With the recent surge of foreign investment interest and the scheduled establishment of the Myanmar Stock Exchange in 2015, the market for capital in Myanmar is expected to grow at an accelerated pace, while at the same time becoming more competitive as local companies vie for limited investment dollars. Myanmar companies hoping to make the most of this influx would benefit from a process of self-appraisal, with an eye towards bringing their corporate operations up to international standards. From both a regulatory and a commercial standpoint, improving corporate governance will help clear a path for partnerships with foreign investors, many of whom face high regulatory burdens and uneasy shareholders at home. Studies have shown that the quality of governance arrangements affects firm performance and shareholder value, and good corporate governance practices have been found to result in lower costs of capital, higher returns on equity, and greater corporate efficiency.
Development of Corporate Governance Policies
A central issue that has shaped the development of modern corporate governance principles is the so-called “agency problem” resulting from the separation of company ownership and management. While the application of corporate governance principles is a relatively new phenomenon, the “agency problem” has a legacy dating back to the 1800s. Historically, directors and managers without a significant a stake in the ownership of the company lacked the zeal typically displayed by business owners in safeguarding a company’s interest. To address this problem, rules were formulated with the intention of aligning the interests of corporate directors and managers with those of the corporation and its ultimate owners – the shareholders. Thus emerged the now established and well-known duties of care, loyalty and good faith that directors and managers owe to the corporate form.
It was only at the beginning of the 1970s that a clear corporate governance agenda began to take shape, making its debut in the form of governmental oversight and regulatory policies in developed nations. The prevalence of leveraged buy-outs and similarly aggressive take-overs strategies in the 1980s and 1990s further fueled the corporate governance diologue, focusing the discussion on the agency problem identified nearly two centuries prior. By the 1990s, corporate stakeholders were aware of the need to adopt guidelines for the effective management and operation of corporate entities and in 1999, the OECD issued its seminal Principles of Corporate Governance. The Principles were broad in scope and included recommendations on shareholder rights, equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency, and the responsibilities of the board.
Then in 2001: the Enron scandal. Following revelations that members of its board and other officers had used questionable accounting practices to hide billions of dollars in debt from failed deals and projects, the Enron Corporation was forced into bankruptcy in what was, at the time, the largest Chapter 11 filing in U.S. history. The U.S. government responded in 2002 with the enactment of the Sarbanes-Oxley Act, which required the senior management of publicly listed companies to certify the accuracy of corporate financial records on pain of criminal prosecution. The passage of the Sarbanes-Oxley Act was considered a watershed event that placed the concepts of corporate governance forefront in the minds of corporate managers and shareholders. The “old ways” of managing corporations were over; greater accountability and transparency were now expected and required.
Today, the cutting edge of corporate governance thinking has shifted its focus towards enhancing shareholder participation and democratization of corporate decisions. Issues such as executive compensation, board entrenchment and the use of shareholder resolutions for matters previously reserved for board action are now being debated in boardrooms, classrooms and even courtrooms across developed economies. The push for changes in corporate management style is likely to meet, as it has in the past, strong resistance from directors and managers, but regardless of what consensus emerges, there can be no question that a strong and robust corporate governance regime makes good business sense.
Unique Ownership Structures for Developing Economies
While existing princples of corporate governance have clasically addressed the perceived misalignment between the interests of shareholders and managers in a widely held firm, companies in developing economies, including Myanmar, do not necessarily face the same shareholder vs. management misalignment. Instead, what would typically be described as corporage governance challenges arise from the more amorphous ownership structure common to developing countries, often characterized by management through familial or social ties.
For family-owned firms, the shareholder vs. management misalignment concern is minimized because of active participation by the owners in the day-to-day operations of the company. Issues of corporate governance persist, however, precisely because of the lack of outside stakeholder interest driving the company towards improvement. Owner-managers often fail to recognize business opportunities or may be reluctant to take otherwise reasonable risks in the expansion of the company’s business. Succession disputes among family members are also common, and if not properly resolved, can threaten to undermine the integrity of the corporate enterprise.
Closely held firms also have comparable corporate governance challenges, although the structure of such firms presents a distinct set of problems. Because most closely held corporations feature a majority shareholder with control of the management and operation of the firm, the most common conflicts involve a clash of interests among the shareholders, rather than between shareholders and the management. In these situations minority shareholders may find it difficult to successfully contest the wishes of larger shareholders directly, resulting in a shift from conflicts between management and shareholders to a three-way conflict between large block holders, managers, and minority investors.
Perceptions and Absence of Regulatory Infrastructure
Along with these unique structural concerns, companies in developing economies have at times demonstrated a fundamental misunderstanding of the role of certain corporate actors – in particular, the role of corporate directors. It is not uncommon in developing nations for directorships, for example, to be regarded as “rewards” for loyal service or long-standing friendship with owners of a company. Thus, only individuals perceived to be acceptable to family owners or controlling shareholders will have a realistic chance of being elected to the boards of many companies. By contrast, external directors are uncommon, and as a result, transactions involving interested or related parties are typically approved without any checks or safeguards.
Legal and regulatory frameworks in developing economies have been slowly but steadily improving to meet the demands of the changing investment landscape, but for corporate governance principles to truly take hold, further changes must be implemented. For example, the Myanmar Companies Act, which forms the foundation of corporate regulation in Myanmar, does not sufficiently address core issues of corporate governance as it was developed at a time when such modern concepts did not yet exist. Originally enacted in 1914, the Act provides only indirect references to prohibitions against breach of the duty of trust, the primary safeguards against interested directors and the requirement of shareholder approval for major corporate decisions. While these basic protections include rules on notice, disclosure and shareholder rights, they may still fail to offer the kind of specificity and depth incoming investors and other potential stakeholders are likely to expect. Further complicating matters is the perception of foreign investors that these protections are not uniformly enforced. To overcome such perceptions, developing nations will need to revolutionize their corporate governance legislation and make genuine and notable efforts towards consistent enforcement.
The Way Forward
There is little doubt that governments in developing economies will play a crucial role in forming, promoting and propagating corporate governance policies in their respective jurisdictions. In Myanmar in particular, we eagerly anticipate the modernization of the Myanmar Companies Act, and mark progress in the recent passage of the Securities Exchange Law. If carefully crafted and properly enforced, these new laws – and implementing regulations that will follow – can serve as an effective means by which to promote corporate governance rules and principles at the national level. The challenge for Myanmar, and developing nations like it, is to be able to capture the critical elements of the rules and principles already in use in developed economies and adapt them to the unique circumstances of its own developing economy.
These changes need not begin solely with guidance and regulations issued by the government. Companies should act now, of their own accord, to move forward in adopting the most fundamental corporate governance policies of independence, transparency and fairness in the operation of their businesses. Corporate shareholders must also do their part in bringing about this paradigm shift. Through the establishment of nomination and remuneration committees and the professionalization of directorships and management, corporate stakeholders, whether in family-owned or closely held corporations, are in a position to play a greater role in ensuring transparency and professionalism in the conduct of corporate business activities.
With the opening of its market to the world, opportunities in Myanmar abound, but with greater global business engagement will come ever-stronger calls for corporate accountability and transparency. International investors will expect compliance with a baseline standard of corporate behavior and will be hesitant to invest in otherwise successful operations that exhibit opaque or non-traditional operations. By adopting essential corporate governance principles that ensure transparency and clearly define board responsibilities, Myanmar companies can prepare for the expectations of their future corporate partners. More importantly, by adopting these principles, Myanmar companies will be able to further enhance corporate performance and shareholder value, putting themselves on better footing to participate in highly competitive regional and global economies.