Corporatization of Family Companies

1
Corporatization of Family Companies
International Corporate Governance
PrinciplesSyrian Commission on Financial
Markets Securities3rd Conference on Investment
and Capital Markets

• William P. Mako
• The World Bank
• 3 December 2007

2
Many well-known public companies have emerged
from family businesses.
3
Institutional investors can play an important
role in protecting minority shareholders (stock
ownership)
4
Family businesses go public for various reasons.

• Good reasons
• Capital for generally-known business purposes
• Family succession, exit
• More professional management
• Capital market discipline ? possible by-product
• Bad reasons
• Prestige
• Capital for hidden business purposes

5
What can go wrong?E.g., South Korea, 1990s

• Cross-shareholding and pyramiding
• Family ownership minor, in some cases
• Lack of holding company structure
• Lack of accountability poor governance
• Public subsidiaries private subs. juxtaposed
• RPT expropriation of public S/Hs ? growth
• Cross guarantees on debt unsustainable debt
• Bad decisions bad investments bankruptcy

6
OECD PrinciplesII. Shareholder rights
ownership functions

• Basic rights
• Extraordinary transactions
• Participation in general shareholder meetings
• Disclosure of anomalous control arrangements
• Free market for corporate control
• Free exercise of ownership rights

7
OECD PrinciplesIII. The equitable treatment of
shareholders

• Including protections for minority shareholders
• Prohibitions
• Insider trading
• Abusive self-dealing
• Disclosures by management and board
• Material interest in any transaction or matter
• Directly, indirectly, or on behalf of 3rd parties

8
OECD PrinciplesV. Disclosure transparency

• Material information, e.g.
• Financial and operating results
• Company objectives
• Major share ownership voting rights
• Remuneration info on board members
• Related party transactions
• Accounting standards
• Annual independent audit
• Etc.

9
OECD PrinciplesVI. Responsibilities of the Board

• Fully informed, in good faith, diligent
• All shareholders treated fairly
• Ethical standards
• Key functions e.g.,
• Guidance
• Monitoring
• Hiring/firing CEO
• Independent judgment
• Timely access to relevant information

10
Good corporate governance helps firm performance,
even for family-owned firms.

• Gompers, Ishii, Metrick (2001)
• Studied 1500 firms per year during 1990s
• Purchase (sale) of firms with strong (weak) S/H
  rights 8.5
• Correlation between governance index and
  valuation
• LaPorta, et al (2002)
• Disconnect between cash flow control rights ?
  RPT tunneling
• Low S/H protection ? lower valuation

11
Corporate governance activism resultsSouth
Korea, post-crisis

• Activist shareholders (e.g., Peoples Solidarity)
• Sued bank for lending to a bankrupt steel maker
• 18 mn. from Samsung for related party shares
  sale
• Activist funds
• 400 mn. Lazard Korea Corporate Governance Fund
• 211 bn. California Public Employees Retirement
• Results
• Daehan register HoldCo investor relations up
  127
• LG Corp reorganized as HoldCo 10x price rise
• SK Corp reorganized as Hold Co up 31 since
  7/07