Asian corporates are unaware of broader spectrum of risks: Fitch

They are missing the picture by focusing on communication and spin rather than on better corporate governance, argues Fitch MD Andrew Steel.

In an email interview with Singapore Business Review, Steel outlined his view that, when focusing on improving corporate governance, companies need to be fully aware of the much broader spectrum of issues that professional risk analysts consider when assessing risk in this area. “With some of the recent highly publicised events surrounding corporates in China, investors have also become much more focused on corporate governance.

Fitch has been frequently asked by investors in the last few weeks if our view of corporate governance in China has changed. Our response to this is that it hasn't changed and our view remains consistent with that which we have held for the past few years.

Under our criteria for assessing corporate governance we clearly recognise the systemic issues regarding China (centrally controlled economy with low levels of transparency, issues surrounding the accuracy and availability of reliable data, uncertain and changing regulation, lack of clarity regarding rule of law and property rights etc), and the impact that these have on our general level of corporate ratings (predominantly sub-investment grade in the BB and B categories).”

Steel said one of the concerns that Fitch has held for some time now is that, with a scarcity of investment opportunities around the globe following the financial crisis, 'portfolio style' investors will increase their focus on markets which they are less familiar with, and overlook or make assumptions about issues that could derail their investment.

“Whilst it is impossible to predict every scenario or to take account of instances where management fail to reveal or deliberately withhold information, being aware of the particular risks inherent in corporate governance in that jurisdiction and the likely limitations for an entity, can at least ensure that an investor is not 'surprised'. The fact that so many investors appear to have been surprised by some of the recent events surrounding Chinese corporates, seems to indicate a lack of awareness (or decision to disregard) some of the systemic issues for the country.”

Steel added that from Fitch's perspective the ratings of an entity can be limited or restricted by corporate governance factors at 2 levels - on the one hand the big picture systemic issues (things such as: regulation; rule of law; property rights; control of corruption; prioritisation of creditors in bankruptcy claims; adoption of financial standards and reporting), only some of which a company within a country can influence or 'rise above'; and on the other hand issuer specific corporate governance characteristics (things such as: board effectiveness - demonstrating independence, skills, knowledge and effectiveness in controlling the company via a robust and clearly laid out framework: management effectiveness - fulfilling the board objectives regarding strategy, risk tolerances, policies and procedures; 'key man' risks; transparency of financial information; related party transactions) most of which tend to be within the immediate control of the company.

“In visiting a number of prospective issuers in China and South-East Asia Fitch was surprised at how many of these companies, all of which were contemplating accessing the debt capital markets for funding, appeared to be very strongly focused on communication as a proxy for corporate governance. In our view this focus on communication by corporates has probably arisen from the highly publicised criticisms of many emerging markets regarding the transparency and availability of information.”

“However, when it comes to assessing the quality of a company's corporate governance there are many factors which are taken into account which are not only issuer specific but are also systemic. Whilst it is clearly good business practice for a corporate to have more open and transparent communication with its stake-holders, wider issues such as the creditor-friendliness of a jurisdiction and common business practices can often play a bigger role in determining the risks that investors face,” he said.