Transcript Hong Kong Economy
Corporate Governance: Asian Experience
Stephen Yan-leung Cheung Professor of Finance (Chair) Department of Economics and Finance City 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
Corporate Governance in Asia (I)
Shareholder environment Concentrate d ownership “Insider boards” Independence and performance Reliance on family and INSTITUTIONAL state finance CONTEXT Underdeveloped and illiquid investment market Capital market liquidity
Inefficient corporate governance
Limited market for corporate control Incentives aligned with core shareholders Limited disclosure Inadequate minority protection CORPORATE CONTEXT Transparency and accountability
Source: McKinsey, 2001
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?”
Value of Corporate Governance 30% 25% 20% 15% 10% 5% 0% U ni te d U St ni at te es d Ki ng do m Sw itz er la nd Source: McKinsey & Co.
Sp ai n G er m an y Fr an ce Ta iw an Ja pa n Ita So ut ly h Ko re a M al ay si a Th ai la nd In do ne si a
Benefits of Corporate Governance in Asia (I) Expected market return and anti-director rights 0.4
0.3
Hong Kong 0.2
Korea Taiwan 0.1
Singapore 0 -0.1
0 1 Thailand 2 3 Philippines 4 Malaysia 5 6 -0.2
Indonesia -0.3
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
Benefits of Corporate Governance in Asia (II) Expected market return and rule of law 0.4
0.3
Hong Kong Korea 0.2
0.1
Taiwan Singapore 0 -0.1
0 2 Philippines 4 6 Malaysia 8 10 -0.2
Indonesia Thailand -0.3
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
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) BASE DATE 0.7
0.6
0.5
0.4
0.3
0.2
Mar 11, 1999 Capital Reorganization (Share Consolidation, Rights Issue) Mar 29, 1999 Parallel Trading in New Shares May 7, 1999 Announcement of placement and subscription of shares Jan 13, 2000 Change of name to Digital World Dec 12, 1999 Proposal of Change of name 0.1
0
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) 20 18 16 14 12 10 8 6 4 2 0 Source: DataStream
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