Corporate Governance Development in Southeast Asian Countries

CG practices amongst Southeast Asian countries share some common characteristics with other Asian markets. With distinct factors giving rise to CG in addition to structural characteristics of

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developing countries, such as under-developed capital markets and government involvement, models of CG in these countries differs from developed economies (Rabelo and Vasconcelos, 2002). The level of CG development and CG legal frameworks across the region also present some differences. For instance, based on the review of CG performance in the six countries conducted by Asian Development Bank (ADB, 2014) in 2013, the top three countries with high mean scores in relation to CG performance are Thailand (75.39), Malaysia (71.69) and Singapore (71.68). The lowest three are the Philippines (57.99), Indonesia (54.55) and finally Vietnam (33.87). The mean scores demonstrate disparities across the three groups, between the top three performers (Thailand, Malaysia and Singapore), the middle ones (Indonesia and Philippines) and the lowest one (Vietnam). The mean scores of the 2013 report presented an increase of 19% compared with its predecessor in 2012 (ADB, 2014), however, the ranking order is slightly distinct in the reports of Asian Corporate Governance Association (ACGA, 2016). The reports of ACGA rank the CG performance of eleven Asian countries, including five countries included in this study with Vietnam being the exception. In their 2014 report, Singapore ranked first, Thailand and Malaysia ranked fourth, and the Philippines and Indonesia ranked tenth. In 2016, the ranks of Thailand, Malaysia and Indonesia dropped to the positions of fifth, sixth and eleventh respectively. The differences between the two assessments, of ADB and ACGA, could be attributed to the differences in terms of methodology, sample size and collected data. While the assessment of ADB focuses on CG performance at company level, the CG ranking of ACGA was conducted based on the legal framework of the countries. Generally, however, the assessments present differences across the six countries regarding CG legal framework as well as CG performance.

In order to garner an overview of CG in the region in general and in each of the countries in particular, the following sub-sections will present the legal framework of CG in each of the six countries with a detailed summary in table 5 and table 6. Table 6 highlights in detail key CG regulations relevant to the study. Comparisons of the legal framework and CG performance of these countries are also provided at the end of the section.

Indonesia

The development of CG in Indonesia arose from the 1998 financial crisis in East Asia, which had a huge impact on the country’s economic development. Harmful CG practices were deemed to be the main cause of the crisis. Issues such as transparency, board practices, disclosure and protection

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of minority shareholders were badly implemented in many Public Listed Companies (PLCs). As a result, after the crisis, public and private sectors, including the Indonesia Capital Market and Financial Institution Supervisory Authority (BAPEPAM-LK), National Committee on Governance Policy, and the Bank of Indonesia, have all attempted to strengthen the CG framework in the country through the release of various regulations and guidelines. The primary law covers diverse CG issues in Indonesia is the Limited Liability Company Law (No.40 of 2007). The Law addresses general regulations from the establishment, management and governance of a company and fiscal issues, to shareholders’ rights and meetings, and major actions. Aside law No.40, the CG of listed companies also follows the Capital Market Law No.8 of 1995 which provides general guidance, supervision and regulation of the Capital Market to protect the interests of investors and the public to ensure the Market is fair and efficient. Issues mentioned in the Capital Market Law include the protection of minorities, protection against market manipulation, fraud, insider trading, conflicts of interests and the governance of professional advisors. Moreover, regulations released by the Financial Services Authority (also called Otoritas Jasa Keuanga OJK) and listed requirements of the Indonesia Stock Exchange (IDX) also contribute to the development of a CG legal framework for listed companies in Indonesia. Besides all of these regulations and rules, specific sectors, such as insurance, multi-finance and banking, have their own laws and regulations with detailed compliance requirements and guidance on good CG. Although each governmental agency has a duty to participate in implementing CG, the laws and regulations have not been fully implemented. For instance, in the case of the Company Law, there is lack of government regulation supplementing and guiding the processes and procedures. Moreover, in practice, the overlapping laws and regulations have led to confusion, uncertainties and ambiguities for firms when implementing good CG. Other non-statutory sources for CG include the Code on Good Corporate Governance issued by the National Committee for Governance (KNKG) and the Corporate Governance Manual issued by the Financial Services Authority (FSA). The Indonesia Code on Good Corporate Governance is not legally-binding and is applied by companies on a voluntary basis.

Malaysia

Following the downturn of Malaysia’s economy in 1997, the High Level Committee on Corporate Governance was established in 1998. The Corporate Governance Code was reported by the

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Committee in 2000 and adopted by the Kuala Lumpur Stock Exchange in 2002 in which all listed companies are required to follow the code on a ‘comply or explain’ basis. Since then, the Code has been revised three times, in 2007, 2012 and 2016 to improve CG practices. The new Code has adopted a revised approach with the focus on conduct and outcomes of CG practices to motivate progression. Besides changes in the Code, the Malaysian government has also attempted to improve the legal and regulatory framework through altering the Company Act 1965, revising legal frameworks for securities markets and listing requirements, as well as adding additional guidance on CG for government-linked companies (GLCs) and financial institutions.

The key laws regulating the capital markets include the Capital Markets and Services Act 2007 and the Securities Commission Act 1993. In addition to the Malaysia Stock Exchange (Bursa Malaysia), the supervision of the Securities Commission also plays a role of regulators through its listing requirements which cover a diverse set of CG requirements for listed companies. Moreover, there are also other governmental agencies, such as the Putrajaya Committee and the Bank Negara Malaysia, which are responsible for supervising CG practices and issuing guidance of CG for government-linked companies and financial institutions. In terms of auditing, the Malaysian Institute of Accountants, as the legally established professional institution, is responsible for auditing standards and practices as well as certifications. Authorities with enforcement power on CG in Malaysia include the Companies Commission, the Securities Commission, Bursa Malaysia, and Bank Negara Malaysia. Each of these agencies has concise areas of authority and precise enforcement frameworks (World Bank, 2012). In the case of overlap, these bodies often cooperate. Firms and conglomerates in the investment and financial sectors are under the jurisdiction of all four authorities.

Philippines

The key governmental agency that retains overall jurisdiction, control and supervision on domestic companies is the Philippines Securities and Exchange Commission (SEC). The SEC also oversees the activities of the Philippine Stock Exchange (PSE) to ensure it functions as a self-regulatory organisation in conjunction with SEC’s rules and the Securities Regulation Code. The PSE governs all listed companies. Aside from the SEC and the PSE, the Bangko Sentral ng Philipnas (BSP) and the Office of the Insurance Commission (IC) also play supporting roles. Each of these bodies is responsible for a distinct financial market sector and has the authority to issue its own circular

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memoranda, implementing rules and regulations if there is no conflict with existing law. For example, while the BSP supervises and regulates companies in the financial and banking sectors, the IC is accountable for charitable trusts, mutual benefit associations, and insurance companies. The two important pieces of legislation under the control of SEC is the Securities Regulation Code and the Corporation Code of the Philippines, in which the Corporation Code (Batasang Pambansa 68) is the main legal document that governs all stock and non-stock corporations from their establishment to dissolution, with regards to several key CG aspects such as board of directors, stockholders and records.

As with many other countries, the Code of Corporate Governance plays a vital role in regulating companies’ CG practices in Philippines. Under the Memorandum Circular No. 2, Series of 2002, the Code of Corporate Governance and the Manual of Corporate Governance were issued with the main purpose of providing guidance for firms to formulate their governance rules and practices. The Code of Corporate Governance has been revised twice, firstly in 2009 (under the SEC memorandum Circular No. 6, Series of 2009) and recently in 2016. In response to the criticism of overregulation, the new code adopts a ‘comply or explain’ approach. With this approach, companies are not required to comply with the Code but they must identify the areas of compliance and non-compliance as well as explain the reasons for non-compliance. The Code allows company’s board greater flexibility. According to SEC’s rule, all the listed companies are required to submit the new Manual on Corporate Governance prior to the 1st of June 2017. Besides the SEC, PSE, BSP and IC as the key bodies, other institutions, such as the Institute of Corporate Directors (ICD) or the Institute of Certified Public Accountants, are also active in promoting good governance practices. For instance, with support from the SEC and the PSE, the ICD developed and institutionalised the Corporate Governance Scorecard for public listed companies. The scorecard was initially voluntary for listed companies, however, since 2009, according to the SEC Memorandum Circular No. 12, the scorecard has been mandatory and includes specific penalties classified under the Circular No.5, Series of 2009 for non-compliance.

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Table 5: Summary of the CG’s legal frameworks in the six countries

Country Corporate Governance Frameworks Key issues

Indonesia The Limited Liability Company Law

No.40 of 2007

Key issues: Establishment of a new company, capital issues, management and governance of a company (annual report, profit and dividends, CSR, shareholders meetings, board of directors, board of commissioners, and cross shareholdings), the use of profit, liquidation, merge and acquisition, and expiry of company

The Capital Market Law No.8 of 1995 Key issues: Governance of professional advisers and offerings, insider trading, minority protection, fraud and conflict-of-interest transactions, reporting and disclosing information.

The Financial Services Authority regulations

Includes regulations on reporting and CG for companies operating in banking, insurance and financial services.

For example: The regulation on monthly report of non-bank financial services institutions and the Regulation 73/POJK.05/2016 on Good Corporate Governance for Insurance Companies (Regulation 73)

The Code on Good Corporate Governance

Main areas: Code of conduct, business ethics, shareholders, stakeholders, board of directors, board of commissioners, CG principles (transparency, accountability, responsibility, independence and fairness) and good CG practices.

The Corporate Governance Manual The manual provides general guidance for good CG practices mentioned as follows: board of commissioners, board of directors, board committees, auditing, shareholder rights, corporate secretary, general meeting of shareholders, and information disclosure.

Listing requirements Includes general provisions for listing, procedure of listing and reporting obligations.

Code of Conduct (IDX) (2011) Key areas: company’s relationships with shareholders and stakeholders, documentation and reporting, protection of data and information systems, insider trading, honesty, bribery, awards, and compliance to laws and regulations.

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Malaysia The Code of Corporate Governance

(2016)

Include four principles regarding board leadership and effectiveness, financial and corporate reporting, managing risks and create value, and relationship with shareholders, on ‘comply or explain’ approach.

The Company Act (2016) replaced the old Act (1965) effective from 31st_, January, 2017

Relevant CG issues regulated in the law include: substantial shareholdings, board of directors, financial statements and report, meetings and auditing.

The Capital Markets and Services Act (2007)

Regulates securities and derivatives markets, capital markets services, compensation fund, market misconduct and prohibited conduct, issues of securities, take over and mergers, provisions for listed corporations (CEO and directors’ respnsibilities, prohibited conduct of directors, information submission, auditor’s duties, false and misleading statements, whistle-blowing protection), disclosure information, and civil actions.

The Securities Commission Act (1993) last amended in 2015

Regulates the securities commission

Bursa Malaysia’s listing requirements Provides detail principles of CG regarding: board of directors, audit committee, external auditors, CG disclosure, and internal audit

Philippines The Corporation Code (Batas Pambansa Bilang 68)

The Code governs the establishment and operation of both stock and non-stock corporations in Philippines, including some CG issues such as board of directors, meetings, stock and stockholders, corporate books and records.

The Securities Regulation Code (Republic Act No. 8799)

Governs the Securities and Exchange Commission, shareholders protection, fraud, manipulation and insider trading, responsibilities and oversight of self-regulatory organisations, acquisition and transfer of securities, settlement of transition, margin and credit.

The Code of Corporate Governance (2016)

Addresses principles of five CG areas: the board’s governance responsibilities, disclosure and transparency, internal control and risk management, relationship with shareholders, and duties to shareholders.

PSE’s listing and disclosure rules Mentions general requirement of listing securities, disclosed information, listing rules and requirements for specific industries, public ownership, etc.

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Singapore The Companies Act (Chapter 50) Key regulated issues: constitution of companies, shares, debentures and charges, management and administration (includes regulations on directors and officers, meetings and proceedings), accounts and audit, winding up, regulations for specific type of companies (includes investment companies and foreign companies), and general provisions (enforcement, offences and miscellaneous).

The Securities and Future Act of 2001 (Chapter 289)

Key regulated areas: establishment of markets, regulations of approved exchanges, regulations of recognised market operators, trade repositories, regulation of licensed foreign trade repositories, clearing facilities, holders of capital markets services licence and representatives, books, consumer assets and audit, conduct of business, disclosure of interests (including disclosure by directors and CEO, disclosure by substantial shareholders, and disclosure by corporation), securities industry council and take-over offers, supervision and investigation, prohibited conducts, attributed liability, offer of investment, appeals and miscellaneous.

SGX’s listing requirements The rulebooks contain general and detail requirements for listing, such as shareholding spread and distribution, quantitative criteria, profit test, financial position and liquidity, directors and management, etc.

The Code of Corporate Governance (2012)

Key issues: Board matters (Board’s conduct of affairs, board composition and guidance, chairman and CEO, board membership, board performance, access to information), remuneration (remuneration policies, disclosure of remuneration), accountability and audit, shareholder rights and responsibilities, and disclosure of CG.

Thailand Public Limited Companies Act (1992) Regulates all the key aspects of companies, including formation, registration, share and shareholders, board of directors, meetings of shareholders, accounts and reports, inspections, liquidations, capitals, conversion to a company and penalties The Securities and Exchange Act

(1992)

Key regulated issues: supervision of securities and exchange, issuance of securities, public offering of securities, governance of public company (directors and executive, duty and responsibility of director and executive, and shareholder meetings), securities business, securities exchange, institutions related to securities business, unfair trading, acquisition of securities for business take overs, supervision and penalities.

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SET’s regulations for listed companies Includes several rules, regulations and policies regarding listing equity securities, disclosure practice, minimum public ownership, best practices for directors, guidelines for audit committee, etc.

Principles of good corporate

governance for listed companies (2012)

The principles and recommended best practices are presented under five main categories: the board’s responsibilities, rights and equitable treatment of shareholders, stakeholders’ role, disclosure and transparency. The Code does not include issues that have already been addressed in laws and regulations

Vietnam The Enterprise Law (2014) The Law regulates key aspects of companies from the establishment, management,

reorganisation to dissolution, including some CG issues for listed companies, such as shares, rights and obligations of shareholders, dividends, organisational and managerial structure, general meeting of shareholders, board of directors, supervisory board, and information disclosure.

The Law on Securities (2006) The law governs securities listing, public offering of securities, securities market services, provisions of securities, trading and investment.

Relevant CG issues for public companies: compliance with CG principles, report of major shareholders, and information disclosure of public companies.

Corporate Governance regulations (2012) (121/2012/TT-BTC)

Key regulated aspects: shareholders’ rights and obligations, shareholders’ meetings, board of directors (qualifications, composition, rights, obligations, meetings, and remuneration), supervisory board (composition, rights, obligations, and remuneration), conflict of interest prevention, information report and disclosure, internal CG, board committees, supervisions and penalties.

Disclosure Rule (2012)52/2012/TT- BTC

Key regulated areas: obligations to disclose information, methods and forms of information disclosure, content of information, infrequent disclosure.

HoSE’s listing requirements Includes rules about registration, supervision of listing requirement and penalties for violations of listing requirements on the HoSE.

HNX’s listing requirements Include rules about registration, application, listing requirement, listing procedure, supervision and penalties (639/QD-SGDHN), information required to disclose (606/QD-SGDHN), and CG report (52/2012/TT-BTC)

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Singapore

Among the six countries, Singapore has been recognised by many assessment reports as one of the countries with best corporate governance practices in Asia (ADB, 2012, 2013; ACCA, 2014, 2016). The Singapore CG framework includes the Companies Act (Chapter 50), the Securities and Future Act of 2001 (Chapter 289), the Singapore Exchange (SGX) Listing Rules and the Code of Corporate Governance (2012), with the SGX and the Monetary Authority of Singapore as the main regulative bodies. These CG rules and regulations cover many aspects of CG in listed companies, such as regulations on directors and officers, meetings, proceedings, disclosure, supervision, remuneration, accounting and auditing. In the past few years, these rules and regulations have adopted many alterations and amendments. For instance, the Companies Act, as the overarching legal framework for Singaporean companies, is reviewed frequently with approved changes made into law. The most recent amendment of the Companies Act is in 2017. The listing requirements and the Code of Corporate Governance were also amended in 2011 and 2012 respectively. All of these changes have reflected the government’s efforts in keeping up with the evolving business environment. Moreover, the combination between mandatory requirements and guidelines of best practice allows flexibility for firms while still meeting global best practices.

Thailand

According to ADB report (2013), Thailand is one of the leading countries in the region in terms of CG. The country has diverse CG regulations and guidelines with an elevated level of compliance in key areas. The main regulatory bodies overseeing CG in the country include the Department of Business Development, the Securities and Exchange Commission (SEC), the Stock Exchange of Thailand (SET), the Thai Institute of Directors, the Bank of Thailand, the State Enterprise Policy Office and the Federation of Accounting Professions. The key legislation that governs listed and other public firms is the Public Limited Companies Act (1992) which provided strong enforcement rules for the capital market as well as a supervisory framework. The secondary level of regulation consists of regulations issued by the SEC and listing requirements of SET, in which the SEC is considered the main regulator of capital markets. The Securities and Exchange Act (1992) issued