Institutional Investors and Corporate Governance

Stilpon NestorOECD

Issues

• The role of institutional investors in promoting corporate governance

• The role of institutional investors in Korea

• Corporate governance progress in Korea and its perception by the markets.

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131

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End 1990 End 1991 End 1992 End 1993 End 1994 End 1995 End 1996 End 1997 End 1998 End 1999 End 2000

OECD AREA MARKET CAPITALISATION RELATIVE TO GDP

Chart 2: Market Capitalisation Relative To The Size of GDPPer Cent of GDP

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1 Australia 35 46 44 68 64 67 75 70 88 105 95

2 Austria 17 16 12 16 16 14 15 18 17 16 16

3 Belgium 33 35 28 36 36 37 44 57 97 74 81

4 Canada 42 45 42 58 56 62 81 91 91 126 113

5 Czech Republic - - - - - - - - - - -

6 Denmark 29 33 20 30 32 32 39 56 57 60 69

7 Finland 17 12 11 27 38 34 49 60 119 270 241

8 France (4) 26 31 26 36 33 32 38 48 68 104 112

9 Germany 23 22 17 24 24 23 28 39 51 68 68

10 Greece 18 14 11 15 13 14 19 28 66 158 96

11 Hungary - - - - - - - - - -

12 Iceland (3) - - - - - - - - - -

13 Ireland - - - - - 39 48 62 77 74 86

14 Italy 13 14 10 15 18 19 21 30 48 62 72

15 Japan (3) 99 91 62 68 77 69 65 51 64 99 67

16 Korea 44 33 34 40 48 37 27 9 36 75 32

17 Luxembourg 101 103 94 150 196 176 178 194 207 186 180

18 Mexico 15 32 38 50 31 32 32 39 22 32 22

19 Netherlands 41 45 40 56 64 69 91 124 153 177 176

20 New Zealand (3) 20 34 37 58 54 54 56 46 46 51 37

21 Norway 23 19 14 24 30 30 36 43 32 42 41

22 Poland - - - 3 3 4 6 8 13 19 20

23 Portugal 13 12 10 15 18 17 22 37 56 60 58

24 Slovak Republic

25 Spain 22 23 16 24 24 26 40 52 69 72 90

26 Sweden 39 39 31 56 63 72 92 111 117 155 144

27 Switzerland (3) 69 75 78 114 109 130 135 225 268 268 328

28 Turkey (3) 13 10 6 20 17 12 17 32 17 61 35

29 United Kingdom 86 96 87 120 111 120 139 151 168 198 185

30 United States 52 66 70 75 70 92 108 129 144 180 154

Notes:

Data on Hungary,Slovak Republic, Czech Republic and Iceland is not reported by FIBV

Data for Poland starts from 1993 and for Iceland is from 1995

Corporate governance and equity risk

• Equity is a bundle of risks:– Business plan– Execution (management and financial

structure)– Corporate governance (expropriation)

• Investors adjust for this risk

Financial Assets of Institutional Investors As a Percent of GDP

38

81

106

144

146

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40

60

80

100

120

140

160

Per Cent

1981 1991 1996 1999 2000p(*)

Portfolio composition of institutional investors in

the OECD

0%

20%

40%

60%

80%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999

OECD

Pension funds

• 300 largest pension funds manage more than $ 6 trillion in 2000--up 8.5% from 1999.

• They have grown 158% over the last 10 years

• 8 of the top 10 are based in the US• Equity exposure varies. In the UK is

more than 70%. In Japan it is tiny.

Pension funds

• Diversification is the key risk strategy• Drivers of better governance in 2

ways governance consciousness +active ownership– Liability profile– Indexing– Investment in asset classes of low liquidity– Global fiduciaries – Politics

Pension funds: dynamics

• US waiting for the Enron effectdiversification in 401K plans indexing

• Unilever/Mercury in the UK more prudence by managers more indexing and focus on CG risk

• Other (Japan, Scandinavia): pension funds diversification to other equity classes seeking a more active corporate governance role

• Other (Germany, France, Italy) pension reform important growth in the medium term

1992 1993 1994 1995 1996 1997 1998 1999 2000p

Australia 6.7 8.5 8.0 9.6 11.6 13.2 17.4 19.5 19.8Austria 8.1 10.0 11.8 14.2 17.3 21.8 30.7 38.5 45.3Belgium 15.7 23.7 23.9 23.2 25.3 30.9 43.8 47.8 54.8

Canada 9.4 14.9 17.1 18.7 23.9 28.7 33.9 36.6 35.8Czech Republic .. 3.0 2.9 2.4 3.8 2.4 1.7 3.1 7.3

Denmark 2.5 3.4 3.6 3.6 5.1 7.7 11.3 15.1 ..

Finland 0.1 0.8 1.1 0.9 1.9 2.6 4.5 8.0 9.4France 35.7 40.7 41.3 37.4 38.1 40.5 49.6 53.8 62.2Germany 8.8 11.9 14.3 15.3 17.6 22.7 30.3 34.8 38.4Greece 1.1 4.4 6.2 9.5 13.1 22.1 27.7 32.2 27.8Hungary (2) .. .. 0.8 1.0 1.6 2.7 3.2 3.7 4.4Iceland 2.4 3.2 4.5 4.2 6.6 9.6 16.4 18.3 14.0Italy 3.4 6.6 7.9 7.4 10.6 18.3 34.9 40.5 39.0Japan 9.5 9.6 8.3 8.3 8.3 7.1 9.8 12.5 ..

Korea 27.9 31.8 32.4 31.7 30.6 20.4 69.7 56.3 31.6Luxembourg (3) 1613.3 2149.3 2150.8 2076.5 2051.7 2716.1 3401.8 3757.0 ..

Mexico 4.4 6.0 2.6 2.5 3.0 3.1 2.9 4.1 3.3Netherlands 11.3 15.6 16.3 15.8 15.9 17.9 14.6 21.9 26.9Norway 1.8 4.3 4.5 4.9 6.5 8.7 7.8 9.9 ..

Poland .. 0.5 0.6 0.2 0.4 0.4 0.3 0.5 1.2

Portugal 8.8 12.0 18.8 15.6 15.6 21.2 26.4 21.2 19.1Spain 10.0 15.6 18.3 18.6 25.3 34.5 45.3 36.2 33.2Sweden 13.5 19.2 20.2 22.2 23.9 33.7 35.8 51.2 51.1

Switzerland 7.9 14.3 14.8 14.4 16.0 20.8 26.5 .. ..

Turkey 0.2 0.6 0.6 0.3 0.6 0.5 0.6 1.4 1.0

United Kingdom 13.1 20.3 19.8 21.5 26.9 26.8 27.2 31.3 ..

United States 27.0 32.3 32.7 38.8 45.6 53.4 61.9 68.1 65.2(1) Open-end and closed-end investment companies.(2) Total assets for 1992 and 1993.(3) Total assets.

Source: OECD

Chart 5 : FINANCIAL ASSETS OF INVESTMENT COMPANIES (1)

AS A PERCENTAGE OF GDP

8090 92 97

106117

135 144

146

51 55 55 54 5536

10393

65

0

20

40

60

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100

120

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160

Per

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1992 1993 1994 1995 1996 1997 1998 1999 2000 p(*)

KOREA

OECD

Financial Assets of Institutional Investors Relative to the Size of Economy, Korea Compared with OECD

KOREA OECD

0%

20%

40%

60%

80%

100%

1991 1993 1995 1997 1999

KOREA

Other

Cash and deposits

Bills and bonds

Loans

Shares

0%

20%

40%

60%

80%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999

OECD

COMPOSITION OF FINANCIAL ASSETS OF INSTITUTIONAL INVESTORS

DISTRIBUTION OF FINANCIAL ASSETS OF INSTITUTIONAL INVESTORS IN KOREA

Chart 2: Market Capitalisation Relative To The Size of GDPPer Cent of GDP

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1 Australia 35 46 44 68 64 67 75 70 88 105 95

2 Austria 17 16 12 16 16 14 15 18 17 16 16

3 Belgium 33 35 28 36 36 37 44 57 97 74 81

4 Canada 42 45 42 58 56 62 81 91 91 126 113

5 Czech Republic - - - - - - - - - - -

6 Denmark 29 33 20 30 32 32 39 56 57 60 69

7 Finland 17 12 11 27 38 34 49 60 119 270 241

8 France (4) 26 31 26 36 33 32 38 48 68 104 112

9 Germany 23 22 17 24 24 23 28 39 51 68 68

10 Greece 18 14 11 15 13 14 19 28 66 158 96

11 Hungary - - - - - - - - - -

12 Iceland (3) - - - - - - - - - -

13 Ireland - - - - - 39 48 62 77 74 86

14 Italy 13 14 10 15 18 19 21 30 48 62 72

15 Japan (3) 99 91 62 68 77 69 65 51 64 99 67

16 Korea 44 33 34 40 48 37 27 9 36 75 32

17 Luxembourg 101 103 94 150 196 176 178 194 207 186 180

18 Mexico 15 32 38 50 31 32 32 39 22 32 22

19 Netherlands 41 45 40 56 64 69 91 124 153 177 176

20 New Zealand (3) 20 34 37 58 54 54 56 46 46 51 37

21 Norway 23 19 14 24 30 30 36 43 32 42 41

22 Poland - - - 3 3 4 6 8 13 19 20

23 Portugal 13 12 10 15 18 17 22 37 56 60 58

24 Slovak Republic

25 Spain 22 23 16 24 24 26 40 52 69 72 90

26 Sweden 39 39 31 56 63 72 92 111 117 155 144

27 Switzerland (3) 69 75 78 114 109 130 135 225 268 268 328

28 Turkey (3) 13 10 6 20 17 12 17 32 17 61 35

29 United Kingdom 86 96 87 120 111 120 139 151 168 198 185

30 United States 52 66 70 75 70 92 108 129 144 180 154

Notes:

Data on Hungary,Slovak Republic, Czech Republic and Iceland is not reported by FIBV

Data for Poland starts from 1993 and for Iceland is from 1995

The Korea discount

• P/Es, PBs and dividend yields have been among the lowest in the region

• CLSA study: Korea 16th out of 25 emerging markets

• Two reasons:– too much government interference– too much corporate suspicion

Conclusions

• Institutional investors are driving corporate governance demand globally and will continue to do so

• Korea needs stronger independent institutional investors as a key component of its domestic investment process

• Korea has made progress in corporate governance but is not out of the woods yet