Corporate Governance, Business Ethics and the CFO

Corporate Governance,
Business Ethics and the CFO
A research report prepared by CFO Asia in col aboration with ACCA

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Contents
About this report
2
Study methodology
3
Introduction
4
Notable findings
Structure of the report
Chapter 1: THE IMPORTANCE OF ETHICS TODAY
7
Case study: IBM Singapore
Case study: Sinochem International
Chapter 2: RESPONSIBILITY
13
Case study: Mulitex Limited
Chapter 3: ETHICAL PRACTICE
17
Ethical hurdles
Case study: Kärcher Asia-Pacific
Chapter 4: INFLUENCE OF AN ETHICAL
21
CORPORATE CULTURE
Common sense and ethical sensibilities
The ethical pressure cooker
Case study: DuPont China
Chapter 5: ADVICE AND REGULATION
25
Sarbanes-Oxley and al that
Case study: Tanjong
SNAPSHOT OF SURVEY RESPONDENTS
29
ACCA’S PERSPECTIVE
31

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Corporate Governance, Business Ethics and the CFO
About this report
In April 2006, CFO Asia Research Services (a unit of CFO Publishing Corp), in col aboration with
ACCA (the Association of Chartered Certified Accountants) launched a research program to
understand the role of the CFO in issues surrounding business ethics, the drivers for change in
this area, and the importance to Asian companies of practicing an ethical culture. The goal of this
research was to explore the kind of commitment Asian companies have made to developing an
ethical culture, what importance CFOs have attached to their companies performing in accordance
with ethical practices, and whether attitudes towards ethics are changing and, if so, why.
This report presents the findings of a survey of more than 160 CFOs and senior finance execu-
tives from mainland China, Hong Kong SAR, Malaysia, and Singapore. One hundred respondents
originated from Asian-based companies, while 32 and 27 of the respondents came from companies
headquartered in the United States and Europe, respectively (three respondents returned their
questionnaires noting that their companies were based outside these regions). This direct question-
naire-based research has been supplemented with in-depth, one-on-one case study interviews with
executives at six companies spanning a range of company types, industries, and locations.
CFO Asia Research Services and ACCA developed the hypotheses for this research jointly. ACCA,
the largest and fastest-growing international accountancy body, funded the research and publica-
tion of our findings, and we would like to acknowledge Paul Moxey, ACCA’s head of corporate
governance and risk management and the ACCA team; Adam Lincoln conducted the interview
program and wrote the report.
We would like to thank the many executives who gave their time to participate in the survey and
shared insights in interviews for this study.
Corporate Governance, Business Ethics and the CFO is published by CFO Publishing Corp., 60/F
Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. Please direct inquiries to Melissa Magley
at +852 2585 3885 or melissamagley@economist.com, or contact ACCA’s network of offices in
Asia Pacific or email info@accaglobal.com.

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may be reproduced or stored in a retrieval system, or transmitted in any form, by any means, without written permission.

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Study methodology
In April 2006, CFO Asia Research Services conducted a survey among CFO Asia subscribers. CFOs
and other senior finance executives were surveyed from a range of companies and industries
spread across four key markets in the Asia Pacific region: China, Hong Kong SAR, Malaysia, and
Singapore. The questionnaires were self-completed online or fil ed in during an independently
conducted direct telephone interview.
More than nine industries are represented in the survey including manufacturing, financial services,
IT and communications, energy, retail, pharmaceuticals, transport and distribution, leisure and
tourism, and other professional services.
A range of company types within each country are represented including family-owned, govern-
ment-control ed, publicly-listed and the subsidiaries or divisions of a larger shareholding corporation.
Almost 62% describe themselves as Asian-based, 19.8% are US-based or -listed companies, while
16.7% originate in Europe.
Al sizes of organizations are represented in the survey, from SMEs to local conglomerates to re-
gional headquarters of multinational companies. Those with less than US$100m in annual turnover
account for 41.4% of respondents, while 42% report annual turnover of more than US$351m.
The remaining 16.1% fall between these two groups, with revenue in the range of US$101m to
US$350m.
To shed further light on the data in this study, in-depth interviews were conducted with senior
finance executives from six companies reflecting the diversity of the sample. These are presented
as case studies in the report.
Chart 1
Chart 2
Distribution of respondents
Distribution of respondents
by corporate geographic base
by industry
2%
17%
13%
11% 5%
7%
10%
8%
20%
3%
62%
4%6%
33%
Asian-based
Financial services
Pharmaceuticals


US-based or US-listed global company
Energy & Utilities
Professional services

European-based or European-listed global company
IT/Communications
Retail/Consumer
Other
Leisure/Tourism
Transport/Distribution
Manufacturing
Other
(Total may not add up to 100% due to rounding.)


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Corporate Governance, Business Ethics and the CFO
Introduction
This study explores the influence of the chief financial officer (CFO) in Asia on building an ethical
culture in companies. Ethical practice in business is easy enough to define in a narrow sense as
adhering to and promoting accepted principles of right and wrong that govern the conduct of a
profession. Yet this definition, while handy enough, hardly makes a case for the powerful impact
that moral behavior of officers and employees brings to bear on essential company systems and
activities, and how it influences all aspects of compliance. To be sure, it is harder to establish a
connection between codified ethics and practical actions than to track compliance on governance
or accounting systems. But ethics can be reasonably seen as an intangible, yet powerful, catalyst
and supporter of compliance. Put another way, it is not possible to legislate for ethical behavior.
Ensuring sound ethical practice requires participation – and even leadership – from al ranks within
a company. This report assumes that the CFO occupies a focal point of that leadership. The rise
of the profession in recent years has enabled CFOs to do far more than tend to finances and
financial reporting. Increasingly, CFOs have a hand in a company’s strategic direction and provide
a representative face to investors and the media. CFOs are the guardians of company controls
and, often, a partner to the chief executive and member of the board. This dual part of steward
and strategist accords the position a unique role in disseminating ideas and attitudes on ethical
practice throughout the firm. How, then, do CFOs deploy this unique position – if at all? And how
do they do so in Asia, where conditions of fast growth and intense competition often place ethical
pressures on companies in the race for profits?
Fairly, or unfairly, the ethical practices of Asian business have long been called into question. The
region’s tradition of close business connections – whether they be cal ed chaebol, keiretsu, or guanxi
– have contributed to this impression. So too have prominent scandals connecting major businesses
to the favor and profit of government officials or their families. But the enormous changes affecting
the region – fal ing trade barriers, greater market transparency, intensified regulatory clout, tougher
government enforcement, and heightened investor activism – have chal enged this negative view.
Moreover, a number of high-profile scandals has emerged in markets held to be the world’s most
transparent, amply demonstrating that there’s no such thing as a regional exclusive on ethics.
Indeed, it’s accurate to say that global shifts in standards are facilitating – and adding pressure to
– the adoption of ethical practice everywhere. The convergence or harmonization with Interna-
tional Accounting Standards has been a positive step towards uniformity and improved controls
in territories such as Hong Kong, Malaysia, and Singapore. These accounting reforms have been
accompanied by new ethical codes. At the same time, political initiatives such as America’s Sar-
banes-Oxley Act, with its provisions for personal responsibility and the separation of auditing and
consulting, have made an impact even on non-US companies.

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This research asks CFOs in Asia themselves to define their role in shaping ethical policy in the
region’s companies. What benefits do CFOs see as flowing from a strong company culture on
ethics, and do they view themselves as the drivers of good ethics in their company? How do their
own views sit with their company’s commitment to developing an ethical culture? This survey sheds
light on these issues and explores the growing awareness among Asian companies of the business
benefits of a strong code of ethics.
Many wonder if there is room for traditional ‘Asian values’ in the emerging globalized environment.
As Daniel Leung, regional finance director of DuPont Greater China, the US-based chemical giant,
puts it: “During the Mid-Autumn Festival it’s very common to take mooncakes to customers. How
do you treat that? Do you get the business because of the mooncake? Hopeful y the customer is
smart enough to look at your products and service.”
While there are ambiguities, the research reveals a ringing endorsement of the idea that best
ethical practice is increasingly important to the long-term health of their companies. More than
85% of the survey’s respondents say ethical practice in business is more important – or even a lot
more important – than it was five years ago. If attitudes towards ethics are changing, why is this
so? And how can CFOs clarify their role – to themselves, and to their company?
Notable findings
l More than half the respondents believe they are responsible for promoting an
ethical culture in their companies. Some 70% of those surveyed said that they should set a
good ethical example, while more than half feel they should drive the integration of ethical values
into board and senior management decision-making. Just over half of the respondents said that
ensuring an ethical environment is very important to them personal y, while another 18% said it
was vital.
l Many CFOs highlighted the impact of ethics on reputation. The survey participants
acknowledge that a good ethical culture has become a requirement in business, particularly for a
company’s overal reputation and impact on a company’s brand. The perception of a good ethi-
cal culture, they say, improves relationships with banks, institutional investors, and suppliers, and
heightens a company’s attractiveness as an employer.
l Even as internal controls improve, Asia’s CFOs still worry about corporate cul-
tural issues. The shift to international accounting standards and the need to comply with tougher
national codes have placed new operational demands on finance departments. CFOs appear to
have taken such governance-related changes in their stride. Despite media coverage of business
ethics-related scandals, the biggest chal enge, they say, is stil ‘big picture’. More than two-thirds of
participants in the survey say that building an overal corporate culture of integrity is among their
top three chal enges; for one in three, this remains the peak issue.


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Corporate Governance, Business Ethics and the CFO
l CFOs cite time and effort as the greatest hurdle to establishing best ethical
practice, an indication of intensifying pressures on the CFO role. Asked to rank
the barriers to developing and improving ethical practices inside their company, nearly 60% state
that the time and effort involved is the biggest hurdle. Likewise, almost half say that they struggle
to balance the needs of ethical practice with company culture. Broadly, these responses reflect
overburdened CFOs in markets characterized by increased competition and high growth, but
also marked by greater regulatory scrutiny and cal s for transparency. CFOs’ responsibilities to
implement best practice in these dual and sometimes conflicting aspects of the Asian growth story
have increased. They are feeling the pinch.
l Juggling regulations and codes with the realities of doing business at the ‘coal-
face’ is a struggle. In-depth interviews with finance executives reveal that even the most
ethical y-aware companies find their standards chal enged on a daily basis, especial y if they have
dealings with smal er operators in less-developed countries. K Sriram, group manager of internal
audit at Hong Kong garment trader Mulitex, suggests: “Perhaps we need a two-tier system, with
global standards in key ethical areas underscored by room for flexibility at the local level. Each
country has its cultural values, its upbringing, and so it’s very difficult to bring in a motherhood
ethical governance system. A customized system could enable companies to project themselves
international y but keep customers and suppliers happy closer to home.”
l Over half of CFOs report that companies have processes in place to assess adher-
ence to their ethics policy. It is clear that many boards now recognize the importance of
ensuring that their companies have ethical practices and it is encouraging to learn that over half of
the respondents say they have processes in place to assess adherence to their ethics policy or code.
Experts say that this practice is stil rare in the United States and Europe, and so far there is little,
if any, best practice on how it should be done. Just how companies assess their ethical practices
would make a very interesting subject for further research.
l Sarbanes-Oxley has made a considerable impact on non-US companies. Clearly,
the Sarbanes-Oxley law has had a profound effect on companies whose shares are traded on
US exchanges, forcing them to rethink business processes they once took for granted. Grievances
about the cost of compliance – in terms of staff numbers, time, and focus – are widely documented.
There is too much red tape, executives say, and too many distractions from other business impera-
tives. Yet roughly half the executives who took part in this survey believe the Sarbanes-Oxley Act
has had a positive global effect on business ethics – even though just one in five respondents work
for a US-based or -listed company. There are even signs that the region’s CFOs would welcome
a more stringent ethical framework.
Structure of the report
This report has five chapters. Chapter 1 examines the importance of ethics to Asian businesses
today, the key chal enges that senior finance executives face, and the steps taken to build a culture
of integrity. Chapter 2 looks at the way ethics-related responsibilities are assigned within corporate
structures, and how CFOs feel about the role they play. Chapter 3 focuses on the specific measures
that companies in Asia have put in place to support the practice of good business ethics, and the
barriers to further improvement. Chapter 4 seeks to define the benefits that CFOs see as flowing
from good governance and ethics, from both the financial and less-tangible perspectives. In Chapter
5, we ask CFOs where they turn for guidance on assurance processes and internal controls, with
particular focus on the role of legislation and national codes of corporate governance.


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may be reproduced or stored in a retrieval system, or transmitted in any form, by any means, without written permission.

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Chapter 1
THE IMPORTANCE OF
ETHICS TODAY
Cultivating and maintaining Some CFOs who took part in this survey say that ensuring an ethical culture in business is no
an ethical business
more important today than it was five years ago. Cause for alarm? Not at al . For them, ethics and
environment with strong
governance have always been top of the agenda. The views of this group are summed up by a
governance are more
CFO who says: “Our business has been operating globally for more than 120 years and having a
important today than they consistent ethical culture is one of the reasons for its sustainability.”
were five years ago.
But for the vast majority of survey respondents – nearly 86% – cultivating and maintaining an
ethical business environment with strong governance are more important today than they were
five years ago. Although this isn’t surprising, the specific reasons for the change in mindset vary
greatly – from new legal requirements to a very human fear of being shamed in public. As Gerard
Nathan, CFO of Malaysian leisure and power group, Tanjong, observes: “Corporate governance is
on everyone’s lips, but the parameters and implications are stil a subject of debate. It is not just
a question of process but of mindset and values among al stakeholders – and this can pose the
greatest chal enge.”
One thing is certain: nobody likes to ‘lose face’. As one respondent observes, nervousness about
doing the wrong thing has heightened: “Since the US accounting scandals, senior executives of
multinational corporations are more concerned about the effectiveness of corporate governance
in their own organization as they have a better understanding of the potential damage that could
result from a poor control environment.” Another adds: “[Sarbanes-Oxley] has contributed to
enhanced awareness, even if you aren’t an American company.”
It seems the increased role played by government is appreciated. “In recent years the Malaysian
government has placed more emphasis on transparency and global y acceptable standards,” says
one CFO. “At least in my organization, the ethical culture is somehow more important now,
through the authorities’ supervisions.” It’s a similar story in Hong Kong, where one CFO welcomes
the government’s lead in this area. The same source says: “The government has correctly identified
a vision for Hong Kong as a premier international financial center and it’s real y up to business and
society to embrace the vision and make it a reality.” Another respondent observes: “Mainland
China [is] implementing regulations in previously grey areas. This has helped to remove a lot of
the ambiguity over the implementation of regulations.”
Indeed, if companies value the formalizing of an ethical framework, it is surely because it helps
them cope with an increasingly complex business environment due to opening markets, fal ing
trade barriers, and intensified competition. As one respondent notes: “There are more ways for
malpractice and therefore governance is crucial to track and detect it within practices.” Another
adds: “The increase in the ‘hire-and-fire’ culture has also led to increased recklessness among
employees in conducting transactions, and has created a ‘me-first’ attitude at al levels.”


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Corporate Governance, Business Ethics and the CFO
Companies are finding that as they evolve, the demands on them are changing. This is especial y
true if they harbor global ambitions – but you don’t have to be listed in New York or even
Singapore to be affected. As one CFO points out: “Corporate governance for non-public listed
companies is gaining increasing attention not just from governmental authorities but also from
bankers and rating agencies.”
Such comments reflect growing awareness of the impact of ethics on al areas of a business. “Ethics
help to eliminate the financial and business risks a company is exposed to due to unclean business
negotiation and practices,” says one CFO. Other respondents identify a fundamental shift among
stakeholders. “Financial results are no longer the sole key concern for investors,” says one. Another
executive comments: “The stakeholders of the company – which include the shareholders, clients,
staff, suppliers, and government regulators – are treating ethics as a more important factor in their
decision-making.”
Put simply, an ethical approach is smart, as Ong Wee Gee, CFO of IBM Singapore, notes: “The
threat of legal penalties exists, but that is not the main motivation. Upholding the company’s
good name and reputation for integrity are important competitive advantages, and that’s the main
motivation.”
Chart 3 In your opinion, is ensuring an ethical culture in
business more or less important to your company now than it
was 5 years ago? (%)
60
51.2
t
n 40
34.6
r
c
e
e
P 20
13.6
0.6
0
0
More
A lot more
No change
Much less
Less
important
important
important
important
The research suggests Asia’s corporate community was quick to hear the post-Enron clarion cal for
better ethics. With the exception of ethical transfer pricing, the majority of CFOs have addressed
key ethical issues over the past three years.
That said, a systematic approach to governance and ethics remains very much a work in progress
for many. Some 16% of survey respondents in Chart 4 report their company is stil without a code
of conduct or ethics, although they expect the issue to be addressed in the coming year. Others still
have work to do in key areas such as combating fraud and bribery, resolving or removing conflicts
of interest, and equal treatment of shareholders.

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may be reproduced or stored in a retrieval system, or transmitted in any form, by any means, without written permission.

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