Corporate Governance in Myanmar: A new world (Part 2)

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Exciting times are ahead in Myanmar with the recent launch of the Yangon Stock Exchange (“YSX”). Leading up to its launch in December 2015, to help guide potential listing aspirants YSX first released an Announcement of its Listing Criteria, followed by a Securities Listing Business Regulations document (“the Business Regulations”) and an Enforcement Regulations document clarifying the application of the Business Regulations. Business Regulations - the salient features

Section 8 of the Business Regulations provides that listing applicants and their corporate groups will be subject to a substantive examination, which determines among other aspects, whether “corporate governance and internal management systems are appropriately established and functioning”.

The specifics of the terms “corporate governance” and “internal management systems” have not been explained in the current form of the Business Regulations. Some light was shed on the coverage of the substantive examination in section 6 of the Enforcement Regulations. Sections 6(3), 6(4) and 6(6) provide that systems subject to examination include those for:

• Reporting of matters that may have a significant influence on investment decisions,

risks in business and other company information

• Legal compliance

• Prevention of insider trading

The typical elements of corporate governance seen in many overseas markets are however conspicuously absent—no mentions are made of Board composition, director independence, transparency around board member selection and renewal, remuneration, audit and accountability in any of the three documents. Whilst Section 6(7) of the Enforcement Regulations has a reference to an “ability to make independent decisions”; whose ability and independence of what in particular are left open to question.

Governance requirements & when to expect them

The Japan Exchange Group (JPX) is an 18.75% joint-venture partner in YSX, and the foremost points of the MOU agreed with the Central Bank of Myanmar in 2012 included JPX “providing technical assistance on the design of securities exchange markets and the enactment of the stock exchange rules.” If the JPX securities listing regulations can be used as a guide therefore, the Enforcement Regulations may gradually bring in provisions on director independence, shareholder and stakeholder (in particular minority shareholder) protection measures, as well as disclosures on the reason for selection of the corporate governance framework.

In time to come, further corporate governance requirements may be incorporated within the securities listings regulations or prescribed in a standalone Code of Corporate Governance guideline. These requirements may be drawn from codes of more mature jurisdictions with a more advanced state of corporate governance—for instance the UK Corporate Governance Code 2014, Singapore Code of Corporate Governance 2012 or Tokyo Stock Exchange Corporate Governance Code(issued as recent as June 2015) just to name a few.

© 2016 PricewaterhouseCoopers LLP. All rights reserved.

April 2016

As with the tailoring of the securities listings regulations, YSX and the Securities Exchange Commission of Myanmar are expected to use one or more of these as a baseline, with appropriate customization for Myanmar’s business environment and fledgling state of corporate governance. While private sector consultation would be helpful in this regard, the extent of such may be hampered by limited experience as trading activity only commenced in March 2016.

In the absence of definitive guidelines many of the YSX applicants may follow the basic principles of governance generally accepted across the region including a basic level segregation of board and management, setting up of the Remuneration, Nomination and Audit committees with appropriate terms of reference, development of internal policies and procedures, establishing an internal audit function, improving the transparency around financial reporting and having some basic form of risk management structure and practices in place.

Benefits of good corporate governance framework for local companies

1. Clarity of segregation of duty: Effective corporate governance separates the ownership from management where owners set the vision, Board provides the direction and management remains focused with its execution.

For most local companies, decision making authority remains centralized with the owner and his connected persons—family members and close friends whom the owner trusts, but often lack the requisite operational, financial and industrial expertise to significantly contribute to the business. The absence of formalised policies, procedures and codified accountability mean that delegation of authority may not be effective, even where there may be a strong business case for such.

Segregating ownership from management, complemented by a drive to professionalise management, will better equip these local companies to cope with a fast paced, dynamic environment and compete with newer and leaner foreign entrants to the market.

2. Credibility and standing: Improved governance is expected to raise the credibility of the corporates and lead to better access to institutional funding and/or strategic alliance with the appropriate foreign partner.

Potential foreign partners may be reluctant to deal with the local corporates citing the lack of transparency as a key hindrance where effective corporate governance is not in place. Many of the local corporates do not possess a corporate website, and do not otherwise make available critical information which foreign entrants may consider to be basic requirements (e.g. overview of ownership, Board and key management, brief track record and high level financial results).

Local corporates which differentiate themselves on good corporate governance practices will therefore enjoy better prospects for attracting foreign partners. This may partially explain why FMI group with a strong governance focus managed to attract more than 25 foreign alliances within a limited timeframe.

3. Risk Management: Effective governance will enable corporates to harness risk in the pursuit of growth, rather than continually being exposed to its downside.

© 2016 PricewaterhouseCoopers LLP. All rights reserved.

April 2016

In traditional Myanmar conglomerates, the concept of risk management is generally not formalised. In rare instances where a risk management unit exists, it predominantly deals with operational matters such as credit risk, basic compliance risk, etc. However the more critical aspects such as risk of competition from foreign entrants or newly aspiring generations of Myanmar companies, impact from a rapidly increasing technology adoption and a rapidly changing legal, social and political environment are often not considered.

As with other emerging markets, Myanmar’s industry infrastructure is struggling to catch up with the pace of development. Weak management controls and inadequate risk management in such situations often lead to unacceptable business practices with undesirable outcomes. We have seen many cases of companies suffering regrettable losses in the region due to inadequate risk management practices at the time of significant changes. Until safeguards such as a robust risk management framework are in place, transformation in the market system in Myanmar will continue to be fraught with uncertainty for

A win-win for all

Clearly, Myanmar is keen to catch up with its neighbors and again become one of the economic giants in the ASEAN region, as it once was in the 1960s. The emergence of stock exchange and the listing of the first corporate is a step in the right direction to improve overall institutional strength, inculcate a governance culture, spur investment inflows, and kick start the training and hiring of local staff.

A good number of leading corporates in Myanmar have realised that corporate governance is not merely about conformance but rather a sound investment that will drive sustainable corporate performance amidst organisational transformation and volatile economic conditions.

For more information, contact:

© 2017 PricewaterhouseCoopers LLP. All rights reserved.

Jessica Ei Ei Sanjessica.ee.san@mm.pwc.com+95 9 4402 30342

Greg Unsworthgreg.unsworth@sg.pwc.com+65 6236 3738 / +65 9848 6025

Samit Debsamitendra.k.deb@sg.pwc.com+959 961049 664 /+65 8168 4135