02 February 2015
Prior to 2008, Asia held a reputation as the Wild East in terms of corporate-governance and the way companies monitored their operations. But the world has changed entirely since the global financial crisis, and forward-thinking companies in the region must now emphasize internal supervision and transparency.
The trend has filtered through to the real-estate industry, where service providers are required to prove their mettle in many ways with back- and middle-office oversight, and must also protect their clients from any potential pitfalls in negotiating tenancies, property purchases and tenders for business.
"Reputation and corporate governance now is vital," Jeremy Sheldon, head of Integrated Portfolio Services at JLL Asia Pacific, says. "Every single thing we get involved in has to be compliant. It's the new watchword."
Life has certainly become more complex as a result of enhanced regulation. Companies that had five lawyers before the financial crisis now have a legal staff of 20. The paperwork surrounding deals is at least 25 per cent greater.
An appropriate level of Corporate Governance is vital in providing confidence but "this governance is to most organizations a cost to the bottom line, and not a revenue producer," Sheldon says.
If companies fail to set in place the necessary checks, they risk losing business when partners and customers demand an explanation of how they are monitoring compliance issues. "It could be argued that excessive governance will affect a company's ability to be competitive but the key is balance." Sheldon adds
Business best practice
Sheldon recently visited a large telecommunications company in southern China to brief them on how to set up an appropriate model for outsourcing parts of their business. The consultation involves instructing executives on what processes they need to adopt in setting up an outsourced contract and office, how they need to protect themselves, and how to make sure that bidding on items such as real-estate contracts is handled appropriately and competitively.
The issue is perhaps of most importance to the finance industry, which has come under heavy scrutiny in the wake of the global financial crisis. "You have had six or seven years of bank bashing being enforced on everybody," Sheldon says. Each of those institutions that survived is now intent on making sure it is going to be "one of the best-run banks in the world."
Asia's competitive advantage
In terms of Asian nations, Singapore sets a high corporate governance standard, according to a study instigated by the Singapore chapter of the Association of Chartered Certified Accountants and conducted in conjunction with KPMG. The Lion City ranks third globally in the report, which was released last November, behind the United Kingdom and the United States.
The researchers pointed to improvements in Singapore's corporate-governance code and to the listing rules for the Singapore Exchange as reasons for the high ranking, with the city having enhanced disclosure, audit committees and risk governance. But Singapore still has plenty of work to do when it comes to the diversity of corporate boards, which tend to be dominated by a small circle of executives with similar profiles, as well as the way boards are evaluated and social responsibility is reported.
Developed nations generally fared well in the study, while developing countries ranked poorly, as you might expect. Laos, Brunei and Myanmar were at the bottom of the ranking.
But there were some surprises. India and Russia performed strongly, something Irving Low, the head of risk consulting at KPMG in Singapore, attributed to recent revisions to their corporate-governance codes.
Japan (21st) and Canada (18th) scored unexpectedly poorly, something Low said may stem from confusing governance requirements that make it hard, particularly for outsiders, to "easily understand what is required and when, where and how these requirements interact with one another."
Asian companies have an advantage in operating around the Asia Pacific region because they understand how business is done in this part of the world, Sheldon says. At the same time, they are eager to adopt best practices from the West. That combination gives them a competitive edge.
"These companies are going to be the behemoths of the future," Sheldon says. If they combine strong corporate governance with the lower cost base and an Asian business model, they will be competitive on a global scale.