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ASIA PACIFIC CORPORATE GOVERNANCE SESSION 6. Outline Family ownership Asian financial crisis Japanese corporate governance Reform of corporate governance.

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Presentation on theme: "ASIA PACIFIC CORPORATE GOVERNANCE SESSION 6. Outline Family ownership Asian financial crisis Japanese corporate governance Reform of corporate governance."— Presentation transcript:

1 ASIA PACIFIC CORPORATE GOVERNANCE SESSION 6

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

3 Central Element of Asia-Pacific Governance FAMILY OWNERSHIP

4 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

5 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

6 Concentration of Family Control of Corporate Assets Source: Adapted from Claessens, S., Djankov, S and Lang, L. (2000)

7 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 managements performance. This issue is subject to wider debate in regard to family- owned firms with concentrated ownership structures. S&P Commentary Report 2005

8 ASIAN FINANCIAL CRISIS 1997/98

9 Dimensions of the East Asian Crisis * CurrenciesStock IndexMarket 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 KongNil-43.2%-$223bn (-42%) *(Fall in currency exchange rate for US$ between 30 June 1997 and 3 July Percentage decline in stock market index between 30 June 1997 and 3 July 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.

10 Change in Share Indexes of East Asia Region Source: Adapted from Bloomberg IHT

11 Market Capitalization of Stock Exchanges in Asia Pacific, 1998 Source: Stock Exchanges Respective Annual Reports 1998.

12 Asia Pacific Stock Markets 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), Hong Kong 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.

13 JAPANESE CORPORATE GOVERNANCE

14 Distribution of Share Ownership in Japan by Type of Shareholder Shareholder Distribution in Japan (%) Government and local government Banks, Trusts companies Pension Trusts Investment Trusts Life and Casualty Insurance Other financial Institutions Other Business corporations Foreign Shareholders Individual Shareholders Total100 Source: Takaya Seki (2005) and Tokyo Stock Exchange (2006)

15 The Japanese Model of Transformation Source: Adapted from Japanese External Trade Organization JETRO (2005).

16 Transitions of Japanese CG Source: Toriihara (2004)

17 REFORM OF CORPORATE GOVERNANCE IN THE ASIA-PACIFIC

18 Asia Pacific Reform of CG Regulation Source: Clarke T. (2006), UTS CCG.

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

20 Differences of Board Structures OECD Principles USUKHKChinaJapan Board Structure Not definedSingle Two-tier Directors should be accountable to shareholders? yes Board should be independent of supervise management? yes NO Boards should form independent committees? Recommendedyes NO Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)

21 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 blockholdersLikely 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 fightsUnlikely to be effective when ownership is strongly concentrated Technology improvements for communicating with and among shareholders, disclosure of ownership and control Board activityUnlikely 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 compensationLess important when controlling owner can hire and fire and has private benefits Disclosure of compensation schemes, conflicts of interest rules Bank monitoringImportant 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

22 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 activismPotentially important, particularly in large firms with dispersed shareholders Encourage interaction among shareholders, strengthen minority protection. Enhance governance of institutional Investors Employee monitoringPotentially 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 LitigationDepends 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 controlPotentially 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 Competition Determines scope for potential mistreatment of factors of production including financing Open up all factor markets to competition including from abroad

23 CORPORATE GOVERNANCE PERFORMANCE IN THE ASIA PACIFIC

24 Corporate Governance in Selected countries of Asia Pacific 2008 (CG Watch Survey, Selected Asia Pacific Countries) RankCountry Singapore Hong Kong India Malaysia Korea Taiwan Thailand Philippines China Indonesia Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)

25 Corporate Governance Category Score in Selected Asia Pacific Countries Market CG Rules & Practices EnforcementPolitical Regulatory IGAAPCG CultureTotal Singapore Hong Kong India Malaysia Korea Taiwan Thailand Philippines China Indonesia Source: Compiled from CLSA Asia Pacific Markets and ACGA (April 2009)

26 Market Capitalization of Selected Asia Pacific Countries 2005 (in millions of local currencies) % Change 2005/2004 USD Exchange End 2005End Australian SEAUD1,096, , % Bombay SEINR24,893, ,793, % Bursa MalaysiaMYR682, , % Colombo SELKR584, , % Hong Kong ExchangesHKD8,179,937.26,695, % Jakarta SEIDR801,252, ,949, %9, , Korea ExchangeKRW725,801, ,182, %1, , National Stock Exchange IndiaINR23,223, ,791, % New Zealand ExchangeNZD59, , % Osaka SEJPY350,527, ,353, % Philippine SEPHP2,111,738.01,605, % Shanghai SECNY2,309,613.02,601, % Shenzhen SECNY933,415.01,104, % Singapore ExchangeSGD427, , % Taiwan SE Corp.TWD15,633, ,989, % Thailand SETHB5,079,283.54,482, % Tokyo SEJPY539,739, ,554, % Source: WFE Annual Report 2005

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


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