Recognizing these distinctive features, we in East Asia should nonetheless move forward, with pragmatism, towards improving our corporate governance practices. We may do so by first highlighting the fundamental facts behind our corporate governance regimes. Some of these fundamental facts are the following:
• The relative concentration of economic and financial power on a still narrow base of corporations does invest upon these corporations a substantial and often very significant public interest. Even though these corporations may be privately owned in several economies in the region–and the evolving trend is towards private ownership and control–still, through past connections and the relative stress on close relationships between government and business, many big corporations do carry enormous public responsibilities in many economies in the region.
• It is imperative, therefore, that not only shareholder interest should be promoted and protected. Often, other stakeholder interests are much more significant and, therefore, these need to be proportionally safeguarded and respected. This is particularly true of banks, which play a central role in most East Asian economies since they provide a high percentage of corporate external finance.
• Through the banks and often through preferential treatment they get from the government, many corporations do take in and rely on "other people’s money." In addition, their interconnection with other related business interest can give them substantial influence within an economy. Such influence can assume systemic proportion: any weakness they may have gets transmitted to the rest of the economy; and any failure they may suffer can prove to be very expensive for the entire economy.
In view of these admittedly selective fundamental facts, it is critical that the governance regimes of corporations within the "insider model" that applies to East Asia should be undertaken fully in line with the global principles of fairness, accountability, and transparency. In fact, the regulators in East Asia, in view of the common good and the general economic welfare, have a special and vital interest in these fundamental corporate governance principles being fully and strictly observed.
In operational terms, the empowerment of the corporate board of directors entails at the least the following:
• The board must enjoy some freedom, i.e. a degree of effective autonomy and independence from the controlling interest, to promote long-term shareholder value as well as to protect and safeguard other stakeholder interests. This is a basic responsibility of the entire corporate board, whose composition must be such that such freedom (at least from being unrestrainedly dictated upon by the controlling shareholder) is effectual.
• The board must be called upon to exercise fairness in the treatment of all shareholders as well as all the other stakeholders. The corporate decision the board makes should meet the tests of fairness and justice to controlling shareholders and minority shareholders, officers and employees, creditors and suppliers, the community and the economy, or any of the other stakeholders the company may choose to specify.
• In view of it basic duty of fairness, the board must also ensure that reporting to the regulators and the general public on the state and the results of the performance of the corporation is timely, accurate, and in line with global standards of transparency and accountability.
The corporate board of directors may well be empowered and equipped to perform other basic functions. But in the context of the fundamental facts that shape the corporate governance regime in the East Asia economies, the three basic duties listed above should rank as among the most important and critical. Thus, corporate governance reforms in East Asia need to be pursued with a view towards ensuring that corporate boards actually and effectively perform these basic duties in ways that meet the felt needs and imperatives of local regulators and of domestic economies, and also the expressed preferences, if not the specific requirements, of global financial markets.
The idea behind requiring some independent directors (independent of controlling shareholders and of management) being elected to corporate boards is simple: there is so much more in a corporation other than the resources contributed by the controlling shareholders, and there is much more to it than maximizing the short-term returns to the investment made by the controlling shareholders. Thus, there should be a corporate board of directors, at least of corporations invested with significant public interest, a few independent directors who can help ensure that the long-term interest of the entire corporation, with all its shareholders and stakeholders, is in fact being served.
Some of the issues in regard to independent directors may include the following:
• The issue of independent directors is not only about numbers, i.e. how many there should be in each corporate board. It is also about the quality of the qualifications of independent directors who meet the highest bars of "fit and proper" tests for corporate directorship. In the end, it is the professional capability and effective influence of independent directors within each corporate board. Presumably, the higher the proportion of public interest and importance of other stakeholders–relative to the investment of the controlling shareholders–the bigger that influence should be. Each economy in the East Asian region is grappling with this issue, although the general approach has been to require a minimum number or percentage of seats in the board for independent directors.
• All corporate directors are now being required to take an orientation seminar on their basic duties and responsibilities as well as on the demands on them, based on the principles of modern corporate governance. There is now also a growing awareness that at least the independent directors should be encouraged to take more specialized courses, depending on specific committee assignments they have in the corporate board. Specialized courses on audit committees, risk management committees, and governance committees (often tasked to handle governance, nomination, performance, evaluation, and remuneration) are being developed in the East Asian region to address this need on the part of at least the independent directors. Some consideration has been given in a few East Asian economies to certify–after undergoing a core course on corporate governance and meeting other professional requirements–professional directors who can be tapped to serve as independent directors.
• Self assessment of corporate governance practice in the corporate board is being encouraged in some East Asian economies. Every corporate director is expected to participate in this annual performance evaluation exercise. But it is incumbent upon the independent directors to actively promote and encourage this exercise and those among them who constitute the majority of the governance committee of the board should see to it that this exercise is undertaken with greater professionalism each year.
• The active participation of independent directors in some board committees, the majority of whose members would increasingly be taken by independent directors–such as audit, risk management, and possibly governance (with various key functions‚ increasingly heaps upon individual independent directors a much higher professional "reputational risk". As regulators in the regular exercise of their supervisory functions increasingly inquire into the work of board committees, independent directors are being asked to "sign off" on the results of the regulatory audit and to commit to a program of action that effectively addresses the audit "findings".
• In some economies in East Asia, the list of independent directors of the board of directors of the most significant corporations is in the process of being formalized. In a few instances, where serious issues have arisen, the regulators have gone as far as asking the independent directors to come to exclusive and confidential working meetings on those issues. This sends the signal that regulators are taking the role of independent directors seriously and the latter are being called upon to show a high degree of professionalism and involvement in resolving critical, strategic issues that may be of special concern.
The manner in which issues concerning independent directors are being addressed points to certain trends that may already be firmly set. The requirements to have at least a few independent directors and to provide initial basic training to all corporate directors has become widespread in the East Asian region. The others–such as specialized courses for independent directors, possible certification of independent directors, requiring them to play a reserved and significant role in the discharge of certain key board functions–are yet tentative straws in the wind. They yet have to firm up in enough economies in the region, or creative, perhaps more pragmatic, alternatives to them may be tried and tested.
The overall direction, however, has been set: independent directors are a must and they have to be made to work so that corporate governance regimes improve significantly in the East Asian region.
Certain practices are emerging to ensure that board audit committees live up to their specific terms of reference. These are:
• They meet at least quarterly with management to have a thorough review and analysis of corporate financial performance.
• They initiate the process of hiring (and of changing, if necessary firing) the external auditor.
• They meet the external auditor three times a year, without anyone from management present.
• They sign off on the report the external auditor prepares and certifies.
• The internal auditor and the compliance officer report directly to them.
Several of these practices are new. They are emerging. There is yet no guarantee that these would firm up, take root, and eventually spread. But they do look promising in view of the imperative for transparency and accountability through the certified corporate reports issued to the regulators and the general public. On the part of those economies in East Asia that have yet to align their accounting and auditing standards fully with the International Accounting Standards, there is an ongoing program to achieve the full alignment target by 2005.
It is necessary, for these steps to be effective, that there should be an appreciation of some of the fundamental facts from the "insider model" of corporate governance in the East Asian region. A few of these are far from surprising. Many major corporations are in fact invested with substantial public interest, so that, in promoting long-term shareholder value, care should also be taken that other stakeholders’ interests are safeguarded and served. The public interest in major corporations is reinforced by their having to depend on "other people’s money" and their systemic influence on vast segments of the economy.
In view of these fundamental facts, a proper corporate governance regime in East Asia must ensure the relative independence and autonomy of the board of directors, at least from the predominant controlling shareholders. And the board of directors should have enough powers to ensure fairness for all shareholders and other stakeholders, and, therefore, to adhere to global standards of transparency and accountability in public reporting.