Summary of Distinguished Scholars Lectures Series on “Corporate Governance and Independent Directors in (Southeast) Asia”
Date: 4 October 2019
Venue: Chitti Tingsabadh Room, Faculty of Law, Thammasat University, Tha Phra Chan
Speaker: Professor Luke Nottage, Professor of Comparative and Transnational Business Law at University of Sydney Law School; Director, Australian Network for Japanese Law (ANJeL) & Japanese Law Links Pty Ltd
Lecture Summary by Mr Kornranut Junwerasatien, 2nd year student, Faculty of Law, Thammasat University
Overview of the Session
- Backdrop: The growing of South-East Asian securities markets and still corporate governance (CG) diversity
- Independent director (ID) requirements: five sets of questions
- WHEN and WHY introduced?
- HOW implemented? (Mandatory, “comply or explain”, and/or purely voluntary?)
- WHAT requirements? (Proportions, definitions of IDs)
- WHO are the IDs? (Least data)
- WHERE are they (likely) having an impact?
- Three ASEAN states (+ e.g. Singapore: already in Professor Nottage’s 2017 CUP book)
- Thailand (More family-owned companies)
- Malaysia (More government-linked companies (GLCs))
- Cambodia (Much more fledgeling securities market)
1. Backdrop: 1. Evolving securities markets
According to the Organisation for Economic Co-operation and Development OECD Equity Market Review of Asia 2018, the red line in Figure 2 (the Share of ASEAN non-financial companies in global public equity financing in 2000-2017) shows the overview of how importance of the Asian stock markets.
Figure 27 shows the number of top markets of non-financial company IPOs in 2008-2017. The top five are China, United States, Hongkong, Australia and Korea while Vietnam Thailand and Malaysia have a smaller number of companies in general.
Table 3 on Stock exchanges in the Asia region as end 2017 shows the importance of Hong Kong and Singapore market.
The figures of the Corporate Governance Frameworks in CLMV (2019) shows a smaller ASEAN economy. Vietnam has 739 listed companies but Vietnam has a small share, in term of market capitalisation.
A.2 Yet still “blockholders” in Asia:
There has been an increase in the scale of the stock market in Asia. However, at the same time, there are still blockholders even in the listed companies as figure 31 (Ownership concentration at the company level as of end 2017) showed. Japan has so much concentration while Thailand is at around the average in Asia. However, Malaysia is a lot higher.
Figure 4 shows the Government-linked Companies (incl. SOEs) and family-controlled listed companies. This can be seen that the Governments has around 40 per cent of the ownership of listed companies in Malaysia while the Governments has around 20 per cent of the ownership of listed companies in Thailand.
A.3 Matched by growing ID requirements?
Are IDs (expected to) be “agents” for (especially dispersed) shareholders not only vs (professional) executives or employees but also vs blockholders? The discussion on this issue came from the background of structures of the individual director requirement. From the Anglo-American perspective, the IDs are expected to be agents for shareholders vs (professional) executives or employees. However, for the situation in Asia and some situation in Australia where there are many blockholders, IDs can also be useful to be agents for (especially dispersed) shareholders vs blockholders.
This has been recognised and pushed by OECD Principles in 1999, including Southeast Asian Government Roundtables, World Bank, ADB, OECD Asia Surveys in 2006 and 2016, board nominations/elections in 2012 and 2013 and more recently ASEAN (especially through the Corporate Governance Scorecards), Asian Corporate Governance Association (https://asia.nikkei.com/Business/Business- trends/Japan-and-Malaysia-trade-places- in-corporate-governance-rankings)
B. Thailand: 1. WHY … have IDs?
According to the tentatively ranked motivations for this legal transplant (see Professor Nottage’s 2017 CUP book), there are generally four types of motivation for legal transplant.
- Efficiency-driven: This situation is like Singapore. This motivation is to increase foreign investment by promising better corporation performance after the 1997 Asian Financial Crisis. Actually, it is cheap to replicate ID requirements such as better accounting standards or enforcement.
- Externally-dictated: This motivation is less so than the situation in Korea with International Monetary Fund (IMF) after Asian Financial Crisis; ADB then OECD.
- Entrepreneurial: This motivation is often driven by politicians. There might be the initiation of change from the local politicians such as Japan or Thailand (Prime Minister Shinawatra 2002).
- Legitimacy-enhancing: This motivation comes from an influential foreign legal system such as the firm system in the UK. The firm corporate governance system would be directly transplanted.
… and WHEN have IDs?
According to the 1992 Securities and Exchange Act section 4 (4) (ข), there is the mandatory requirement of at least 2 IDs. This is an early instrument soon after the Australia & UK/Cadbury Reports in 1991-1992. Singapore, Hong Kong and Malaysia also have this since 1989, 1993, and 1994, respectively. Then, interestingly, there has been a revised version of the Act in 2008. According to this version, at least 3 IDs plus at least one-third IDs are required as a mandatory requirement. The motivation for early development in Thailand is interesting.
Since 2001, the Stock Exchange of Thailand (SET) has started to set out some principles in the SET Report: (a) ‘should do’ & (b) ‘might do’ (AFC & 1999 Securities and Exchange Commission study).
(a) As of 2002, there was ‘15 SET Principles’ and it was under the requirement of at least 2 IDs on the board but there was a requirement to ‘comply or explain’ the requirements on the stock exchange to at least one-third of the board. Then, in 2006, the SET revised the principles to at least 3 IDs and at least one third to be independent. According to the 2012 version, if a chairperson is also a CEO, at least half IDs of the board is required.
(b) Corporate Governance Reports of Listed Companies of the Thai Institute of Directors (TIOD) (from 2001 onwards) for the best practices. It asks the company to make a report. Then, this mostly checks achievements between the Principles and the Codes (but some go further). It is voluntary, with only very top companies individually named.
B.2 HOW are ID requirements implemented?
Thailand is a good example of how the ID requirements are implemented. Thus, there is a three-level ‘regulatory’ structure.
- Securities and Exchange Commission: Laws and regulations which set mandatory standards including defining ‘independence’
- Mostly Stock Exchange of Thailand: SET Principles which is not mandatory but requires to ‘comply or explain’ in practice.
- Thai Institute of Directors: Best practices which are produced in the form of surveys or reports and (related, but comparing largest companies, with ADB support, since 2012) ASEAN Corporate Governance Scorecard.
In term of the effectiveness of the implementation, the SEC Report in 1999 noted that PWC (1996) finding minimalist adoption of requirements of 2 IDs. Then, from 2008, the regulations change to at least 3 IDs and at least one third to be independent. However, the questions turn to be are they really independent, who are they and what do they actually do?
B.3 WHAT requirements for IDs?
The minimum numbers or proportions IDs has been increasing over time. The definition of IDs is also becoming stricter. The definition in the original 1992 Act and regulation are quite limited. According to the original Act, the definition of the IDs are (1) not an employee of the company, its subsidiaries or part of the same conglomerate; (2) do not own more than 0.5% of equity share and (3) not a relative to have special relations with insiders that may obstruct impartiality in forming duty” (2001 report for OECD CG Roundtable, p4)
However, according to the current SEC regulation, the definition of the IDs excludes (1) employee etc or “controlling party” for company or affiliate (unless over 2 years prior*), (2) 1%+ shareholder, (3) relatives, (4) relation with co. impeding independent views (significant shareholder or controlling person for persons having business relations with co.), (5) co’s auditor, or (6) (2mB+) consultant, (7) appointed to represent the co’s directors, major shareholders (or their shareholders), (8) (1%+ shareholder in) entity with similar business nature and significant competition, (9) ‘any conditions that may impede the person from having independent views’ re the company (https://www.sec.or.th/cgthailand/EN/Pages/FAQ/BOARDFAQ.aspx#sec4)
In term of multiple directorships, there is no specific mandatory limitation in the Regulation. However, there are some limitations appear in the SET principle and the 2017 Code. According to the 2012 SET Principle 1.8, there is the limitation of five board seats in listed companies for all directors. However, Principle 1.9 recommends stating a policy not only the number of other board positions but in terms of director type (ie executive, outside, independent).” This has been similarly mentioned in the 2017 Code Principle 3.5 Re effectiveness, Guideline 3.5.2. Additionally, the TIOD Corporate Governance Report in 2017 (Question E08) also mentioned that 62% have a policy stating limit of 5 other board positions (38% of not compliance) and 7% have directors exceeding this. However, no overall score “penalty,” later if have so many multiple directorships.
In term of lengthy tenure, Code Guideline 3.2.5 stated that ID tenure should not exceed 9 years but can continue to serve thereafter subject to the board’s rigorous review of his/her continued independence. Moreover, the TIOD Report 2017 (Question E08) stated that 92% are “poor” regarding the term limit of 9 years, and (Question E13) 57% got penalty having IDs serving more.
In term of positive requirements for the IDs (not just negative/disqualifying), for the audit committee members (all IDs) at least one (i.e. expert) can review the reliability of financial statements. For other relevant experience (e.g. SMH critique in Australia), the 2012 Principles (“prior working experience”) and 2017 Code Guideline 3.1.1 mentioned that At least one of the non-executive director (NEDs) (i.e. not necessarily ID) should be experienced and competent in the company’s main industry (https://www.set.or.th/en/regulations/simplified_regulations/AC_ID_p1.html)
B.4 WHO are the IDs?
IDs are mostly personally known to or comfortable for the larger shareholders, as all IDs elected by majority vote. This process is not only in Thailand but also mostly elsewhere. (Professor Nottage’s 2017 CUP book) The IDs are mostly (ex) businesspeople (e.g. Singapore, Australia), also accountants or lawyers (e.g. Japan), fewer government officials unless government-linked companies (unlike Korea: ex-prosecutors) or professors (e.g. Taiwan, China).
However, the SEC filings only list basic information such as formal qualifications including education background (i.e. LLB not necessarily lawyer etc.), names, and gender. The statistic in Thai Dictatorship in 2015 showed that 5/11 IDs in SET comprised more than 90% of total market capital (more than 25% of those with over half IDs). However, only 36% of all Directors (Ds) have more than 5 apts, only 32% lack nomination and remuneration Cees, 79% of firms have more than one female Ds (48% have more than one female IDs).
Actually, there is not much policy to push for extra gender diversity (e.g. Malaysia). For instance, the 2017 Code Guideline 3.1.4 urges listed companies to disclose in annual report and website that its diversity policies a detail relating to directors, including directors’ age, gender, qualifications, experience, shareholding percentage, years of service as a director, and director position in other listed companies. According to the TIOD Report (Question E31), 34% of them are rated “poor” and 66% of them are rated “excellent.” Thousands of the graduates via TIOD courses since 2000 have not been so elite networking (Mr Treerat’s study in 2018).
B.5 WHERE (likely) having an impact?
The major selling point of the IDs is increasing overall corporate value. However, this impact is hard to show and prove. Another impact of the ID is to stop individual major corporate collapses. This issue has been less discussed or researched. However, the research (Inya et al, 2018) found that more (albeit, 2012) SEC successfully prosecuted misconduct cases in firms with more tenure (although 5.24 average vs 3.9 years), more other board appointments (although on 1.97 vs 1.25 other companies) and with no significant impact from just having overall independent boards. Additionally, firms with good CG policy adoption less likely to violate listing rules or laws designed to protect shareholders except for some “talk only” firms exercising “symbolic governance” (Ananchotikul, Kouwenberg et al 2010).
In term of the effectiveness of the IDs, there is little information on this. However, there some case studies on this issue such as the case of CP-All running 7-11 chains and the case of large Thai bank bid (Phutrakul, Bangkok Post 11/4/16). These cases point out the situation when the IDs are not doing the jobs. The SEC News Releases warned that audit committee recommending against share purchases and/or borrowing involving connected persons, even own directors (No. 54/ 2010, 28 July).
Any other (unexpected) possible roles played by IDs includes mediating intra-family disputes. This case is found in Singapore, with initially and even now looser the definition of IDs. In Thailand, it is not obviously in TIOD Reports. Actually, the report doesn’t mention in its 2016 report on board disputes (although 23% indicate “differences in view on organisational goals or strategic focus” as the second-ranked cause; second-ranked “factor” at 29% is “directors’ personalities’). Besides, TIOD has separate “Family Business Governance” courses and promotes separate “Family Councils.” Nevertheless, it is possible that tensions are generally mentioned (Jongsureyapart, 2006, p73).
The IDs can be useful for interaction with other (non-) reforms to corporate governance e.g. related party transactions or more enforcement of SEC and civil penalties.
In term of influence from and on other countries, there were some disparate influences even on the 1999 SEC Report and 2017 Code (including South Africa). In terms of influence on the ASEAN cooperation, there is ASEAN (Corporate Governance Scorecard with ADB & from IDEA.net). Recently, the TIOD has recently engaged with Cambodia with regulators (https://www.sec.or.th/EN/Pages/Activities.aspx?SECID=7552)
C. Malaysia: 1. WHEN & WHY have IDs?
After the Asian Financial crisis, prime minister Mahathir re-nationalised family-owned companies, especially Chinese family-owned companies, thanks to government-linked investment companies (GLICs). Actually, the GLCs have 36% of Bursa market capital (2016). Malaysia did not take IMF conditional loans (like Korea). However, 1999 CG Report, 2000 CG Code and Listing Rule changed There have been the 2001 SC Master Plan, 2003 CC Corp Law Reform Committee, and Minority Shareholder Watchdog Group MSWG (funded initially by GLICs). Then, the question turns to be ‘window dressing to regain foreign investors? or serious intent, but facing problems when transplanting foreign templates, especially from the United Kingdom (Salim, 2006).
Yet, the ID regulations from the 1994 Bursa listing rules have already introduced two plus and 1/3 (whichever higher). This is mandatory listing rules which then introduce into regulations. In Singapore, the 1989 Act requires auditing Cee: 3 plus non-executive director with majority IDs but undefined. In the UK Cadbury, Australian Bosch Committees, and Hong Kong Listing Rules require 2 plus IDs. The regulations in Malaysia has strengthened by CG Code (& Listing Rules) since 2000, 2007, 2012, 2017, respectively.
C.2 HOW are ID requirements implemented?
The Listing Rules requires 2 plus and 1/3, auditing cees, and majority IDs (1994). (and all NEDs (2008)). It also covers the definition of IDs (2006), Nominating Cee all NEDs with majority IDs (2012).
In term of the CG Code, it initially started with ‘comply or explain’ (due to Listing Rules) e.g. adding Nominating Cee all NEDs with majority IDs (2000) or at least half of IDs (2008, 2012). Then, the 2017 CG Code changes the implementation structure to ‘apply or explain’ with an alternative approach for the expected outcome. Also, there have been stricter extra requirements for large companies (like in Korea or India from 2000 onwards). It also discloses a timeline to implement, so it is quite mandatory. For instance, it requires majority IDs” (e.g. 4 of 6) rather than “at least” (e.g. 3 of 6). Actually, the 2017 CG Code was designed to be tougher. This practice is called ‘Step Up Practices’ which is voluntary disclosure.
C.3 WHAT requirements in Malaysia?
Since 2012, the minimum numbers or proportions has been growing. Additionally, the exclusions also growing too, and not if 5% plus shareholder (like Australia). In term of comparative curiosity in Listing Rules since 1994, foreign-operating companies must have one plus ID resident in Malaysia (2 plus since 2015). In term of comparative innovation in (otherwise majority) rules for electing directors, according to 2012 Code, after 9 years’ tenure, ID can continue as non-ID unless approval. According to 2017 Code, after 9 years, it needs the approval to continue as a director and after 12 years it requires shareholder approval in a two-tier vote. The vote does not only come from the majority shareholders but also includes the minority shareholders.
C.4 WHO are the IDs?
The data is still limited. The IDs can be (ex) UMNO politicians, more professional directors on government-linked companies (although govt in/direct shareholdings means still beholden?) (Gomez) e.g. 699 IDs in 217 family controlled (20% plus) listed companies (2008) average 7.6 directors. Specifically, 3.2 IDs selected ‘not because of their supposed monitoring role but because of their ability to facilitate access to valuable external resources such as government contracts, networks, projects, licences, loans, specialized skills and resources.’ Furthermore, 55 companies had govt servants and politicians as IDs (14-29% of all companies, depending on the extent of family ownership). Similar numbers (56: not necessarily the same companies) had IDs with interlocking directorships sitting on other boards. Also, 197 companies had directors with significant tenure. However, almost all the companies had IDs who were lawyers and/or accountants.
According to the research by SC Corporate Governance Monitor in 2019, directors mostly long-tenured (older) men. From the 2018 annual reports, 5231 director apts with 3244 IDs (4381 NEDs) / 930 listed companies (801 main market) average 5.62 Ds, with 3.5 IDs (4.7 NEDs). 83% of all directors have only one apt (but likely that a few hold many?). 634 (of 930) listed companies have at least one woman director (134 have 30% plus, 16 have 50% plus). Additionally, none of top-100 company has an all-male board, 24% of their board positions held by women (17% in 2016). 16% of all board positions female (12% in 2016); while 28% of companies had women in senior management positions. 785 ID apts (probably mostly only sitting on one board) had tenure of more than 9 years (394 had 9-12, 322 had 13-20 years); 447 companies of 930 companies have such long-tenured IDs (287, 218 respectively).
Long-serving independent directors
There has been a reduction in the average tenure of independent directors from 67 years in 2015 listed companies adopted at least 3 Mid-cap and to 5 years as of 31 December 2018. This may be attributed to greater scrutiny by shareholders and the need to seek shareholders’ annual approval to retain long-serving independent directors beyond 9 years. The breakdown of independent directors’ tenure is presented in Figure 2.
The tenure of an independent director does not exceed a cumulative term limit of 9 years. Upon completion of the 9 years, an independent director may continue to serve on the board as a non-independent director.
If the board intends to retain an independent director beyond 9 years, it should justify and seek annual shareholders’ approval. If the board continues to retain the independent director after the 12th year, the board should also seek annual shareholders’ approval through a two-tier voting process.
The board has a policy which limits the tenure of its independent directors to 9 years.
C.5 WHERE (likely) having an impact?
Few good studies of IDs causing better aggregate corporate performance. However, these may help avoid disasters such as by flagging listed companies that board did a bad job with resignations/reasons given. Therefore, there would be more monitoring of executives by IDs (but not if so long-tenured?). Some evidence that IDs may provide other benefits, especially family companies, according to resource dependency theory (so could entrench government and business nexis?). This is different from Singapore where the IDs mediating intra-family disputes. Also, the IDs are important in terms of general and background culture, not just politics (e.g. tenure: although opportunities from higher social status/age?). Malaysia could be considered as model/interlocutor, especially for ASEAN. Malaysia instrument also has persistent Anglo-Commonwealth influence such as Bursa Malaysia CG Guide (2017) which is a very detailed guide which has influence from the UK, Australia, Singapore and India.
D. Cambodia: 1. WHEN & WHY have IDs?
There has been the Securities and Exchange Commission of Cambodia (SECC) Law since 2007 but the regulations have only established from 2010 with two “Prakas,” The first one is on corporate governance for the listed company (December 2009). The second one is on corporate governance for listed public enterprise (December 2010). There has not been stock exchange until 2010 (with Korean Exchange 45%). The first (of now 5) happened in 2012 was Phnom Penh Water Supply (SOE). In Cambodia, there is diversified and cheaper corporate financing. However, the banks are liberalised and competitive. Additionally, turning (family) companies to be public for listing will attract financial reporting & tax obligations. The ‘Growth Board’ tried relaxing profitability regulations. Besides, the government also tried to support tax deductions and encourages banks to offer discounted rates, if borrowers are listed. More recent emphasis on CG and boards (including IDs) for corporate performance. In December 2018 (only in Khmer) the two Prakas has been combined resulted in the changes of ID proportions.
D.2 HOW are ID requirements implemented?
The Prakas are just mandatory requirements for all listed companies in Cambodia. It seems to be easier to educate the business sector and professional advisors. However, this is challenging due to limited enforcement capacity. The comply-or-explain approach is further impeded by so few listed companies. The issue arises from struggling to clear bare minimum Prakas regulations, including for IDs. There is no equivalent to the TIOD (or even dispersed Malaysian institutes) to encourage Best Practices and training, although there are the Forums (for executives not directors) between TIOD and CSX.
D.3 WHAT requirements in Cambodia?
For (currently only 2) listed companies, the first Prakas required the minimum 1 plus IDs and 1 NED representing private shareholders; and 5-15 directors, of which at least one-fifth IDs. The requirements are both positive and negative. The sample of the positive definition is “exercising judgement independently of management, political interests or inappropriate outside interests.” Additionally, Auditing Cee must have 3 plus NEDs and ID chair, at least one must have financial expertise (so sometimes the ID?). The negative regulation includes the fact that IDs must have “no material interests” and not be: (ex-)employees/ senior officers, employed/ auditors, significant customer or supplier (or senior officer of companies’ insurer), affiliated with NGO, senior officer of company that has on any compensation Cee an executive officer of company. The second Prakas is similar to the first one. However, it requires 1 NED representing employees. The combined (3rd) Prakas stated that ID could also not be a director of “competitor company.” For Growth Board listed companies, the requirements are 3 plus directors (not 5 plus) and one-third IDs (not one-fifth). However, there are no changes to essentially majority voting by shareholders to elect the directors. There has been little discussion about why ID requirements introduced or revised.
D.4 WHO are the IDs? WHERE impact?
It is easy to calculate the average because there are only 5 companies. (Somewhat larger boards than Thailand and especially Malaysia, with minimal NEDs/IDs). However, it is hard to work out who are the IDs. The majority of the IDs are male. The IDs can be the wealthy (e.g. businesspeople, ‘Okhna’ – title from King), the experienced persons (e.g, in financial affairs), and the overseas IDs (who might be appointed by foreign shareholders). Future research should do on these issues. (1): connections with families or political establishment? (2) impact? As well as domestically, in Laos (Korea) or Myanmar (Japan)?
The ID requirement has been spreading in Southeast Asia as a part of corporate governance package, before and after the Asian Financial Crisis. (IKEA effect?). Furthermore, they all have mandatory requirements, some comply-&-explain approach (in Thailand and Malaysia), and slower Best Practices. Especially, Malaysia has added interesting techniques. Besides, each country’s ID definitions especially attention to excluding factors reflects the fact that it is not just some recognition of blockholder vs dispersed shareholder tension. However, there are some localised concerns such as the politics in Cambodia (including NGOs) and Malaysia. Nevertheless, the issue of who the IDs are and where they (likely) have impact needs really more research. It is necessary to research especially on both their backgrounds and actual not just theoretical roles. It should also include regionally, not just within each country.
- Kozuka & Nottage, Independent Directors in Asia: Theoretical Lessons and Practical Implications (2018), https://ssrn.com/abstract=3139309
- For last chapter in co-edited Independent Directors in Asia (CUP, 2017)
- Vivien Chen et al, Guest blog: Corporate (Mis)Governance in Malaysia (& Japan),