2Outline Family ownership Asian financial crisis Japanese corporate governanceReform of corporate governance in the Asia PacificCorporate governance performance in the Asia Pacific
3Central Element of Asia-Pacific Governance FAMILY OWNERSHIP
4Characteristics 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 financeMajority holder will have holding of 50% or more. Minority shareholder protection is limited or non-existentOpaque disclosure regimes; Information is difficult to obtainInsider culture: intricate network of cultivated personal relationships
5Characteristics of Asian Corporate Governance High cost/barriers of entry in doing ‘legitimate’ businessEnforcement of laws difficultUnderdeveloped institutions with the exception of Japan, HK & SingaporeCulture of saving faceIndependent directors on boards is highly controversial
6Concentration of Family Control of Corporate Assets Source: Adapted from Claessens, S., Djankov, S and Lang, L. (2000)
7Board StructureFamily 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
9Dimensions of the East Asian Crisis 1997-1998* CurrenciesStock IndexMarket FallIndonesia-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 KongNil-43.2%-$223bn (-42%)*(Fall in currency exchange rate for US$ between 30 June 1997 and 3 July Percentage declinein 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.
10Change in Share Indexes of East Asia Region 1997-8 Source: Adapted from Bloomberg IHT
11Market Capitalization of Stock Exchanges in Asia Pacific, 1998 Source: Stock Exchanges Respective Annual Reports 1998.
12Asia Pacific Stock Markets 1990-2003 Market Capitalization. Total market capitalization is presented on an annual basis from ,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), StockExchange of Thailand (SET), Singapore Exchange (SGX),Shanghai Stock Exchange (SSE), and the TaiwanStock Exchange (TSEC) are represented on the left hand vertical axis. The Tokyo Stock Exchange (TSE) isrepresented on the right hand vertical axis due to its large size compared to the other markets.
14Distribution of Share Ownership in Japan by Type of Shareholder 19501970198019902000200320042005Shareholder Distribution in Japan (%)Government and local government126.96.36.199.30.20.1Banks, Trusts companies12.613.717.520.919.217.41111.6Pension Trusts--0.00.95.54.52.0Investment Trusts188.8.131.52.82.34.2Life and Casualty Insurance16.115.810.98.03.0Other financial Institutions184.108.40.206.31.41.3Other Business corporations11.023.9220.127.116.115.119.8Foreign Shareholders18.104.22.1688.816.522.2Individual Shareholders61.337.727.920.419.420.545.636.8Total100Source: Takaya Seki (2005) and Tokyo Stock Exchange (2006)
15The Japanese Model of Transformation Source: Adapted from Japanese External Trade Organization JETRO (2005).
16Transitions of Japanese CG 1960-2000 Source: Toriihara (2004)
18Asia Pacific Reform of CG Regulation Source: Clarke T. (2006), UTS CCG.
19Countries with Higher Concentration of Wealth Show Less Progress on Institutional Reforms
20Differences of Board Structures OECD PrinciplesUSUKHKChinaJapanBoard StructureNot definedSingleTwo-tierDirectors shouldbe accountable toshareholders?yesBoard should beindependent ofsupervisemanagement?NOBoards should formindependentcommittees?RecommendedSource: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)
21Corporate Governance Mechanisms in Developing Transition Countries Relative importance in developing and transition countriesScope of policy interventionLarge blockholdersLikely to be the most important governance mechanismStrengthen rules protecting minority investors without removing incentives to hold controlling blocksMarket for corporate controlUnlikely to be important when ownership is strongly concentrated, can still take place through debts contracts but requires bankruptcy systemRemove some managerial defences, disclosure of ownership and control, develop banking systemProxy fightsUnlikely to be effective when ownership is strongly concentratedTechnology improvements for communicating with and among shareholders, disclosure of ownership and controlBoard activityUnlikely to be influential when controlling owner can hire and fire and has private benefitsIntroduce elements of independence of directors, training of directors, disclosure of voting, cumulative voting possiblyExecutive compensationLess important when controlling owner can hire and fire and has private benefitsDisclosure of compensation schemes,conflicts of interest rulesBank monitoringImportant but depends on health of banking system and the regulatory environmentStrengthening banking regulation andinstitutions, encourageaccumulation of information on credithistories; develop supporting credit bureauand other informationintermediariesSource: Berglof, E. and Claessens S. (2004)
22Corporate Governance Mechanism Corporate Governance Mechanisms in Developing Transition Countries (Berglof & Claessens 2004)Corporate Governance MechanismRelative importance in developing and transition countriesScope of policy interventionShareholder activismPotentially important, particularly in large firms with dispersed shareholdersEncourage interaction among shareholders,strengthen minority protection. Enhancegovernance of institutional InvestorsEmployee monitoringPotentially very important, in particular in smaller companies with high skilled human capital where threat of leaving is highDisclosure of information to employees,possibly require board representation; assureflexible labour marketsLitigationDepends critically on quality of general enforcement environment but can sometimes workFacilitate communication amongshareholders; encourage class action suitswith safeguards against excessive litigationMedia and social controlPotentially important, but depends on competition among and independence of mediaEncourage competition in and diverse control media; activepublic campaigns can empower public.Reputation and self enforcementImportant when general enforcement is weak, but stronger when environment is strongerDepend on growth opportunities and scopefor rent seeking. Encourage competition infactor marketsBilateral private enforcement mechanismsImportant, as they can be more specific, but do not benefit outsiders and have downsidesRequiring functioning civil commercialcourtsArbitration, auditors, other multilateral mechanismsPotentially important, often the origin of public law; but the enforcement problem often remains, audits sometimes abused, watch conflicts of interestFacilitate the information of private thirdparty mechanisms (sometimes avoid formingpublic alternatives) deal withconflict of interest, ensure competitionCompetitionDetermines scope for potential mistreatment of factors of production including financingOpen up all factor markets to competitionincluding from abroad
23CORPORATE GOVERNANCE PERFORMANCE IN THE ASIA PACIFIC
24Corporate Governance in Selected countries of Asia Pacific (CG Watch Survey, Selected Asia Pacific Countries)RankCountry20002001200220032004200520071Singapore22.214.171.124.06.52Hong Kong126.96.36.199.36.76.93India188.8.131.52.66.26.14Malaysia184.108.40.206.55.84.95Korea5.23.85.06Taiwan5.75.37Thailand2.84.68Philippines220.127.116.11.84.19China18.104.22.168.44.510Indonesia4.0Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)
25Corporate Governance Category Score in Selected Asia Pacific Countries MarketCG Rules & PracticesEnforcementPolitical RegulatoryIGAAPCG CultureTotalSingapore7.05.06..22.214.171.124Hong Kong6.05.67.38.36.16.7India126.96.36.199.56.6Malaysia188.8.131.52.34.9Korea44.75.5Taiwan184.108.40.206.84.3Thailand3.63.1Philippines1.94.1China5.22.5Indonesia2.23.7Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)
26Market Capitalization of Selected Asia Pacific Countries 2005 (in millions of local currencies)% Change 2005/2004USDExchangeEnd 2005End 200420052004Australian SEAUD1,096,033.0990,457.010.7%1.36321.2757Bombay SEINR24,893,849.016,793,378.048.2%Bursa MalaysiaMYR682,266.1690,170.4-1.1%3.77953.8000Colombo SELKR584,039.9382,065.952.9%Hong Kong ExchangesHKD8,179,937.26,695,893.022.2%7.75357.7727Jakarta SEIDR801,252,702.1679,949,067.317.8%9,9,Korea ExchangeKRW725,801,125.0403,182,825.080.0%1,1,National Stock Exchange India23,223,921.215,791,608.547.1%New Zealand ExchangeNZD59,601.960,546.0-1.6%1.46831.3845Osaka SEJPY350,527,220.0234,353,793.049.6%Philippine SEPHP2,111,738.01,605,288.831.5%Shanghai SECNY2,309,613.02,601,434.0-11.2%8.07028.2765Shenzhen SE933,415.01,104,123.0-15.5%Singapore ExchangeSGD427,906.0355,239.320.5%1.66281.6324Taiwan SE Corp.TWD15,633,858.013,989,100.011.8%Thailand SETHB5,079,283.54,482,916.313.3%Tokyo SE539,739,508.8364,554,898.048.1%Source: WFE Annual Report 2005