Southeast Asia’s companies need to add more independent directors to their boards and boost diversity to attract foreign investors including Aberdeen Asset Management Plc and Manulife Asset Management.
One of the biggest obstacles is strengthening the roles of independent directors because many publicly traded companies in the region are family-owned, Stephen Schuster, a financial sector specialist at the Asian Development Bank, said in an interview yesterday from Manila. Other challenges include disclosure and cross-border dispute resolution, he said.
Singapore, ranked Asia’s best in corporate governance by the Asia Corporate Governance Association or ACGA, requires publicly traded companies to have independent directors make up one-third of their boards. That compares with 20 percent for the Philippines, with family businesses representing 83 percent of its stock market, and Indonesia, which only asks for one unaffiliated director and 30 percent independence among commissioners, the trade group said.
“First, there needs to be a sufficient supply of well-trained independent directors, and second, to make sure their voices are heard,” Schuster said. “This is ever more challenging given the recognition that international standards favor term limits for independent directors.”
Aberdeen Asset sees room for improvement in board diversity in terms of background in the region, David Smith, head of corporate governance, said in a March 27 interview. Manulife, with $238 billion in global assets, expects increased role of independent directors to improve transparency.
Countries with a small number of public companies or those dominated by family-owned businesses may not have produced enough independent directors, prompting rules that don’t require a higher number of unaffiliated board members, Schuster said.
Asian corporations fare the worst in board independence, with about 40 percent of firms in Singapore and the Philippines having three or more family members on the board, ACGA analysts led by Amar Gill wrote in a September report.
Still, shares of Southeast Asian markets gained this year, making up four of the world’s 10 best performers in U.S. dollar terms. Benchmark indexes in the Philippines, Vietnam and Laos climbed 18 percent, while Thailand’s SET Index advanced 16 percent, according to data compiled by Bloomberg.
The top-ranked Southeast Asian firms in 2012, including companies with market values of more than $10 billion, were Malaysia’s Public Bank Bhd., Oversea-Chinese Banking Corp. and Singapore Airlines Ltd. in Singapore, as well as Thailand’s Advanced Info Service Pcl, the ACGA report showed.
“We spend much time making sure controlling shareholders will act in the interest of all shareholders, which includes how they source, recruit and interact with independent directors,” said Smith at Aberdeen Asset, which oversees $295 billion worldwide. “It’s a case of whether these independent directors have the backbone and diversity of experience to challenge the board.”
Singapore, Thailand and Malaysia are the top three Southeast Asian nations on the ACGA’s corporate governance watch ranking, having improved their scores from 2010 to last year. Indonesia is the only country from the region which worsened over the two-year period.
PT Bumi Resources, Indonesia’s largest coal exporter, said 10 directors resigned this month, as its biggest shareholder Bumi Plc works to dispose of its stake in the company and separate from the nation’s Bakrie family after defeating an attempt by Nathaniel Rothschild to take control of the board. Rothschild, scion of a centuries-old banking dynasty, is a co-founder of Bumi Plc.
The dispute caused investors to avoid the companies, sending Bumi Plc’s shares to plunge 56 percent in the past year, and prompting Bumi Resources to fall 71 percent in the same period.
Only a a few of the Southeast Asian markets studied by the ACGA ranked above 60 percent in the quality of non-financial reporting, such as the disclosure of related-party transactions and definitions of independent directors, the ACGA report said.
“We expect good corporate governance from the companies we invest in, especially in terms of disclosure, which still needs improvement,” said Ezra Nazula, head of fixed income overseeing 25 trillion rupiah ($2.6 billion) at PT Manulife Asset Management Indonesia in Jakarta. “It is certainly a plus point if companies have independent directors as we would be able to expect better transparency.”