Japan has soared up the rankings in Asia Pacific for corporate governance, while Hong Kong has plummeted, according to the latest biennial report from the Asian Corporate Governance Association (ACGA).
The ACGA’s report, which canvasses responses from 108 questions in seven different categories across 12 markets, saw Japan climb three places to second, while Hong Kong dropped four places to sixth.
Australia remained in first place, while Singapore, Taiwan and Malaysia rounded out the top five.
Japan’s rise will not come as a surprise to any of the country’s observers as the government and regulators have made huge strides in recent years to boost governance.
Earlier this year, the Tokyo Stock Exchange introduced a soft target of 1x or above for price-to-book ratios, while the Financial Services Agency has also introduced a new action programme, targeting not just capital management but also seeking to strengthen engagement.
This has partly explained why flows into Japan have soared this year, with the MSCI Japan index up 16.71% this year in US dollar terms, and Jamie Allen, secretary general of the ACGA, thinks that after previous false dawns, this time is different.
“It’s a little hard to say why the regulators have finally bitten the bullet because we’ve been pushing them for 10 years. I’m not sure if it’s because they’re sick of listening to us on this or if they just realised that they have an opportunity now to really try to fix some of these issues. When we talked with the Tokyo Stock Exchange (TSE) and asked why are you pushing this so hard, their basic response was we think this is our last chance to get this right,” he said.
“We wrote about cost of capital and efficiency and hoarding cash back in 2008 in our white paper. It often takes more than a decade for regulators to really start changing their thinking on issues, but clearly there’s a very strong push by the TSE to get things right.”
Japan also notably scored highly in the investor sub-category, which Allen said is a reflection of the leadership demonstrated by the local investor community.
He noted that Japan introduced its stewardship code in 2014 and has revised it twice since then, while at the asset management level, both domestic and foreign firms are increasingly investing in their stewardship teams.
Hong Kong slides down the order
This is in stark contrast to Hong Kong, where the stewardship code has remained untouched since 2016 and the ACGA said that they do not see the same degree of focus by domestic asset owners.
Equally, Amar Gill, secretary general designate of the ACGA, singled out the fact that often the chairman of the board will sit as the chairman of the nomination committee in Hong Kong as one reason for its lower score.
“If you look at the new regulations that have come from the Hong Kong Exchange in the last couple of years, they focus much more on the ‘E’ and the ‘S’, sustainability disclosures, etc. What this report is highlighting is that the ‘G’ in Hong Kong has stayed flat if not actually lost some momentum against the other markets in the region,” he said.
“I think there are two main areas that both companies and regulators could push in Hong Kong. One is nomination committees. And the other step for governance to move beyond compliance is you need more interaction by investors and the companies need bigger stewardship teams. Investors should more resources into stewardship and Hong Kong needs to see how the stewardship code can be updated.”
Other factors that explain Hong Kong’s disappointing ranking include the efforts by the local bourse to foster market development, such as the introduction of weighted voting rights, and steps taken by Beijing to rein in the judiciary and the free press.
