Asia's corporate governance pioneers

AS REGULATORS ACROSS the world's leading financial markets issue, revise and reissue laws, codes and guidelines, reacting to the latest breach to emerge in the corporate governance dam, requirements become ever more Byzantine, compliance costs increase and companies' cooperation seems to become more reluctant by the day. It is hard to escape the conclusion that little is being achieved. Companies may learn to tick a few new boxes, convey the appearance of compliance and make the right noises without actually improving the way they are run.

For a few Asian companies, though, including some small and medium-size ones, the penny dropped years ago.

Mention the words corporate governance to Richard Elman, founder and chief executive officer of Noble Group, and it is hard to tell whether the expression on his face is a smile or a grimace.

"It's got nothing to do with corporate governance," he says gruffly as though the answer is obvious, "it's a culture. It's about how you run your business, what's fair and reasonable. How you treat people."

Elman has treated his shareholders particularly well. Since 1998, Singapore-listed Noble's share price has risen 1,500%. In the seemingly mundane business of global supply chain management for a variety of commodities, Noble is obviously doing something right. In the nine months to September 30 2003 the group reported sharply increased revenues and profits, both hitting record highs. Perhaps most impressive of all, return on equity was 28%.

Elman is quick to point out that although he operates in growth markets in a fast-growing region, part of the group's success is the result of efforts less tangible than pushing shipments of coal, iron ore or coffee around the world,

"We decided day one we wanted to build the best company in the world," he says. "A fish smells from the head. If you don't have the top of the organization adhering to best practice, the rest of the company won't reflect that back to the customers. Look at Marks and Sparks [retail chain Marks and Spencer] - their great thing was they'd always take what you bought back and change it, long before anyone else thought of it. That idea must have come from the top."

Fine words indeed, but Elman backs them with actions. Current corporate governance standards required by the Singapore exchange are effectively immaterial to Noble. The company split the role of chairman and chief executive long ago and neither has ever taken share options. The board comprises 11 people, eight of whom are independently hired non-executive directors. There is a committee for everything, including audit, remuneration and even social responsibility. Non-executives form the majority on each.

Despite controlling 59% of the company, Elman claims his salary, combined with that of the chairman, is not even in the top 10 in the company. That may say as much about how remunerative it is to work for Noble, of course, but the principle is perhaps the key issue.

Elman is not driven by philanthropy alone. This zeal to exceed established standards, or rather just to set one's own, is a deliberate strategy that he is convinced translates into a clear financial benefit.

"We're being recognized for it [corporate governance]," Elman says. "The capital markets are immaculate. If you screw up, they don't take it lightly and they don't forget."

Noble performance versus Straits Times Index

Source: Bloomberg

Noble is in good but select company. Consider the same share price chart for Hong Kong-headquartered global fashion retailer Esprit Holdings. Despite operating in completely separate business sectors and being listed on different markets, Esprit and Noble share a deliberate policy of corporate governance outperformance.

Echoing the words of Elman, John Poon, executive director and group chief financial officer of Esprit says: "This term corporate governance came out after the Enron and WorldCom scandals, but at Esprit, we started this years ago. The disclosure choices we make go into our strategy over and above what's required [by listing regulations]."

As if to prove his point, Poon calls up Esprit's share price on the huge screen that adorns the firm's boardroom. "Look at our share price," he says, waving expansively towards the screen. "How much of this is because of corporate governance or good management? It's impossible to say. But I know one thing. If you ask a fund manager outside of Hong Kong, they will tell you that corporate governance is a must." He continues: "There are over 700 stocks in Hong Kong – ignoring GEM [Hong Kong's second board]. Why would a fund manager invest in your stock if he can't sleep at night?"

According to Poon, better corporate governance does not just help insomniac fund managers but can also assist in the recruitment of otherwise wary non-executive directors. "The listing rules require at least two independent non-executive directors," says Poon, "and there's talk of that going to three. But it's not the number. The problem companies face is the lack of good people willing to take the risks. With good corporate governance, you should be able to attract higher-quality directors." In fact, Poon claims that the application of the same business ethics across all aspects of Esprit's business is a key to the group's financial success.

"Corporate governance renders your standing among your stakeholders in a much better light," he says. "Your bankers, your suppliers can look at your books and see the professional management. They can see that you will treat them better. Also, your employees are happy - they can see that the company's going to be around."

It all might sound a touch evangelical, but like Noble, Esprit practises what it preaches. The board boasts five non-executive directors, four of whom are independent, on a board of 11. The chairman and chief executive roles have been split for years; the audit committee members and chair are all non-executive. Esprit has even outsourced its internal audit department and hired an international accounting firm separately from its auditor.