Experts
- 203 -
Singapore Mr. Tan Wee Liang
Professor
Lee Kong Chian School of Business
Singapore Management University
50 Stamford Road, Level 5
Singapore 178899
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