ASIA PACIFIC CORPORATE GOVERNANCE

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ASIA PACIFIC CORPORATE GOVERNANCE
SESSION 6
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Outline

• Family ownership
• Asian financial crisis
• Japanese corporate governance
• Reform of corporate governance in the Asia
  Pacific
• Corporate governance performance in the Asia
  Pacific

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Central Element of Asia-Pacific Governance

• FAMILY OWNERSHIP

4
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

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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

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Concentration of Family Control of Corporate
Assets
Source Adapted from Claessens, S., Djankov, S
and Lang, L. (2000)
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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
  managements performance.
• This issue is subject to wider debate in regard
  to family-owned firms with concentrated ownership
  structures.
• 
  SP Commentary Report 2005

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• ASIAN FINANCIAL CRISIS
• 1997/98

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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.
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Change in Share Indexes of East Asia Region 1997-8
Source Adapted from Bloomberg IHT
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Market Capitalization of Stock Exchanges in Asia
Pacific, 1998
Source Stock Exchanges Respective Annual Reports
1998.
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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), Hong Kong 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.
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JAPANESE CORPORATE GOVERNANCE
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Distribution of Share Ownership in Japan by Type
of Shareholder
1950 1970 1980 1990 2000 2003 2004 2005
Shareholder Distribution in Japan () Shareholder Distribution in Japan () Shareholder Distribution in Japan () Shareholder Distribution in Japan () Shareholder Distribution in Japan () Shareholder Distribution in Japan () Shareholder Distribution in Japan () Shareholder Distribution in Japan () 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)
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The Japanese Model of Transformation
Source Adapted from Japanese External Trade
Organization JETRO (2005).
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Transitions of Japanese CG 1960-2000
Source Toriihara (2004)
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REFORM OF CORPORATE GOVERNANCE IN
THE ASIA-PACIFIC
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Asia Pacific Reform of CG Regulation
Source Clarke T. (2006), UTS CCG.
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Countries with Higher Concentration of Wealth
Show Less Progress on Institutional Reforms
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Differences of Board Structures
OECD Principles US UK HK China Japan
Board Structure Not defined Single Single Single Two-tier Two-tier
Directors 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)
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Corporate Governance Mechanisms in Developing
Transition Countries
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
Source Berglof, E. and Claessens S. (2004)
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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
Competition Determines scope for potential mistreatment of factors of production including financing Open up all factor markets to competition including from abroad
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• CORPORATE GOVERNANCE PERFORMANCE
• IN THE ASIA PACIFIC

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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)
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Corporate Governance Category Score in Selected
Asia Pacific Countries
Market CG Rules Practices Enforcement Political Regulatory 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)
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Market Capitalization of Selected Asia Pacific
Countries 2005
(in millions of local currencies) (in millions of local currencies)
        Change 2005/2004 USD USD
Exchange   End 2005 End 2004 Change 2005/2004 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
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AXISS (2005) Market Capitalization of Regional
Stock Markets 2005 (US Billion)