A. Commelin, D. Gayeski, R. Mackenzie, H. Sehrt Corporate Governance: Hong Kong Presented by: Heidi Sehrt Ryan Mackenzie Dana Gayeski Alexandra Commelin

A. Commelin, D. Gayeski, R. Mackenzie, H. Sehrt

Corporate Corporate Governance: Hong Governance: Hong

KongKongPresented byPresented by: Heidi Sehrt: Heidi Sehrt

Ryan MackenzieRyan MackenzieDana GayeskiDana Gayeski

Alexandra CommelinAlexandra Commelin


AgendaAgenda

• What is corporate governance?What is corporate governance?• Hong Kong background and trendsHong Kong background and trends• An example of poor corporate An example of poor corporate

governancegovernance• An example of good corporate An example of good corporate

governancegovernance• Recommendations Recommendations • Q & AQ & A


Definitions of Corporate Definitions of Corporate GovernanceGovernance

• "Corporate governance - which can be defined narrowly as "Corporate governance - which can be defined narrowly as the relationship of a company to its shareholders or, more the relationship of a company to its shareholders or, more broadly, as its relationship to society -….", from an article in broadly, as its relationship to society -….", from an article in Financial TimesFinancial Times

• "Corporate governance is about promoting corporate "Corporate governance is about promoting corporate fairness, transparency and accountability" J. Wolfensohn, fairness, transparency and accountability" J. Wolfensohn, president of the president of the World BankWorld Bank

• ““The device that is used to represent the ownership of a The device that is used to represent the ownership of a public company…a series of standards, a code of behavior, public company…a series of standards, a code of behavior, tradition…varies from company to company…a moving tradition…varies from company to company…a moving target…evolves over time.”, Arthur Levitttarget…evolves over time.”, Arthur Levitt


Criteria for Measuring CGCriteria for Measuring CG

Discipline/Discipline/ManagementManagement

TransparencyTransparency

Independence Independence

AccountabilityAccountability

ResponsibilityResponsibility

FairnessFairness

Social AwarenessSocial Awareness


Examples of How CG Can Examples of How CG Can Effect a CompanyEffect a Company

Bad:Bad:– EnronEnron– WorldcomWorldcom

Good:Good:– Colgate-PalmoliveColgate-Palmolive– PfizerPfizer


Background and TrendsBackground and Trends

• China vs. Hong KongChina vs. Hong Kong– The new mainland regulator (CSRC) has The new mainland regulator (CSRC) has

no say over Hong Kongno say over Hong Kong– Quarterly vs. bi-yearly reportsQuarterly vs. bi-yearly reports– Disclosure requirementsDisclosure requirements– HK firms have been de-rated in China HK firms have been de-rated in China

(“dishonest discount”)(“dishonest discount”)• Corporate transparence lackingCorporate transparence lacking• Lack of class action suitsLack of class action suits


Background and TrendsBackground and Trends

• Board of directorsBoard of directors– Controlling stakeholdersControlling stakeholders– Need for “independent” directorsNeed for “independent” directors– Minority stakeholders have little or no Minority stakeholders have little or no

saysay

• David Webb’s roleDavid Webb’s role


Problems in Hong KongProblems in Hong Kong

• This is problem in HK and Asia: of 33 stocks on This is problem in HK and Asia: of 33 stocks on Hang Seng Index, 32 have a controlling Hang Seng Index, 32 have a controlling shareholdershareholder

• This shareholder can control the composition of This shareholder can control the composition of the board, and thus, basically runs the companythe board, and thus, basically runs the company

• To actually have this power, one needs only 30% To actually have this power, one needs only 30% (de facto control), where as Esprit Holdings Ltd (de facto control), where as Esprit Holdings Ltd has a strong owner, who controls 59% of shareshas a strong owner, who controls 59% of shares

• Compared to US and other Western companies, Compared to US and other Western companies, there is not a lot of dominant shareholdersthere is not a lot of dominant shareholders

• Even Bill Gates only has about 20% of MicrosoftEven Bill Gates only has about 20% of Microsoft


Bad Corporate Governance:Bad Corporate Governance:The Boto ScandalThe Boto Scandal

Prior to ScandalPrior to Scandal

• Boto Holdings Limited started 1983 as Christmas Boto Holdings Limited started 1983 as Christmas tree manufacturertree manufacturer• No affiliations with other Hong Kong No affiliations with other Hong Kong companiescompanies• Massive outperformerMassive outperformer

• Gross profit margins 40%Gross profit margins 40%• Sold at five times less than earnings, 10.7% dividend Sold at five times less than earnings, 10.7% dividend yieldyield


The ScandalThe Scandal

• Company wants to go private again, Company wants to go private again, propose buying out manufacturing division propose buying out manufacturing division at discount to price shares trading atat discount to price shares trading at

• All that remains is animation business of All that remains is animation business of owner’s sonowner’s son

• Partnered with Carlyle Group (advisor Partnered with Carlyle Group (advisor George Bush) to squeeze all value outGeorge Bush) to squeeze all value out

• 20% down, rest financed by debt20% down, rest financed by debt

Bad Corporate Governance:Bad Corporate Governance:The Boto ScandalThe Boto Scandal


• Demand more compensations, Boto Demand more compensations, Boto agrees to leave 25% manufacturing to agrees to leave 25% manufacturing to shareholders, still no profitsshareholders, still no profits

• Restructuring deal passed 53% to 47%Restructuring deal passed 53% to 47%• Passed because conflict of interestPassed because conflict of interest• Ruling groups allowed management to Ruling groups allowed management to

vote because dominated by people from vote because dominated by people from listed companies on exchange, who are listed companies on exchange, who are dominated by family ownersdominated by family owners

Bad Corporate Governance:Bad Corporate Governance:Outcry of ShareholdersOutcry of Shareholders


Boto TodayBoto Today• Deal passed because no longer considered Deal passed because no longer considered

related-party transaction, board and related-party transaction, board and management did votemanagement did vote

• first deal advised against in over 10 yearsfirst deal advised against in over 10 years

• Class-action suits not permitted in Hong Class-action suits not permitted in Hong Kong and no contingency fees for lawyersKong and no contingency fees for lawyers

• Today Boto known as IMI Global Holdings Today Boto known as IMI Global Holdings Limited, computer animation companyLimited, computer animation company

P/E (ttm):21.63EPS (ttm):1.01Div & Yield:0.70 (3.19%)


Esprit Holdings LimitedEsprit Holdings Limited

• Core markets in 40 countries, in all 5 Core markets in 40 countries, in all 5 continentscontinents

• Acquired WW Esprit trademark rights Acquired WW Esprit trademark rights (Esprit de Corp) in US and Caribbean in (Esprit de Corp) in US and Caribbean in April 2002April 2002

• 11stst time since 70’s, ownership of Esprit time since 70’s, ownership of Esprit brand ww under control of one companybrand ww under control of one company

• Focus on future expansion (sportswear, Focus on future expansion (sportswear, clothes for newborns, toys introduced)clothes for newborns, toys introduced)


Good Corporate Good Corporate Governance:Governance:

Esprit Holdings Ltd.Esprit Holdings Ltd.• Acquisition of Esprit (US) :Acquisition of Esprit (US) :

– Provided source of long-term growthProvided source of long-term growth– Ended mgmt fee paid out of listed companyEnded mgmt fee paid out of listed company– Enabled this united company to take action Enabled this united company to take action

against mgmt in areas where poor performanceagainst mgmt in areas where poor performance– Increased performance of stock, improved CG Increased performance of stock, improved CG

relationshipsrelationships

• This, along with increased depreciation of This, along with increased depreciation of US $ for European customers, greater US $ for European customers, greater upside potentialupside potential


Achievements of SuccessAchievements of Success

• Jun 2003: Best Company Investment Jun 2003: Best Company Investment Report in the consumer industry in Report in the consumer industry in AsiaAsia

• May 2003: Best Corporate May 2003: Best Corporate Governance and Best Financial Mgmt Governance and Best Financial Mgmt in HK (no.8)in HK (no.8)

• Apr 2003: Best in Corporate Apr 2003: Best in Corporate Governance in Asia (top 20)Governance in Asia (top 20)


Management for Successful Management for Successful Corporate GovernanceCorporate Governance

• May 2003 Esprit was one of the best May 2003 Esprit was one of the best managed companies in HK, managed companies in HK, according to FinanceAsiaaccording to FinanceAsia

• This is due to its quality directors and This is due to its quality directors and managementmanagement


Management of EspritManagement of Esprit

• Michael Ying Lee Yuen, ChairmanMichael Ying Lee Yuen, Chairman• Over 25 yrs experience, responsible for Over 25 yrs experience, responsible for

overall direction and formulation of overall direction and formulation of company’s corporate policiescompany’s corporate policies

• John Poon, executive director and group John Poon, executive director and group CFOCFO

• Recognized for his corporate governance Recognized for his corporate governance capabilities, social service contributions, capabilities, social service contributions, and treatment of shsand treatment of shs


Management for Successful Management for Successful Corporate GovernanceCorporate Governance

• Frederick Ma, HK Secretary for Financial Frederick Ma, HK Secretary for Financial Services and the Treasury said, stressing Services and the Treasury said, stressing the importance of having good quality the importance of having good quality directors on company boards, directors on company boards, “Qualifications, training and experience “Qualifications, training and experience can be recommended, or required through can be recommended, or required through legislation or regulation. Integrity has to legislation or regulation. Integrity has to come from the business community itself.”come from the business community itself.”

• In other words, HK companies, like Esprit, In other words, HK companies, like Esprit, need to set the bar for other local need to set the bar for other local companies, and drive through these companies, and drive through these reformsreforms


Esprit Stock Price change Esprit Stock Price change over past 5 Yearsover past 5 Years

• P/E (ttm):23.23P/E (ttm):23.23• EPS (ttm):1.005EPS (ttm):1.005


A Premium for Good CG? A Premium for Good CG?

• Institutional investors claim to be willing to pay Institutional investors claim to be willing to pay as much as 30 percent more for shares in as much as 30 percent more for shares in companies that are well-governedcompanies that are well-governed

• Companies with better corporate governance Companies with better corporate governance had higher price-to-book ratios had higher price-to-book ratios

• Companies can expect a 10 to 12 percent boost Companies can expect a 10 to 12 percent boost to their market valuation by going from worst to their market valuation by going from worst to best on any single element of governanceto best on any single element of governance

• Investors the world over are looking for the Investors the world over are looking for the same basic standards of good governance—and same basic standards of good governance—and will pay a premium for shares in companies will pay a premium for shares in companies that meet themthat meet them


Esprit ConclusionsEsprit Conclusions

• These characteristics coupled with a These characteristics coupled with a corporate transaction that improves corporate transaction that improves the CG structure often leads to big the CG structure often leads to big outperformanceoutperformance

• HK proven that high CG companies HK proven that high CG companies give higher beta-adjusted returnsgive higher beta-adjusted returns

• However, if market perception of a However, if market perception of a company’s CG declinescompany’s CG declines lose value lose value


Room for ImprovementRoom for Improvement• Great international exposureGreat international exposure• But no Quality Management System (QMS), like But no Quality Management System (QMS), like

ISO 9000ISO 9000• Study done by Tsoi Salahuddin found that only Study done by Tsoi Salahuddin found that only

companies with significant international mkt companies with significant international mkt interests show commitment to corporate social interests show commitment to corporate social responsibility (part of CG).responsibility (part of CG).

• In other words, there are local barriers in terms of In other words, there are local barriers in terms of incentives to implement CSR strategies, and incentives to implement CSR strategies, and doing this is not seen as a competitive advantage doing this is not seen as a competitive advantage for companiesfor companies


Reforms NecessaryReforms Necessary

• Protection of minority shareholders’ Protection of minority shareholders’ rightsrights

• Greater transparencyGreater transparency• Improve board practicesImprove board practices

– INDEPENDENT directorsINDEPENDENT directors– Refrain from voting when conflicts of Refrain from voting when conflicts of

interest existinterest exist

• The Standing Committee on Company The Standing Committee on Company Law Reform’s roleLaw Reform’s role


Reforms NecessaryReforms Necessary

• Quarterly reportingQuarterly reporting• Disclosure of salariesDisclosure of salaries• Publish and dispatch annual reportsPublish and dispatch annual reports• Require audit committeesRequire audit committees• Promote investor educationPromote investor education • Promote greater transparency and Promote greater transparency and

provide training for non-executive provide training for non-executive directorsdirectors


Business Roundtable’s Statement of Business Roundtable’s Statement of Corporate Governance :Corporate Governance :

““Adoption of a set of rules…is not a Adoption of a set of rules…is not a substitute for and does not itself assure substitute for and does not itself assure

good corporate governance.”good corporate governance.”


Q & AQ & A

Documents

A. Commelin, D. Gayeski, R. Mackenzie, H. Sehrt Corporate Governance: Hong Kong Presented by: Heidi Sehrt Ryan Mackenzie Dana Gayeski Alexandra Commelin