Corporate Governance: Boards of Asian companies ‘tend to behave like private clubs’

This article first appeared in Enterprise, The Edge Malaysia Weekly, on January 13, 2020 - January 19, 2020.
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Company directors in Asia have the tendency to invite friends to join their boards, so much so that these end up functioning like “private clubs”. Such a situation could lead to weakness in those companies, including corporate governance issues, says Stéphane Garelli, founder of the IMD World Competitiveness Centre and former managing director of the World Economic Forum.

“It is like, you are the CEO of a company [who is usually also a board member] and you invite me to become a member of the board and a member of the compensation committee that determines the salary of the CEO. Then, you get a good increment and I expect you to do me a similar favour. This is one of the biggest issues we find in Asia,” he says.

Garelli points out that such a person, who gets invited to be a board member by a friend, tends to avoid asking the tough questions to protect shareholders’ interests and ensure that there is proper corporate governance in place. “You enjoy a lot of things and your mission is to not rock the boat. You will not be asking the hard questions.

“In Asia, there is too much of this kind of relationship. I am nice to you, provided that you are nice to me. This has to stop!”

Garelli says such a situation could weaken the corporate governance of a company. The fact that many Asian companies are family businesses does not help.

He says the founders of such companies could also be their CEO and board member. It is extremely challenging for another board member, especially one who joined from another industry and is not part of the family, to ask the hard questions. “If the company is successful, the founder himself is a success story. It is extremely challenging for a board member to challenge the founder [who has a lot of authority].”

However, this situation has improved over the years as the legal environment globally, including in Asia, is increasingly holding boards of directors accountable for any wrongdoing committed by the company. “We are seeing this happen more and more in the US and the EU. If I know the company is doing something illegal and I do not ask the necessary questions and oppose it, I am legally responsible,” says Garelli, adding that this trend is gaining traction in Asia, even though the progress in each country may differ.

He suggests that boards of directors be certified by the authorities to ensure that they are fit to hold such a post. “Too many times you find people appointed to the board and they see it as a kind of prestige or reward. But it is actually a difficult and technical job. You need to be able to read the balance sheet and find out what has gone wrong and why. You need to interact with the shareholders, who could be family members. If they are family members, there could be a feud and in-fighting. A certified director should know how to deal with these things.”

Garelli stresses that a professional board member should always raise the necessary questions even when facing the founder of the company. These questions may not only be related to corporate governance but can also touch on other areas such as succession planning. For instance, when the founder is retiring and wants to pass the baton to the next generation.

What if the successor is not up to the task? “Would you tell the founder that his son or daughter may not be the right fit and that he may want to consider letting a professional manager take over the role for a period of time?” asks Garelli.

“It is very difficult. But you have to do it. It is your responsibility. If you do not like the heat, then you had better get out of the kitchen.”