Corporate Governance: Asian Experience

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Corporate GovernanceAsian Experience

• Stephen Yan-leung Cheung
• Professor of Finance (Chair)
• Department of Economics and Finance
• City University of Hong Kong
• October 29, 2002

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Contents

1. Importance of corporate governance
2. Asian experience
3. Regional cooperation
4. Policy recommendations

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The Asian Financial Crisis has Underscored the
Importance of

• A sound macro-economic policy and
• Financial infrastructure

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Corporate Governance in Asia (I)

• Source McKinsey, 2001

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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?

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Value of Corporate Governance

• Source McKinsey Co.

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Benefits of Corporate Governance in Asia (I)

• 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 shareholders
• 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
  places published in the FEER
• Source Professor Gul (2001), City University of
  Hong Kong

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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

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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

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Case 1 Directors Remuneration in Hong Kong

• Sample period 1991-1995
• 10 companies paid more than the companys net
  profits
• No relationship between firm performance and
  directors compensation

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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

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Case 2 Q-Tech Holdings Ltd (II)
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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

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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.

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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.

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Case 3 Peregrine Group (IV)

• Source DataStream

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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.

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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 HK130 million.

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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.

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Summary of Good Corporate Governance Principles

• Right of shareholders
• Equitable treatment of shareholders
• Role of stakeholders
• Disclosure and transparency
• Responsibilities of the board

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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

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Policy Recommendations (II)

• Independence of board
• Proper evaluation system
• Audit committee
• Adoption of international standards
• OECD
• APEC
• Political willingness

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Crisis Prevention

• The nature of crisis has changed
• No prediction model
• The best medicine is a solid financial
  infrastructure

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Thank You