Prevalence of family-owneed firms problematic for governance.
Companies in these parts of the world will have to balance tradition with innovation by diversifying their boardrooms to include directors who aren’t family members, experts say.
‘The reluctance of family-owned firms to open their equity to outside shareholders has to some extent constrained the development of the capital markets in the Middle East,’ says Alissa Koldertsova, a policy analyst at the Paris-based Organization for Economic Cooperation and Development (OECD).
Sharmila Gopinath, program and research expert at the Hong Kong-based Asian Corporate Governance Association (ACGA), emphasizes the need for transparency at foreign companies.
‘It is important for listed companies to realize that their shareholders are part-owners of the company,’ she says. ‘Companies owe their shareholders timely information and the right to have their votes counted at meetings – one share, one vote.’
Issues in Asia
Corporate governance is still a fairly new concept in Asia. ‘China has been busy these past few years creating and amending securities rules,’ Gopinath says, ‘but as far as the market and the private sector are concerned, there is definitely scope for improving corporate governance.’
Gome Electrical Appliances, one of the largest privately owned electronics retailers in China, serves as a prime example of a private, family-owned company struggling to survive under weak governance practices. Huang Guangyu, the company’s billionaire founder and its biggest shareholder, is serving a 14-year sentence in a Chinese prison for illegal business practices. In late September, he tried to increase his family’s control over the company from prison by submitting a proposal to have his younger sister and his lawyer installed as directors. The proposal failed.
‘The Gome case highlights the classic problem in the governance of family-controlled companies – how to address conflicts between family shareholders and non-family members,’ writes Raffi Amit, a management professor in China, in an article entitled ‘The fight for Gome: who’s the real victor in China’s big boardroom battle?’
‘Enforcement of minority shareholders rights in family firms is an important issue.’
China is not the only Asian country with these conflicts. In Taiwan, dismal voting requirements and a lack of independent executives have earned the country a weak governance grade, according to a report released by the ACGA in February.
‘Taiwan remains a difficult and challenging market for long-term global institutional investors who are seeking to act responsibly, vote their shares and engage with companies,’ the report says. ‘Governance practices at most listed companies have some way to go to match global standards.’
At Taiwanese companies, institutional investors – the largest and most sophisticated investor class – find it hard to vote in an informed manner at shareholder meetings. The prevalence of family-owned businesses and the mind-numbingly slow legislative process also reduce the opportunity for long-term investors to carry out business in the country, the ACGA report notes. Governance there has been ‘inconsistent’.
‘What we found in Taiwan is that while regulators have been willing to talk with us and listen to investors’ concerns, regulatory reform is slow,’ says Gopinath. ‘Legislative amendments take quite a long time to go through the parliamentary system.’
Challenges in India
Corporate governance is currently in the spotlight in India, as studies are indicating that there is a need for stronger regulations and stricter enforcement. The challenge in India is similar to that encountered in China: regulations need to discipline companies’ dominant shareholders while protecting their minority investors.
‘In India, you have one shareholder who can control more than 50 percent of the shares,’ Gopinath explains. ‘That presents huge issues, as the controlling shareholder can basically get a ‘yes’ vote for any resolution he or she might put forward at a meeting. As for foreign institutional investors getting their votes counted at a shareholder meeting? Next to impossible.’
Gopinath points out that foreign institutional investors usually try to vote at these meetings by proxy, but 99 percent of the time proxies are not allowed participate in show-of-hands votes, which are the norm in India. The only time a proxy’s vote is counted is if there is a vote by poll, ‘but here’s the catch-22: proxies cannot ask for a vote by poll because they are not allowed to speak at shareholder meetings.’
Governance practices in Asian countries are a global concern given that investors see China and India as emerging markets.
‘Asia is a huge continent, and issues vary from country to country,’ says Gopinath. ‘We are not advocating ‘one system fits all’. What we are saying is that there are global best practices, and you can learn lessons from every market – how different jurisdictions tackle similar issues.’
Priorities in the Middle East
In Egypt, the most populous country in the Arab world and one to which foreign investors once flocked, there is a high budget deficit and there has been an increase in fiscal spending to aid in rebuilding the economy, which has been shaken as a result of the recent wave of social unrest in that part of the world.
According to Koldertsova, awareness of good corporate governance practices in the region has been developing relatively rapidly. ‘Less than a decade ago, the understanding of corporate governance as a concept was nascent in the Middle East and North Africa,’ she says.
In her recent paper entitled ‘The second corporate governance wave in the Middle East and North Africa’, Koldertsova notes that only three of the 17 Middle East and North Africa jurisdictions – Iraq, Kuwait and Libya – do not have any corporate governance code or guidelines.
‘An additional complication is that in the region, what constitutes good corporate governance and good corporate social responsibility practices tends to be confounded,’ Koldertsova says. ‘There is a growing discussion about CSR all over the region, but perhaps not enough recognition that good corporate governance does not necessarily always equate to good CSR.’
As a manager of the Middle East and North Africa corporate governance initiative at the OECD, Koldertsova believes the ‘first wave’ of corporate governance in the region was to some extent triggered by the need to attract foreign investment, especially for those countries with no petrochemical resources.
On the other hand, the ‘second wave’ of governance will need to focus on ‘implementation of corporate governance frameworks as opposed to awareness-raising,’ she says, adding that ‘regulators’ capacity to transparently monitor and enforce breaches of existing regulations, and to fine-tune them when necessary, will continue to be tested.’
