Asian corporate governance improves

CLSA releases its second annual corporate governance report showing that Asian companies and regulators are getting the CG religion.

Entitled 'CG Watch - Make me holy... but not yet!' - the CLSA report affirms the truism that companies that have good management also have good share price performance. The report grades companies in Asia as well as those in Latin America and Emerging Europe, Middle East and Africa according to seven key criteria, which measure each company's overall corporate governance. These are discipline, transparency, independence, accountability, responsibility, fairness and social responsibility.

The report found that the companies with the highest scores also had the best stock market performance. The top quartile of companies in the CG rankings beat their respective country indices in nine out of ten Asian markets. "Better companies and better markets tend to outperform," says Amar Gill, head of Hong Kong research at CLSA and the author of the report.

Topping the table in terms of best CG practies among Asian companies was Infosys, with TSMC, HSBC and Kookmin Bank following closely behind.

More importanly, the report found that the overall environment for CG in Asia has improved markedly over the past year. Most of this improvement has come from changes to the regulatory environment in each Asian market, as opposed to wholesale adoption of good CG by Asian companies.

"Since the Asian crisis, a lot of the worst cases of corprate governance have come to light and the regulators have got the message from investors that they should tighten up," says Gill. "There has almost been a race by various regulators to improve the regulations in their countries [ahead of the other countries]."

Furthermore, increasing instances of shareholder activism such as the HAMS proposal in Hong Kong and the Minority Shareholder Watchdog Group in Malaysia have added a further impetus to improving CG over the last year.

According to Jamie Allen, head of the Asian Corporate Governance Association, companies now understand the need for better govenance and national regulators are imposing the rules. It is now down to enforcement. "The rules are being made but they are not yet being enforced," says Allen.

Gill reports that this overall improvement in Asian CG, could be a cause for a re-rating of Asian stocks, esecially as they compare to the valuations afforded to western stocks. After Enron and the egregious examples of appalling corporate governance in the west, the valuation gap between east and west should narrow. "Enron shows that you are not any safer with western companies than you are with Asian comapnies," said Gill.

Despitre the improving environment, a lot still needs to be done. Key is the issue of independent directors, which is a problem facing all markets. True independence rarely exists and getting the right people for the job will be difficult and expensive. Gill believes that this issue, along with regulatory enforcement of the new rules will dominate CG discussions over the next year.