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Corporate governance reform can help drive long-term value in Asia-Pacific

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Corporate governance reform can help drive long-term value in Asia-Pacific

Regulators, investors in Asia-Pacific are increasing emphasis on corporate governance

➤ Interests of company management teams, shareholders need to align with ultimate goal of creating value

➤ Right talent, technology and transparency needed to improve corporate governance

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EquitiesFirst's CEO Gordon Crosbie-Walsh

Source: EquitiesFirst

EquitiesFirst's director Alexander Kent

Corporate governance is becoming a hot-button topic among investors, governments and companies in Asia-Pacific. Regulators and companies in the region are seeking to align the interests of stakeholders, including company management teams and shareholders with the ultimate goal of creating long-term value.

Nasdaq Governance Solutions, the governance technology and consulting unit of Nasdaq Inc., has partnered with asset-backed financing firm Equities First Holdings LLC to produce a series of research reports on corporate governance practices in the Asia-Pacific region. The project aims to provide actionable insights on corporate governance best practices and add value for investors and management in the region.

Regulators in key regional markets, including Hong Kong, Japan and Australia, have been pushing for changes in culture, remuneration, and environmental, social and corporate governance practices in companies, according to the reports. Hong Kong Exchanges and Clearing Ltd. in April proposed new rules that seek to realign a company's culture with its purpose, values and strategy. Japan's Corporate Governance Code released by the Financial Services Agency and Tokyo Stock Exchange Inc. encourages firms to embrace incentive-based compensation while focusing on returns and capital efficiency.

However, more still needs to be done in the region to better align the interests of all stakeholders, EquitiesFirst Asia CEO Gordon Crosbie-Walsh and director Alexander Kent told S&P Global Market Intelligence in an interview.

Establishing structures within the board, such as a remuneration committee, can help clarify financial incentives for both the management and clients. It can also provide more visibility on how aligned their interests are, the executives said. In Australia, ASX Ltd.'s latest Corporate Governance Principles emphasized on a board structure that should be effective and add value, and that a listed entity should pay sufficient remuneration to attract and retain high-quality talent.

Technology can also increase the transparency of the company toward its shareholders and make decision-making more inclusive, they said, adding that such openness can drive more value for companies in the long run.

This is an edited transcript of the interview.

S&P Global Market Intelligence: What is the business case for better corporate governance?

Alexander Kent: Corporate governance is about creating value. That's what unites traditionally antagonistic factions, whether it is management or shareholders. At the end, they probably want the same thing, which is creating long-term value. That's the title of the whole series. Thinking about corporate governance, not as a box ticking exercise, not as just compliance superficiality, but how do you create the next stage of your company.

What are the biggest corporate governance priorities and risks for financial institutions in Asia-Pacific?

Kent: For financial institutions, the biggest corporate governance priority is definitely alignment of interests. Thinking about the clients' financial interests, also headline risk, and also from the perspective of the banks ... are they really acting in the best fiduciary angle when it comes to actually dealing with clients.

You see it all the time in terms of financial institutions not acting in the best interest of their clients. It's difficult because everyone's always going to act in their own best interests. How you avoid that is through setting up the basics of the structure. From the get-go, everybody knows what they're getting out of it, and how both sides are incentivized, and having that clearly disclosed, and by having that aligned in the right direction.

What is a typical example of misaligned interests in financial institutions today?

Gordon Crosbie-Walsh: Very often there are different interests inside an investment bank. So, one desk might be the ones lending the money, but they're receiving the money from another desk, another part of the business. So there's multiple chains of interest even within one investment bank.

How would you describe the corporate governance reform in Asia?

Kent: A unifying theme is that corporate governance is kind of unleashed in Asia. Expectations are changing among the investor community. So, they are expecting more from boards, companies and governance. And it also grassroots up. So, populations, consumers and employees actually have changing expectations towards companies. And that is all feeding into, in every geography to a different degree, a shift and reevaluation upward of where corporate governance should be going. In the case of Hong Kong, the theme is moving from compliance to strategy. Our report shows that Gen Z and Gen Y expectations are pushing companies in Hong Kong to have good corporate culture and live up to their values.

What role can technology play in improving corporate governance?

Kent: Democratization of the shareholders. The more you have shareholder meetings accessible to the broader public, the investing public, it becomes easier for shareholders to make informed decisions. And, they actually engage with the company.

After transparency and inclusion, what's next?

Crosbie-Walsh: It'll be implementation. Right now, a lot of the reporting requirements and audit requirements require companies to, for example, disclose sustainability. Corporate governance has been around for a while. But if you look at the trends in their annual and audited reports, they're very, very detailed. So, the reporting requirements are a lot more significant. When we take Nasdaq, for example, why they're so keen on this, is that they care about shareholder disclosure. That's really something they care significantly about, and they feel they should as an exchange. So, you'll see that trickle throughout. It wouldn't surprise me that the other exchanges will probably try to replicate what Nasdaq is doing here.