Hong Kong penalized for lack of independent audit regulator
Singapore leads Asia in corporate governance performance this year, beating previous winner Hong Kong, according to CG Watch 2016, a bi-annual report assessing corporate governance performance produced by the Asian Corporate Governance Association (ACGA) and brokerage and investment group CLSA.
After Singapore, countries are ranked: Hong Kong, Japan, Taiwan, Thailand, Malaysia, India, Korea, China, the Philippines and Indonesia. Australia, whose corporate governance score outperformed Singapore’s and which was included in the survey for the first time, was excluded to avoid skewing past results.
ACGA secretary general Jamie Allen highlights Australia’s governance ecosystem as a model for Asia. ‘In contrast to Australia, the controlled and hierarchical management-shareholder communication system may become, if it does not evolve, a significant impediment to corporate governance and capital market development in Asia,’ he says in a statement.
Hong Kong, which was the top performer in 2014, lost out on the top spot mainly because of its lack of an independent audit regulator. The Hong Kong Institute of Certified Public Accountants serves as the regulator in Hong Kong, one of three countries ‒ along with India and the Philippines ‒ not to have independent audit regulators, says Allen.
CG Watch 2016 was released in Hong Kong on September 29, and assesses 1,047 companies and 12 countries in Asia-Pacific on their corporate governance performance. Its country assessments are based on performance in five areas: corporate governance rules and practices, enforcement, political and regulatory environment, accounting and auditing, and corporate governance culture.
Allen says corporate governance excellence depends on a well-functioning corporate governance ecosystem. ‘It is the collective interaction of all parties that delivers better outcomes,’ he explains. ‘Reforms also matter but how markets and companies respond and deliver them is crucial. A more robust ecosystem demands accountability and compliance, which in itself makes for better governance.’
Charles Yonts, CLSA head of sustainable research, says there is no proven link between better governance and higher share prices because of the broad range of factors that affect share prices, many of which are beyond the impact of governance. But strong fundamentals are linked to better governance, he adds.
‘Fundamentals and balance sheet are under management’s direct control and our analysis shows that better governance is associated with better fundamentals,’ Yonts expands. ‘CLSA analysis shows companies that achieve higher ESG scores perform better on earnings revision and payout while exhibiting better free cash flow quality and lower balance sheet risk. One could conclude that, over time, these companies would perform better.’