ASIA PACIFIC CORPORATE GOVERNANCE

SESSION 6

Outline

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

Central Element of Asia-Pacific Governance

FAMILY OWNERSHIP

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

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

Concentration of Family Control of Corporate Assets

0

10

20

30

40

50

60

70

80

90

100

Hong Kong Indonesia Japan Korea Malaysia ThePhilippines

Singapore Taiw an Thailand0

10

20

30

40

50

60

70

80

90

100

Top 1 family Top 5 familiesTop 10 families Top 15 families% of GDP

% of GDP (1996)

% of total value of listed corporate assetsthat families control

1.681.171.262.681.972.071.044.092.36 1.681.171.262.681.972.071.044.092.36

Average number offirms perfamily

Source: Adapted from Claessens, S., Djankov, S and Lang, L. (2000)

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 management’s performance.

This issue is subject to wider debate in regard to family-owned firms with concentrated ownership structures.

S&P Commentary Report 2005

ASIAN FINANCIAL CRISIS

1997/98

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.

Change in Share Indexes of East Asia Region 1997-8

-80

-60

-40

-20

0

20

40

60+60%

*Emerging markets indexes

Asia*

Latin America*

W. EuropePercentage change inMorgan Stanley Capital Internationalshare indexes in U.S. dollarsJuly 4, 1997 = 100

1997 1998

J SAJMAMFJDNOSAJ J SAJMAMFJDNOSAJ

N. America

Source: Adapted from Bloomberg IHT

Market Capitalization of Stock Exchanges in Asia Pacific, 1998

54.28 13 21 31 45 68 81 115 220 276 278 314

1195

2210 2260

10465

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000K

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Jaka

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Ban

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Man

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Seo

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Tok

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Source: Stock Exchanges Respective Annual Reports 1998.

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), HongKong 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.

JAPANESECORPORATE GOVERNANCE

Distribution of Share Ownership in Japan by Type of Shareholder

1950 1970 1980 1990 2000 2003 2004 2005

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)

The Japanese Model of Transformation

0

5

10

15

20

25

30

35

40

45

50

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Hol

ding

rat

io (

%)

46%

Stable holding ratio

Japan Investment Council (1996)•Expects to promote M&A throughreversion of cross-shareholding

24%

21%

Ratio held by Foreigners

6%

CROSSHOLDING

Source: Adapted from Japanese External Trade Organization JETRO (2005).

Shareholder Main Bank Shareholder Main Bank

Management Management

Used to create stable relationships with shareholders by cross-shareholding, and so have management under main Bank’s surveillance. Therefore it was possible for management to innovate.

JAPANESE COMPANIES in 80s

Now stockholders provide surveillance, and so companies improve manage-ment on their own in order to enhance long-term corporate and shareholder value

JAPANESE COMPANIES TODAY

High ratio held by foreign investors in selected JapaneseFirmsHoya Corp 56% Canon Inc 52%

Fuji Photo Film 49% ROHM Co.LTD. 49%Kao Corp 47% Takeda 41%

SURVEILLANCE

Transitions of Japanese CG 1960-2000

Executive officers

Mutual dependence among companies

Crossholding of shares, main financing bank system,

company groups, etc.

Japanese-style employment practice

Lifetime employment, seniority system,

company union, etc.

Industrial policy

Administrative control, public-private cooperation framework, coordination in a industry group, etc.

Ambiguous corporate accounting practice

Limited disclosure of corporate information

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te

Japanese-style management

1960s 1980s

High-growth period

2000

Change of capital market

Indirect financing→ Direct financing

Shift to borderless economyGlobal economization

Trade and capital liberalizationBig ban, IT revolution

Corporate scandal

(Limitation of Japanese-style governance)

New corporate governance

Reform of the board of directors

Introduction of US-style

Enhancement of auditor's

authority

Independentboard members

System selectivity

1990s

Lost decadeEconomic bubbles

Shareholder value

Source: Toriihara (2004)

REFORM OFCORPORATE GOVERNANCE

IN THEASIA-PACIFIC

Asia Pacific Reform of CG Regulation

Code of Best Practice forDirectors

Guidelines on Behaviour for Board Members

1999

THAILAND

Malaysian Code of Corporate Governance

Self regulation over statutory regulation

2000

MALAYSIA

Indonesia Code of Corporate Governance

Code to raise the standards of corporate

governance2001

INDONESIA

Chinese Code of Corporate Governance

An enforceable framework for all listed companies

2002

CHINA

Kumar Mangalam BirlaCommittee Report

Recommendations that distinguishes responsibilities and obligations of the board

2002

INDIA

SEC Corporate Governance

Reforms to raise investor confidence

2002

PHILIPPINES

Hong Kong Code of Corporate Governance

2004

HONG KONG

Japanese Corporate Governance

Principles of Corporate Governance

2004

JAPAN

Singaporean Code of Corporate GovernanceRequirements under the Singaporean Exchange

Listing Rules2005

SINGAPORE

Source: Clarke T. (2006), UTS CCG.

Countries with Higher Concentration of Wealth Show Less Progress on Institutional Reforms

10 20 30 40 50 60 70 80

0

2

4

6

8

10 Judicial efficiencyJudicial efficiency

Rule of lawRule of law

Absence of corruptionAbsence of corruption

10 20 30 40 50 60 70 80

Ownership by top 15 families (%)

(10

is t

he

be

st, 0

is

th

e w

ors

t)

Ra

nk

ing

Japan

Taiwan

Malaysia

Singapore Hong Kong

Korea

Thailand

Philippines

Indonesia

Source: Claessens, Djankov, and Lang (1999).

Differences of Board Structures

OECD Principle

s

US UK HK China Japan

Board Structure Not defined Single Single Single Two-tier Two-tierDirectors

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)

Corporate Governance Mechanisms in Developing Transition Countries

Source: Berglof, E. and Claessens S. (2004)

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

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

CompetitionDetermines scope for potential mistreatment of factors of production including financing

Open up all factor markets to competition including from abroad

CORPORATE GOVERNANCE PERFORMANCE

IN THE ASIA PACIFIC

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)

Corporate Governance Category Score in Selected Asia Pacific Countries

Market CG Rules & Practice

s

Enforcement

Political Regulato

ry

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)

Market Capitalization of Selected Asia Pacific Countries 2005

(in millions of local currencies)

        % Change 2005/2004

USD USD

Exchange   End 2005 End 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

AXISS (2005): Market Capitalization of Regional Stock Markets 2005 (US$ Billion)