?? Regulators, investors Asia-Pacific increasingly emphasizes corporate governance
➤ In the interests of the company’s management teams, shareholders must align themselves with the ultimate goal of value creation
➤ The right talent, technology and transparency needed to improve corporate governance
Gordon Crosbie-Walsh, CEO of EquitiesFirst
|Alexander Kent, Director of EquitiesFirst|
Corporate governance is becoming a hot topic among investors, governments and businesses in Asia Pacific. Regulators and businesses across the region seek to align the interests of stakeholders, including corporate leadership teams and shareholders, with the ultimate goal of creating long-term value.
Nasdaq Governance Solutions, the governance and advisory technology unit of Nasdaq Inc., has partnered with asset-backed finance firm Equities First Holdings LLC to produce a series of research reports on corporate governance practices in the Asia-Pacific region. The project aims to provide actionable insight into corporate governance best practices and add value to investors and management in the region.
Regulators in key regional markets, including Hong Kong, Japan and Australia, have pushed for changes in the culture, compensation, and environmental, social and corporate governance practices in companies, according to the reports. Hong Kong Exchanges and Clearing Ltd. proposed in April new rules aimed at realigning a company’s culture with its purpose, values and strategy. The Japan Code of Corporate Governance published by the Financial Services Agency and the Tokyo Stock Exchange Inc. encourages companies to adopt incentive compensation while focusing on returns and capital efficiency.
However, there is still a long way to go in the region to better align the interests of all stakeholders, EquitiesFirst Asia CEO Gordon Crosbie-Walsh and Director Alexander Kent told S&P Global Market Intelligence in an interview.
Establishing structures within the board, such as a compensation committee, can help clarify financial incentives for both management and clients. It can also provide more visibility into the alignment of their interests, the executives said. In Australia, the latest corporate governance principles of ASX Ltd. emphasize a board structure that must be efficient and add value, and that a listed entity must pay sufficient compensation to attract and retain high quality talent.
Technology can also increase a company’s transparency to its shareholders and make decision-making more inclusive, they said, adding that such openness can generate more value for companies in the long run.
This is an edited transcript of the interview.
S&P Global Market Intelligence: What’s the Business Case for Better Corporate Governance?
Alexandre Kent: Corporate governance is about creating value. This is what unites traditionally antagonistic factions, be it management or shareholders. In the end, they probably want the same, which creates long-term value. This is the title of the whole series. Think about corporate governance, not as a tick-mark exercise, not just as superficiality of compliance, but how to create the next step in your business.
What are the main corporate governance risks and priorities for financial institutions in Asia-Pacific?
Kent: The top corporate governance priority for financial institutions is undoubtedly alignment of interests. Thinking about the financial interests of the clients, as well as the overall risk, and also from the point of view of the banks … are they really acting in the best fiduciary angle when it comes to actually dealing with clients.
You see it all the time in terms of financial institutions not acting in the best interests of their customers. It is difficult because everyone will always act in their own interests. To avoid this, it is necessary to put in place the bases of the structure. Right off the bat, everyone knows what they get out of it, and how both parties are incentivized, and that it’s being clearly disclosed, and aligning it in the right direction.
What is a typical example of misaligned interests in financial institutions today?
Gordon Crosbie-Walsh: Very often there are different interests within an investment bank. So one office might be the one that lends the money, but they get the money from another office, from another part of the business. There are therefore several chains of interest even within the same investment bank.
How would you describe corporate governance reform in Asia?
Kent: A unifying theme is that corporate governance is sort of unleashed in Asia. Expectations are changing within the investment community. Thus, they expect more from boards of directors, companies and governance. And it is also at the base. Thus, populations, consumers and employees effectively have changing expectations vis-à-vis companies. And all of this is fueling, in each geography to a different degree, a shift and an upward reassessment of the direction that corporate governance should take. In the case of Hong Kong, the theme shifts from compliance to strategy. Our report shows that Generation Z and Generation Y expectations are driving Hong Kong companies to have a good corporate culture and live up to their values.
What role can technology play in improving corporate governance?
Kent: Democratization of shareholders. The more shareholder meetings you have that are accessible to the general public, the investing public, the easier it becomes for shareholders to make informed decisions. And, they actually engage with the business.
After transparency and inclusion, what’s the next step?
Crosbie-Walsh: This will be the implementation. Today, there are many reporting and auditing requirements for companies, for example, to disclose sustainability. Corporate governance has been around for some time. But if you look at the trends in their annual and audited reports, they’re very, very detailed. Thus, the reporting requirements are much more important. When we take the Nasdaq, for example, the reason they’re so excited about it is that they care about shareholder disclosure. It’s really something they care a lot about, and they think they should be doing it as part of an exchange. So you will see this trickle all the way through. It wouldn’t surprise me that other exchanges will likely try to replicate what the Nasdaq is doing here.