Corporate Governance:Asian Experience

Stephen Yan-leung CheungProfessor of Finance (Chair)Department of Economics and FinanceCity University of Hong Kong

December 14, 2001

Contents

1. Importance of corporate governance

2. Asian experience

3. Regional cooperation

4. Policy recommendations

The Asian Financial Crisis has underscored the importance of

1. A sound macro-economic policy; and

2. Financial infrastructure

Corporate governance in Asia

Source: McKinsey, 2001

Inefficient corporate

governance

Reliance on family and

state finance

Underdeveloped and illiquid investment

market

Limited market for corporate

control

Inadequate minority

protection

Limited disclosure

Incentives aligned with

core shareholders

“Insider boards”

Concentrated ownership

Independence and

performance

Capital market liquidity

Transparency and

accountability

CORPORATE CONTEXT

Shareholder environment

INSTITUTIONAL CONTEXT

Corporate governance in Asia (III)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

Source: McKinsey & Co.

0%

5%

10%

15%

20%

25%

30%

Ave

rage

pre

miu

m

Benefits of corporate governance in Asia (I)Expected market return and 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

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0 1 2 3 4 5 6

Anti-director rights

Exp

ecte

d M

arke

t ret

urn

KoreaTaiwan

Thailand

Indonesia

Philippines

Singapore

Malaysia

Hong Kong

Benefits of corporate governance in Asia (II)Expected market return and 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

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0 2 4 6 8 10

Rule of law

Exp

ecte

d M

arke

t ret

urn Korea

Taiwan

ThailandIndonesia

Philippines

Singapore

Malaysia

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)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

12

/01

/98

11

/02

/98

13

/03

/98

14

/04

/98

14

/05

/98

15

/06

/98

15

/07

/98

14

/08

/98

15

/09

/98

15

/10

/98

16

/11

/98

16

/12

/98

15

/01

/99

16

/02

/99

18

/03

/99

19

/04

/99

19

/05

/99

18

/06

/99

20

/07

/99

19

/08

/99

20

/09

/99

20

/10

/99

19

/11

/99

21

/12

/99

20

/01

/00

21

/02

/00

HK

$

BASE DATE

Mar 11, 1999Capital Reorganization(Share Consolidation, Rights Issue)

Mar 29, 1999Parallel Trading in New Shares

May 7, 1999Announcement of placement and subscription of shares

Dec 12, 1999Proposal of Change of name

Jan 13, 2000Change of name to Digital World

Case 2: Q-Tech Holdings Ltd (III)

1999 2000

EPS (9.50 cents) 0.04 cents

Directors’ remuneration $ 3,631,000 $1,730,000

Number of Directors

The emoluments of the directors

Nil to HK$1,000,000 12 6

HK$1,000,001 to HK$1,500,000 1 1

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)

Source: DataStream

0

2

4

6

810

12

14

16

18

20

1/1

/97

2/1

/97

3/1

/97

4/1

/97

5/1

/97

6/1

/97

7/1

/97

8/1

/97

9/1

/97

10

/1/9

7

11

/1/9

7

12

/1/9

7

1/1

/98

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

Thank You