Better corporate governance makes investment more attractive
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
 |
Thriving stock exchanges are built on good corporate governance.
What is corporate governance?
"Corporate governance deals with the rights and responsibilities of a company’s management, its board, shareholders and various stakeholders. "
Why is corporate governance important?
"How well companies are run affects market confidence as well as company performance. Good corporate governance is therefore essential for companies that want access to capital and for countries that want to stimulate private sector investment. If companies are well run, they will prosper. This in turn will enable them to attract investors whose support can help to finance faster growth. Poor corporate governance on the other hand weakens a company’s potential and at worst can pave the way for financial difficulties and even fraud." (Source: OECD FAQ)
Capital flight from developing countries to the stock markets of developed countries like the United States and Europe is a major problem that is holding up economic development nowadays.
Stock markets in the developing world are striving to get more of their countries' savings invested in their countries' stock markets.
They want to broaden the investor base and attract more individual retail investors.
To do this, these smaller investors have to be confident that their investments are safe from stock price manipulation. Stock price manipulation is more common in closely held corporations, closely held by one family for instance, something very common in developing economies.
There are other important issues in corporate governance such as broadening the group of corporate stakeholders whom corporate boards act for in their decisionmaking beyond shareholders to include employees, the environment, and society as a whole. Many in Thailand believe that principles of corporate governance should move to be more in line with the Buddhist religion.
To read further on the topic of corporate governance, check out the Stock Exchange of Thailand's (SET) online publications on corporate governance, the special collection of books on corporate governance in SET's library open the the public, the OECD homepage on corporate governance which includes a FAQ (answers to frequently asked questions), a large book OECD principles of corporate governance, and also Wikipedia on corporate governance with an extensive list of online publications.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What are the two major problems in Asian corporate governance?
2. What kind of corporate governance cases have been on the rise recently?
3. What are some of the factors that make corporate governance weak in Thailand?
4. What are some of the problems that hold back enforcement of corporate governance issues?
5. How is corporate governance being measured and compared internationally?
6. Has corporate governance been a problem with Chinese companies that seek to list on the Hong Kong stock exchange? (Use inference here)
7. How has India increased the enforcement of financial market regulation?
Article
CORPORATE GOVERNANCE STRATEGIES
Lax enforcement an obstacle KRISSANA PARNSOONTHORNInefficient law enforcement and a lack of co-ordination among regulatory agencies are major hurdles in developing corporate governance in Asian countries including Thailand. Key panelists at the 2006 Asian Roundtable on Corporate Governance agreed that most Asian countries were seeing a rising number of corporate governance cases, regarding issues such as share manipulation, insider trading, nominees, misleading statements and accounting fraud.
Chalee Chantanayingyong, senior assistant secretary-general of the Securities and Exchange Commission in Thailand (SEC), said promoting corporate governance was not easy as it needed discipline and co-operation between regulatory bodies, the market and individuals.
Thai corporate governance culture is weak and most of the 40,000 companies are family-owned, with many business transactions conducted between family members. Moreover, company directors have inadequate knowledge of corporate governance and boards lack concern over the issue.
''Retail and institutional investors are not active and most of them lack concern over the corporate governance of a company they have already, or intend to, invest in,'' Mr Chalee said.
Meanwhile, Thai regulatory bodies, particularly the SEC, do not have sole authority to proceed with criminal charges against those who act against regulations. At the same time, legal proceedings involve too many agencies with insufficient enforcement mechanisms and little understanding of capital-market fraud.
''Thailand has a long way to go in corporate governance development... We have to work harder as the public has the perception and expectation that enforcement power is still far from realistic,'' he added.
Nik Ramlah Mahmood, director for market policy and development of the Securities Commission of Malaysia, said effectiveness of enforcement depended on efficiency of regulatory bodies which needed an array of enforcement tools.
''Developing market and regulatory disciplines is a key to corporate governance improvement. The international community is increasingly looking to enforcement as a main measure,'' she said.
In Malaysia, the Securities Commission has many tools to proceed with criminal, civil and administrative action, but sometimes, criminal prosecution is not appropriate as it is costly and time consuming.
Charles Grieve, director of the Securities and Futures Commission in Hong Kong, said that cross-border listing had caused problems as a drastic number of Chinese companies seeking to list on the Hong Kong stock exchange were of poor quality.
In India, Mahendra Chouhan, the vice-chairman of the Asian Centre for Corporate Governance, said India had a special court to handle cases related to the capital market in Mumbai and Delhi.
India has already revised its securities law to increase fines and seize assets related to those going through investigation and court procedures to help minimise losses for others involved in a case.
Vocabulary (in discussion above)
are major hurdles - are major difficulties
corporate governance - "Corporate governance is the method by which a corporation is directed, administered or controlled. It includes the laws and customs affecting that direction, as well as the goals for which it is governed. The principal participants are the shareholders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community." (See Wikipedia on corporate governance)
a panel - a group of people, usually experts, gathered together to talk publicly about an issue
panelists - people on a panel
share manipulation - causing the price of stock shares to go up or down so one can profit frm these movements
insider trading - using information that one has access to as an insider to profit from stock price movements (for example you are the company's president and you know that the annual report will show increased earnings and this will cause the stock price to go up so you buy the stock; See Wikipedia on insider trading)
nominees - Thai people who own a company in name only, they actually hold the shares for the real foreign owner
fraud - gaining money by trick or lying
retail investors - individual investors, non-institutional investors
institutional investors - large organisations with a lot of money to invest, "An organization whose primary purpose is to invest its own assets or those held in trust by it for others. Includes pension funds, investment companies, insurance companies, universities and banks." (Source)
the SEC - the Securities and Exchange Commission, regulates corporations whose shares are publicly traded (See the Thai SEC homepage and Wikipedia on the American SEC)
perception - the way people see it
expectation - what people expect to happen
an array of - a variety of
disciplines - rules, regulations, ways of controlling
cross-border listing - when a company in one country is traded on the stock exchange of another country
Answer Key:
1. What are the two major problems in Asian corporate governance?
a. Inefficient law enforcement
b. Lack of coordination among regulatory agencies.
2. What kind of corporate governance cases have been on the rise recently?
Cases involving share manipulation, insider trading, nominees, misleading statements and accounting fraud have all been on the rise.
3. What are some of the factors that make corporate governance weak in Thailand?
a. Since most businesses are owned by families in Thailand, business transactions are between family members, so they are not transparent.
b. Corporate boards of directors are not concerned about corporate governance issues.
c. Lack of knowledge of corporate governance issues among investors.
4. What are some of the problems that hold back enforcement of corporate governance issues?
a. The Thai SEC does not have "sole authority to proceed with criminal charges against those who act against regulations."
b. Too many agencies are involved with legal proceedings.
c. "Insufficient enforcement mechanisms."
d. Inadequate understanding of fraud in financial markets.
5. How is corporate governance being measured and compared internationally?
By the enforcement of corporate governance regulations. ("The international community is increasingly looking to enforcement as a main measure")
6. Has corporate governance been a problem with Chinese companies that seek to list on the Hong Kong stock exchange? (Use inference here)
Chinese companies seeking to list on the Hong Kong stock exchange ("cross-border listings") usually have poor quality corporate governance.
7. How has India increased the enforcement of financial market regulation?
They have set up special courts in New Delhi and Mumbai and they have used increased fines and asset seizure to "minimize losses for others involved in the case."
