Corporate Governance:Asian Experience
Stephen Yan-leung CheungProfessor of Finance (Chair)Department of Economics and FinanceCity University of Hong Kong
October 29, 2002
Contents
1. Importance of corporate governance
2. Asian experience
3. Regional cooperation
4. Policy recommendations
The Asian Financial Crisis has Underscored the Importance of:
A sound macro-economic policy; and
Financial infrastructure
Inefficient corporate
governance
Reliance on family and
state finance
Underdeveloped and illiquid investment
market
Limited market for corporate
control
Inadequate minority
protection
Limited disclosure
Incentives aligned with
core shareholders
“Insider boards”
Concentrated ownership
Independence and
performance
Capital market liquidity
Transparency and
accountability
CORPORATE CONTEXT
Shareholder environment
INSTITUTIONAL CONTEXT
Source: McKinsey, 2001
Corporate Governance in Asia (I)
Corporate Governance in Asia (II)
Some commonly repeated cliches within the region (even in Hong Kong)
“I do not need to raise any capital anytime soon. Why should I worry about corporate governance?”
“I would rather have a higher cost of capital than higher taxes that I would be forced to pay under greater disclosure”
“Why should I appoint independent non-executive directors? My company is well run.”
“Why should I own a bank if I cannot lend to myself?”
Expected market return and anti-director rights
Anti-directors rights is an index from 0 to 6, with a higher score indicating better protection for minority shareholdersExpected market return is an index from –0.2 to +0.4, with a higher score indicating a higher expected stock market performance for 10 Asian places published in the FEERSource: Professor Gul (2001), City University of Hong Kong
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0 1 2 3 4 5 6
Anti-director rights
Exp
ecte
d M
arke
t ret
urn
KoreaTaiwan
Thailand
Indonesia
Philippines
Singapore
Malaysia
Hong Kong
Benefits of Corporate Governance in Asia (I)
Benefits of Corporate Governance in Asia (II)
Expected market return and rule of law
Rule of law is an index from 0 to 10, with a higher score meaning a stronger tradition of law and order.
Expected market return is an index from –0.2 to +0.4, with a higher score indicating a higher expected stock market performance for 10 Asian placed published in the FEER.
Source: Professor Gul (2001), City University of Hong Kong
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0 2 4 6 8 10
Rule of law
Exp
ecte
d M
arke
t ret
urn Korea
Taiwan
ThailandIndonesia
Philippines
Singapore
Malaysia
Hong Kong
Family-Controlled Asian Corporations
Asia: 60% of total market cap held by family-led firms holding more than 20% of the equity of listed companies
Compare this with US - 18.3% Australia - 12.2%
Case 1: Directors’ Remuneration in Hong Kong
Sample period: 1991-1995
10% companies paid more than the company’s net profits
No relationship between firm performance and directors’ compensation
Case 2: Q-Tech Holdings Ltd (I)
Listed on HKEX on Jan 12, 1998
Company changed name to Digital World Holdings Ltd on Jan 13, 2000
1 Right Issues and 2 placings in 1999
2 Right Issues and 3 placings in 2000
Case 2: Q-Tech Holdings Ltd (II)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
12/0
1/98
11/0
2/98
13/0
3/98
14/0
4/98
14/0
5/98
15/0
6/98
15/0
7/98
14/0
8/98
15/0
9/98
15/1
0/98
16/1
1/98
16/1
2/98
15/0
1/99
16/0
2/99
18/0
3/99
19/0
4/99
19/0
5/99
18/0
6/99
20/0
7/99
19/0
8/99
20/0
9/99
20/1
0/99
19/1
1/99
21/1
2/99
20/0
1/00
21/0
2/00
HK
$
BASE DATE
Mar 11, 1999Capital Reorganization(Share Consolidation, Rights Issue)
Mar 29, 1999Parallel Trading in New Shares
May 7, 1999Announcement of placement and subscription of shares
Dec 12, 1999Proposal of Change of name
Jan 13, 2000Change of name to Digital World
Case 3: Peregrine Group (I)
The Peregrine Group was the largest investment banking group in Asia
Best Regional Fixed-income House by Finance Asia in December 1996
Top book-runner of Asia equity issuer in 1996 by International Financial Review Securities Data and many others
Case 3: Peregrine Group (II)
Statement on 27th October, 1997
Major points:
1. Year to data unaudited net earnings in the equity products had fallen… Peregrine had no material outstanding underwriting commitments.
Case 3: Peregrine Group (III)
Statement on 27th October, 1997
2. All major bank relationships and credit lines were in place
3. The board confirmed there were currently no discussions taking place with another party to acquire a substantial shareholding in Peregrine.
Case 3: Peregrine Group (IV)
Source: DataStream
0
2
4
6
810
12
14
16
18
20
1/1
/97
2/1
/97
3/1
/97
4/1
/97
5/1
/97
6/1
/97
7/1
/97
8/1
/97
9/1
/97
10
/1/9
7
11
/1/9
7
12
/1/9
7
1/1
/98
Case 4: Dickson Concepts International Ltd (I)
Background It trades in luxury goods
Bvlgari watches Lighters, pens Jewellery, fashion products Warner Bros. Products
The operations of the group mainly base in Hong Kong, Asia, UK, European countries and in North America.
Case 4: Dickson Concepts International Ltd (II)
Unusual Transaction
On 30th December, 1999, the company entered into a consultancy agreement with a related company which is wholly controlled by the director himself.
It was said to be for the design, development, construction, and technological infrastructure of the “Cybermall”.
The fixed fee was HK$130 million.
Case 4: Dickson Concepts International Ltd (III)
Market Reaction
It was clear to be a related party transaction
The director was being criticised for failure to disclose the agreement.
No records of work done for the consultancy
No approval initially from independent shareholders, but was later ratified by them.
Summary of Good Corporate Governance Principles
Right of shareholders
Equitable treatment of shareholders
Role of stakeholders
Disclosure and transparency
Responsibilities of the board
Policy Recommendations (I) Disclosure of information
Financial and non-financial Regional cooperation
Regional sanction Information sharing Standardize accounting principles
Education Director
Licensing (continuous training programme)Mandating training programme
Investor
Policy Recommendations (II)
Independence of board Proper evaluation system Audit committee Adoption of international standards
OECD APEC
Political willingness
Crisis Prevention
The nature of crisis has changed
No prediction model
The best medicine is a solid financial infrastructure
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