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Business

Taking stock of Asia's corporate scandals

Toshiba's then-President Hisao Tanaka, center, and other executives apologize in front of the media in Tokyo on July 21, 2015. (Photo by Ken Kobayashi)

BANGKOK First Myanmar Investment, one of two companies trading on Yangon's nascent stock exchange, is striving to build a management system befitting a listed corporation. If the property developer were to look for role models in other Asian markets, however, it would find plenty of examples of what not to do.

From Japan and Singapore to Thailand and Indonesia, problems with corporate governance abound. Yet there are also signs of improvement, with growing recognition of the need for greater shareholder diversity and more independent board members.

Myanmar's corporate governance framework is still in its infancy. Most companies typically close their books in March but do not hold their annual meetings until November. Kensuke Yazu of the Yangon Stock Exchange, which opened in March, says most businesses do not even have a date of record for determining shareholders' eligibility for dividends.

FMI, for its part, is preparing to hold a general meeting on Aug. 7. Its shareholder count has increased by more than 1,000 since its listing, and it is stepping up efforts to learn the ways of the global market.

Clearly, those ways do not necessarily guarantee good governance. Consider Japan, which had a nearly 140-year head start over Myanmar in stock trading. A number of Japanese shareholders meetings this year focused not on earnings and plans but on management misdeeds.

This Public Bank shareholders meeting in Kuala Lumpur drew more than 5,000 investors.

Toshiba's top brass, for instance, was grilled about the electronics maker's accounting scandal at a three-hour meeting on June 22. The book-cooking was "caused by a corporate culture in which workers could not go against their superiors," one shareholder said. The board of directors also failed to keep top executives in check.

Aside from Toshiba, contractors Asahi Kasei, Sumitomo Mitsui Construction and Mitsui Fudosan came under fire for manipulating piling data for a condominium project. At Mitsubishi Motors' annual meeting, a shareholder demanded that the entire board resign over the company's fuel economy scandal.

There have also been serious problems at companies where founding families run the show. Defective air bags made by Takata have caused a number of deaths and prompted worldwide recalls. Chairman and CEO Shigehisa Takada's response to the crisis has sowed confusion.

At the company's annual meeting on June 28, the chairman said he would "pass the baton" once the company reaches "a point where its survival through the crisis is a certainty." Shareholders and the media took this as a declaration of his intention to resign, but after the meeting, the company issued a statement denying that he plans to step down.

Part of the reason for Japan's flurry of scandals may be that executives are stuck in the past. Cross-shareholding arrangements -- in which business partners and banks would serve as friendly stakeholders -- used to be common. Most board members were insiders.

Over the past quarter of a century, though, shareholder structures have changed dramatically. Foreign investors now own some 30% of outstanding shares, making them the biggest single group. Executives are learning -- the hard way -- that they will be held accountable.

"WE WANT OUR MONEY BACK" Scandals are by no means a Japan-specific problem. Singapore Post has been under the microscope since the sudden departure of CEO Wolfgang Baier, announced last December. Corporate governance experts have questioned the long tenures of some board members and disclosure lapses related to past acquisitions.

"SingPost's reputation has ... suffered from a very public crisis surrounding our board governance [and] our share price reflects this," newly appointed Chairman Simon Israel said at the company's annual general meeting on July 14. Many investors took the opportunity to express their frustration. One attendee complained: "We want our money back."

Investors in Singapore-listed commodity trader Noble Group, meanwhile, have been fretting over the company's transparency since early 2015, when little-known research group Iceberg Research accused it of accounting irregularities. The accusations, published online, sent Noble's share price plunging.

While Noble has sought to clarify some of the issues raised by Iceberg, its complex corporate structure -- not to mention its poor performance amid the global commodities slump -- has left investors unhappy. At this year's annual meeting, shareholders peppered management with questions about the sustainability of Noble's business model and its accounting methods.

When it comes to corporate practices, Japan and Singapore are supposed to be Asia's guiding lights. In 2014, the Asian Corporate Governance Association ranked Japan's governance quality third out of 11 countries and territories regionwide, while the city-state ranked first, alongside Hong Kong, where Noble is based.

But problems like those at Toshiba and SingPost threaten to undermine investor confidence. At the same time, scandals in lower-ranked markets are underscoring the pitfalls of investing in emerging economies.

ETHICAL ISSUES The recent insider trading case at Thai convenience store operator CP All is a case in point. A number of executives were found to have traded shares inappropriately. Korsak Chairasmisak, vice chairman and chairman of the executive committee, and others were fined a total of 34 million baht ($972,000). Still, they kept their jobs.

The company tried to put the scandal to rest by establishing a corporate governance committee. But many investors feel it has not done enough. At CP All's shareholders meeting on April 21, one investor argued the executives in question should take leaves of absence or serve only as advisers.

Umroong Sanphasitvong, a member of the governance committee, begged to differ. "I would like shareholders to give [the executives] a chance and forgive them," he said.

One CP All investor stressed that some of the onus falls on shareholders. "Thais just care about profits, not ethics," he said. "It just showed how uncivilized our country's investors and big companies are. We can never reach an international standard -- never."

Alan Kam, a Thai financial expert who serves as an independent director for local companies, told the Nikkei Asian Review that a root cause of corporate wrongdoing in the country is a "lack of ethics." It is "not ingrained in the education ... to [be] good corporate citizens."

Step back, though, and one can see a common trait among companies in emerging Asia -- not just Thailand. The biggest tend to be run by wealthy families or affiliated with the government. And share distribution is often unbalanced. CP All, for example, is 40% owned by conglomerate Charoen Pokphand Group. In the case of Noble, 85% of outstanding shares are owned by large stakeholders that make up just 0.25% of all investors.

Such imbalances mean that general shareholders have limited influence.

EXTERNAL PRESSURE To be fair, improving corporate governance has not been a priority in the region for very long. The momentum for doing so "began to increase in Asia after its economic crisis of 1997," observed Shinya Imaizumi, chief senior researcher at Japan's Institute of Developing Economies.

One key step is to improve management transparency, which goes a long way toward ensuring compliance. Transparency International, a nongovernmental organization based in Berlin, said in a July 11 report that 75% of emerging-market companies scored less than 5 on its latest 10-point transparency test. The test looks at companies' anti-corruption programs, their organizational transparency and how much they disclose about their operations in various countries. CP Group, which gained 0.6 of a point this time around, was the sole non-Chinese company on the worst 10 list.

Indian companies, in contrast, performed well. Bharti Airtel, a leading telecommunications provider, topped the ranking with 7.3 points. Member companies of the Tata group, an Indian conglomerate, also made the top 10.

In August 2013, India passed a new corporate law. One feature of the legislation is a requirement that every listed company have at least one female director. The idea was to reinforce good governance by shaking up all-male boards. Yet some companies -- many of them listed government-run enterprises -- have so far failed to comply. The list includes Oil and Natural Gas Corp., GAIL (India) and Bharat Petroleum, which are among the top 50 Indian companies by market capitalization.

It appears that most of India's governance advances are being made by companies that have international operations and partnerships.

Some countries, meanwhile, are acting on criticism of their corporate standards. Indonesia is one.

The Indonesian Stock Exchange has introduced rules requiring every listed company to have at least one independent member on its board of directors. Another new rule states that at least 30% of the members on the board of commissioners must be independent.

In 2014, when the Southeast Asian country ranked at the very bottom of the ACGA ranking, the bourse banned independent directors and commissioners from serving more than two five-year terms. It also called on companies to raise the ratio of floating shares to more than 7.5%.

Cigarette producer Hanjaya Mandala Sampoerna, an Indonesian unit of U.S.-based Philip Morris International, took that order to heart. In October 2015 it issued new shares, raising its number of publicly traded shares from less than 2% to 7.5%.

It has since gone further. "I'm trying to make myself accessible for existing and potential investors," President Director Paul Janelle said when he visited the stock exchange in December. The company held a live webcast of a presentation in April, where it announced a 1-to-25 stock split to provide "investors with an affordable stock price" and attract a "wider base of retail investors."

Like Indonesia, authorities in other Asian countries are cranking up the pressure for reform. A Malaysian rule stipulates that if a company's chairman is not an independent director, outsiders should account for more than half of the board. In Thailand, at least one-third of directors should be independent, and every board should include at least three outsiders.

Japan, too, recognizes that while it may score well by regional standards, it has room to improve. The Tokyo Stock Exchange last year adopted a Governance Code, demanding that listed companies appoint at least two outside directors. Of companies listed on the TSE's first section, 78% have met that requirement. The Financial Services Agency has introduced a stewardship code, calling on pension funds and other investors to put external pressure on companies to strengthen governance.

RISK MANAGEMENT In Taipei on June 17, a shareholder named Echo Lin turned up the heat at Formosa Plastics' annual meeting.

Lin, a senior member of a Taiwanese conservation group, acquired shares in the chemical company five years ago in order to question management about environmental disruption. In April, mass fish deaths in Vietnam cast suspicion on a steel plant the company is building nearby, and Lin urged Formosa Plastics to disclose its effluent data. Jason Lin, Formosa Plastics' chairman and president, said the Vietnamese government had found no link between the plant and the fish deaths.

Two weeks later, though, Formosa Plastics publicly accepted responsibility and agreed to pay a $500 million fine. A source close to the company said it was coerced into admitting culpability.

It is unclear how the Vietnamese case will develop, but it is representative of a global trend: increased activism by a wider range of shareholders, including NGOs, with a sharper focus on corporate responsibility.

Assets managed by institutional investors that signed the United Nations Principles for Responsible Investment totaled $59 trillion in April 2015, up 29% from a year earlier and equal to more than half of the world's institutionally held assets. The principles emphasize good environmental, social and governance practices.

Irving Low, head of risk consulting at KPMG in Singapore, said Asian standards have improved since the consultancy conducted its last comprehensive study in 2014. Frameworks such as the Trans-Pacific Partnership and Association of Southeast Asian Nations Economic Community, he suggested, should spur further progress by boosting cross-border business activity and ushering governments toward common governance guidelines.

Low said the biggest challenge in improving governance is changing how companies think about risk management. "Corporate governance is seen by most people as costs," he said. "This perspective limits their willingness to invest in corporate governance."

While checks and balances do not generate profit in themselves, they can save companies a lot of money. "It is a journey and its benefits are long-tail," Low said. "You put in efforts today, but you may not get the harvest until two or three years down the track."

Nikkei staff writers Tomomi Kikuchi in Singapore, Wataru Suzuki in Jakarta, Takafumi Hotta in Mumbai, Kensaku Ihara in Taipei, Motokazu Matsui in Yangon, Shotaro Tani in Tokyo, Yukako Ono and Kentaro Iwamoto in Bangkok contributed to this story.

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