Corporate Governance & Risk Management Blog

Corporate Governance, Risk Management and Corporate Social Responsibility in Emerging Markets: A Symbiotic Relationship

Robert Adamson — Tue, 22 Mar 2011 18:33:18 +0000

By Robert Adamson
Executive Director, CIBC Centre for Corporate Governance and Risk Management

As corporate governance continues to be an area of focus for most companies, regardless of whether they are involved in global operations, there are many questions and issues that firms still struggle with: What is good corporate governance and why is it so important? Why are so many firms and governments promoting improved techniques in corporate governance? What are those techniques and best practices and is there evidence that these reforms and policies are useful for firms in promoting transparency, sustainability and the confidence of global markets and investors?

In general, corporate governance is about how companies make decisions, how they organize themselves and how they communicate with shareholders and the rest of the world. Typically, corporate governance deals with issues such as how boards and executives are chosen, what mandate and responsibilities boards and executives have, whether shareholders have any right to participate in certain types of corporate decisions through voting and, if so, what form these shareholder rights take.

These issues are important because they promote good business practices, good decision-making and opportunities for investors to ensure the integrity of their investment. Because these issues are so important to developing good businesses and a good business environment, both companies and policy-makers are very interested in ensuring that good corporate governance is adopted widely and is effectively institutionalized throughout the firm.

So why are companies themselves so concerned and preoccupied with corporate governance, risk management and CSR? Many companies recognize that good corporate governance, risk management and CSR is good business practice, good business strategy and what many companies are focusing on to improve their business, particularly in the emerging global marketplace where companies are constantly trying to outdo each other to make their business more effective and to attract new investors. Companies, particularly those that are well-managed, want to develop good business practices, improve their decision-making and provide reasons for investors to invest in the company. While these firms are highly motivated and successful at adopting and implementing good corporate governance practices, other companies may not acknowledge the importance and value of adopting and investing in corporate governance, risk management and CSR.

For those companies that refuse or fail to adopt good corporate practices, this failure can have negative impacts not only for the company but for investors and the community at large. There are increasing numbers of examples where failures of corporate governance have created large liabilities for corporations and their shareholders. While not all of these problems can be linked to failures of corporate governance, many of them can. For example, the company Enron provides a well-known example of systemic problems within a corporation that could have been addressed by improved corporate governance. The recent oil spill disaster for BP also represents an example of how corporate governance problems within the company created a greater likelihood of a problem occurring. The global financial crisis is yet another example of how the failure of boards and executives to understand and manage risks led to governance failures with very serious consequences, not only for financial firms and banks, but for individuals and national economies around the world.

These are but a few illustrations of why corporate governance is important to businesses. Good corporate governance practices are an integral part of business strategy and help businesses make good decisions.

Because failures of corporate governance and risk management can have impacts that reach far beyond the company itself and lead to systemic harm for national economies, or even the global economy, policy-makers have taken a strong interest in passing rules and regulations that ensure that companies adopt good corporate governance and risk management practices. Governments increasingly do not want to take the chance on allowing firms to voluntarily adopt good corporate governance practices and policies. Governments are creating new regulatory frameworks to ensure companies improve their corporate governance.

And with the recent financial crisis as a new catalyst, policy makers have been identifying specific ways in which corporations need to do a better job of corporate governance. For example, policy makers have been passing very extensive and detailed laws on what corporations are required to do to improve the way they make decisions, manage risks, disclose information and give access to shareholders for certain types of corporate decision-making. National regulators around the world have been given extensive and detailed mandates to develop new rules and regulations that improve corporate governance. And firms themselves across all types of business sectors ranging from banking to extractive industries, are improving their own corporate governance institutions and processes, sometimes going far beyond what is required by law or what the new policies and regulations will require.

It is not only companies and policy makers that are focusing on the importance and forms of good corporate governance and risk management. Investors, particularly large institutional investors, are also focused on corporate governance issues in order to inform their investment decisions. Increasingly, institutional investors are identifying key corporate governance policies and practices that they want to see in order to attract their investment. Some institutional investors have requirements or benchmarks for corporate governance such that they are not permitted to invest in companies that do not meet those benchmarks. Paying attention to corporate governance issues is becoming an important part of investment decisions and the way that large institutional investors such as pension funds view their fiduciary responsibility when making and managing investment decisions.

Many companies around the world do not meet some of the basic requirements and benchmarks for what investors require in making their investment decisions. In some cases, companies have very few policies and practices on corporate governance and, even if they do, there is little transparency or disclosure about what those policies are. These corporate governance problems can be exacerbated in those countries where the legal environment provides very few corporate governance practices, few disclosure requirements and few shareholder rights. Together, these policies and practices create an environment where investors are unable or unwilling to invest in the firms and countries with inadequate corporate governance laws and policies.

It is not only potential investors that are constrained in their investment choices when corporations and countries have inadequate corporate governance laws and practices, the opportunities for partnerships and mergers and acquisitions are also limited. Many companies will be less interested in partnering with firms whose corporate governance is inadequate or not properly disclosed since this could expose the partnering companies to legal liability in their home jurisdiction if something were to go wrong.

These dynamics of corporate governance are global, evolving rapidly and will continue to impact businesses around the world, including emerging markets. Companies in emerging markets should be aware of these trends and changes in corporate governance and ensure that they are keeping up with what governments, investors and businesses themselves are adopting and promoting as good corporate governance.

In fact, emerging market businesses have the potential to be leaders in promoting and adopting good corporate governance practices. With this objective in mind, it is important to identify the specific requirements and policies for how corporate governance is evolving, the policies and practices that are being adopted as best practices, and the various benefits and challenges in adopting these best practices in corporate governance.

How is corporate governance evolving: The Rules of the Game

Corporate governance is becoming more complicated, sophisticated and is providing both greater opportunities and expectations for businesses. To understand how corporate governance is evolving and changing, there are a few important ideas that are critical for businesses.

Companies must not only implement general corporate governance practice but must focus on best practices in good corporate governance
A key element of good corporate governance is good risk management
Another key element of good corporate governance is managing a company’s reputation and how it is perceived in the global and local community

What is Good Corporate Governance?

Most companies have structures, policies and processes that create a governance process. Whether required by law or by the necessity to create a decision-making process, companies have created boards, committees of board, management, and reporting processes. Some companies have gone beyond these basic governance requirements and have focused on types of techniques and processes that allow them to improve the quality of their boards, management team, and relationship with shareholders. In some countries, some of these governance techniques are required by law. In other countries, these techniques are chosen and implemented by companies not because they are required to do so by law but rather because companies believe that they add value and make good business sense.

Good corporate governance extends beyond the basic minimum of what companies need to make decisions and create a governance structure. Good corporate governance includes a much more sophisticated structure for improving decision-making and creating avenues for shareholder engagement. These good corporate governance techniques may include improvements in how boards are chosen and compensated, how management is chosen and compensated, how much information is available to the investors and the community at large, how companies identify and analyse risks including the disclosure of these risks, providing for shareholder voting on board election and management compensation issues.

While good corporate governance practices vary from company to company, and from place to place, there is growing consensus on what are best practices in good corporate governance. The OECD, for example, has provided a model for good corporate governance that companies can adopt. Beyond these OECD guidelines, companies operating around the world provide useful models in good corporate governance and set the standard for other companies in respect of what is possible for corporate governance practices. These examples of good corporate governance are particularly important since many of the corporate governance practices and techniques have been adopted because companies recognize the business value and strategy in investing in good corporate governance practices.

What is the relationship between corporate governance and risk management?

Risk management is increasingly becoming a key element of good corporate governance. Some corporations have developed sophisticated and institutionalized ways to ensure that risk is identified and analysed. Other companies have little or no risk management capacity. While risk management techniques require investment of time and other resources to properly address, they are critical to all businesses, even if the firm’s risk profile is relatively benign and simple.

Risks manifest in many forms, and can appear without warning and with serious and significant consequences. The recent global financial crisis is the most recent example of how risks all of types can appear with little warning and impact companies across all business sectors. Even though the main risks during the financial crisis were created within the financial services industry, the risks reverberated though almost all business sectors, and in almost all national economies around the world.

While it is impossible to eliminate risks, companies have been developing processes and policies to improve how risks are identified and analysed. These techniques of risk management may include:

specialized committees of the board to deal with risk separate from accounting or financial risks,
risk officers and other forms of institutionalized risk management professionals throughout the firm,
enterprise risk management,
management individuals or teams to deal with reputational risk, and
specific attention given to macroeconomic risks that often do not receive attention. These risks may include political risks, and environmental risks such as the impact of climate change on a company’s costs, business model, regulatory framework and consumer demand.

Many companies have developed sophisticated forms of risk management that they believe are a worthwhile investment. It is these techniques of risk management that are increasingly becoming a key component of good corporate governance.

Corporate Governance, Reputational Risk and Corporate Social Responsibility (CSR)

CSR has also received a lot of attention particularly from firms who have encountered reputational challenges to their brand. While CSR is quickly becoming an integral part of some companies’ business strategy and corporate governance framework, others feel that CSR is not part of their business mandate of creating profits for the business and its shareholders? It is never simple to demonstrate the business case for CSR, but those companies who have adopted CSR policies and programs have done so on the grounds that it is a good business proposition. For many companies, investing in CSR policies and programs is a way to manage a company’s reputational risk, manage relationships between the company and shareholders and other stakeholders, and preempt potential problems in how products are produced, sourced and sold.

CSR is still a controversial and somewhat amorphous area that many businesses and management either reject as bad business practices, or do not fully understand what CSR is and how it can be implemented. Many businesses still have the following questions:

What exactly is CSR and what policies and practices can be implemented and how?
Is CSR a costly strategy?
How have firms implemented CSR policies and what are the successes and benefits

For the firms that have embraced CSR, they view it is an important part of their business strategy. They recognize that it requires human and financial resources to create and implement, but they believe that it is a good business proposition and good business value. For some businesses, developing CSR policies and programs is not only about good business strategy, but also about ensuring that the communities where the company produces or sells it products or services are well-served by the company. These companies view the relationship with their communities, producers and consumers as symbiotic and mutually beneficial. Furthermore, many companies view CSR as good corporate governance as it allows companies to better engage with many of their stakeholders, including investors and consumers.

These rationales have motivated companies to develop various types of CSR strategies, policies and program. CSR takes many different forms and can be rationalized in many different ways by companies whether engaged in local or global business enterprises. Some examples of CSR policies include a corporate policy on CSR, policies on human rights, policies on sourcing and suppliers to ensure that the supply chain functions according to the company’s overall CSR policy, investments in communities such as schools and infrastructure, health and safety policies for the goods and services that the company sells to ensure that the business process does not create environmental or health “externalities”.

These policies require the allocation of human and financial resources. Even more difficult can be to integrate and infuse the CSR policies and commitments into the cultural identity of the company. Despite these challenges, many companies around the world have made these investments and have argued that it is good business strategy and a necessary part of their corporate governance framework. Even if companies and their management are not convinced on the merits of CSR as a business strategy and integral practice of good corporate governance, companies should remain open to further considering and evaluating the importance and benefits of CSR. More and more academic studies and company case studies are illustrating that these CSR policies bring significant benefits for the company, and assist it in managing reputational risk, improving relationships with stakeholders and improving the company’s corporate governance procedures.

A National Securities Regulator and the Proposed Canadian Securities Act: Is Politics Taking Precedent Over Good Corporate Governance and Regulation?

Robert Adamson — Fri, 26 Nov 2010 23:47:19 +0000

There have been many efforts over the last 40 years to create a national securities regulator in Canada. According to the advocates of a national regulator, the current politicized system of provincial securities fiefdoms threatens the long-term future of capital markets and makes those markets less sophisticated and more prone to peculiar political interests. According to the opponents, the current system of provincial securities regulation works well and ensures that provincial interests and innovation are not trumped by narrow national interests, or more specifically, the interests of Central Canada.

As there is typically a lot of inertia in favour of the status quo – and many political interests who remain invested in this status quo – creating a single securities regulator has been, and remains, elusive. Though almost every group or report that has been tasked to analyse the issue concludes that a single securities regulator is beneficial for Canada’s position and reputation in global capital markets, the political obstacles appear to overwhelm those arguments. This persistent political opposition from several provincial governments has led the federal government to pursue a Supreme Court of Canada reference case that asks the Court to explicitly acknowledge the right of the federal government to create a national securities regulator under the trade and commerce power (Constitution Act, 1867, section 91(2)). The case will be heard next April.

Is this opposition to a national securities regulator merely a case of entrenched provincial interests clinging tenaciously to their own powers and interests to the exclusion of Canada’s national interests to improve its position in capital markets? Or is there merit in the provincial government position? Is there any way in which the current regime of provincial regulators with no common framework is preferable to a national securities regulator? Could there, for example, be a benefit of having provincial regulators define their own regulatory rules? Could this system lead to more innovation, closer regulatory scrutiny and overall better corporate governance? Is there any evidence that this is the case?

In other areas of governance, such as health care, overlapping jurisdiction and shared responsibility between the federal and provincial governments has worked relatively well. The power-sharing and overlapping jurisdiction has allowed for and accommodated innovation and local expression of priorities based on nationally agreed upon processes and minimum requirements. But this type of shared responsibility does not appear to function well in the area of securities regulation. First of all, capital markets seem to prefer predictable and common principles rather than variance, even if this variance can be occasionally exploited to a company’s benefit. For most businesses, their interests are not in being able to exploit local regulatory regimes but rather to have rules that will be the same for all companies: relatively consistent and unswerving to political interests. Secondly, other areas of shared governance such as health care rely on the federal government to define minimum standards and policy objectives. But there is no federal regulator or federal government role in creating common policy or minimum standards in securities. Provincial securities commissions work together through the Canadian Securities Administrators (CSA) but without the involvement or resources of the federal government. The CSA is an initiative of the provincial regulators to create some consistency through programs such as the “passport system”; a program which allows investors to access other provincial markets by complying with the rules of their home province.

But is the passport system really enough to ensure consistency and efficiency in Canadian capital markets? This system was clearly inadequate in dealing with Canada’s asset back commercial paper (ABCP) crisis, particularly due to inadequate coordination and policy mechanisms. There must be a better model?

The United States is also a federal state which accords significant constitutionally entrenched rights to state governments. While states do maintain some jurisdiction over securities trading and activity through state-level responsibility for anti-fraud laws (“blue sky laws”), the securities regulatory regime is primarily federal with eight main statutes governing the general trade and administration of capital markets. And despite the recent global financial crisis and the allegations that some of the problems during the crisis were linked to federal regulatory oversight problems and inefficiencies, there is still no compelling voice in the United States insisting that securities regulation would be improved if regulatory responsibilities were transferred to the states. Discussion of regulatory reform in the United States has focused instead on improving the effectiveness and resources of the federal securities regulatory framework, and particularly the Securities and Exchange Commission.

The fact is that most highly industrialized countries, including other federal states such as the United States, have created national securities regulators and this trend offers at least some prima facie argument for having a national securities regulator. The fact is that Canada is routinely targeted for its lax enforcement of securities fraud and abuses and this suggests that the provinces are not doing an adequate job either to enforce their securities laws, or have not created adequate laws to enforce. The fact is that it is much more difficult for even the most willing provinces to enforce their securities regulations since enforcement resources are dispersed among 13 provinces and territories and this suggests that there is a more effective and efficient way to organize securities regulation, and particularly enforcement. The fact is that it is typically easier for individual corporate interests to influence provincial regulators than to influence a national regulator and this influence-game creates undesirable outcomes by submitting the objectives of good corporate governance to pressure group politics. And despite this potential benefit of the status for companies, most companies support having a national regulator and complain that the current system is ineffective and inefficient.

If Canada intends to protect and promote its reputation for providing stable and efficient capital markets, and its reputation for good corporate governance, is it not time for provincial political interests to act in the best collective interest for Canada’s position and reputation in capital and securities markets? Should it really take more than 40 years and a court challenge to the Supreme Court before political interests are forced to move aside in the pursuit of good- or at least better- corporate governance?

Corporate Governance: Are We Asking the Right Questions?

Robert Adamson — Mon, 15 Nov 2010 17:44:05 +0000

New research by scholars from the University of South California has provided some support for those who are skeptical of the role that good corporate governance plays in improving corporate performance. The study by David Erkens, Mingyi Hung and Pedro Matos followed the performance of 296 financial institutions with assets of more than $10 billion during the period 2007 to 2008. The study concluded that none of the typical practices that are supposed to measure good corporate governance actually helped companies perform better.

Really? None! Can that possibly be? But the authors insist that their research showed that boards with expert directors fared no better than those without, and that companies that separated CEOs from chairmen were similarly no more likely to prosper than those that did not. Other presumed indicators of good governance such as the involvement of institutional shareholders and independent directors were even negatively correlated to company performance.

What could possibly lead to these counterintuitive results? The authors provide their own potential explanation by arguing that preceding the financial crisis, financial institutions were under pressure from institutional shareholders to take additional risks in order to improve returns. Likewise independent directors were more likely to encourage companies to raise more equity capital even when share prices were faltering. So rather than independent directors improving corporate governance, they actually detracted from it.

But are the results of this study really that counterintuitive? Are there not other reasons why the results of this study may not reinforce the merits of adopting good corporate governance practices. Could the problem really be inherent in trying to draw conclusions from arguably inadequate or inappropriate measures of good corporate governance? And could a problem also not lie in trying to draw too many conclusions about corporate governance in one type of firm (financial institutions) during an unusual and extraordinary event (the global financial crisis)?

So what of this idea that this study, and others like it, may be trying to measure corporate governance in the wrong way. What of this idea that board independence and the separation of the role of CEO and chairman are not good proxies for good corporate governance? What if, for example, the authors had used institutionalized risk management as a way of representing good corporate governance? And what if the authors had studied the correlation between this measure of corporate governance and resilience of share value rather than just share value during the crisis?

Beyond this challenge of trying to find adequate proxies for good corporate governance, there is another potential impediment to research that tries to draw simple correlations to share price. While share value may be an easily identified measure of company health, it is only one measure. And I would argue it is not a very good measure, at least not when examining corporate governance. There is a presumption that markets (i.e. shareholders) have the ability and interest to analyse and understand how companies implement good corporate governance and reflect their approval through demand for the stock. But many shareholders, including sophisticated institutional shareholders, focus on a very narrow number of indicators of good corporate governance: independent board members, the separation of CEO and chairman, effective and frequent communication with shareholders. Many shareholders also have very little understanding about how corporate governance is conducted and institutionalised at the firm other than through these same basic corporate governance measures such as board independence etc.

But these traditional measures of good corporate governance may not really be the best way to ensure and promote the objective inherent in good corporate governance. Maybe good corporate governance is not really about these relatively simple indicators used in this study; measures such as the presence or number of independent directors. Maybe good corporate governance is rather about something much more complex and difficult to measure.

In fact, the authors recognize these difficulties and the confusion and contradictions that they create. The authors acknowledge that another financial crisis in another part of the world at another time illustrated that there was a positive correlation between corporate governance and company performance. During the Asian financial crisis of 1997-1998, there is evidence that increased external monitoring of companies produced better performance.

So what could explain this apparent contradiction? As always, there can be many explanations in our attempt to find measures and proxies for corporate governance as well as measures of a healthy and sustainable company. And here the authors of the study acknowledge a problem in the skepticism about corporate governance that most would take away having read their study.

The counterintuitive results of the study raise the question of whether traditional measures of corporate governance are adequate to protect companies from taking excessive risks. As the authors note, good corporate governance cannot be viewed as a simple box ticking exercise. Policies on board independence cannot immediately overcome entrenched preferences for risk-taking, corporate culture, and institutional lack of capacity for identifying and analyzing risk. Independent directors are, for example, only one measure of board objectivity and not an indicator of the quality of a board’s decision-making. If objectivity comes with lack of expertise, then the objectives of good corporate governance will have been thwarted.

So what if the authors had studied something else: the correlation between a firm’s institutionalized risk management and share value? Instititutionalised risk management would include issues such as whether the firm has a risk management team, whether that risk management team focuses on non-traditional risk beyond financial risks, whether there is a separate committee of the board dealing with risk beyond the audit committee, whether the firm attempts to define risk environments and risk tolerance, and whether risk managers have direct access to CEOs or directors. If these measures had been used as proxies for good corporate governance, would the results of the study have been the same?

I would argue that this study should not be used to bolster skepticism of the benefits of corporate governance, and I suspect that the study’s authors would not want their research to be used in any way that reaches premature or inappropriate conclusions. The study should be used to further question the adequacy of how we understand and quantify corporate governance. Corporate governance cannot be a box-ticking exercise about numbers of independent directors and separating the roles of chairman and CEO. These practices will- to some degree and with important caveats- remain ways to prima facie improve corporate governance. But these good corporate governance practices may not always work, particularly if there are more meaningful impediments to good corporate governance at the firm, including the absence of ways of identifying and analyzing risk through what I call institutionalized risk governance.

The study should also prompt us to continue to question whether share value is the best measure with which good corporate governance will, or should, correlate. Perhaps a better measure of the impact of good corporate governance is the resilience of a company’s share value over a meaningful period of time, and not just one crisis.

Skepticism about the benefits of corporate governance is surely healthy. Skepticism about anything is healthy. However, our research program and research tools should assist us in working through this skepticism before the skepticism turns prematurely into cynicism. And as cynicism about the merits of any rules or regulation or interference with corporate practice has been ascendant, even following the recent global financial crisis, we must ensure that our research is actually asking the right questions and using the right assumptions. Understanding the benefits and practices of good corporate governance will remain a challenge but let us not be too skeptical before we have right to be.

What Boards Have Learned From the Financial Crisis

Robert Adamson — Tue, 20 Jul 2010 23:51:37 +0000

There is no one lesson that has been learned from the financial crisis. Instead, the crisis has reiterated long-standing principles for boards and financial companies: the importance for boards in exercising prudence and judgement, the importance of diversification, the fleeting nature of liquidity, the importance of understanding the complex risks and products of modern global finance, and the risks associated with concentration.

But beyond reinforcing these principles, the financial crisis elevated certain concerns for boards to new levels of prominence: the forms and capacity of internal risk management, the issue of remuneration and executive compensation including its relationship to different types of risk, and the diversification of boards including how capable boards are in dealing with highly technical issues of global finance.

With these issues in focus, there is good reason -for boards and shareholders alike- to be concerned that risk management has become more of a “box-ticking exercise” than a sophisticated management strategy where managers and boards exercise their judgement through meaningful dialogue and discussion about complicated macro- and micro-economic risks. If boards learn something from the financial crisis it should be that risk management requires more resources and sophistication than a procedural and pro forma “box-ticking” exercise.

Boards should also be concerned about how remuneration policies- at least at some firms- may be out of line with shareholder interests. While some directors believe that the issue of executive compensation is a red herring which does not create risks for financial firms, others rightly express concerns that excessive and non-transparent compensation policies can create both systemic risks for the financial system as well as reputational risks for firms. In attempt to improve compensation policies, boards should acknowledge and consider some of the “new” approaches or policies that some financial firms are using: holdback, vesting and other incentives.

Another potential lesson for boards is the importance of building diversified boards while maintaining the technical skills and capacity to oversee complex financial management issues. If managed and adopted skillfully, board diversification is an important strategy in creating more effective and informed boards. In addition to board diversification, boards should also be aware of and consider other means of institutional improvement including: promoting independent directors, limiting or eliminating “insiders”, ensuring that boards have more opportunities for and expectations of engaging with employees and shareholders, the use of board representatives within the company, and increased remuneration for directors so that there are incentives to spend more time on board responsibilities.

Despite the dramatic nature of the recent global financial crisis, there is also reasons to be concerned that very little had really changed in the way boards operate, including financial firms. The danger for these firms- and for the economy as a whole- is that the opportunity for reform and improvement will evaporates without any meaningful changes having been implemented. And, in order to target the most meaningful changes and reforms that are needed, we require a much better understanding of the things that went wrong during the financial crisis. Rather than moving toward “knee-jerk” reactions proposed by either firms or regulators, everyone should take the time and allocate the resources to better understand the problems and the types of firm-level and policy reforms that will be helpful in either preventing or mitigating future crises. Perhaps the biggest concern for us all is that the time, resources and level of introspection necessary for meaningful organizational and regulatory reform have faded away as impossibilities in the modern architecture of global finance and the cynical underworld of realpolitik.

Upcoming Corporate Governance and Risk Management Issues for 2010

Robert Adamson — Thu, 04 Feb 2010 21:12:26 +0000

It seems the list of things for corporate boards to consider during their meetings continues to get longer and more detailed. There continues to be an expansion of the types of issues that boards are expected to explore in order to fulfill both their legal duties as well as the expectations of shareholders.

Following the onset of the financial crisis, I was invited by colleagues at the Canadian Institute for Chartered Accountants (CICA) to co-author an installment in the CICA’s Director’s Alert series. This Director’s Alert focused on the consequences of the financial crisis for board members; consequences that were difficult to decipher and which still remain very fluid. The full document can be viewed at the CCGRM’s website at http://business.sfu.ca/cibc-centre/ or at the CICA’s website at http://www.rmgb.ca/

But since that Director’s Alert was written, there have been a number of regulatory initiatives and news stories that continue to redefine and expand the duties and expectations of Boards. Executive compensation and bonuses- particularly among financial institutions- have been drawing the increased attention of regulators and the disdain of the public and media. Whether regulatory attempts to limit executive compensation- particularly in the UK and US- are motivated by good public policy or political calculation, it is very likely that compensation issues will remain in the public’s and regulator’s focus as a symptom of economic malaise and something which merits change. Recent studies which illustrate that Canadian CEOs earn 175 times as much as the average worker will only further focus public and political attention on these compensation inequities. Further focus on compensation issues also reflects increasing evidence of a correlation between compensation policies and effective risk management. There is increasing evidence to show that compensation that is not linked to longer-term performance of the company creates undesirable short-term incentives that lead to unwanted risk taking.

But the list of issues for board consideration is becoming even more complex and fluid than these thorny issues of executive compensation. Issues such as risk management- or more accurately risk oversight- may require separate committees and separate areas of expertise beyond typical board member competencies and mandates. Risk management no longer only deals with traditional areas of financial risk management but also touches on systemic risks, macroeconomic risks, reputational risks and whether consideration has been given to insurance policies that may assist in managing these risks; risks that are typically inherent in complex business enterprises.

Another very fluid consideration for boards is regulatory compliance. As the regulatory environment changes, both in a business’ home jurisdiction as well as the many international areas where it operates, keeping abreast of regulatory and compliance issues can be a daunting task. A related concern is whether companies are adhering to the requirements for transparency and disclosure. And this is not only a legal and compliance issue. More activist and engaged shareholders- particularly institutional ones- are increasingly advocating for, or insisting on, improved levels of communication and information in order to allow them to make informed investment decisions. Businesses and their boards must effect a very difficult balancing act between responding to the regulatory and shareholder requirements against the importance of protecting a company’s competitive position and information.

Reputational issues continue to gain interest, traction and complexity and raise new concerns for boards. Environmental policy, social and human rights issues will inevitably continue to provide difficult terrain for businesses to navigate, particularly those with international operations and diverse suppliers.

And then there is the issue that some companies and their boards fear most: the democratization of the boardroom and corporate decision-making. New initiatives on proxy access, shareholder resolutions and other avenues for having shareholders engaged in corporate governance, raise the possibility that corporate decision-making may change in dramatic ways in the near future. And, as detractors would argue, not all of the changes that promote the “democratization” of corporate decision-making may be positive for businesses. While we are a long way from having corporate decision-making resemble anything like the decision-making processes of modern democracies (including all its inherent flaws), boards will continue to strategise about how to create incremental improvements in shareholder engagement without compromising the board’s role as the main supervisor and overseer of corporate decision-making.

Each new year brings new changes and surprises. The last few years have brought many changes, most of which few of us predicted. This year promises to bring potentially meaningful changes in corporate governance and risk management, particularly in respect of how boards engage with these issues. The Centre will continue to monitor these developments and their implications, whether those that are taking place in our “backyard” in Canada or those that are changing the rest of the world.

“Tiger, Tiger Burning Bright”: Corporate Governance and Investor Opportunity in Viet Nam

Robert Adamson — Fri, 07 Aug 2009 15:22:46 +0000

CCGRM Corporate Governance Working Paper

August 2009

By Robert Adamson, Executive Director, CIBC Centre for Corporate Governance

Executive Summary: The purpose of this CCGRM Corporate Governance Working Paper is to outline some of the current corporate governance challenges facing Viet Nam, highlight the changes in corporate governance policy and practice that are currently underway, and to speculate on the issues and opportunities that government, firms and investors will likely encounter as this corporate governance regime evolves in a rapidly changing and volatile global marketplace.

Intro and Purpose

If a tiger is a symbol of a strong and emerging Asia, Viet Nam is a tiger in an emergent Asia. Viet Nam is also one of the new economic actors that will, along with others in Asia and elsewhere, define the future of an evolving world economy. And despite these turbulent economic times, Viet Nam continues to be a strong market with strong foreign investment, proximity to the world’s most likely next economic powerhouse, thriving stock markets, a highly literate and motivated work force, and an illustrated commitment to the international community and its institutions.

In a Goldman Sachs research paper titled “Vietnam: The Next Asian Tiger In the Making”, author Hong Qiao articulates an optimistic view of Viet Nam’s economic future. The report predicts that Viet Nam will continue to grow at a rate of around 8% and congratulates the government for its commitment to solid economic reforms. (Goldman Sachs Global Economics Paper No. 165, Vietnam: The Next Asian Tiger in The Making, Helen (Hong Qiao), April 17, 2008)

While these facts point to a promising economic future, Viet Nam and other Asian tigers have been tamed before. Most recently, it was the economic financial crisis of 1997 that revised the trajectory and promise of many growing and maturing Asian economies. Some of the causes of the 1997 crisis have been addressed either through domestic financial reforms or through changes in global capital markets. But new potential obstacles and pitfalls lie ahead. This paper addresses one of those obstacles: corporate governance.

Corporate governance refers to the process by which companies are directed and controlled. It encompasses many areas of rules and practices found in company laws, securities laws, trading exchange listing rules, court interpretations, administrative regulation, firm practice and policy as well as shareholder practice and policy. It cannot be expected in an economy as new, fluid and immature as Viet Nam’s that the breadth and depth of corporate governance rules and practices would exist as they do elsewhere. A more interesting and telling issue is whether demonstrable efforts are being made in Viet Nam to create the legal infrastructure that will make corporate governance more rigorous and consistent, thereby creating an environment amenable to business development, innovation, and local and foreign investment. These are the issues that will play a role in Viet Nam’s aspirations to become an innovative and mature market governed by the rule of law and international best practice in its corporate governance.

The purpose of this CCGRM Policy Briefing is to outline some of the current corporate governance challenges facing Viet Nam, highlight the changes in corporate governance policy and practice that are currently underway, and to speculate on the issues that government, firms and investors will likely face as this corporate governance regime evolves in a rapidly changing and volatile global marketplace.

Viet Namese Economy and Markets: Background

While the Viet Namese economy has been extremely volatile, its growth remains remarkably strong, even when compared with other larger and better-known Asian economies. In 2007 and 2008, Viet Nam struggled to adjust to rapid economic growth created by massive capital inflows. The inflows created inflationary pressures, readily available bank credit and asset price bubbles. By the second half of 2008, and as the credit crisis worked its way around the world, foreign demand for Viet Namese exports decreased significantly, led by commodities followed by garments and industrial products. As demand and the general economy deteriorated, Viet Nam joined other governments in offering a stimulus package in November 2008. By World Bank estimates, GDP growth likely bottomed out in the first quarter of 2009. ( see Taking Stock: An Update on Vietnam’s Recent Economic Developments, Mid Year Consultative Meeting, June 8-9, 2009). But many pressures persist including a deteriorating trade balance, unemployment and signs of inflationary pressures.

During the most recent period of global economic crisis and contraction, Viet Namese exports have remained remarkably resilient, especially when compared to other regional economies. For example, in 2007, the two strongest export growth leaders were China and Viet Nam: China’s exports were growing at 25.7% and Viet Nam’s at 21.9%. In 2008, China and Viet were still the leaders but Viet Nam had overtaken China at 29.1% compared to China’s 17.3%. More remarkable are the numbers for the first quarter of 2009 where Viet Nam is the only Asian economy to see positive numbers at 7.4% compared to China’s –19.7% and Japan’s –60% decline in exports.

Viet Nam has also experienced rapid growth and significant volatility in its equity markets. By many measures, Viet Nam had the best performing stock market in 2007. It also had the worst performing stock market in 2008 falling 67%. Since the bottom of the market and the depths of the global financial crisis in February 2009, the VN market has rebounded 81%. With a 35% increase in the index since the beginning of 2009 (up until end of May 2009) the VN index is once again a world leader. (Measured by the VNIndex which tracks all of Viet Nam’s publicly traded companies)

This volatility in the trading markets and stocks would be an obvious concern to outside investors, except for the traders who think they can predict the trend and be on the right side of volatility. But the volatility in VN markets is more complex than more typical market volatility as is it a result of many variables and dynamics: thinly traded stocks, risk averse foreign investors, weary local investors, barriers to entry and exit beyond trading volumes, short-term institutional investment from hedge funds, and a ongoing relationship between government and public companies that makes investors suspicious.

The next part of the CCGRM Corporate Governance Working Paper outlines the efforts that the government has made through policy and regulatory initiatives to ameliorate the volatility and to improve the corporate governance and commercial infrastructure.

For a copy of the full report “Tiger Tiger Burning Bright”: Corporate Governance and Investor Opportunity in Viet Nam, by Robert Adamson, Executive Director, CIBC Centre for Corporate Governance, contact us at: radamson@sfu.ca

Hedge Fund and Private Equity: New Rules for the Game

Robert Adamson — Fri, 17 Jul 2009 23:31:32 +0000

It is highly likely that both hedge funds and private equity firms will be subject to new rules and regulations, and perhaps different rules depending on whether there is any serious and successful attempt to coordinate rules across and between jurisdictions.

In Europe, for example, hedge funds and private equity have become the focus of the EU’s regulatory agenda. The EU has drafted a directive that mandates increased regulation of hedge funds and private equity whereby these financial managers will be subject to increased disclosure, more stringent limits on leverage and tighter restrictions on non-EU funds. The directive would, for example, require alternative fund managers, rather than funds themselves, to register and obtain government authorization. This government authorization was not previously required. The directive also includes reporting, governance and risk management standards, including minimum capital requirements. There are also non-binding recommendations on directors’ remuneration including caps on severance pay and the deferral of bonuses.

The draft law would apply to all managers of alternative investments that use borrowed money and control at least 100million Euros of assets. This limit would therefore include 30% of hedge fund managers and 90% of hedge fund assets. The proposal would also apply to private equity firms if they manage assets of 500million Euros even if their funds do not use borrowed money.

The United States is also targeting hedge funds and private equity firms for increased regulation with some of the details being outlined in the Obama administration’s white paper: Financial Regulatory Reform: A New Foundation. The FDIC has also proposed that new investors such as private equity firms post 15% of tier one capital for at least three years if they are acquiring failed banks. This 15% amounts to four times of the capital that would normally be required. (see FT July 8 ) This new rule reflects the concerns of US regulators that private equity firms could be poor bank owners such that the assumed banks could end up back under the regulator’s wing.

Many questions still remain: whether these proposed reforms will survive the political and lobbying pressure that is mounting, whether different regulatory regimes will develop providing new opportunities for regulatory arbitrage, and, most importantly, whether the proposed reforms will be helpful and achieve their stated purpose of creating greater stability within the financial system. As for the substance of the proposed reforms, increased disclosure is generally welcome, and so too is improved liquidity and better control of hedging. Critics have, however, been less receptive to liquidity controls that apply to both hedge funds and private equity in the same way. These critics argue that liquidity is a much greater concern for hedge funds than private equity while private equity is more likely to run into trouble due to leveraging. Critics argue, therefore, that hedge funds and private equity firms are different managers and need to be subject to different rules otherwise regulation can have a detrimental impact on finance and the economy in general. There is also criticism that the costs of compliance with the new regulations will be prohibitive for small funds.

But there is a more general and powerful criticism of the EU’s approach and that is whether hedge funds and private equity firms should be the institutions first targeted for reform while more serious regulatory gaps and financial stability issues exist in the national and transborder banking system. The argument is that although it is true that some private equity and hedge funds contributed to or exacerbated the economic meltdown, the EU directive focus on hedge funds and private equity is misplaced and stems not from good policy but rather from a longstanding dislike (by France and Germany in particular) of alternative investments. Some opponents of the EU directive argue that hedge funds and private equity firms are not targeted due to any overwhelming empirical evidence that their actions and abuse were primarily responsible for the breakdown in the financial system but rather for political and ideological reasons. Regardless of the political and ideological motivation, it is argued that regulating hedge funds and private equity firms is an unfortunate diversion from the more impactful issue of banking system reform and particularly transborder banking.

But banking system reform is, in fact, also addressed in the EU directive and through other regulatory reform initiatives, at the EU and national levels. The EU directive addresses the sustainability and integrity of the European banking system through provisions to create improved supervision of cross-border banks. The failure of Icelandic banks illustrated the vulnerability of host countries to the inadequate regulation by foreign banks’ home regulators. As with the case of Fortis, national governments realized that they will continue to be responsible for the solution when trouble strikes, even if the failing bank is foreign. The regulatory approach outlined in the EU directive is a trio of supranational committees that will have the mandate to intervene when national regulatory authorities are not adequately identifying risks and not imposing deposit schemes and other protections to prevent banking problems for the banks under their supervision, wherever they operate. The EU directive also provides for a systemic-risk board that will monitor systemic (macroprudential) financial risk.

This effort to improve the regulation of banks that operate internationally is welcome but still suffers inadequacies. For example, provisions have been inserted to reaffirm financial sovereignty and that preclude any country from being forced to prop up a bank. And there is no explicit agreement on how to share the burden (particularly financial burden) of bank bail-outs. Without these explicit agreements, the supervisory function will be limited.

Beyond the substantive criticisms of the proposed reforms, other obstacles lie ahead including the lobbying efforts of those about to be regulated. Hedge funds, private equity and international banks are putting on their best lobby suits, warning that the proposals are a threat to capitalism and are gearing up for battle with the regulators. Jonathan Russell, chairman of the European Venture Capital Association, has called the directive “disproportionate, inappropriate and anti-competitive/” (FT April 30, 2009) These financial firms and the opponents of reform face an uphill battle though. While there is always room for negotiation and political process to alter and dilute proposed reforms, there is an emerging consensus being articulated in London, Washington and at various international bodies in charge of global standard setting (Basle Committee, Bank for International Settlements) that reform is critical, There is also some consensus on the type of reform particularly that reform must include higher capital requirements especially countercyclical ( i.e. when economies are doing well capital requirements should be higher rather than loosened), better liquidity provisions, improved disclosure and better regulation of systemically important institutions (despite ongoing disagreement about which institutions those may be). While the substantive critiques and political lobbying efforts will likely lead to some modification in these draft policy reforms, at the end of this process, hedge funds and private equity will likely face some form of increased regulation particularly in respect of liquidity, leverage and disclosure. Though these reforms may be helpful and add some greater transparency and resilience to the financial system , it is imperative to ensure that these reforms do not take place to the exclusion of other areas of regulatory reform such as transborder banking reform that could be more significant in their impact in creating a more stable and resilient financial system.

For more, go to CCGRM website

Executive Compensation: Disclosure, Advisory Votes on Pay and Source of Systemic Risk

Robert Adamson — Fri, 10 Jul 2009 23:32:48 +0000

Executive compensation has long been a controversial and divisive issue. It is obviously even moreso in our current economic malaise in which companies are vying for their survival while executives walk away with multimillion dollar compensation packages. It seems even more egregious and objectionable when the executives that are walking away with extraordinary bonuses and compensation packages are linked to the demise or near demise of the companies who are paying them their huge packages. In fact, executive compensation is also linked to creating or exacerbating the systemic risks in the financial system that created our current economic malaise.

A typical and not improbable line of defence put forward by the executives and directors who receive extraordinary compensation is that even in time of distress and contraction, the compensation must be adequate in order to keep talent and to prevent executives and other senior employees from leaving the company and going to competitors. Concerned shareholders do not always buy this argument particularly when the amount of compensation is unreasonably high, jobs are scarce and the perception is that these executives should feel lucky to have a job, especially if they have presided over poor performance and mistakes that compromised the company’s financial health.

It is these debates that make executive compensation such a divisive issue. And aside from the quantum of compensation packages and the moral arguments that infuse discussion about such extraordinary compensation, executive compensation is a critical issue in corporate governance. The current reality is that shareholders have very limited means to voice their opinion on levels of total executive compensation and even fewer means to determine or influence it. While various proposals are circulating to mandate or promote advisory votes on executive compensation, no such vote is currently required under Canadian or the US law. Some companies have voluntary given shareholders an advisory vote on executive compensation but the number of companies who have adopted the advisory vote is still very small.

But the governance problems associated with executive pay are even more fundamental and basic than voting rights. Until very recently, company disclosure about executive compensation was limited, obtuse and mired in generality or purposefully complex formulae and calculations. Various techniques have been adopted widely by corporations to use various and sometimes complex methods of compensation- including stock options, bonuses, retirement packages and even packages for when the executive has long ago retired and even passed away- to obfuscate the quantum of executive compensation. While some companies have been transparent with how compensation is calculated and paid, this level of transparency is more the exception than the rule.

Improved and meaningful disclosure, advisory votes or binding votes on executive compensation, and compensation policies that link compensation to long-term value creation represent meaningful progress in good corporate governance. What will determine whether these reforms are implemented and respected, and whether new reforms take place, is a much more complex question about how markets, shareholders and societies value the work of executives, both in a technical sense as well as a more philosophical one. Markets and competition will (and should) continue to guide and reward compensation for executives and other employees who add real value to the company. But the extraordinary and often excessive levels of compensation, even when the markets and individual companies are failing, reflect poorly on companies, markets and how capitalism functions. As Timothy Geithner acknowledged leading up to the announcements about executive compensation policy reforms: “ This financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.” (see NYT June 11 “Treasury to Set Executives’ Pay at 7 Ailing Firms”) And perhaps most challenging for implementing and enforcing changes in executive compensation practices, there is strong argument and evidence that it is not really markets and competition that have led to the current levels of executive compensation but rather an obscure process, institutional bias and executive influence on insider directors and compensation committees that has allowed compensation levels to reach such lofty and objectionable heights. And that is just not a good example of the merits of free markets. And it is certainly not a good model for corporate governance.

For more, visit CCGRM website or link to the full policy paper.

Compensation Structure and Systemic Risk

Robert Adamson — Wed, 08 Jul 2009 23:33:10 +0000

The focus on levels of executive compensation and how they are determined is not just about how much money business leaders are paid and whether that is appropriate or unfair. While shareholders and the general public are particularly annoyed when compensation levels rise to levels that do not seem warranted, or do not appear correlated to company performance, public and shareholder attention to these issues will most certainly wane as the economy rebounds, wages rise and people become less concerned about apparently egregious levels of pay. But failing to address executive compensation levels and the process for arriving at those levels is a potentially much more serious issue than how it speaks to issues of wealth distribution, equity and fairness in the employment marketplace. There is a strong argument that can be made that executive compensation contributed significantly to the current economic malaise and that our ongoing failure to understand and correct how compensation structure encourages ill-advised risk taking will continue to create and sustain dangerous systemic risks for the financial system; risks that may resurface in coming months or years with serious economic consequences.

There is an increasingly large literature with empirical support suggesting that many current pay arrangements have provided executives with incentives to focus on short-term results. Lucien Bebchuk and Jesses Fried outlined the arguments several years ago in Pay Without Performance: The Unfulfilled Promise of Executive Compensation. They argue that the process for arriving at executive compensation has strayed far the “arm’s length” between executives and boards within a competitive labour market, as assumed and promoted within corporate law and economics. This conventional “arm’s length contracting” is more accurately a model where managerial power and influence shape executive pay with potential costs incurring to investors and the economy. The authors’ main concern is not the quantum of executive pay but rather the distortion of incentives resulting from executive compensation practices that fail to tie pay to performance and fail to limit executives ability to sell their shares. To address this contradiction, the authors propose several remedies including: increases in transparency through detailed disclosure, improvement in pay practices such as greater use of “indexed” stock and options, and improvements in board accountability to shareholders through improved corporate governance reforms. (see also Equity Compensation for Long-term Performance, by Lucien Bebchuk and Jesse Fried, forthcoming White Paper).

As with other areas of financial system reform, the SEC and other regulators are considering possible regulatory interventions and other means to improve executive compensation practices and decrease the role that compensation plays in creating systemic risk in the financial system, and banking system more generally. The objective is to find ways to influence executive pay in a ways that limit incentives for excessive risk-taking and to decide what role, if any, government should play in these reforms. While there is growing consensus that executive pay should be tied to long-term growth performance, it is still unclear how best to do so. Most focus is on equity-based compensation since it is typically the most central component of pay structure. The problem with grants of equity incentives such as options and restricted shares is that they usually vest over a period of time and once those share have vested, executives have usually unrestricted freedom to cash them out. This discretion to cash-out equity incentives is a primary cause of short-term distortions. One possible solution to this distortion is to separate the time that options and restricted shares can be cashed out from the time in which they vest. Vested options and shares could be “blocked” for a specified period after vesting. Though the options or shares would belong to the executives, they would be blocked for a time after vesting to decrease the incentives for short-term pay-offs and to promote long-term shareholder value. (see Bebchuk and Fried, Pay for Performance). IT is also suggested that the period of time during which the vested options and shares are blocked should be fixed. For example, upon vesting of shares, the executive would be entitled to cash-out some percentage such as one fifth but the remaining shares would become unblocked over some schedule, say five years. As long as the executive is working for the firm, this provides incentive to promote ongoing share value years down the road and to avoid excessive risk-taking for personal and short-term gain. Some have even suggested that shares and options should be subject to a “hold-till-retirement: provision but others have argued that this would create counter-productive incentives to leave the firm early in order to cash-out thus depriving the firm of potentially important skills and management expertise.

Other proposed reforms for executive compensation include provisions that preclude executives from “gaming” at either the time of the award or the time when the award is cashed-out and from undoing the link to longer-term value though hedging or derivatives transactions.

Critics and observers of current executive pay practices have noted the particular dangers that derive from pay practices at banks. Bank compensation structure are tied to a leverage on bank assets. Though a bank business is tied to leverage, large banks whose equity is generally owned by bank holding companies and which pay their executives partly with stock options and the bank holding company’s common shares, and this adds many additional layers of leverage. There are inherent incentives in this structure for executives to act in ways beneficial to common shareholders of the bank holding company but in conflict with the interest of bondholders, depositors and the government as guarantor of depositors. As the financial crisis has further and sometimes dramatically reduced the value of those common shares, this divergence of interest is even more pronounced. Attempts that has been undertaken to realign the interests of executives and shareholders through say-on-pay advisory shareholder votes and restricted stock in incentive pay do not address the other reality that shareholders often perceive their interests to be forwarded through risk-taking. They can quickly exit and claim losses if things don’t work out. The consequences for the economy more generally are much more dramatic and sustained. To address this additional distortion, one suggestion is that executive pay at banks should be tied to a broader basked of securities rather than just common shares. Value could, for example, be tied to a percentage of the aggregate value of the common shares, preferred shares, and bonds issued by the bank or bank holding company. Pay could also be tied to a measure of the price of credit default swaps which would reflect the probability of default. (see Lucien Bebchuk, in testimony prepared for the “Compensation Structure and Systemic Risk, Committee on Financial Services, US House of Representatives, June 11^th, 2009as posted at Harvard Law School Forum on Corporate Governance and Financial Regulation) The general idea is to devise mechanisms and metrics that reflect interests beyond those of common shareholders to include, among others, preferred shareholders, bondholders and the government as guarantor of deposits.

While there may be some agreement on some of these measures for linking pay structure to better and long-term incentives, there is little agreement on who should be responsible for implementing these reforms. Many argue that these reforms and decisions are best left to private decision-makers and that government should play no role in setting executive compensation. This issue of the government’s role in regulation and regulatory reform is a much larger issue that cannot adequately be addressed in this paper. For the purpose of a discussion between executive compensation and systemic risk, it is important to acknowledge that banks pose a much greater systemic risk as institutions than do non-financial firms. Creating greater oversight for financial institutions should be considered on that grounds at the very least, regardless of the many other arguments that are used to argue in favour of increased regulatory supervision of firms. For non-financial firms, government has a role to play in promoting and shaping companies’ internal governance and corporate governance practices. Government can and should play a role in ensuring advisory say-on-pay votes, accommodating shareholders ability to replace directors, and having shareholders play a greater role in corporate governance arrangements. For financial institutions, governments have the right and responsibility to address any issue and practice that introduces systemic risk into the financial system, including when the source of risk comes from compensation structures and incentives. Banks are different from non-financial firms since bank failures impose costs on the economy that shareholders do not have to internalize. Leverage is often seen as a mechanism for enhancing profit rather than a complex risk-reward equation which carries system wide implications.

In addressing controls over executive compensation at financial institutions, it would be unproductive and political unlikely, to attempt to control the amount of compensation. A better strategy will likely be to guide the process or structure for compensation; a process that discourages excessive and short-term risk taking.

Corporate Governance in Asia

Robert Adamson — Mon, 06 Jul 2009 23:33:56 +0000

Asian companies are increasingly powerful players in the global capital markets. The world media and business pundits have long prognosticated on the emerging and emerged economies of Asia, the Red Tigers, the Asian tigers and the success that the Asian economies have had in engineering rapid economic growth. Business commentators, investors, policy makers all look with keen interest and foreboding at the potential for Asian economies and companies. The demographics, the entrepreneurial spirit, the relative stability of Asian economies have long foretold of the emergence of Asia as an economic powerhouse.

Although Asian economies have many circumstances working in their favour, there are still significant obstacles that remain for Asia to emerge as a formidable and sustained force in the global economy. One of the obstacles is how corporations are responding to the challenges and expectations for corporations in a post- Enron world. How are Asian corporations responding to and predicting the mutating expectations of shareholders? How are Asian corporations reacting to the demands of other stakeholders such as employees and affected communities for increased power and consultation in corporate decision-making? How are corporations responding to the growing threats of environmental harm that may or may not be linked to their business activities? Are corporations in Asia live to these issues? Are they changing their corporate governance practices? Are Asian governments responding with adequately sophisticated laws on corporate governance and environmental management? Do Asian companies acknowledge these corporate governance issues as a risk management issue? Do they realize the potential consequences of failing to acknowledge these risks to their operations, their reputation and their bottom line?

The future of Asian economies and Asia-based corporations is integrally linked to the ability of those corporations and governments to anticipate the new modalities and expectations for corporate enterprise. This is indeed a post-Enron (and now post Satyam) world. The rules for corporate governance have changed and further changes await. Even if Asian corporations and regulators feel that Asian consumers and shareholders are less engaged and more forgiving of corporate conduct in the pursuit of economic growth, these same Asian companies operate in a global world. Regardless of whether their operations are currently transnational, they might someday want to be. Whether now or later, Asian corporations are inevitably subject to the dictates and intricacies of global capital and financial markets. In most cases, they need to play by the rules and expectations of global capitalism. These rules and expectations create an elaborate regulatory and non-regulatory series of rules and practices ranging dealing with everything from unfair trade practices to risk management protocols.

For example, those companies who want to list as public companies on US or European exchanges have to satisfy a growing number of regulatory requirements that come with listing. There are increasingly complicated accounting practices and conflict of interest provisions that have to be met. There are requirements on disclosing certain types of material risks associated with their operations. And these few examples provide only a sampling of the complex and transnational compliance regime, its rules and regulations. All of these rules are likely to get more onerous, with more disclosure requirements, more regulatory oversight and require more resources to comply.

Even more important, and less easily discerned, is what lies above and beyond the regulatory bar; beyond what is required to comply now with current requirements. What do consumers expect from corporations, their practices and their management beyond what law requires? How are some companies and competitors moving beyond legal compliance to anticipate new business trends and consumer demands and expectations? What environmental and other risks will communities in emerging markets assume in exchange for corporate investment?

And then there are the investors. If Asian corporations want to attract the attention of international institutional investors, they will have to be able to satisfy the increasingly demanding criteria that money managers need to honour in investing their clients’ money. These criteria may include a responsible investment statement by a large pension fund manager that links the fiduciary obligations of pension trustees to long-term sustainable investment. There may be increasing interest of shareholders in whether Asian corporations are participating- if not taking the lead- in international initiatives such as the Global Compact. And, from the institutional investor side, there may be increased interest in measuring Asian companies by the newly adopted UNEP Principles for Responsible Investment or in the practices of Asian banks in adopting risk management provisions as outlined in the Basel II (New Accord) dealing with risk management in capital markets.

Many of these questions cannot be answered since most Asian economies, regulators and companies are only beginning to analyse and respond to some of the emergent expectations for corporate governance. What is most important now is to highlight, discuss and hopefully address some of the most important issues for corporate governance that will be critical to the ability of Asian economies and corporations to function in a very fluid, fickle, complex and regulated global marketplace.

For the full report on Corporate Governance in Asia, go to CCGRM website, or to the report here.