Governance, the G in ESG, is critical to businesses seeking capital to survive coronavirus crisis and US-China conflict

Laveta Brigham

Companies that actively communicate with stakeholders, such as shareholders and employees, are more likely to survive and even emerge stronger from economic turmoil than those who run and hide from the unfolding crisis caused by the coronavirus pandemic and worsening US-China relations, according to a panel of governance experts. Corporate-governance […]

Companies that actively communicate with stakeholders, such as shareholders and employees, are more likely to survive and even emerge stronger from economic turmoil than those who run and hide from the unfolding crisis caused by the coronavirus pandemic and worsening US-China relations, according to a panel of governance experts.

Corporate-governance scandals have proliferated across the region as companies have fallen into financial difficulties and sought a quick way out, including Chinese Starbucks’ challenger Luckin Coffee that faked its financial accounts. Investors and creditors are making hard choices over which companies to back, and sound governance will be a deciding factor, the experts said.

“In such an environment, stakeholder engagement is clearly very important,” said Loh Boon Chye, CEO of Singapore Exchange, during a webinar this week organised by the South China Morning Post and independent think tank, the California-based Milken Institute.

Singapore Exchange’s CEO Loh, Boon Chye is pushing companies to communicate with shareholders during the coronavirus pandemic. Photo: Jonathan Wong alt=Singapore Exchange’s CEO Loh, Boon Chye is pushing companies to communicate with shareholders during the coronavirus pandemic. Photo: Jonathan Wong

While regulators and stock exchanges are enabling companies to make electronic submissions and hold online shareholder meetings, Loh stressed that companies should not just be paying lip service to disclosure. “It’s about doing everything to allow shareholders [to ask] questions and answer them across multiple channels,” he said.

In recent years investors have been prodding companies to pay more attention to the environment, their social impact and governance, also known as ESG. This trend has created a sea change in how board members see their roles; just last year, 200 US chief executives renounced shareholder primacy in favour of taking a more balanced approach to their stakeholders.

Such investor pressure is even more important in the Asia-Pacific region where a higher proportion of companies are family-owned. Such boards tend to lag behind their non-family-owned peers in terms of governance, according to a study of over a thousand publicly listed companies released on Wednesday by Swiss bank Credit Suisse.

“When times are bad, companies tend to withdraw into themselves and stakeholder communications shrink, but it’s precisely at this time that shareholders most appreciate very candid conversations,” said Matthew Ginsburg, credit ratings agency Fitch Ratings’ chairman of Asia-Pacific.

Fitch has re-evaluated its portfolio of rated companies between March and July and taken negative ratings actions on about 1,500 companies and 2,500 structured-finance transactions. A deterioration in liquidity and leverage ratios triggered the ratings changes, while it made less than 100 score changes for companies related to ESG and less than 30 were specifically related to governance. That said, sound governance helps attract investors and creditors, thereby averting financial difficulties.

“Governance hasn’t been a major issue for reratings, but it is at the forefront of everybody’s minds because it makes companies more financeable, and the ability to access to capital markets is critical,” said Ginsburg, who was previously an independent director of Sino Gas Holdings and an investment banker.

“We’re paying a lot of attention to key-shareholder issues, above and beyond the company, because you can get a knock-on effect if a shareholder or an affiliated company is under duress, even if the actual rated company itself isn’t experiencing the same,” said Ginsburg.

US-listed Chinese technology companies, including JD.com, are raising capital via secondary listings in Hong Kong. Photo: Xinhua alt=US-listed Chinese technology companies, including JD.com, are raising capital via secondary listings in Hong Kong. Photo: Xinhua

Technology companies seem to be a blind spot for shareholders when it comes to exerting pressure over governance. Instead, they have fallen over themselves to participate in tech stocks’ growth as economies around the world digitise at an accelerated rate this year.

Stock markets globally are competing fiercely to attract such start-ups and are adapting the traditional one-share, one-vote standard to accommodate entrepreneurs concerned about losing control of the companies they founded.

“Corporate governance is clearly important … but it is also evolving,” said Loh. “Exchanges will not compromise on governance standards as markets cannot afford to lose the trust and confidence of investors.” The Monetary Authority of Singapore set up a corporate governance advisory committee in February last year, to advocate best practices among listed companies in the Lion City, underscoring the importance placed on the matter.

Loh’s comments chime with the views of his peer in Hong Kong, Charles Li Xiaojia, who said in a separate webinar that he had sought a way to overcome the “traditional” view of one-share, one vote to give tech founders greater voting power than common shareholders in 2018.

Li, head of Hong Kong Exchanges and Clearing, is keen to create another wave of mega stock offerings by mainland China’s new-economy companies in the city by further tweaking its listing rules, so accommodation of weighted voting rights for technology entrepreneurs and corporate shareholders is likely to continue.

“That means that other aspects of good corporate governance need to come through, such as independent directors,” said Edwin Northover, partner and head of financial institutions in Asia at law firm Debevoise & Plimpton.

Boards of multinational companies have also found themselves in a bind this year when navigating US-China tensions.

“For management, the US-China geopolitical situation really warrants a [another look] at how companies organise their supply chains, regulatory risk and even how you cover your customers,” said Loh.

The conflict between the superpowers has prompted US companies to look at redirecting supply chains away from China, and for companies in China to look at how they can become less reliant on the US dollar system in terms of contracts and relationships with banks.

“Most sensible boards would be thinking about options,” said Northover. “In a worst-case scenario where there ends up being two spheres of influence, one in China and one in the US, and you have to pick one, then you should start planning,” he added.

Japanese Prime Minister Shinzo Abe (C) arrives at Keio University Hospital in Tokyo on August 24, shortly before his resignation. Photo: EPA-EFE alt=Japanese Prime Minister Shinzo Abe (C) arrives at Keio University Hospital in Tokyo on August 24, shortly before his resignation. Photo: EPA-EFE

In Japan, the balance between stakeholders has traditionally been tipped more in favour of employees, suppliers and creditors than in the US, Britain and Australia, which has prompted criticism from shareholders about their lack of return on equity and slow decision-making.

“Crises like Covid-19 have highlighted that this stakeholder model during Covid is a bit of a better fit for survival in the longer term,” said TJ Kono, at private equity firm Unison Capital.

Asked if prime minister Shinzoō Abe’s resignation would hinder the push to gin up shareholder rights, Kono said that would be a “strong no … higher return on equity is much needed to pay for many things.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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