Forum on Government-Business Relations and Corporate Governance International Conference on Corporate Governance in Asia and China Shanghai, March

2 Panel Discussion Understand the relations between business and government Understand the relations between business and government Importance of public in corporate governance Importance of public in corporate governance Effects of political rent seeking in firms Effects of political rent seeking in firms How to improve governance in rent- seeking society? How to improve governance in rent- seeking society?

3 Outline The inseparability between politics and business in Asia The inseparability between politics and business in Asia Political connections, rent seeking, and corruptionPolitical connections, rent seeking, and corruption Public governance – a first order factor missing in the corporate governance debate Public governance – a first order factor missing in the corporate governance debate Cases and research evidence on the effects of rent seeking on corporate governance Cases and research evidence on the effects of rent seeking on corporate governance Implications for corporate governance reforms Implications for corporate governance reforms

4 The Inseparability between Business and Politics Powerful business tycoons can significantly influence government policies Powerful business tycoons can significantly influence government policies They may even directly engage in politics They may even directly engage in politics Conversely, politicians (or their offspring) often become business tycoons Conversely, politicians (or their offspring) often become business tycoons Asking business people in Asia, few would deny relationships or connections with government important Asking business people in Asia, few would deny relationships or connections with government important Particularly so in sectors heavily regulated by governments, including telecommunication, public utilities, transportation, banking and finance, property development, … the list goes on Particularly so in sectors heavily regulated by governments, including telecommunication, public utilities, transportation, banking and finance, property development, … the list goes on In China, almost every sector is heavily regulated, and hence political connections are very important! In China, almost every sector is heavily regulated, and hence political connections are very important!

5 Asia as A Rent Seeking Society Business tycoons seeking rents from governments Business tycoons seeking rents from governments Politicians seeking rent from business Politicians seeking rent from business Vast grey areas of laws and weak (selective) enforcement make rent seeking highly rewarding Vast grey areas of laws and weak (selective) enforcement make rent seeking highly rewarding Perceived corruption levels of a few Asian economies are high Perceived corruption levels of a few Asian economies are high

6 Corruption in Asian Economies (Source: Transparency International: mean Corruption Perception Index )

7 Public governance and corporate governance The quality of public governance is of first order importance in shaping the governance of the corporate sector The quality of public governance is of first order importance in shaping the governance of the corporate sector However, it is largely ignored in corporate governance debates in Asia and around the world However, it is largely ignored in corporate governance debates in Asia and around the world In the following, we use a few examples and research results to illustrate the point In the following, we use a few examples and research results to illustrate the point

8 Political connections have “value” One way to examine the effects of public governance on corporations is to look at the stock price effects of corporations linked to corrupted government officers when they got caught One way to examine the effects of public governance on corporations is to look at the stock price effects of corporations linked to corrupted government officers when they got caught

9 Pervasive corruption in China According to China’s official record, during , there are totally According to China’s official record, during , there are totally corruption cases under investigation corruption cases under investigation corruption cases concluded corruption cases concluded people punished by communist laws, of which expelled from the communist party people punished by communist laws, of which expelled from the communist party Among the punished communist party members,Among the punished communist party members, county （县） level county （县） level 2422 intermediate （厅, 局） level 2422 intermediate （厅, 局） level 98 provincial （省, 部） level or above 98 provincial （省, 部） level or above

10 Recent high-level Corruption cases in China Corrupted Provincial Leaders Corrupted Provincial Leaders

11 Cumulative abnormal stock return around initial disclosure of corruption cases (Daily CAR[-10, 20]) The sample include China ’ s listed companies whose senior managers were found to have bribed the caught politicians

12 Cumulative abnormal stock return around initial disclosure of corruption cases (Daily CAR[-10, 20]) The sample include China ’ s listed companies whose senior managers were former or current colleagues of corrupted politicians

13 Rent seeking hurts corporate transparency Why some Asian companies failed to produce reliable financial information? Why some Asian companies failed to produce reliable financial information? Why corporate transparency in Asia is low, despite new laws and regulations requiring more disclosure? Why corporate transparency in Asia is low, despite new laws and regulations requiring more disclosure? Why do Asian investors seldom read financial reports? Why do Asian investors seldom read financial reports? Disclosure of proprietary information can be costly, even investors agree Disclosure of proprietary information can be costly, even investors agree Fan and Wong, Journal of Accounting and Economics, 2002 Fan and Wong, Journal of Accounting and Economics, 2002

14 Opacity Premium in Asia Source: PricewaterhouseCoopers

15 Corruption in Asian Economies (Source: Transparency International: mean Corruption Perception Index )

16 Boards do not work Weak governance and low professionalism of Chinese firms Weak governance and low professionalism of Chinese firms Over a decade since China ’ s opening up its stock markets, the governance function and the degree of professionalism of listed companies ’ management and boards of directors remain weak compared to the western standard.Over a decade since China ’ s opening up its stock markets, the governance function and the degree of professionalism of listed companies ’ management and boards of directors remain weak compared to the western standard. Chinese boards are populated with politicians (current or ex-government bureaucrats) Chinese boards are populated with politicians (current or ex-government bureaucrats)

17 Boards of directors are weak in governance: the case of China (Chen, Fan, Wong, 2004) Board size 9.22 (range 5 to 19) Manager directors34% Largest shareholder53% Minority shareholders0% Politicians32% Central govt4% Local govt19% Others9%

18 Boards of directors are weak in governance: the case of China (Chen, Fan, Wong, 2004) Directors from unaffiliated firms (“expert” directors)18% (“expert” directors)18% Professionals5% Academics14% Woman directors5% Age 47 EducationBetween Junior college and university

19 Corruption and board professionalism Shougang Group in China Percentage of Directors that Are Professionals – Corruption Case

20 Political connection hurts performance (Fan and Wong, 2005) Share issue privatizations around the world are associated with improved firm performance Share issue privatizations around the world are associated with improved firm performance Megginson and Netter, 2001; Djankov and Murrell, 2002; Chong and Lopez- De-Silanes, 2003Megginson and Netter, 2001; Djankov and Murrell, 2002; Chong and Lopez- De-Silanes, 2003 China is an exception China is an exception

21 Post-IPO stock return performance (CAR) of 625 China ’ s partially privatized firms Figure 1: Cumulative market-adjusted compound stock returns

22 Post-IPO stock return performance (CAR) distinguished by whether CEOs are politically connected Figure 3: Cumulative market-adjusted compound stock returns

23 What did we find? Appointments of politically-connected CEOs hurt accounting and stock performance of newly privatized firms. Appointments of politically-connected CEOs hurt accounting and stock performance of newly privatized firms. Politically connected CEOs have boards populated with politicians and have lower degrees of professionalism. Politically connected CEOs have boards populated with politicians and have lower degrees of professionalism. Their presence is related to regional macroeconomic conditions, i.e., unemployment and government fiscal deficit. Their presence is related to regional macroeconomic conditions, i.e., unemployment and government fiscal deficit. Overall, the results are consistent with the grabbing hand view – politicians seek rents from listed firms Overall, the results are consistent with the grabbing hand view – politicians seek rents from listed firms

24 Implications What should be the focus of corporate governance reforms in China and Asia? No firm-level quick fix please No firm-level quick fix please No more new laws and regulations cut-and-pasted from formula books No more new laws and regulations cut-and-pasted from formula books Focusing on country-level institutional factors, such as fighting corruption, will payoff Focusing on country-level institutional factors, such as fighting corruption, will payoff

25 Questions for Panel Discussion What is the state of business-government relations in China, Asia, and the world? What is the state of business-government relations in China, Asia, and the world? Does public sector governance matter to corporate governance? Does public sector governance matter to corporate governance? How does rent seeking and corruption affect How does rent seeking and corruption affect corporate ownership structures?corporate ownership structures? corporate governance practices?corporate governance practices? corporate transparency?corporate transparency? independent/monitoring boards of directors?independent/monitoring boards of directors? In a rent seeking society, In a rent seeking society, what does “good corporate governance” mean?what does “good corporate governance” mean? how can we win trust from investors?how can we win trust from investors? How can we improve corporate governance?How can we improve corporate governance? what is a successful formula for corporate governance reform?what is a successful formula for corporate governance reform?