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Party transactions in Asia:

Companies should adopt greater transparency

Investors in Asian companies should control shareholders to prevent the possibility of being disadvantaged by related party transactions as abusive related-party transactions take place in Asia due to weaknesses in the mechanism that govern them. Therefore, investors should be more vigilant when such transactions are disclosed and more critical when they are put up for a vote, Head of CFA Institute Centre Asia Pacific Office, Lee Kha Loon told Daily News Business.

Lee Kha Loon

He is in Sri Lanka on the invitation of the Government to make a presentation to Sri Lankan authorities on the improvement of investor protection against abusive related-party transactions in Asia.

Loon said most of the largest listed companies in Asia are owned by families or the state with diverse business interests and because there is often no separation of ownership and control, related party transactions are prone to misuse by families for their private interest or the state for its own agenda.

According to a report by the CFA Institute, the ownership structure of most Asian companies limits the board representation of minority or independent shareholders, but it said that investors should not demonstrate defeatist behaviour by voting with their feet. Instead, they should exhaust all available avenues to express their views.

Loon said that good corporate governance is fundamental to free and efficient markets, and investors should be able to put their money in companies without fear that controlling shareholders will misappropriate corporate assets at the expense of delivering returns to the investor.

Loon said that related-party transactions should pass effective approval and disclosure processes. Regulators in Asia that have not already done so should define material related-party transactions and the threshold values must be disclosed or subject to approval procedures.

He said that Directors have a duty of loyalty to the company and this duty becomes self serving for directors who are themselves controlling shareholders and as such Corporate boards should include more independent directors.

Companies should adopt greater transparency on related-party relationships. One way of doing so is voluntarily disclosing the identities and level of ownership of related parties that own a reasonable sizable portion of the company’s shares.

Corporate laws in Asia should take into consideration the reality that minority investors are prone to abuses by controlling shareholders and, therefore, regulations on related-party transactions should be backed by law, Loon said.

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