The collapse of Enron and the US legislative response Sarbanes-Oxley put corporate governance concerns at the top of the agenda. Backed by the OECD, jurisdictions in the Asia Pacific region are considering their next move

The Australian Stock Exchange Corporate Governance Council Report 'Principles of Good Corporate Governance and Best Practice Recommendations' defines corporate governance as:
The system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised.

'Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved.'

In case you weren't aware, corporate governance is very much on the agenda in Asia. In the wake of the collapse of Enron at the end of 2001 and the Worldcom fiasco in 2002, jurisdictions in the region are grappling with how to achieve higher standards of corporate governance among listed companies without imposing unnecessarily high burdens of compliance.

The tightrope, as always, is investor confidence.
At a corporate governance symposium held in Sydney in March, the CEO of a major Australian listed company said that the issue was one of trust or lack thereof. As a result of the various corporate collapses around the world and with OneTel and HIH, Australia has had its share he surmised that there was a lack of trust at all levels of the corporate world between boards and management, companies and shareholders, and companies and advisers.

In Australia, and in an attempt to head off the government before it started down the US path of Sarbanes-Oxley, the Australian Stock Exchange set up a Corporate Governance Council to produce a set of guidelines aimed at helping companies put in place practices that would go some way to ensuring the transparency and stability of their operations.

The 10 principle-based guidelines, supported by 28 policy proposals and accompanied by commentary and guidance, were released on 31 March to mixed response.

It does nothing more than appease the market, it doesn't correct it,' says Andrew Bristow, a corporate partner of PricewaterhouseCoopers Legal. 'Corporate collapses are always going to occur for one reason or another. Bad or corrupt governance is just one of the factors.

A point reflected in the UK's Higgs Report ['Review of the role and effectiveness of non-executive directors', Derek Higgs, January 2003], which recommended, among other things, that at least half of board members be independent non-executive directors, and that no one individual should sit on all of the audit, remuneration and nomination committees:

Good corporate governance must be an aid to productivity, not an impediment. It is an integral part of ensuring successful corporate performance, but of course only a part. It remains the case that successful entrepreneurs and strong managers, held properly to account and supported by effective boards, drive wealth creation.

But if guidelines are not the answer, what is?

In-house counsel in the region are concerned about their liabilities given Sarbanes-Oxley. While the Act has implications only for US-based corporations or corporations with a US listing, many counsel are seeking to take proactive steps to ensure their role as corporate governance guardians.

ALB's Managing Partner of the Year David Stannard, of Norton Rose's Hong Kong office, says: 'There is obviously concern because it has an extra-territorial impact outside the US.'

Stannard adds that relying on independent non-executive directors to be the 'new corporate watchdog' is unrealistic. 'One of the important things to realise is that we cannot expect them to be the guardian of so many aspects. Instead, we need to look at administration and enforcement of regulations, and in particular the listing rules.'

Complicating matters further is the increasing costs of complying with corporate governance rules. US companies, mid-sized in particular, are reporting that their costs have nearly doubled following a raft of new regulations, including Sarbanes-Oxley. Legal and accounting fees, director insurance and compliance personnel costs have all rocketed.

But some jurisdictions have been active in improving corporate governance.

Hong Kong
Just as the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) are working together to implement new standards and changes in the corporate governance practices of NYSE-listed companies, so too in Hong Kong has the Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong (HKSE) teamed up of late.

The Hong Kong government, the SFC and the HKSE have drawn up a Corporate Governance Action Plan for 2003 identifying priority areas for enhancement.

Nick Rees, managing partner of Linklaters in Hong Kong, says: 'The Enron collapse and the Worldcom fiasco have triggered more intensive and extensive debate on issues such as the role and independence of auditors, the way in which companies appoint auditors, the functions of the audit committee and the quality of financial disclosure in Hong Kong.'
A Corporate Reporting Sub-Committee was formed to make specific recommendations as part of the overall corporate governance review undertaken by the Standing Committee on Company Law Reform (SCCLR).

The SCCLR, established by the Hong Kong Government to review and advise on company law reform, has issued two consultation papers since 2000 containing proposals to enhance corporate governance.

In addition, the HKSE has issued three consultation papers and one consultation conclusions paper; the SFC has issued a consultation paper with the HKSE on strengthening the regulation of corporate finance advisers, particularly sponsors of listing applicants; and the SFC has also issued a joint consultation paper with the government.

And developments resulting from the Hong Kong government's focus on corporate governance in the past two years include:

• proposals of the SCCLR to strengthen the rights of minority shareholders being incorporated in the Companies (Amendment) Bill 2003, gazetted by the Government in June;
• the HKSE amending the Listing Rules to incorporate changes aimed at improving corporate governance of Hong Kong-listed companies later this year; and
• the SCCLR issuing a new consultation paper in June 2003 putting forward further proposals to tighten regulation on directors, improve the transparency of corporate reporting and enhance shareholders' rights.

Hong Kong's response to the Enron incident is understandably not as direct (or drastic) as the enactment of the Sarbanes-Oxley Act in the US,' says Rees. 'However, the series of proposals and actions taken by Hong Kong regulators to enhance corporate governance in the past two years have covered many areas that their US counterparts have focused on. We believe it is fair to say that Hong Kong has been quick in responding to market needs.

Given that most corporate governance measures in Hong Kong have not yet been implemented and are still in the consultation stage, most legal advice administered by Linklaters and others is updating clients on the latest developments. Advice on compliance with the new rules is expected in due course.

Singapore
Much of the advice from clients based in Singapore has focused on the basics ranging from amending articles of association to setting up key relevant director committees, to preparing disclosure reports of implementing the requirements of the Singapore Corporate Governance Code. Mandatory disclosure requirements as to the extent of compliance with the Code kicked in with effect from 1 January 2003.

Kala Anandarajah, partner and head of knowledge and risk management at Rajah & Tann, says: 'On a more routine basis, however, clients seek advice on board and management obligations, identification of who qualifies as an independent director and the exact scope of independence, structuring boards and management, and structuring internal control mechanisms.'

The collapse of the likes of Enron and Worldcom, says Anandarajah, did not cause too much of a stir in Singapore, where corporate governance rules started taking shape in their current form before the collapses were announced.

Even issues such as auditor independence were being reviewed before the collapses came about,' she says, 'although the actual changes in this regard were probably speeded up and influenced to some extent by the collapses.

The actual changes relating to auditor independence were introduced in 2003 with the amendments to the Public Accountants Board Rules.
To be frank, says Anandarajah, 'Singapore has been doing a very good job, despite what you hear about family-owned companies and GLCs and TLCs. The issue of boosting investor confidence is more an economic issue than a corporate governance one.'

However, Anandarajah would like to see the regulators in Singapore continue to insist on better quality disclosures and greater transparency.

When this improves further, the market as a whole in Singapore will also improve.

She adds: 'There should also be some investor education on the difference between protecting minority shareholders and an understanding of exactly what shareholder rights are and media management. Many have, in the process of managing the media so that views are presented objectively, unfortunately become embattled in the issue of minority shareholders taking issue when they in fact do not have a right to do so.'

Meanwhile, Rees believes that sufficient attention has been put and action taken on enhancing corporate governance in Hong Kong. 'While this shows that Hong Kong regulators have been responsive to market needs,' he says, 'we would like to see the proposed corporate governance measures genuinely functioning as positive forces to enhance shareholder value and not as rules which will over-burden companies or stifle corporate activities.'

A helping hand
The Enron and Worldcom incidents highlighted the fact that creative accounting, conflicts of interest of auditors and the lack of transparency in financial reporting are risk areas that, if not addressed, may result in serious scandals and raise serious confidence issues.

We believe that Hong Kong regulators understand the urgency and importance of coming up with a framework that can effectively prevent and detect the problems that led to incidents such as Enron and Worldcom, says Rees. However, it is worth noting that, for Hong Kong regulators, the problem of enforcing laws and regulations against non-compliant listed companies (and their management) which do not operate or are not based in Hong Kong is an equally important, if not more important, priority.

Given the state of development in Singapore, adds Anandarajah, 'there has not been much added pressure on the regulators in Singapore with the introduction of Sarbanes-Oxley. Where there has been some pressure is in corporations' concerns about its implementation and impact. I have been responding to queries in this regard on numerous occasions.

Helping corporations in the Asia Pacific region get their house in order is a new service, launched on 16 June, by the Asian Corporate Governance Association (ACGA). ACGA Quick Assessment provides companies, insurers and investment managers with a qualitative view on a company's governance regime.

Analysing a company's performance in five core areas accounting and auditing policies; board structure and leadership; non-financial disclosure; training; and treatment of minority shareholders ACGA Quick Assessment just reviews information in the public domain.

Jamie Allen, secretary general at ACGA, says: Its main focus is an assessment of the quality or substance of the transparency and accountability within a company. We then make recommendations on how a company could improve, and prioritise these suggestions into a practical governance plan.

While there are concerns over some aspects of Sarbanes-Oxley, many welcome the increased transparency of corporate dealings.
Moses Cheng, chairman of the Hong Kong Institute of Directors, says that investors' expectations of protection of their rights, transparency of board practices and disclosure of information requirements, have risen to the point that directors of listed companies must continually update their knowledge and skills to ensure company prosperity.

Lawrence Fok, deputy chief operating officer of Hong Kong Exchanges and Clearing Limited, adds: 'Good corporate governance is a vital element in future success.'

The 10 principles of good corporate governance
1) Lay solid foundations for management and oversight
2) Structure the board to add value
3) Promote ethical and responsible decision-making
4) Safeguard integrity in financial reporting
5) Make timely and balanced disclosure
6) Respect the rights of shareholders
7) Recognise and manage risk
8) Encourage enhanced performance
9) Remunerate fairly and responsibly
10) Recognise the legitimate interests of stakeholders

White Paper
With no carrot in place, the Organisation for Economic Cooperation and Development (OECD) has opted for the stick approach.

Holding its fifth Asian corporate governance roundtable in Kuala Lumpur, Malaysia from 26-28 March, the OECD called on Asian governments to resort to so-called rough justice measures to improve corporate governance standards in the region.

In a White Paper, launched in Tokyo on 10 June, the OECD advised governments and regulators to adopt less sophisticated rules that are perhaps more enforceable than subtle regulations for example, a complete ban on loans to company officers and directors in the interests of protecting shareholders' rights.

Reflecting discussions and recommendations of meetings that took place from 1999-2003 (sponsored by the World Bank and the Asian Development Bank, in partnership with the Government of Japan and the Global Corporate Governance Forum), the White Paper advocated the following priorities for reform:

• Public and private sector institutions should continue to raise awareness among companies, directors, shareholders and other interested parties of the value of good corporate governance.
• All jurisdictions should strive for effective implementation and enforcement of corporate governance laws and regulations.
• Asian Roundtable Countries should work towards full convergence with international standards and practices for accounting, audit and non-financial disclosure. Where, for the time being, full convergence is not possible, divergences from international standards and practices (and the reasons for these divergences) should be disclosed by standards setters; company financial statements should repeat or reference these disclosures where relevant to specific items.
• Boards of directors must improve their participation in strategic planning, monitoring of internal control systems and independent review of transactions involving managers, controlling shareholders and other insiders.
• The legal and regulatory framework should ensure that non-controlling shareholders are protected from exploitation by insiders and controlling shareholders.
  Even before the publication of the White Paper, Asian companies' commitment to raising their corporate governance standards was questioned in a joint study by CLSA Emerging Markets and the Asian Corporate Governance Association. The study found that companies from the Philippines had the lowest average ratings (39.8%) while South Korean companies had the highest (70.8%).

Corporate governance in Indonesia

Corporate governance has been high on the reform agenda in Indonesia in recent years. The impact of the Asian economic crisis on Indonesia's corporate sector led to closer examination of governance practices and calls for improved standards. There have been significant developments in this area and reform is ongoing.

Corporate governance framework
So far as Indonesia's private sector is concerned, the principle law on corporate governance remains, for the moment, the 1995 Company Law (Law 1 of 1995 a new company law is being deliberated by the legislature at present). For publicly listed companies, the requirements of the Company Law are supplemented by regulations of the Capital Market Supervisory Board (Bapepam) and the rules of the Jakarta and Surabaya Stock Exchanges. References below to 'Stock Market Regulations' are to regulations of Bapepam or rules of the Jakarta Stock Exchange.

In addition, Indonesia now has a National Code for Good Corporate Governance (the Code). This was published in 2001 by the National Committee for Corporate Governance.

The management of state-owned (Persero) companies is regulated by a Decree of the Minister of State Owned Enterprises issued in May 2000 (Decree Kep-23/2000, the Persero Decree).

Company law
Key features of the Company Law relating to corporate governance include the following:

• Indonesian companies must have two boards, a board of directors (BOD), responsible for management of the company, and a board of commissioners (BOC) responsible for supervising the actions of the BOD (this enshrines a long standing feature of Indonesian company law).
• Directors and commissioners must perform their duties in the best interests of the company and may be personally liable for negligence or wrongdoing.
• Directors are not entitled to represent a company where they have a conflict of interest.
• The BOD must prepare, and submit to shareholders for approval at a general meeting of shareholders, an annual report, the content of which is prescribed.
• Shareholders have certain basic rights, including the right to attend and vote at general meetings of shareholders (where the shares held are voting shares).
• Certain actions by the BOD require the prior approval of a prescribed majority of shareholders in general meeting.
• There are certain rights conferred on minority shareholders (in some cases, a shareholder holding, or shareholders who together hold, not less than 10% of issued voting shares).

Stock market regulations
Among the requirements imposed by the stock market regulations are:

• continuous disclosure requirements;
• specific requirements in relation to 'material transactions' and transactions involving a 'conflict of interest' (including the need for appraisal by an independent expert);
• a minimum number of independent commissioners; and
• the appointment of an audit committee, independent from management and controlling shareholders.

The Code
The Indonesian government established a Committee for Corporate Governance (the Committee) in 1999. This was partly in recognition of the need to promote strong corporate governance practices so as to bolster investor confidence in the wake of the Asian financial crisis. The Committee's task was, and is, to develop and implement a national corporate governance policy consistent with best international practice. After a period of research and consultation and several exposure drafts, the Committee published the Code in March 2001. The Code is designed to enhance transparency, accountability, professionalism, fairness and independence in the management of companies. While a voluntary code without the force of law, its stated objective is to become a reference point for good corporate governance, both in the private sector and for State owned companies.

The Code articulates principles of corporate governance to be observed in the management of companies and the treatment of shareholders. Issues addressed by the Code include the rights of shareholders, the composition and duties of the BOD and BOC, committees and audit systems, disclosure and business ethics.

Since publication of the Code, the Committee has been engaged in various programs designed to promote public awareness of and adherence to its principles. The Committee is involved in the preparation of a number of industry-specific codes in consultation with relevant industry representatives.

Audit committees
Under the Company Law, a company's annual accounts must be audited by public accountants if the company is a public company or (whether or not a public company) it is engaged in the mobilisation of public funds or issues debt instruments. In practice, the Articles of Association of most Indonesian companies provide for the appointment of public accountants to audit the company's books and auditors are typically appointed each year at the mandatory annual general meeting of shareholders (AGM).

Whether or not a company is required to have audited accounts, the BOD must, as part of its annual report, submit annual accounts to shareholders for approval at the relevant AGM, and the BOD is responsible for the content of the accounts so submitted. The Company Law specifically provides that the BOD's annual report (including annual accounts) must be signed by all members of the BOD and the BOC and that if any member of the BOD or BOC fails to do so written reasons for this must be given.

There is no requirement under the Company Law for an audit committee.

For listed companies, an audit committee is mandatory. The stock market regulations provide that there must be an audit committee responsible for, among other things, examining the independency and objectivity of the company's auditors and the adequacy of their audit. The audit committee must consist of at least three members, the chair must be an independent commissioner, and the other members must be independent appointees at least one of whom has accounting and financial expertise. (Under the relevant regulations, at least 30% of the members of a listed company's BOC must be independent commissioners, and, subject to that minimum requirement, the number of independent commissioners must be proportional to non-controlling shareholders. Independent commissioners are those who have no affiliation with the controlling shareholder or the BOD and are elected by non-controlling shareholders.)

According to the Code, every company should have an audit committee established by the BOC and independent of the BOD and the company's external auditors. The Code also states that a company's BOC should consider establishing other committees to support the BOC in the performance of its functions. Examples given by the Code are a nomination committee (responsible for criteria to be applied in the appointment of directors and assessment of their performance), a remuneration committee and an insurance committee.

On the subject of auditor independence, the Ministry of Finance recently issued a Decree under which a company may not appoint the same firm of auditors to audit the company's books for more than five years in succession (MOF Decree 423/KMK.06/2002). This applies to all companies.

Directors' duties
Under the Company Law:

• the BOD is fully responsible for management of the company;
• each member of the BOD must, in good faith and with full responsibility, perform their duties in the interests of the company and is personally responsible for any neglect or default in the performance of their duties;
• a director may not represent the company where they have a conflict of interest;
• a 10% shareholder (or shareholders together holding not less than 10% of voting shares) may sue a director whose default or negligence causes damage to the company.
  Similar provisions apply to the BOC and its members (in their supervisory role).

The Code amplifies the requirements of the Company Law relating to the appointment and duties of directors and commissioners. For example, the Code states that, depending on the particular nature of the company, at least 20% of the BOD and the BOC should be directors or commissioners independent of the controlling shareholder, that members of the BOD and the BOC should derive no personal gain other than their remuneration in that capacity, and that the interests of minority shareholders and other 'stakeholders' (including creditors) should be taken into account in the management of the company's affairs.

Disclosure requirements
The principal disclosure requirement under the Company Law is the obligatory annual report of the BOD, already mentioned. The content of the annual report is prescribed and must include, as well as accounts, a report by the BOD on the company's operations and condition and details of the remuneration and allowances of the BOD and the BOC. The Company Law also provides that the BOD is required to give to any shareholder, on written request, access to and copies of minutes of meetings of the BOD and the financial records of the company.

Under the Stock Exchange Regulations and Bapepam regulations, listed companies are subject to continuous disclosure requirements. Any 'material fact' must be announced within two business days. Anything likely to affect the price of a company's shares or the decision of an investor to invest in a company's shares is material. Every listed company must make a public announcement on its operations and results at least once a year. In addition, there are specific notification (and other) requirements applicable in particular circumstances.

Transparency and disclosure are key themes of the Code. The Code calls for prompt and accurate disclosure of all material information (and not only information required to be disclosed by law) to shareholders, creditors and other 'stakeholders'.

Shareholders' rights
The 'basic rights' of a shareholder under the Company Law are:

• a proprietary interest in the company;
• for voting shares, the right to receive notice of, attend and vote at general meetings of shareholders; and
• the right to proportional distribution of the company's assets after payment of creditors on dissolution of the company.

The Company Law provides that certain actions (for example, amendments to Articles of Association, sale or encumbrance of substantial assets, merger and dissolution) require the prior approval of a prescribed majority of shareholders in general meeting. For public companies, there are specific reporting and independent appraisal and approval requirements applicable to certain transactions. For example, transactions involving a conflict of interest (as defined) must be publicly announced, are subject to independent expert appraisal and must be approved by minority shareholders.

The Company Law contains provisions specifically concerned with the interests of minority shareholders. Some of them have already been mentioned. They are designed to arm minority shareholders (a 10% threshold applies in some cases) with rights of action where their interests are prejudiced. These include the right to apply to court, in the name of the company, for an examination where there is suspicion of wrongful conduct causing damage (tort) by the company or any member of the BOD or the BOC.

The Code recognises the rights of not only minority shareholders but of other 'stakeholders' (described as including suppliers, creditors and the 'surrounding community') and exhorts controlling shareholders to be mindful of their responsibilities as shareholders, including their 'social responsibility', in exercising control over corporate management.

In 2001, a research team appointed by the Asian Development Bank to review Indonesia's corporate governance framework concluded that, while reform was warranted in certain areas, overall, Indonesia had a 'sound base of law'. The introduction of a National Code for Good Corporate Governance was a significant initiative and, as mentioned, the formulation of the industry codes is ongoing. It is expected that the new company law under deliberation will adopt as law a number of the principles set out in the Code.

While Enron and the other financial scandals that have rocked international markets of late have not been the impetus for reform in Indonesia, they have not gone unnoticed and Indonesian regulators are monitoring legislative developments in other jurisdictions such as the Sarbanes-Oxley Act in the US.