From Activism to ESG: Regulatory Developments for APAC Directors to Watch

Introduction

Historically, corporate governance in Asia has differed in many ways from corporate governance in Western nations. Yet, recent decades have seen increased convergence between these two worlds.

Since the Asian financial crisis of 1998 and the global crisis of 2008, structural reforms have evolved to include new regulations for corporate governance. For example, “fit and proper clearance,” professional experience, and minimum education and training are now norms for director and executive leadership positions.

Activists worldwide have been escalating challenges related to board representation, executive compensation, divestitures, strategy, C-suite leadership and more. Even asset management giant BlackRock has faced scrutiny over its stance on ESG investing. Will continued economic volatility bring even more developments in 2023?

What APAC Directors Should Prepare for in 2023

In light of recent trends, here are a few things APAC boards should put on their radar in the year ahead.

Escalating activism

KT&G Corp was among the first Asian companies to face activist demands in the mid-2000s. It returned to the spotlight last October when Korea’s Flashlight Capital Partners called on it to divest its ginseng business, improve corporate governance and return cash to shareholders.

Overall, the APAC region saw 76 public corporate actions on corporations and issuers in the first quarter of 2022, up from 50 in the same period of 2021. Global communications firm Fleishman-Hillard noted growing involvement by retail and institutional investors, as well as a particular focus on board representation, governance and environmental issues.

Activism has been particularly prevalent in nations with sizable capital markets, like Australia, Korea and Japan. In Japan, for example, environmental campaigns targeted five Japanese-headquartered companies in the first four months of 2022, the same number as in the first four months of 2020 and 2021 combined, and ValueAct, Elliott, Oasis and Third Point have all waged successful campaigns.

Expanding regulations

Japan’s regulatory environment for corporate governance has been evolving as well. Prime Minister Shinzo Abe’s administration in the 2010s brought audit and supervisory committees and mandates for greater disclosure around cross-shareholdings and conflicts, and 2021 updates to Japan’s Corporate Governance Code expanded requirements for director independence and disclosures around diversity and sustainability.

Next door, China’s first ESG disclosure standards went into effect in June 2022, expanding the China Securities Regulatory Commission’s guidelines from specific, mostly environmental areas and annual and semi-annual reports into a much broader purview. As the nation’s economy continues to diversify from industrial to digital, ESG’s “S” and "G" have been rising in importance.

Boards will need to monitor how these new standards play out in practice, and if they grow to align with other international frameworks via the Common Ground Taxonomy, the IFRS’s International Sustainability Standards Board (ISSB) and the Chinese Ministry of Finance.

Evolving financial markets

Higher interest rates, sagging stock markets and global uncertainty bring the temptation to “sell stocks short” to profit from falling asset values. Companies worldwide enlisted bans on the practice in 2008 during the global financial crisis and in 2020 during the COVID-19 pandemic.

Could similar restrictions shape governance in 2023? South Korea is strengthening its monitoring and punishment for illegal short-selling, and Taiwan’s Financial Supervisory Commission rolled out a series of restrictions in October 2022. But not everyone is on board. “[A short-selling ban] is unlikely to stem declines in their stock markets,” Adam Harper with Nikkei Asia noted. “Instead, now is the time to promote liquid markets.”