BANGKOK -- The world is moving toward standardized regulations and codes of conduct for corporate governance. But while the rules themselves may be increasingly similar, their effects vary from one market to another, reflecting differences not only in levels of market development but also in business cultures.
Japan introduced a Stewardship Code for institutional investors in 2014 and a Corporate Governance Code for publicly traded companies in 2015. The former has spurred major institutional investors to begin disclosing how they voted on each proposal at general shareholders meetings of the companies they invest in. That, in turn, has led to more uncompromising proxy votes by those fund managers, including "nays" for board-member candidates.
Other Asian markets have introduced similar codes and most have already set a minimum number or ratio of independent board members. Many developed markets, too, are introducing new rules on corporate governance and institutional investors' practices. Even in the U.S., which has tended to set its own market rules, there are moves to introduce written governance rules that mesh with those of other markets.
Setting the agenda
One of the driving forces behind the global trend toward standardized, written codes and rules is the ongoing multilateral discussion led by the Organization for Economic Cooperation and Development. It published its first international Principles of Corporate Governance in 1999 and adopted the latest version in 2015, which was then endorsed by the leaders of the Group of 20 nations later in the same year.
These principles drew attention for their emphasis on the balance between shareholder interests and the interests of other stakeholders, including employees, creditors, suppliers, customers and surrounding communities and societies. The principles also introduced environment, society and governance, or ESG, criteria to measure the long-term value creation capability and sustainability of a company.
In short, the OECD encouraged a departure from the long-established trend of reinforcing so-called shareholder primacy, a philosophy that prevailed throughout the 20th century in the U.S. and Britain.
Advocates of shareholder primacy insist that shareholders are the sole owners of a company and are thus entitled to dictate its actions. In a famous lawsuit in 1919, minority shareholders demanded that Ford Motor pay a larger dividend instead of making capital investments. The Michigan Supreme Court declared that the very purpose of a corporation is to create shareholders' wealth and ruled that Ford should pay a higher dividend.
Times have changed.
Speaking at a conference of corporate directors held in Bangkok in June, Mervyn King, chairman of the International Integrated Reporting Council and an expert on modern corporate governance, said shareholder primacy is a "thing of the past." A company is a legal person that is supposed to exist for a longer time than a typical human life, he argued. Thus its long-term sustainability is to the benefit of long-term shareholders and other stakeholders.
Paul Polman, chief executive of Unilever, is one of the active champions of this new way of corporate governance thinking.
Immediately after he assumed the top position on the first day of 2009, he declared that he and the company's board will not work for short-term investors. Under his leadership, he said, Unilever will make committed efforts to lowering its environmental impact, such as carbon emissions. In 2011, he abolished quarterly profit reporting, switching to quarterly sales reports by line of business, to keep short-term investors away, which include many institutional investors.
For the eight years through 2016, the company's annual revenue grew by 32% and its share price more than doubled, reflecting long-term shareholders' confidence in his approach.
Polman is also a leading member of the Coalition for Inclusive Capitalism, a London-based nonprofit that promotes corporate value creation for a wide range of stakeholders, including society as a whole. Other members include leaders from such companies and institutional investors as BlackRock, Dow Chemical, MasterCard and State Street.
It all depends
But the potential for modern corporate governance to produce wider social benefits varies greatly depending on the culture and social governance of each society.
For instance, Japan's governance and stewardship codes are based on the OECD's principles, according to a member of the panel that wrote the drafts of the codes. But they are actually working to strengthen shareholder rights, because the preceding governance regime in Japan had been far less shareholder-oriented. It may well take some time before investors and managers shift their attention toward wider stakeholder interests.
East and Southeast Asian economies have long been dominated by family-owned and state-owned companies, while China under communist rule has grown through massive state-owned enterprises. Many publicly traded companies in these economies are part of a complex conglomerate, the core of which is owned by a family or a tycoon. Protecting the rights of external, minority shareholders remains a big issue in these parts of the world.
Many Asian markets share a more political problem: A lack of institutions tasked with ensuring the freedom and safety of transparent observation, analysis, discussion and reporting about corporate and government conduct in general.
The Nation, an English-language Thai daily newspaper, and one of its reporters are facing a criminal defamation charge for an article published in early March about a tin mine's alleged contamination of a river in a Myanmar village. The private Thai company running the mine sued the reporter in March. The first hearing by a district court will start in mid-July. While this would be a typical example of investigative journalism in most democracies, this kind of reporting tends to be very dangerous in Thailand, which, ironically, places relatively high in corporate governance rankings.
Fourteen migrant workers from Myanmar submitted a complaint to the National Human Rights Commission of Thailand about their working conditions in July 2016, which included forced labor of 20 hours a day. Their employer, a chicken farm, then filed criminal defamation charges against the workers, and the case was opened on June 7 at a Bangkok court.
These incidents show that, whether it be external or internal, whistleblowing about corporate conduct carries the risk of criminal charges, which companies, authorities and individuals in Thailand are only too ready to pursue. Similar issues persist in Malaysia and India.
The OECD, in its corporate governance reports, has repeatedly recommended that those markets abolish criminal defamation laws or restrict their implementation to ensure the safety of journalists and internal whistleblowers, which the organization says is an essential ingredient for better corporate governance.
An investment manager at International Finance Corp., the World Bank's private-sector investment arm, said he constantly faces the issue of unpredictability in how laws and regulations are enforced by the Chinese central and provincial governments.
Formal rules on modern corporate governance are rapidly penetrating into most capital markets in Asia. But, as with all laws and rules, real-life implementation determines what they achieve. Unfortunately, transparency -- the most important tool for achieving good governance for shareholders or any other stakeholder -- has yet to take root in many societies in Asia.