asia pacific corporate governance session 6. outline family ownership asian financial crisis...
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ASIA PACIFIC CORPORATE GOVERNANCE
SESSION 6
Outline
Family ownership Asian financial crisis Japanese corporate governance Reform of corporate governance in the Asia Pacific Corporate governance performance in the Asia Pacific
Central Element of Asia-Pacific Governance
FAMILY OWNERSHIP
Characteristics of Asian Corporate Governance
Generally, the public sector is the major employer; The State plays an interventionist role (SOEs)
High family ownership concentration in the private sector with the exception of Japan; Bank finance instead of market finance
Majority holder will have holding of 50% or more. Minority shareholder protection is limited or non-existent
Opaque disclosure regimes; Information is difficult to obtain
Insider culture: intricate network of cultivated personal relationships
Characteristics of Asian Corporate Governance
High cost/barriers of entry in doing ‘legitimate’ business
Enforcement of laws difficult
Underdeveloped institutions with the exception of Japan, HK & Singapore
Culture of saving face
Independent directors on boards is highly controversial
Concentration of Family Control of Corporate Assets
0
10
20
30
40
50
60
70
80
90
100
Hong Kong Indonesia Japan Korea Malaysia ThePhilippines
Singapore Taiw an Thailand0
10
20
30
40
50
60
70
80
90
100
Top 1 family Top 5 familiesTop 10 families Top 15 families% of GDP
% of GDP (1996)
% of total value of listed corporate assetsthat families control
1.681.171.262.681.972.071.044.092.36 1.681.171.262.681.972.071.044.092.36
Average number offirms perfamily
Source: Adapted from Claessens, S., Djankov, S and Lang, L. (2000)
Board Structure
Family ownership and voting control typically result in family domination of the board.
For widely held companies, major international corporate governance codes clearly recommend that the board of directors consist of a majority of directors independent of management and the company, with their main role being to monitor management’s performance.
This issue is subject to wider debate in regard to family-owned firms with concentrated ownership structures.
S&P Commentary Report 2005
ASIAN FINANCIAL CRISIS
1997/98
Dimensions of the East Asian Crisis 1997-1998*
Currencies Stock Index Market Fall
Indonesia -83.2% -35.0% -$96bn (-88%)
Thailand -40.2% -48.0% -$40bn (-66%)
Malaysia -39.4% -56.0% -$217bn (76%)
Philippines -36.1% -33.8% -$43bn (-58%)
South Korea -34.1% -58.7% -$111bn (-71%)
Singapore -16.5% -43.5% -$91bn (-53%)
Hong Kong Nil -43.2% -$223bn (-42%)
*(Fall in currency exchange rate for US$ between 30 June 1997 and 3 July 1998. Percentage decline in stock market index between 30 June 1997 and 3 July 1998. Fall in stock market capitalization in US$ billions, between 30 June 1997 and 3 July 1998)
Sources: Bank of International Settlements; IMF; World Bank; Asia Week 17 July 1998; Jones Lang Wootton; Dataquest.
Change in Share Indexes of East Asia Region 1997-8
-80
-60
-40
-20
0
20
40
60+60%
*Emerging markets indexes
Asia*
Latin America*
W. EuropePercentage change inMorgan Stanley Capital Internationalshare indexes in U.S. dollarsJuly 4, 1997 = 100
1997 1998
J SAJMAMFJDNOSAJ J SAJMAMFJDNOSAJ
N. America
Source: Adapted from Bloomberg IHT
Market Capitalization of Stock Exchanges in Asia Pacific, 1998
54.28 13 21 31 45 68 81 115 220 276 278 314
1195
2210 2260
10465
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000K
arac
hi
Jaka
rta
Ban
gkok
Man
ila
Seo
ul
Kua
la L
umpu
r
Sin
gapo
re
Bom
bay
Chi
na
Syd
ney
Tai
pei
Hon
g K
ong
Fra
nkfu
rt
Lond
on
Tok
yo
New
Yor
k
Source: Stock Exchanges Respective Annual Reports 1998.
Asia Pacific Stock Markets 1990-2003
Market Capitalization. Total market capitalization is presented on an annual basis from 1990-2003,By Asia Pacific exchange in USD, The Australian Stock Exchange (ASX), Bursa Malaysia (BMA), HongKong Exchanges and Clearing (HKEx), Jakarta Stock Exchange (JSX), Korea Exchange (KRX), Stock Exchange of Thailand (SET), Singapore Exchange (SGX),Shanghai Stock Exchange (SSE), and the Taiwan Stock Exchange (TSEC) are represented on the left hand vertical axis. The Tokyo Stock Exchange (TSE) is represented on the right hand vertical axis due to its large size compared to the other markets.
JAPANESECORPORATE GOVERNANCE
Distribution of Share Ownership in Japan by Type of Shareholder
1950 1970 1980 1990 2000 2003 2004 2005
Shareholder Distribution in Japan (%)
Government and local government 3.1 0.6 0.4 0.3 0.4 0.3 0.2 0.1
Banks, Trusts companies 12.6 13.7 17.5 20.9 19.2 17.4 11 11.6
Pension Trusts -- 0.0 0.4 0.9 5.5 4.5 2.0 2.0
Investment Trusts -- 2.1 1.9 3.7 2.8 3.7 2.3 4.2
Life and Casualty Insurance -- 13.7 16.1 15.8 10.9 8.0 4.2 3.0
Other financial Institutions 11.9 3.4 3.8 3.3 1.4 2.1 1.3 2.0
Other Business corporations 11.0 23.9 26.2 30.1 21.8 25.1 17.4 19.8
Foreign Shareholders -- 4.9 5.8 4.7 18.8 21.8 16.5 22.2
Individual Shareholders 61.3 37.7 27.9 20.4 19.4 20.5 45.6 36.8
Total 100 100 100 100 100 100 100 100
Source: Takaya Seki (2005) and Tokyo Stock Exchange (2006)
The Japanese Model of Transformation
0
5
10
15
20
25
30
35
40
45
50
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Hol
ding
rat
io (
%)
46%
Stable holding ratio
Japan Investment Council (1996)•Expects to promote M&A throughreversion of cross-shareholding
24%
21%
Ratio held by Foreigners
6%
CROSSHOLDING
Source: Adapted from Japanese External Trade Organization JETRO (2005).
Shareholder Main Bank Shareholder Main Bank
Management Management
Used to create stable relationships with shareholders by cross-shareholding, and so have management under main Bank’s surveillance. Therefore it was possible for management to innovate.
JAPANESE COMPANIES in 80s
Now stockholders provide surveillance, and so companies improve manage-ment on their own in order to enhance long-term corporate and shareholder value
JAPANESE COMPANIES TODAY
High ratio held by foreign investors in selected JapaneseFirmsHoya Corp 56% Canon Inc 52%
Fuji Photo Film 49% ROHM Co.LTD. 49%Kao Corp 47% Takeda 41%
SURVEILLANCE
Transitions of Japanese CG 1960-2000
Executive officers
Mutual dependence among companies
Crossholding of shares, main financing bank system,
company groups, etc.
Japanese-style employment practice
Lifetime employment, seniority system,
company union, etc.
Industrial policy
Administrative control, public-private cooperation framework, coordination in a industry group, etc.
Ambiguous corporate accounting practice
Limited disclosure of corporate information
Era
of
Jap
an
ese
-sty
le c
orp
ora
te g
ove
rna
nce
G
ove
rna
nce
by
ma
na
ge
me
nt,
ba
nk
an
d
ec
on
om
ic a
ge
nc
ies
of
sta
te
Japanese-style management
1960s 1980s
High-growth period
2000
Change of capital market
Indirect financing→ Direct financing
Shift to borderless economyGlobal economization
Trade and capital liberalizationBig ban, IT revolution
Corporate scandal
(Limitation of Japanese-style governance)
New corporate governance
Reform of the board of directors
Introduction of US-style
Enhancement of auditor's
authority
Independentboard members
System selectivity
1990s
Lost decadeEconomic bubbles
Shareholder value
Source: Toriihara (2004)
REFORM OFCORPORATE GOVERNANCE
IN THEASIA-PACIFIC
Asia Pacific Reform of CG Regulation
Code of Best Practice forDirectors
Guidelines on Behaviour for Board Members
1999
THAILAND
Malaysian Code of Corporate Governance
Self regulation over statutory regulation
2000
MALAYSIA
Indonesia Code of Corporate Governance
Code to raise the standards of corporate
governance2001
INDONESIA
Chinese Code of Corporate Governance
An enforceable framework for all listed companies
2002
CHINA
Kumar Mangalam BirlaCommittee Report
Recommendations that distinguishes responsibilities and obligations of the board
2002
INDIA
SEC Corporate Governance
Reforms to raise investor confidence
2002
PHILIPPINES
Hong Kong Code of Corporate Governance
2004
HONG KONG
Japanese Corporate Governance
Principles of Corporate Governance
2004
JAPAN
Singaporean Code of Corporate GovernanceRequirements under the Singaporean Exchange
Listing Rules2005
SINGAPORE
Source: Clarke T. (2006), UTS CCG.
Countries with Higher Concentration of Wealth Show Less Progress on Institutional Reforms
10 20 30 40 50 60 70 80
0
2
4
6
8
10 Judicial efficiencyJudicial efficiency
Rule of lawRule of law
Absence of corruptionAbsence of corruption
10 20 30 40 50 60 70 80
Ownership by top 15 families (%)
(10
is t
he
be
st, 0
is
th
e w
ors
t)
Ra
nk
ing
Japan
Taiwan
Malaysia
Singapore Hong Kong
Korea
Thailand
Philippines
Indonesia
Source: Claessens, Djankov, and Lang (1999).
Differences of Board Structures
OECD Principle
s
US UK HK China Japan
Board Structure Not defined Single Single Single Two-tier Two-tierDirectors
should be accountable
to shareholders?
yes yes yes yes yes yes
Board should be
independent of supervise management?
yes yes yes yes yes NO
Boards should form
independent committees?
Recommended
yes yes yes yes NO
Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)
Corporate Governance Mechanisms in Developing Transition Countries
Source: Berglof, E. and Claessens S. (2004)
Corporate Governance Mechanism
Relative importance in developing and transition countries
Scope of policy intervention
Large blockholders Likely to be the most important governance mechanism
Strengthen rules protecting minority investors without removing incentives to hold controlling blocks
Market for corporate control
Unlikely to be important when ownership is strongly concentrated, can still take place through debts contracts but requires bankruptcy system
Remove some managerial defences, disclosure of ownership and control, develop banking system
Proxy fights Unlikely to be effective when ownership is strongly concentrated
Technology improvements for communicating with and among shareholders, disclosure of ownership and control
Board activity Unlikely to be influential when controlling owner can hire and fire and has private benefits
Introduce elements of independence of directors, training of directors, disclosure of voting, cumulative voting possibly
Executive compensation Less important when controlling owner can hire and fire and has private benefits
Disclosure of compensation schemes, conflicts of interest rules
Bank monitoring Important but depends on health of banking system and the regulatory environment
Strengthening banking regulation and institutions, encourage accumulation of information on credit histories; develop supporting credit bureau and other information intermediaries
Corporate Governance Mechanisms in Developing Transition Countries (Berglof & Claessens 2004)
Corporate Governance Mechanism
Relative importance in developing and transition countries
Scope of policy intervention
Shareholder activism Potentially important, particularly in large firms with dispersed shareholders
Encourage interaction among shareholders, strengthen minority protection. Enhance governance of institutional Investors
Employee monitoring Potentially very important, in particular in smaller companies with high skilled human capital where threat of leaving is high
Disclosure of information to employees, possibly require board representation; assure flexible labour markets
Litigation Depends critically on quality of general enforcement environment but can sometimes work
Facilitate communication among shareholders; encourage class action suits with safeguards against excessive litigation
Media and social control Potentially important, but depends on competition among and independence of media
Encourage competition in and diverse control media; active
public campaigns can empower public.
Reputation and self enforcement
Important when general enforcement is weak, but stronger when environment is stronger
Depend on growth opportunities and scope for rent seeking. Encourage competition in factor markets
Bilateral private enforcement mechanisms
Important, as they can be more specific, but do not benefit outsiders and have downsides
Requiring functioning civil commercial courts
Arbitration, auditors, other multilateral mechanisms
Potentially important, often the origin of public law; but the enforcement problem often remains, audits sometimes abused, watch conflicts of interest
Facilitate the information of private third party mechanisms (sometimes avoid forming public alternatives) deal with conflict of interest, ensure competition
CompetitionDetermines scope for potential mistreatment of factors of production including financing
Open up all factor markets to competition including from abroad
CORPORATE GOVERNANCE PERFORMANCE
IN THE ASIA PACIFIC
Corporate Governance in Selected countries of Asia Pacific 2008 (CG Watch Survey, Selected Asia Pacific Countries)
Rank Country 2000 2001 2002 2003 2004 2005 2007
1 Singapore 7.5 7.4 7.4 7.7 7.5 7.0 6.5
2 Hong Kong 7.1 6.8 7.2 7.3 6.7 6.9 6.7
3 India 5.6 5.4 5.9 6.6 6.2 6.1 5.6
4 Malaysia 3.2 3.7 4.7 5.5 5.8 5.6 4.9
5 Korea 5.2 3.8 4.7 5.5 5.8 5.0 4.9
6 Taiwan 5.7 5.3 5.8 5.8 5.5 5.2 5.4
7 Thailand 2.8 3.7 3.8 4.6 5.3 5.0 4.7
8 Philippines 2.9 3.3 3.6 3.7 5.0 4.8 4.1
9 China 3.6 3.4 3.9 4.3 4.8 4.4 4.5
10 Indonesia 2.9 3.2 2.9 3.2 4.0 3.7 3.7
Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)
Corporate Governance Category Score in Selected Asia Pacific Countries
Market CG Rules & Practice
s
Enforcement
Political Regulato
ry
IGAAP CG Culture Total
Singapore 7.0 5.0 6..5 8.8 5.3 6.5
Hong Kong 6.0 5.6 7.3 8.3 6.1 6.7
India 5.9 3.8 5.8 7.5 5.0 6.6
Malaysia 4.4 3.5 5.6 7.8 3.3 4.9
Korea 4 3.8 4.7 5.5 5.8 5.0
Taiwan 4.5 3.9 4.8 6.8 4.3 4.9
Thailand 5.8 3.6 3.1 7.0 3.9 4.7
Philippines 3.9 1.9 3.8 7.5 3.6 4.1
China 4.3 3.3 5.2 7.3 2.5 4.5
Indonesia 3.9 2.2 3.5 6.5 2.5 3.7
Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)
Market Capitalization of Selected Asia Pacific Countries 2005
(in millions of local currencies)
% Change 2005/2004
USD USD
Exchange End 2005 End 2004 2005 2004
Australian SE AUD 1,096,033.0 990,457.0 10.7% 1.3632 1.2757
Bombay SE INR 24,893,849.0 16,793,378.0 48.2% 45.0100 43.4700
Bursa Malaysia MYR 682,266.1 690,170.4 -1.1% 3.7795 3.8000
Colombo SE LKR 584,039.9 382,065.9 52.9% 102.1050 104.4750
Hong Kong Exchanges HKD 8,179,937.2 6,695,893.0 22.2% 7.7535 7.7727
Jakarta SE IDR 801,252,702.1 679,949,067.3 17.8% 9,840.0000 9,282.5000
Korea Exchange KRW 725,801,125.0 403,182,825.0 80.0% 1,010.8500 1,035.2000
National Stock Exchange India INR 23,223,921.2 15,791,608.5 47.1% 45.0100 43.4700
New Zealand Exchange NZD 59,601.9 60,546.0 -1.6% 1.4683 1.3845
Osaka SE JPY 350,527,220.0 234,353,793.0 49.6% 118.0300 102.4700
Philippine SE PHP 2,111,738.0 1,605,288.8 31.5% 53.0350 56.1250
Shanghai SE CNY 2,309,613.0 2,601,434.0 -11.2% 8.0702 8.2765
Shenzhen SE CNY 933,415.0 1,104,123.0 -15.5% 8.0702 8.2765
Singapore Exchange SGD 427,906.0 355,239.3 20.5% 1.6628 1.6324
Taiwan SE Corp. TWD 15,633,858.0 13,989,100.0 11.8% 32.8430 31.6900
Thailand SE THB 5,079,283.5 4,482,916.3 13.3% 41.0000 38.8500
Tokyo SE JPY 539,739,508.8 364,554,898.0 48.1% 118.0300 102.4700
Source: WFE Annual Report 2005
AXISS (2005): Market Capitalization of Regional Stock Markets 2005 (US$ Billion)