2. THE CORPORATION AND CORPORATE MANAGEMENT

The corporation is widely utilised throughout the region for trade, commerce and the conduct of business, particularly for the conduct of medium to large business activities. The corporation has been long recognised as the most convenient and appropriate form of business organisation for the conduct of that size of business. However, it has been also long acknowledged and accepted that the corporation is a form of enterprise that is open to management and other abuse. Adequate external and internal controls are necessary.
This leads to the issue of corporate management.

2.1 Corporate management and its relevance to corporate insolvency law systems
The ADB report observed that there are a number of factors that, when aggregated, may be regarded as essential for a proper standard of corporate management. These factors are adequate accounting standards and practice, objective financial management, provision of information and other more general standards of corporate governance.
It appeared to be the case that standards of corporate management in many of the economies in the region were defective for one or more of a number of reasons. Examples included:
-The effect on the management of a corporation as a result of political and government patronage, cronyism or corruption. In the minds of management this is often taken as some type of 'licence' to disregard proper or any standards of corporate conduct because it invariably operates to shield and protect those responsible for abuse of the standards;
-The existence of close family held corporations in which the influence or power of one or more family members can prevent objective assessment and management of the financial position of a corporation;
-The association of banks or financial institutions with corporations which can cause considerable commercial conflict in credit assessment, loan management and financial difficulty or insolvency;
-Inadequate accounting standards, poor standards of auditing practice and absence or disregard of internal financial controls;
-The failure to impose and enforce proper standards of corporate governance which effectively causes the corporation to disregard the interests of a number of its constituents, including creditors.

It was also observed in the ADB report that this is not an area that can or should be regulated by an insolvency law. However, it cannot be ignored because, most importantly, an insolvency law system cannot be expected to operate and produce positive results in an environment of inadequate corporate governance and financial irresponsibility. Weaknesses in this area result in considerable havoc to any form of insolvency law endeavour. It cannot be emphasised sufficiently strongly that continued reform in this area is absolutely vital.
2.2 Corporate management in the five economies
In all of the five economies the issue of corporate management continues to be a troublesome area. The local consultants were asked to identify areas of weakness. A summary of their responses follows.
2.3 Korea
-There is a significant difference between the accounting standards applied in Korea and those that are generally accepted as conforming to an international standard.
-The management of directors cannot be supervised or controlled because there are few instances of the presence of outside, independent directors.
-There is evidence of poor quality auditing.
-The power of minority shareholders is very weak.
-There is evidence of corporate fraud.

The Korean local consultant has suggested that concentration on the following areas would be helpful:

-The introduction of a legal requirement that companies with a significant capital base must have a high percentage of outside, independent directors on the board of management;
-The establishment of a supervisory management committee from the board of directors which must include two thirds of independent directors;
-Enabling class and representative actions to be instituted on behalf of shareholders, particularly minority shareholders;
-Legislation to enable recovery of the proceeds of corporate fraud.

The Korean country report properly points to the problems that might arise from an excessive or over officious corporate management conduct regime. If such a regime is severely restrictive it might stifle entrepreneurial endeavour or, worse, lead to an increase in the number of 'illegal' activities. It is therefore important to maintain a fair balance between corporate regulation and corporate business endeavour.
2.4 Malaysia
In Malaysia, the important issue of corporate governance has in fact been addressed, in part. A recently published 'Code on Corporate Governance' is the result of the work of a committee under the initiative of the Minister of Finance to establish industry standards of best practice. It covers such things as appointment of directors, compositional balance of a board of directors, supply of information, communication between company and shareholders, financial reporting, internal controls and the relationship between the board and the external auditors. Interestingly, having regard to the Korean suggestion that there should be a significant percentage of outside, independent directors on the board of a large corporation, this is now provided for by the Corporate Governance Code. It requires that a board of directors be composed of at least one third outside independent directors.
Additionally, the Kuala Lumpur Stock Exchange has been armed with powers to take action against a director for failure to observe the rules and listing requirements of the exchange.
There has also been much greater attention given to the prosecution of corporate governance offences in Malaysia.
However, despite these welcome and important advances, problems still exist in Malaysia. The chief concerns are with:
-Valuation of assets. It is said that unrealistic non-objective valuations of corporate assets are common. That presents a misleading, if not false, balance sheet;
-Internal financial control. A number of cases have revealed contraventions of internal financial and other controls and failure to detect such breaches.
-Links between corporate groups, political parties and state agencies that are clearly capable of resulting in conflicts of interest.
2.5 Thailand
The Thailand local consultant comments that the application of what are termed 'traditional Thai methods and values of governance' are still more influential than the law. These 'methods' and 'values' pay little or no regard to the more sterner and exacting methods and values prescribed by law and regulation. The consultant points out that in Thailand the relevant laws or regulatory requirements exist. However, those laws are not applied nor enforced.
The main areas of concern are these:
-The requirement to keep proper accounting records is often ignored or neglected.
-Financial reports do not comply with accounting standards.
-Enforcement of standards and duties of directors is weak.
-There are still many undisguised links between large corporate conglomerates, political parties and government that result in awards of government contracts, concessions, approvals and other preferential treatment.
Despite this, the Thailand consultant points out that there are signs that a combination of the new Constitution of 1997 and the need for austerity following the economic crisis is creating a more transparent, fairer and less abused corporate governance environment.
2.6 Philippines
In this jurisdiction the areas of concern are:
-There are significant differences between what might be regarded as 'international' accounting standards and those that appear acceptable in the Philippines. This results, for example, in valuing assets otherwise than on an objectively and properly assessed basis.
-Many corporations maintain a number of different sets of accounts.
-There is evidence that audited financial statements are routinely produced without an actual audit of the corporation. It is suggested that this area can only be addressed by the imposition of a stringent code of professional responsibility for accountants and a legislative insistence that proper standards are applied.
-Although there are legislative standards of duties and conduct for directors, their abuse is rarely, if at all, prosecuted or enforced.
-There is some evidence that 'cronyism' is now more rampant.
The view of the Philippines consultant is that legal guidelines on director duties and responsibilities are essential and the law should provide sanctions for breach and enforce the application of those sanctions.
2.7 Indonesia
Some attempt has been made to ensure greater transparency in the contents of annual financial accounts that some particular classes of companies are required to prepare and file. Regulations made earlier this year require disclosure of financial and cash flow reports. This should provide for greater corporate disclosure and more opportunity to access financial information. However, two matters, identified by the Indonesian consultant, might tend to limit the effectiveness of these regulatory requirements. First, only 6% of companies have submitted annual accounts. Secondly, many classes of companies are exempt from the obligation.
New anti-corruption laws have been enacted. Although not specifically directed to the corporate sector, they each assume a likely patronage or corrupt commercial link between corporations and government officials and others.
The problems of corporate management in Indonesia appear to be mainly centred upon corruption, non-enforcement of regulatory requirements regarding accounts, and inadequate laws concerning director duties and responsibilities.
The Indonesian consultant considers that two things in particular would greatly assist in raising standards of corporate governance in Indonesia. First, the enactment of legal guidelines on the duties and responsibilities of company directors together with sanctions for abuse or breach. Secondly, the establishment of an independent supervisory board with powers to control corporate practice in Indonesia would do much to help develop the application of corporate governance. The vision is of a regulatory board that would act as an alternative means of law enforcement on business practices. It would act as an investigatory body with power to report breaches to the courts and recommend enforcement.
2.8 Training and education
The local consultants were asked whether education and training programs for directors and managers might be of benefit.
The Thailand report considered that this would benefit only directors who might be ignorant of their responsibilities. The real problem lies with directors whose conduct is deliberate or wilfully neglectful.
The Malaysian report considers that many directors are ignorant of proper corporate governance in the areas of financial management and responsibility for which education and training is required. Further, it is considered that directors should be educated on the recognition of creditors rights, the mechanics of a work out, the initiation of work-out processes and the need for correct, up to date information concerning the company.
The Philippines report supported the proposal.
The Indonesian report considered that such a program would be helpful. The Company Law provides no or no sufficient standard of performance for officers of a company.
The Korean report says that although there are education programs on financial management and responsibility, the substance and extent of these is not considered sufficient. Also, training programs on negotiation of financial restructuring and informal work out techniques are not available.
2.9 Conclusions and proposals
It seems apparent that, with one or two exceptions, there are fundamental weaknesses in corporate management common to the five economies. The areas of weakness are:
-Adequate accounting standards either do not exist or are not applied;
-Auditing standards are poor, particularly regarding valuation of assets;
-The need for proper internal financial management and financial control is disregarded; and
-There is either an absence of and/or a failure to enforce an appropriate legal regime of director duties and responsibilities.
It is not appropriate in the context of this Project to suggest proposals for detailed corporate governance and management. However, for the reasons stated earlier, it is appropriate and necessary to urge the need for reform generally and to identify particular areas that are vital for the operation of an insolvency law system. This leads to a consideration of the following proposals:
-Standards of corporate governance and accountability of managers and owners need to be considerably improved.
-A legal regime of basic director duties and responsibilities (or 'guidelines' that will help to establish a 'standard' that the law may recognise) is required in many of the economies. From the perspective of the subject matter of this Project, it would seem important that any such regime should include a positive duty that a director must have regard to the interests of creditors in the management of a corporation.
-It is fundamentally important that the law (but not the insolvency law) provides adequate sanctions to penalise managers and owners of insolvent corporations for fraudulent behaviour and also for behaviour that falls short of proper standards.
-Accounting standards, auditing practices and internal financial control mechanisms must be considerably improved. Objectively assessed financial information in relation to a corporation is vital. It provides an early warning of possible financial difficulty. It is important externally as an information system for financiers and suppliers, and it can be crucial to the prospect of rescue or work-out.
-Long term programs of education and training for directors appear desirable and necessary. Such programs should be directed at corporate management generally and particularly at director duties and responsibilities; financial control; and the operation of formal and informal insolvency processes.