Corporate Governance of Banks in Asia – Volume 1 – A Study of Indonesia, Republic of Korea, Malaysia, and Thailand Sang-Woo Nam and Chee Soon Lum Asian Development Bank Institute Corporate Governance of Banks in Asia – Volume 1 – A Study of Indonesia, Republic of Korea, Malaysia, and Thailand Sang-Woo Nam and Chee Soon Lum Asian Development Bank Institute Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan www.adbi.org ADBI Policy Papers No. 10 [email protected] ©2006 Asian Development Bank Institute. ADBi Publishing 07/06 ISBN: 4-89974-011-5 The views expressed herein do not necessarily reflect the views or position of the ADB Institute, its Advisory Council, Board of Directors or the governments they represent. The ADB Institute does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use. The word “country” or other geographical names do not imply any judgment by the ADB Institute as to the legal or other status of any entity, including its borders. Preface / 1 Contents Preface.................................................................................................1 Executive Summary...........................................................................5 1. Survey of Banks’ Corporate Governance in Indonesia, Republic of Korea, Malaysia, and Thailand.............................11 Sang-Woo Nam and Chee Soon Lum 2. Corporate Governance of Banks in Indonesia.........................85 Takuji Kameyama, Vita Diani Satiadhi, Antonius Alijoyo, and Elmar Bouma 3. Corporate Governance of Banks in Republic of Korea.........167 Jae-Ha Park 4. Corporate Governance of Banks in Malaysia........................243 Chee Soon Lum and Philip T. N. Koh 5. Corporate Governance of Banks in Thailand.........................315 Piruna Polsiri and Yupana Wiwattanakantang Preface / 1 Preface This study is about the practice of corporate governance in the banking systems in post-crisis Asia. Corporate governance has been a key area of re- search in the Asian Development Bank Institute (ADBI). This study follows an ADBI research project completed in 2004 with a publication, Corporate Governance in Asia: Recent Evidence from Indonesia, Republic of Korea, Malaysia, and Thailand. While basic corporate governance principles are to be shared by banking institutions as they are by non-fi nancial fi rms, bank governance has its own uniqueness and challenges. This is mainly due to the nature of banking services and the consequent supervision and fi nancial safety nets provided by the government. While it is now widely recognized that all the Asian central banks have in- troduced regulatory reforms to encourage the development of good corporate governance policy in the banking institutions during the post-crisis period, not much is known about the success of these policy reforms. The primary focus of the study was to address the issue of corporate governance practices in the banking institutions of Indonesia, the Republic of Korea, Malaysia, and Thailand in the post-crisis period, 1998–2003. The two volumes in this study are based on four country studies by country consultants (volume one) and six theme papers mostly by fi eld consultants (volume two). The cover- age of the theme papers includes a review of the current issues in corporate governance of banks, board effectiveness, risk management procedures, the role of market discipline, compensation of bank CEOs and directors, and fi - nancial safety nets in these countries. An important contribution of this study is the empirical results from ques- tionnaire surveys on the boards of directors including the opinions of board members on board effectiveness, executive compensation, and risk manage- ment practices in the banking institutions in the four countries. These results provide useful insights into the observed behaviors of board members as well as the signifi cance of and progress in other aspects of bank governance in post-crisis Asia. In addition, the ADBI in collaboration with the country consultants collated factual information on the legal and regulatory environ- ment relating to bank supervision and fi nancial safety nets, bank operations and ownership, composition and functions of the boards, and disclosure rules in the banking systems in the four countries. The questionnaire survey covers 63 banks: 26 in Indonesia, 14 in the Republic of Korea, 10 in Malay- sia, and 13 in Thailand. 2 / Corporate Governance of Banks in Asia In the process of conducting the research, the ADBI in collaboration with the Center for Economic Institutions at Hitotsubashi University hosted two seminars on the subject in Tokyo in June 2004 and January 2005. We would like to thank Professor Juro Teranishi, Director of the Center, for his strong support in organizing the seminars. The authors of the papers and other con- tributors and discussants at the seminar guaranteed the success of this study with their time, constructive discussions, and confi dence in the outcome. We thank all of them for their contributions. We hope this study will provide an updated and broader perspective of the corporate governance mechanisms and practices of the banking institutions in post-crisis Asia. Sang-Woo Nam Asian Development Bank Institute March 2006 Preface / 3 List of Contributors Antonius Alijoyo Forum for Corporate Governance in Indonesia Elmar Bouma Forum for Corporate Governance in Indonesia Takuji Kameyama UFJ Institute Indonesia Philip T. N. Koh Senior Partner, Messrs. Mah-Kamiriyah & Philip Koh, Malaysia Chee Soon Lum Capilano College, Canada Sang-Woo Nam Asian Development Institute Jae-Ha Park Korea Institute of Finance Piruna Polsiri Dhurakijpundit University, Thailand Vita Diani Satiadhi UFJ Institute Indonesia Yupana Wiwattanakantang Center for Economic Institutions, Hitotsubashi University, Japan List of Discussants ADB Institute wishes to thank the discussants for their valuable comments and contributions on 10–11 June 2004 and 21–22 January 2005 at the two seminars on Corporate Governance of Banks in Asia, organized in collabo- ration with the Center for Economic Institutions, Hitotsubashi University in Tokyo. Chaiyasit Anuchitworawong Center for Economic Institutions, Hitotsubashi University Giovanni Ferri University of Bari, Italy 4 / Corporate Governance of Banks in Asia Yukiko Fukagawa Graduate School of Arts and Sciences, University of Tokyo Masaharu Hanazaki Development Bank of Japan Akiyoshi Horiuchi Chuo University Peter McCawley Dean, Asian Development Bank Institute Eiichi Michizoe Tokyo Research International, Bank of Tokyo-Mitsubishi Andreas Moerke German Institute for Japanese Studies Seki Obata Graduate School of Business Administration, Keio University Masaya Sakuragawa Department of Economics, Keio University Yuri Sato Institute of Developing Economies (IDE-JETRO) Megumi Suto Graduate School of Finance, Accounting and Law; Waseda University Kazunori ‘Icko’ Suzuki Graduate School of International Accounting, Chuo University Juro Teranishi Director, Center for Economic Institutions, Hitotsubashi University John Weiss Research Director, Asian Development Bank Institute Jeong Koo Yeo Korea Institute of Finance Naoyuki Yoshino Department of Economicsc, Keio University Executive Summary / 5 Executive Summary Corporate governance is now widely seen as a key to the success of the banking system in post-crisis Asia. Much attention has been focused on the importance of good corporate governance practices in the banking institu- tions, especially in the four countries hardest hit during the 1997 fi nancial crisis: Indonesia, the Republic of Korea, Malaysia, and Thailand. Obviously, these post-crisis policy and regulatory reforms were in response to the diag- nosis that the governance infrastructure in the banking system was not ro- bust and had contributed substantially to the crisis. However, not much has been documented on the state of corporate governance in the Asian banks and the progress and success of the regulatory reforms in these countries during the post-crisis period. This volume of our study addresses these issues and the chapters are drawn from the four country studies written by country consultants that were pre- sented at two seminars in Tokyo hosted by the Asian Development Bank Institute (ADBI) in collaboration with the Hitotsubashi University Center for Economic Institutions in June 2004 and January 2005. The country pa- pers were written by Kameyama et al. for Indonesia, Park for the Republic of Korea, Lum and Koh for Malaysia, and Polsiri and Wiwattanakantang for Thailand. Since there is much diversity among the institutional, regulatory, and legal environments in these four countries, corporate governance has evolved quite differently in each of these countries; obviously the policy re- forms and responses of each central bank and government have also shown some differences. These differences and diversity, together with the common strands in the four countries, as indicated in Nam and Lum, have made this study more interesting and fruitful in terms of useful lessons of experience from these post-crisis reforms. A unique contribution of this volume is that it provides fi rst-hand evidence on the corporate governance structures of the banking institutions in these four countries. Based on the micro-level results of the ADBI questionnaire surveys of factual information about the board of directors and the regula- tory and legal environment in which they operate, it is apparent that there is a catalogue of distinct characteristics in actual corporate practices and ownership/control structures in the Asian banking institutions. This evidence is also apparent in the results of the opinion survey of board members, where the observed behaviors and perceptions of the executive and independent directors converge as well as diverge in such important issues as confl icts of 6 / Corporate Governance of Banks in Asia interests, the independence of individual board members, and the ways that board effectiveness can be enhanced in the banking institutions. One thread that weaves its way through much of the analysis in the coun- try studies in this volume is the importance of certain board characteristics that serve to enhance board effectiveness. The regulatory and behavioral aspects of such board characteristics include board accountability, overall responsibilities, composition, and the defi ning roles of the CEO/controlling owners and independent directors in board committees and related-party transactions. The country consultants have carefully brought these aspects to surface in this volume for our understanding of the complexities in board governance processes in these countries. When analyzing the attributes of board characteristics, generalizations are not always the norm among these countries — there are usually distinct dif- ferences between the countries. For instance, virtually all board members in the countries studied believed that the board was mainly accountable fi rst to the shareholders and then to the depositors and creditors in terms of importance. Specifi cally, it appears that when making corporate decisions, the board was concerned more about the controlling shareholder than the minority shareholders and depositors as the most important persons they are responsible to. However, board members in Indonesian banks believed oth- erwise: that the board was mainly accountable to the depositors. In order to discourage the infl uence of confl icts of interest on the behaviors of board members in the banking institutions, it should come as no surprise that the banking laws and regulations in these countries defi ned the role and responsibilities of the board of directors quite clearly. As pointed out in all four country studies, the perfunctory roles of the board members such as formulating, reviewing, and guiding corporate strategies and approving and reviewing risk management and the internal control system are generally well performed by the boards in the banking institutions. The degree of board involvement in overseeing and implementing major corporate policies may vary across countries. For example, banks in Thai- land are not specified by law to set performance objectives, approve and review annual budgets, or set key executive compensation and board re- muneration. Boards in the Korean banks are not obliged by law to perform these functions or manage potential confl icts of interests of the controlling shareholders and the stakeholders. In contrast, the boards in Indonesia, Ma- laysia, and Thailand are specifi ed by their banking laws and regulations to
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