You're a UK member of parliament, what's the reason for this trip to Asia?
Maude: I 'm here as the chairman of the Incepta Group, for which investor relations and financial communications is a core business around the world. Quite coincidentally, a corporate governance parliamentary group has been established, which I was asked to be chairman of. And one of the key reasons I'm in Asia is to talk to our clients in Hong Kong, Singapore and China about corporate governance. It's a hot topic.
What is emerging from this UK parliamentary committee?
We're looking principally at the issues in the UK itself, where by and large the corporate governance has been reasonably good. We have quite balanced boards. Of course you can get hung up on the theology of whether a majority of the directors should be outside directors or not. I think that is second order. The most important thing is to have a balanced board where you have executive directors who will conduct a debate and outside directors who are intelligent, experienced and confident enough to ask the right questions. In fact, you're sometimes being most useful as an outside director when you ask what may appear to be a stupid question, but half the time it turns out to be the question everyone else wanted to ask.
There's a danger of there being too much arcane theology about corporate governance and not enough basic common sense. For example, the definition of independence. We have a non-executive director on the board of Incepta - who technically, according to the UK code is not independent - but you only have to listen to him for a short while to realize he is totally independent. Independence is not a matter of ticking a box. Investors should exercise sensible judgement. They should look at the history of directors and the other things they do, and then judge if these guys are independent? Are they going to be willing to stand up to management, ask the right questions and exercise control?
In the UK the approach is to try to marry best modern practice, without being too dogmatic and losing this common sense approach.
Should there be major financial penalties for directors who don't ask the right questions?
The penalty you pay as a director if you are off the pace and not alert to what is going on, or exerting the right sort of governance, is that your reputation is damaged. That's the most significant sanction that there is. If there is gross negligence, you can be disqualified from being a company director, and in the UK there is the possibility of financial penalties. But what corporate governance is essentially about is giving shareholders confidence that the business is being run for the benefit of shareholders.
You mention in the UK the importance of a common sense approach, and the significance for directors of keeping their reputations. How applicable is this to Asia, particularly since Asia tends to prefer to mimick the US, which has more of a rule-based approach? Surely, what you are describing is more difficult to codify?
It is more difficult to codify. But the basis of the UK model is comply or explain. I don't object to this at all. I don't know many boards that comply with every single aspect of a code and it is good to explain why you think it is right for your business to operate in a different way. You have to be persuasive in explaining it.
The issue in Asia is that capital markets are younger, they are less entrenched and there is less experience in dealing with the relationships between shareholders, managements and boards. But these things evolve.
Earlier in the week I had a number of meetings with senior people in China and I was very impressed by how interested they were in the whole corporate governance issue and for the right reasons. They know that capital markets and maintaining confidence in China is critical to its continued development and they want to have an approach to corporate governance that meets the overriding objective of giving investors' confidence. That doesn't happen overnight. You do it gradually.
I said to them that there was no point looking at other models and trying to find one that can be directly replicated in China - because actually there will be things unique to China. Pretty much all of the listed state-owned enterprises continue to have a majority government stake, and that in itself raises a governance issue. Who are the management accountable to?
The people I've spoken to this week have converted me into believing the Chinese economic miracle is sustainable. I had my doubts. Any remaining skepticism I had about China has gone. I feel there is an ironclad recognition that these issues need to be addressed and from what I've seen regulators and a number of companies are taking a really intelligent, well informed approach to addressing them.
How did you convey your "common sense" definition of 'independent director' to the Chinese officials you met?
It's difficult. I was asked exactly that question. My view is you have to look for someone who has a reputation at stake, someone who themselves - through their business interests - may need to have access to the capital markets. If their reputation is put on the line, they will safeguard that reputation. There is not necessarily a huge universe of people currently in this position, but that is your ideal. You need to get people that are independent of management and avoid mutual backscratching.
You are right that the UK has had fewer problems with corporate governance, although there has been the big scandal with Shell overstating its reserves.
Part of the problem with Shell was that it had a very unconventional board of directors. It had a chairman of the Dutch end and a chairman of the British end, two separate boards, and a committee of managing directors. It is a highly unusual corporate structure and very unsatisfactory. Can you be sure that what happened would never have happened if it had been a more conventional structure - no you cannot. But there would have been a better chance of it not happening. If the management are accountable to two different boards - which is the case in Shell - then, arguably, they are actually accountable to neither.
What makes the UK board work is that it is a unitary board where the law makes no distinction between executive directors and non-executive directors. All directors are equally liable. You will also generally have some sort of sensible balance between executive and non-executive directors, and things do generally surface at the board level. You need a chairman who encourages open debate, and allows time for discussions to happen - in that way you have the best possible chance of problems surfacing. That's better than what tends to be the structure in the US where the board may only contain one or two executive directors, one of whom will be chairman and CEO combined, plus outside directors. That mostly works, but the danger is that the outside directors only hear about what is going on from the CEO and I find as a chairman that it is invaluable to get various directors debating and throwing light on issues - in a very open way.
Were the Chinese companies asking whether you could find people from the US and Europe who could become independent board directors?
We didn't get into that, although there is interest in where you get these people from. We are very keen to give advice on international candidates, and there will be a need for that.