In Asia, A Change In Attitude

Minority shareholders in Hong Kong defeat self-serving attempts by corporate executives to take their companies private. In Japan, investors demand that companies disclose board members' salaries and shame a former Sony president into donating his $13 million retirement bonus to charity. And in Singapore, independent directors now sit on the boards of the city-state's government-linked companies.

Such triumphs of corporate governance are still rare in the region. But they would have been unthinkable just a few years ago, when booming Asian markets pulled in investors by the thousands who didn't care much about transparency as long as share prices kept rising. Then the Asian financial crisis hit, wiping out hundreds of billions of dollars of shareholder value. Since then, a combination of government initiatives, pressure from global institutional investors, and the efforts of grassroots investor groups have shaken things loose in many Asian boardrooms. Increasingly, board members and executives who abuse minority shareholders can expect to be challenged.

Still, many Asian companies are miles from where investor activists want them to be. "There is greater awareness and sensitivity," says Mark Mobius, managing director of Templeton Asset Management Ltd. "In that sense there is improvement. But if you ask me if there is improvement in actual behavior, I would hesitate."

Financial disclosure leaves much to be desired. Many companies do not have independent audit or compensation committees. So-called independent directors, though they may not be financially connected to companies, are often golf buddies or college classmates of the chairman. Majority shareholders continue to shift assets among private holding companies and listed companies they control, cheating minority shareholders in the process. Regulations are in place to prevent such abuses, but enforcement is lax. "I would say the glass is about 20% full," says Jamie Allen, secretary general of Asian Corporate Governance Assn. in Hong Kong. "And that might be generous in some countries."

The obstacles to establishing good corporate governance in Asia are high. That's because even today, most Asian companies are controlled by a single shareholder group, usually a family or, in the case of Singapore, the government. While Western shareholders and regulators are concerned with keeping hired managers in check, in Asia the big issue is figuring out how to force family potentates to share the wealth. "Something like 60% of the companies are family-owned in Asia," says Dominic Barton, a director of McKinsey & Co. in Asia. "The minority shareholders can be streamrolled."

But as global rankings by Institutional Shareholder Services show, some Asian companies are making real progress. The highest-ranked examples are in Singapore. That's surprising because the five companies ranked highest by ISS are majority-owned by the government. Moreover, many senior execs have close ties to the regime. First-ranked Singapore Telecommunications is run by Lee Hsien Yang, whose brother is Deputy Prime Minister Lee Hsien Loong and whose father is Senior Minister Lee Kwan Yew.

Yet the board is chaired by Chumpol NaLamlieng, a well-respected Thai who is also President of Siam Cement. More than 75% of SingTel's board members are independent outsiders, and the board's audit, compensation, and nominating committees are wholly comprised of independents. "In Singapore, even though the major shareholder is the government, officials have worked very hard to make sure that people realize they do not wish to dominate the company," says Chumpol. In an e-mail response to a query, a SingTel spokesman noted that the government has "removed its 'golden share' in SingTel -- the special share that gave it the right to veto certain key decisions." Hugh Young, managing director of Aberdeen Asset Management Asia Ltd., says Singapore gets high marks on corporate governance because "the government understands the way of the modern world and has been seeking to reflect that in the companies with which it has links."

In Japan, companies ranking high on the ISS list often have one characteristic in common: large foreign ownership. Foreign institutional investors own 38% of the stock at Sony (SNE)Corp. and more than half of the shares at 4th-ranked optical glassmaker Hoya Corp. Top-ranked Nomura Holdings (NME) was one of the first Japanese companies to abolish executives' and directors' retirement bonuses based on seniority, replacing them with U.S.-style stock options, which aligns directors' incentives with the goal of maximizing shareholder value. Sony, ranked second in Japan, was one of the first companies to adopt a U.S.-style board of directors last year. The majority of its audit, compensation, and nomination committee members are outsiders.

Still, Sony, like other Japanese companies, has a ways to go. Although a proposal to disclose directors' individual compensation at last year's annual meeting won an unprecedented 30% of shareholder votes, the board has refused. Sony officials were not available to comment.

In Hong Kong, the third jurisdiction ranked by ISS, finding examples of good corporate governance isn't easy. Top-rated CLP Holdings Ltd. ranks lower than any of the top 10 Japanese entries. And CLP, which is one of the largest electric utilities in Asia, is 35% controlled by Chairman Michael Kadoorie and his family. Yet admirers say it is an example of how even a family-controlled company can move toward more transparency. The company's board has several independent directors, and its Web site gives comprehensive information on its corporate governance policy. Kadoorie says family shareholders are treated the same as others.

At the opposite end of the spectrum is Henderson Land Development Co., with 3.9 out of 100 on the ISS scale. The company is controlled by Lee Shau Kee, one of Hong Kong's wealthiest tycoons. Its latest corporate-governance scuffle: Henderson attempted to buy 73% of listed subsidiary Henderson Investment for 30% below its reported net asset value but was thwarted by minority shareholders, including Templeton Asset Management. At the time, Henderson Land Vice-Chairman Colin Lam insisted the dissenting investors had placed "a very, very high valuation on Henderson Investment," implying that this placed too high a value on its shares.

How committed are Asian boards to better governance? "You can only test a change in commitment when there's another crisis," says Amar Gill, head of Hong Kong research at CLSA Asia-Pacific. "That's when the insects come out of the woodwork." Meanwhile, activists are just getting started. By Frederik Balfour in Hong Kong, with Hiroko Tashiro in Tokyo

The Good Business Issue
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