I AGREE with Singapore Exchange chief executive Hsieh Fu Hua that the Anglo-Saxon model of corporate governance may not be fully suitable for Singapore and Asia. The Anglo-Saxon model – sometimes called the outsider model – is based on the assumption of dispersed ownership, while in many parts of the world, concentrated ownership by founders, families or government is the norm.
However, concentrated or dispersed ownership is only one of several dimensions needed to describe differences in institutional environments across countries. For example, there are shareholder versus stakeholder models, and countries following different legal systems, such as common law and civil law.
Using just those three dimensions, we can describe Singapore as having concentrated ownership, a shareholder model and a common law system. Other countries in Asia such as Indonesia, South Korea and China would not belong to the same grouping as Singapore. Further, Indonesia and China, just to name two Asian countries, have dual board structures like some continental European countries, while we have a unitary board structure.
Asia is so diverse that searching for a single ‘Asian-style’ governance model would be a fruitless exercise. I would argue that we have many more similarities with developed markets like the UK and Australia than differences, and many more differences from some Asian markets than similarities. We should continue to look outside and at ourselves when developing our corporate governance framework.
Recently, I heard a speech by a senior official of one of the major exchanges in Asia who claimed that the global financial crisis showed that the Western model of corporate governance is flawed, and justified the style of corporate governance in his own country.
This is despite his country having itself gone through a prolonged period of recession, and weak corporate governance having been identified as a contributing factor. To me, what the global financial crisis actually demonstrated is what happens when regulators forget to regulate and when we fail to address fundamental weaknesses in the corporate governance landscape. For example, the US model of corporate governance has fundamental weaknesses in areas such as CEO pay, board leadership (where the single CEO-cum-chairman model is still prevalent), and director elections, just to name a few. The global financial crisis does not prove that everything is bad in the US or UK, and that there is nothing we can learn from them.
There is nothing wrong with modelling our system on the developed markets. We should not re-invent the wheel and most of what works in the UK and Australia will probably work here because, at least, we are all on the common law legal system and ‘more or less’ similar shareholder models (there is arguably a bigger push towards a more stakeholder focus in those countries).
Further, we are too small to throw our weight around by having a totally different system. A big country can develop what they want and say ‘to hell with the others’, but if we do that, it will be ‘to hell with us’.
In some cases, we have not adopted certain ‘best practices’. This is fine as not all ‘best practices’ may be appropriate for us because of differences in institutional environments. However, like eating in a buffet, we may end up choosing what is not really good for us (like the char kway teow), and leaving the good (like the salad) on the buffet table.
Before we know it, we need to fix our arteries. The lack of statutory derivative action for listed companies and our weak definition of independent directors are two examples of where we have decided not to follow ‘best practice’ even though they are arguably even more important for our environment.
I like the thought pattern of Mr Hsieh that we should adapt our corporate governance framework to suit our environment. Let’s now consider the three ideas he proposed.
The first is dual-class shares. I think that this is a bad idea. As it is, there are already many ways for controlling shareholders to entrench themselves, such as through control of board appointments and complex shareholding structures. We do not need to introduce another way for controlling shareholders to further entrench themselves.
We should instead be looking at how to increase the ability of minority shareholders to appoint independent directors so that we do not have the situation where controlling shareholders who do not own the entire company get to appoint the entire board.
One way is to have cumulative voting for directors, which is permitted in countries such as the US, China, Taiwan and South Korea. This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board.
This can help minority shareholders to vote in independent directors. Therefore, rather than introducing dual-class shares which can further entrench management and controlling shareholders, I suggest that we introduce cumulative voting for directors to strengthen the rights of minority shareholders.
The second idea of a cost-effective dispute resolution mechanism is worth considering. I agree that the US-style contingency fee-based system is not the way to go, unless we have a way of eliminating frivolous suits. We need to find ways of reducing the cost and barriers to shareholders in taking action to redress their rights.
Cost is an important reason why shareholders taking legal action against directors are our own ‘black swan’ events.
If we do set up a dispute resolution mechanism, we must make sure that it has the proper governance in place and enough resources to do the job. Dispute resolution is serious business as I have seldom seen two happy people in a dispute.
Before we set up any dispute resolution mechanism, we should make sure that there is a robust governance framework in place for this new institution which addresses actual and perceived conflicts of interests – otherwise, it risks capture by interest groups. Some have told me that avoiding actual and perceived conflicts of interests is impossible in Singapore because everybody knows everybody else – even though I do not know any of the contestants in the recent Miss Singapore contest.
However, making it easier for shareholders themselves to redress their rights is not an excuse for regulators not to be more proactive in pursuing civil and criminal actions, or to consider other sanctions to improve market conduct.
Recently, I had a discussion with a former head of enforcement of a foreign regulator about whether regulators in some countries have a tendency to only pursue actions which they are sure of winning. We agreed that a truly effective regulator is likely to lose some cases, as this means that the regulator is taking action in less clear-cut cases to establish standards.
Finally, I like the idea of having an independent assessment of corporate governance. If there is a need for an external auditor to issue an independent opinion on the financial numbers reported by management, there would seem to be a similar need for an external party to provide an independent opinion on the representations about corporate governance made by the company.
The opinion can state whether the company has properly applied the ‘comply or explain’ requirement and whether the assertions by the company about its corporate governance in its annual report and other public disclosures fairly present what is practised in the company. In fact, there are already precedents for having an external party provide an opinion about a company’s corporate governance disclosures.
For example, in its latest annual report for the year ending Dec 31, 2008, Antam – an Indonesian mining company which is 65 per cent owned by the Indonesian government and listed on both the Indonesian and Australian Stock Exchanges – included a four-page report by an external advisory firm on the assertions by the company about its corporate governance.
The assessment was conducted through document reviews and interviews, and it concluded that the company’s assertions about its corporate governance were fairly presented in accordance with the Australian Securities Exchange corporate governance principles and recommendations.
We should have a corporate governance system that is both right for us and good for us. Not an Asian model, but something that reflects the key corporate governance issues in our landscape.