While debate about leadership in the board of directors and management is not new in other countries, it is almost unheard of in Cambodia. Our entire corporate governance system is at nascent stage, with little study on the subject.
Regulations related to corporate governance were issued between 1990s and 2000s. The real focus on the theme has taken shape when more and more companies get listed in the stock market which puts governance structures of these companies into the spotlight. Such query and attention are interesting to watch, in a country where almost all businesses were small, unregistered and lack funding.
The roles played by chairperson of the board of directors and chief executive officer (CEO) are vital in driving the business to achieve both top line and bottom line objectives. How companies are governed and run will affect shareholders’ return on investment and the society. The chairpersons and CEOs are primary influencer and decision-makers to the success or failures of any business and impact to key stakeholders (customers, vendors, regulators etc).
With such critical functions, one question often asked is whether these positions are filled with the same person or not? This is a question not yet settled both in Cambodia and in other countries, with two sides of the camps advocating differently.
On one camp, the separation can achieve board independence in overseeing the performance of the management. The chair acts on behalf of the shareholders in recruiting, paying and dismissing the CEO. Unifying the two roles can give rise to potential conflict of interest and result in a weak monitoring role of the board. On the contrary, there are those who believe that combining the two roles can tell who is in charge and creates clear lines of responsibility and accountability for effective management. This is particularly important for the success of the organisations as they have solid, unconfused, directive and steady leadership.
In Cambodia, there is only the insurance regulations which require the chairperson to be a non-executive director, that is, separation structure (prakas on Governance of Insurance Companies 2007, Article 7). This is the first clear cut rule in the country in prohibiting the duality role. Regulations in other sectors do not provide straightforward provisions. They are either silent or allowed duality.
Such inconsistent and unclear regulations are not strange. For the last few decades from Europe to the US, it is still a heated governance debate among listed companies, boards and shareholders in pursuit of the best governance approach to achieve aligned business goals by the board and management. The only consistent guideline is from the Group of 20 (G20) and the Organisation for Economic Cooperation and Development (OECD) which always recommend separate structures for all kinds of businesses (listed companies, financial services, or family-owned companies . . .).
I have examined how large companies operating in Cambodia – insurance companies, banks/microfinance institutions (MFIs), securities firms, state-owned enterprises (SOE), subsidiaries of multinational enterprises (MNE) and local family-owned conglomerates – are implementing the separation and duality structures.
It was clear that insurance companies, banks/MFIs and MNE subsidiaries had separate structure. It is as expected for the insurance firms given regulatory requirements. For the banking industry, such separate structure practice can be attributed to soft law enforcement or expectation of international standard compliance by the regulators during fit and proper checks of new board members and CEO. For MNE subsidiaries, it is not unusual to see the CEOs run local operations while the chairpersons monitor operations from regional offices. Such separation by these companies provide clear responsibility and objective supervision by the board.
For securities firms and SOEs, most adopted separation role approach while a few had unified structure. Even though local regulations allowed duality roles for these sectors, I suggest that they follow international standard from G20/OECD for listed companies and SOEs and ASEAN Corporate Governance Scorecards which encourage the separation. Shares of these companies are more or less held by the public or public funds; therefore, it is important that they demonstrate higher degree of accountability, transparency and checks and balances between the business execution and supervisory roles.
For the three local conglomerates I have studied, the founders or their family members chaired most of the companies within the groups. At least one founder held a dual role in his holding company. The owners normally hired professional executives to manage business operations. There were a few cases whereby the owners’ relatives are the CEOs of the subsidiaries. Despite such separation, the founders/family members might still maintain significant influence. This can be explained by media reports and public appearances which portrayed them as playing central role to the business.
Such practice among Cambodian conglomerates are similarly found in Thailand, Indonesia, the Philippines, Malaysia and Singapore. In these countries, families and businesses were reported as “culturally inseparable”. The owners chaired the holding companies and subsidiaries and do not necessarily listen to outside CEOs. While such practice brings short-term success and expansion, it puts the business at risk in the long run. It creates barriers to get outside investment and constraints for the board and management to perform their functions independently. Another problem is around long-term survival. It was reported that 95 per cent of family businesses failed to carry on during the third generation of ownership. One of the principal reasons for such failures is the lack of adaptation to changing environment.
As a concluding observation, I contended that the separation rule and practice will be on the rise alongside Cambodia’s growing economy and foreign direct investment plus outward-looking regulatory regime. It will continue its unitary board system with binding laws and regulations.
In whatever direction, the real focus should remain with the effectiveness of the board chair. The board should not be a rubber-stamp structure but should aim at bringing a real and long-term value to the shareholders and key stakeholders. This can be achieved via fit and proper checks during regulatory approval processes which should be enhanced by relevant regulatory bodies. Significant roles of the founders or family members in the board and management will not go away in the foreseeable future. However, they will diminish over times when corporate governance regulations and standard become more established and they need external funding to expand their business empires.
Cambodian entrepreneurs will remain open-minded and adaptive to external and changing environment. The country’s entire corporate governance framework will continue to evolve significantly in the coming decades, in particular among the securities and financial sectors and locally owned conglomerates.
Sythan Prou is chief legal and compliance officer of Manulife Cambodia, a lawyer at GCL Law Group and university lecturer. The views expressed in this article are his own.