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What hope for better investor ‘stewardship’ in Asia?
Why the ability of management to articulate their approach to governance and the environment is very revealing.
Bombay Stock Exchange
A 450-page offer document from an Asian company hoping to list recently landed on the desk of Asian investors. A cursory glance revealed a number of worrying corporate governance issues. The owners had previously been banned by the regulator from accessing the stock market for two years because of stock price manipulation. The company had 172 outstanding litigation cases covering 31 pages. There were significant conflicts of interest. There had been three different auditors in the past three years and, to cap it all, there were several serious environmental issues outstanding. In terms of corporate governance, it would have been hard to give it more than one out of ten. Yet far from scaring off investors, the offer was oversubscribed 39 times. For now at least, corporate governance is firmly off the radar screen of many Asian investors. The contrast between East and West is noticeable. In the UK, the debate over corporate governance, the ownerless corporation and engagement has recently reached a crescendo. All institutional investors are to be subject to a ‘Stewardship Code,’ which aims to improve the quality of engagement between shareholders and the companies they own. Unlike their Western counterparts, Asian markets are not dominated by ownerless corporations. Nonetheless, better stewardship is desperately needed in Asia too.
Good stewardship requires three simple guidelines. Most importantly, investors need to open their eyes. Too many still hide behind the excuse that information on governance, environmental or social performance is not available. This is not true. The information is there, albeit not always in the places one might expect to find it. As a useful rule of thumb, the greater the number of pictures of smiling children in the sustainability report, the greater the problems lurking beneath. Yet by far the best source remains the companies themselves. The ability of management teams, to articulate convincingly their approach to corporate governance or environmental management, is very revealing. They can also be a rich source of both positive and negative information on their peers. Reputation checks on owners, independent directors and auditors are usually easily done, while local NGOs provide invaluable insights. Elsewhere, there are often plenty of clues in the notes to the accounts, while flotation documents offer a once-in-a-corporate-lifetime glimpse at what are usually well-hidden skeletons. A second useful guideline is to recognise that there is no such thing as the perfect company. Having started to look, it is easy to get overwhelmed by the number of issues that appear, particularly where companies have multiple business divisions.
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