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Doing Business in the Asia Pacific-Examining the Governance Implications

April Chan

2011ANNU

AL

CONFERENCE

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“Doing Business in the Asia-Pacific – examining the governance implications”

– A practitioner’s perspective

April ChanPresident, The Hong Kong Institute of Chartered SecretariesPresident, Corporate Secretaries International AssociationCompany Secretary, CLP Holdings Limited

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This presentation covers:• Business Environment in Asia-Pacific

Region (focus on China and India)• Challenges to Corporate Governance in

China and India• Tackling the Challenges: a Company

Secretary’s perspective• Case Study: CLP Group

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• Asia-Pacific Region remains a diverse region, with a range of culture, economic, legal, and political systems.

Business Environment in Asia-Pacific Region

Table: GDP, Market Capitalisation, Listed Companies and Legal System in Asia-Pacific Region

JurisdictionGDP (2010)

(USD Billions, PPP)Market Capitalisation

(USD Millions)Number of Listed

Companies Legal System

China 10,085.71 4,027,840 2,063Civil Law

Traditions

India 4,060.39 3,228,455 6,586Common Law

Traditions

Korea, Republic 1,459.25 1,091,911 1,798Civil Law

Traditions

Australia 882.36 1,400,000 1,999Common Law

Traditions

Thailand 586.88 277,731 541Civil Law

Traditions

Malaysia 414.43 408,689 956Common Law

Traditions

Singapore 291.94 647,226 778Common Law

Traditions

Vietnam 276.57 30,325 290Civil Law

Traditions

Hong Kong SAR, China 225 2,711,316 1,413Common Law

Traditions

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Business Environment in China and India

• Concentrated shareholdings – Block holding by families in business house

and by individuals in entrepreneurial ventures

– Dominant and significant state-owned sector• Growing capital markets• Businesses transitioning rapidly to listed

status

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Concentrated Shareholding –Implications and Challenges on Governance

• Dominant shareholder, potential for:– Conflict of interests– Related party transactions– Excessive influence on board– Weakened separation of board and management– Unfair treatment of minority shareholders

• Significant SOE sector, leading to:– Insulation from market forces and disciplines– Status above applicable laws and regulations

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Growing Capital Markets –Implications and Challenges on Governance

• Short operational track record• Lack of long-term vision• No tradition of accountability to stakeholders• No tradition of commitment to transparency and

honesty• Shortcomings in legal and regulatory systems

and government commitment to demanding and enforcing good governance

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Business transitioning rapidly to listed status

– China; a Case StudyMoody’s Red Flags Report on China• Screened 61 rated Chinese entities to identify areas of governance

concern

Source: Red Flags for Emerging-Market Companies: A Focus on China issued by Moody’s Investors Services

Number of Red Flags TrippedTotal No.

of Issuers1 Short track record: Under 7 years of operating history 32 Short listing history: Under 3 years or private 183 Concentration of family ownership: 43

Major shareholding family control > 30% stake4 Change of senior management: Change of CEO/CFO 135 Significant related-party transactions 3

a) >10% of sales or 10% of cost of goods sold, or 3b) Receivables due > 10% of total assets 0

6 Major shareholder's private business: 13Existence of material business outside of issuer

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Tackling the Challenges: a Company Secretary’s perspective• Improve Board Performance

– Participate in establishment of proper and transparent nomination process

– Issue guidelines on independence, directors’ duties, etc.

– Update directors on regulatory changes timely

– Provide continuous development training for directors

– Introduce effective board performance evaluation

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Tackling the Challenges: a Company Secretary’s perspective (Cont’)

• Promote Good Corporate Governance– Establish Corporate Governance

Framework for adoption by Company– Recommend good corporate

governance practice to the Board which are applicable to the Company as a whole

– Participate proactively in establishment of Code of Conduct

– Contribute to the corporate governance debate/government and regulatory consultations

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Tackling the Challenges: a Company Secretary’s perspective (Cont’)

• Promote Transparency of Disclosure and Dialogue with Shareholders– Establish Shareholders’ Communication Policy– Fair and continuous disclosure – in policy and practices– Publish Annual Report/Interim Report/Quarterly Statements and

timely announcements– Hold shareholders’ visit programme to enhance shareholders’

activism– Annual General Meeting – Website– Shareholders’ hotline

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Case Study: CLP Group

• Incorporated in Hong Kong• Listed before World War II• Supply electricity to Hong Kong since 1903; Mainland expansion in 1980s; regional

growth from 1990s to Australia, Southeast Asia, Taiwan and 2000s to India• 34.87% owned by Kadoorie Family• No other substantial shareholder• Business centred in Hong Kong• Board and Management located in Hong Kong• Subject to public scrutiny in Hong Kong, due to nature of business• Growing scrutiny of environmental performance• Global Dow 150 Company• Dow Jones Sustainability Asia Pacific 40 Index Company• Hang Seng Index Constituent• Hang Seng Corporate Sustainability Index Constituent• Hang Seng (Mainland and Hong Kong) Corporate Sustainability Index Constituent• Well recognised as among the best in corporate governance in Asia

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CLP Corporate Governance Framework

Source: https://www.clpgroup.com/ourcompany/corporategovernance/framework/codespoliciesandguidelines/Documents/CLP%20CG%20Eng%20(Clean)%202009.pdf

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CLP experience – Jhajjar Project, India

• In 2008 CLP successfully bid for the greenfield development of a 1320MW coal-fired power station at Jhajjar in Haryana State.

• The basis of tendering was against the lowest tariff bid.• Station due for commissioning in 2012.

Governance Challenges

Bidding• Different laws, regulations and bidding procedures• Governance characteristics and processes of key

stakeholders – Coal India, India Railways, Haryana State Government, Domestics banks etc.

• Environmental governance – compliance or better

Development and Construction• Governance for safety• Governance for quality• Ongoing stakeholder interfaces• Evolving regulatory issues (e.g. visas for Chinese workers)

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Conclusion• Corporate governance in Asia-Pacific is facing a number of

challenges.• Raising the bar on corporate governance demands the

support of all internal stakeholders (shareholders, board of directors and management) and external stakeholders (regulatory and professional bodies).

• But we are the Corporate Governance Professionals – we can make a difference by:– Improving Board Performance– Promoting Good Corporate Governance– Promoting Transparency of Disclosure and Dialogue

with Shareholders

Thank You