1
Government-Business Relations and Corporate
Governance
International Conference on Corporate Governance in Asia and China
March 12, 2005Shanghai
Hasung JangKorea University Business School
Asian Institute of Corporate Governance www.aicg.org
2
Corporate Governance in Asia
• Poor Corporate Governance– New regulations are introduced after the crisis– But, weak enforcement of laws and regulations – Pervasive related party transactions– Poor investor protection
• Entrenched Management – Family owned and managed firms – State owned enterprises
• Convergence of Corporate Governance in Asia– After 1977 crisis, it is a new trend
3
Convergence of Asian Corporate Governance
McKinsey Quarterly, 2004
4
Why Poor Corporate Governance
in Asia• Establishments’ rent seeking behavior
– Controlling shareholders and management are unwilling to enhance corporate governance
• Concentrated ownership– Pyramidal or circular ownership
• Weak protection of shareholders• Expropriation of minority shareholders• Shareholders are inactive
– Institutional investors are not independent
5
Pervasive Political Rent Seeking
• Rent-Seeking Players– Big Businesses (conglomerates, chaebols)– Politicians– Bureaucrats– Financiers– Labor (Large company’s unions)
• Impact of Political Rent Seeking Practices– Strengthens entrenchment of incumbent players– Limits new competitions and ‘creative destruction’– Discriminates against market based financing– Restricts building independent financial institutions– Corruptions
6
Corporate Governance RankingIMD 2004, 60 economies surveyed
AverageRank
CorporateBoard
ShareholderValue
InsiderTrading
ShareholderRight
Singapore 7.5 5 13 3 9
Hong Kong 16.0 9 8 22 25
Malaysia 16.3 10 12 25 18
Sweden 18.8 38 14 17 6
UK 22.5 22 30 16 22
Germany 23.5 44 31 7 12
USA 23.5 35 17 29 13
Taiwan 23.8 12 21 34 28
India 37.0 29 35 49 35
Thailand 37.3 27 28 55 39
China 41.5 25 40 57 44
Japan 45.3 50 59 13 59
Philippines
45.8 37 42 54 50
Korea 50.5 53 53 41 55
Indonesia 55.3 56 52 59 54
7
Corporate Governance IndexWorld Economic Forum 2003, 49 countries surveyed Rank Score
1 United Kingdom 6.34
6 Sweden 5.98
7 USA 5.94
8 Singapore 5.91
9 Germany 5.78
13 Hong Kong 5.59
21 Malaysia 5.27
23 Taiwan 4.96
28 Thailand 4.72
31 Japan 4.59
32 India 4.59
33 Korea 4.59
43 Philippines 3.89
44 China 3.80
46 Indonesia 3.62
8
9
10
11
12
Corporate Governance and Country Competitiveness
Competitiveness by IMD, Corporate Governance by WEF, 45 countries
Korea
05
1015
2025
3035
4045
50
0 10 20 30 40 50
Corporate Governance rank by WEF 2003
Cou
ntry
Com
pet
itiv
enes
s ra
nk b
yIM
D 2
004
China
13
Corporate Governance andCorruption
Corruption Perception Index by TI, Corporate Governance by WEF, 49 countries
Korea
0
10
20
30
40
50
60
0 10 20 30 40 50
Corporate Governance rank by WEF 2003
Corr
upti
on P
erc
epti
on Index rank
by T
I 2003
China
14
Target Growth Industries Selected by Korean Government and Financial
SystemIndustry ISIC Bank-based Market-based Dominance
Digital TV/Broadcast 32+64 1.94 3.84 Market-based
Display Device26+30+
32-0.22 1.43 Market-based
Intelligent Robotics29+31+
320.69 3.18 Market-based
Future Automobile 30+34 -0.92 1.12 Market-based
Next G Semi-conductor
30+32 -0.93 1.42 Market-based
Next G Mobile Telecom
33+64 1.97 2.55 Market-based
Digital Contents 64+72 6.47 7.85 Market-based
Next G. Battery 31+32 0.53 3.45 Market-based
Bio Pharmaceuticals 33+24 1.45 1.76 Market-based
Average 1.22 2.96 Market-based
Annual Growth Rate of Real Value Added (%) (1991-2001)
Data: OECD STAN database, World Bank WDI, B. Shin & et al (KSRI)
15
Financial System in Asia
• The Asian financial markets are under-developed
• The capital market is under-developed relative to the banking sector in Asia
• Dependence on foreign trade is increasing
16
External Trade/GDPExternal Trade = Export + Import
1990 2001 1990 2001
Singapore 361.2 325.4 Germany 53.2 69.2
Hong Kong 260.1 281.6 United
Kingdom50.9 56.5
Malaysia 146.4 214.3 France 46.8 55.2
Netherlands 104.3 129.9 Italy 39.8 53.6
Thailand 76.3 126.8 China 29.3 49.2
Philippines 57.3 95.2 Australia 33.2 43.0
Switzerland 84.6 94.3 India 17.2 29.1
Korea 59.2 83.4 Brazil 13.6 27.9
Canada 52.0 82.5 United States 20.0 23.4
Indonesia 49.6 78.1 Japan 20.3 21.0
17
Under-development of Financial Markets
A=Stock Market Cap to GDP(%)B=Domestic Bank Credit to GDP(%)
Rank Country A B A+B
1 Hong Kong 312.6 142.5 455.1
3 Japan 54.4 317.5 371.9
4 US 137.2 163.9 301.1
5 UK 155.7 140.5 296.2
6 Malaysia 135.1 155.3 290.5
11 Singapore 137.0 102.0 239.0
12 Sweden 78.7 143.3 222.0
16 Germany 58.1 147.5 205.5
21 China 45.2 140.6 185.8
24 Korea 55.0 110.4 165.4
30 Thailand 31.7 112.0 143.7
39 Philippines 29.9 63.1 93.0
43 India 23.1 54.7 77.8
44 Indonesia 15.8 60.6 76.4
18
Relative Under-development of Stock Market
Rank Country %
2 Hong Kong 219
5 Singapore 134
9 UK 111
14 Malaysia 87
15 US 84
27 Sweden 55
28 Korea 50
30 Philippines 47
35 Germany 39
39 China 32
43 Thailand 28
45 Indonesia 26
51 Japan 17
Stock Market Capitalization to Domestic Bank Credit (%)
19
Socio-Economic Implication of Financial Market Development • Financial Market Development and Country
Competitiveness• Stock Market Development and Country
Competitiveness• Financial Market Development and Corruption• Stock Market Development and Corruption• Stock Market Development and Corporate
Governance
• Variables– Country competitiveness rank by IMD (2000, 2001)– Financial market development = (Stock market capitalization +
Domestic Credit Provided by Banks)/GDP (2001)– Stock market capitalization to Domestic Credit Provided by Banks (2001)
20
Financial Market Development and Country Competitiveness
-10
0
10
20
30
40
50
60
0.00 100.00 200.00 300.00 400.00 500.00
Financial Market to GDP
Cou
ntry
Com
pet
itiv
enes
s R
ank
by IM
D
21
Stock Market Development and Country Competitiveness
0
5
10
15
20
25
30
35
40
45
50
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Stock Market Capitalization to Domestic Credit by Banks
Cou
ntry
Com
pet
itiv
enes
s R
ank
by IM
D
22
Financial Market Development and Country Competitiveness
• Income level (per capita GDP) affects the country competitiveness significantly
• For Developed Countries– OECD member countries– Stock market development significantly affect country
competitiveness– Financial market development is not significant
• For Under-developed Countries– Non-OECD member countries– Financial market development significantly affect
country competitiveness– Stock market development is not significant
23
Country Competitiveness and Financial Market Development
OECD Countries (n=27)
Dependent Variable:Country Competitiveness Rank by IMD
Stock marketdevelopment
-0.079 (0.021)
-0.058 (0.028)
-0.055 (0.037)
Financial mkt.development
-0.074 (0.002)
-0.026(0.237)
-0.021 (0.301)
Per capita GDP -0.081 (<0.001)
-0.079(<0.001)
-0.071(0.001)
Adj. R-sq 0.477 0.702 0.655 0.703
24
Country Competitiveness and Financial Market Development
Non-OECD Countries (n=15)
Dependent Variable:Country Competitiveness Rank by IMD
Stock marketdevelopment
-0.015(0.70)
0.017(0.67)
0.037(0.261)
Financial mkt.development
-0.091(0.004)
-0.054(0.020)
-0.059(0.014)
Per capitaGDP
-0.153(0.001)
-0.094(0.006)
-0.112(0.005)
Adj. R-sq 0.567 0.640 0.771 0.779
25
Country Competitiveness and Financial Market Development
OECD Countries (n=27)
Dependent Variable:Country Competitiveness Rank by IMD
Stock market dev. (x1)-0.060(0.045)
Stock market dev.residual of x2
-0.079(0.050)
-0.060(0.045)
Stock market dev.residual of x3
-0.060(0.045)
Financial market dev. (x2)-0.090(0.001)
-0.029(0.163)
-0.018(0.383)
Financial market dev.residual of x3
-0.018(0.383)
Per capita GDP (x3)-0.075(0.001)
-0.083(<0.001)
-0.084(<0.001)
Adj. R-sq 0.439 0.701 0.701 0.701
26
Country Competitiveness and Financial Market Development
Non-OECD Countries (n=15)
Dependent Variable:Country Competitiveness Rank by IMD
Stock market dev. (x1)0.043
(0.298)
Stock market dev.residual of x2
-0.015(0.767)
0.043(0.298)
Stock market dev.residual of x3
0.043(0.298)
Financial market dev. (x2)-0.096(0.001)
-0.046(0.047)
-0.061(0.016)
Financial market dev.residual of x3
-0.061(0.016)
Per capita GDP (x3)-0.111(0.004)
-0.089(0.010)
-0.165(0.001)
Adj. R-sq 0.559 0.778 0.778 0.778
27
Financial Market Development and Corruption
0
2
4
6
8
10
12
0 100 200 300 400 500
Financial Market to GDP
Cor
ruption
Per
ception
Index
by
Tra
nspar
ency
Inte
rnat
iona
l
28
Stock Market Development and Corruption
0
2
4
6
8
10
12
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Stock Market Capitalization to Domestic Credit
Provided by Banks
Corr
uption P
erce
ption Index
by
Tra
nsp
are
ncy
Inte
rnational
29
Stock Market Development andCorporate Governance
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Stock Market Capitalization to Domestic Credit by Banks
Cor
por
ate
Gov
ernan
ce S
core
by W
EF
30
Thank you
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