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Japan soars while Hong Kong sinks in corporate governance rankings

THE NIKKEI via scoutAsia

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December 19, 2023 3 min read
Japan soars while Hong Kong sinks in corporate governance rankings

Japan‘s corporate governance ranking in the Asia-Pacific region soared to an unprecedented second place behind only Australia, while Hong Kong slipped from the runner-up position to sixth, according to research released by the Asian Corporate Governance Association (ACGA) on Wednesday.

The ACGA, a Hong Kong-based non-profit organization, describes the latest rankings to be the “biggest shake-up” in over 20 years of this research, which has been scoring corporate governance of 12 markets in the region since 2003. The 11th “CG Watch” report — compiled in conjunction with CLSA, a unit of Chinese state-owned financial conglomerate Citic — was conducted by analyzing answers to 108 questions in seven categories from regulators, listed companies, auditors and other stakeholders.

Japan climbed the most in the rankings, jumping from fifth place in the previous report in 2020. The country’s score was 64.6%, up 5.3 percentage points from the previous report.

Jamie Allen, founder and secretary general of the ACGA, pointed to factors such as the resolve of Japanese regulators over the last decade to reform corporate governance through specific measures and programs.

Unlike in the early days, reform efforts have now been “internalized,” becoming a key part of corporate Japan‘s drive to lift the economy out of deflation and onto a growth trajectory by creating a more investor-friendly environment.

Allen views the recent rally in the stock market and ongoing corporate reform to be mutually “reinforcing.”

On the other side of the coin is Hong Kong, which dropped 4.2 percentage points to 59.3%, dropping its second-place position it held with Singapore to sixth and tied with India.

Allen is critical of Hong Kong‘s recent market reform push, as it is overly focused on “development,” with “quality” and investor protection somewhat neglected.

Allen says Hong Kong‘s “turning point” in corporate governance began with the introduction of a weighted voting mechanism, which abandoned equal voting rights for all shareholders to allow mainland Chinese tech companies to list shares in the city. The Hong Kong Exchange made the decision after it lost Alibaba Group Holding‘s blockbuster initial public offering to the New York Stock Exchange.

This has attracted a number of those companies to the city’s bourse including Alibaba‘s secondary listing. But Allen says it is only a short-term benefit that is “weighing very heavily now on Hong Kong” as market performance has been dismal over the past few years.

Another important point is the erosion of freedom in the city, which is stifling the media, academia and public discourse. Allen did not explicitly mention the impact of the draconian national security law imposed by Beijing in June 2020, but he said it would be “helpful if those redlines are clearly defined.”

The law covers four offenses — collusion with foreign forces, inciting subversion, separatism and terrorism — but the legislation is loosely worded and allows wide interpretations.

Although Allen does not see a much steeper drop for Hong Kong in the years to come, he says that “it is hard to see civil society [changing] dramatically” given the current situation.

Other markets that gained were Taiwan, India and South Korea, while Singapore and Thailand fell slightly. Australia kept its top position, while China, the Philippines and Indonesia remained at the bottom.

While Japan‘s rise was substantial, Allen stressed that more focus should be on the score. Even though Japan jumped to second, the overall score of 64.6% is a “terrible score,” as it is barely a passing grade in school and the ranking shot up mainly because “everyone else did worse,” according to Allen.