Corporate Governance of Banks in Asia

393 Pages·2006·1.33 MB·English

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