Corporate Governance : An Institutional Investor’s Perspective Manish Singhai, CFA Vice President, Portfolio Manager - Global Emerging Markets Alliance Capital Management, Singapore December 14, 2001 The AICG Conference, Seoul, South Korea

Corporate Governance : An Institutional Investor's Perspective2 Does Corporate Governance Matter? Difficult to Isolate and Quantify the impact of Corporate Governance on Stock Market Returns – What are the appropriate proxy indictors? – Even if correlation is established, can causality be proven? – How to factor in the different issues that exist at the company and market levels? But a few empirical surveys & studies do confirm the intuitive conclusion that good governance does matter!

Corporate Governance : An Institutional Investor's Perspective3 Empirical Evidence: McKinsey Survey In , McKinsey & Co. surveyed 200 Institutional Investors with US$3.25tn in total Assets Under Management, in cooperation with the World Bank and the Institutional Investor journal – LatAm: 90 Respondents, AUM: US$1,650bn – Europe/US: 42 Respondents, AUM: US$550bn – Asia: 84 Respondents, AUM: US$1,050bn

Corporate Governance : An Institutional Investor's Perspective4 McKinsey Survey: Key Findings To 75%+ of the investors, board practices were as or more important than financial performance in evaluating companies 80%+ of the investors were willing to pay a premium for a well-governed company over a poorly-governed one with comparable financial performance The absolute premium level that investors were willing to pay differed by market Foreign investors were willing to pay a higher premium than local investors

Corporate Governance : An Institutional Investor's Perspective5 Empirical Evidence: CLSA Study In 2000, brokerage firm CLSA published a study on the impact of corporate governance issues on historical stock price performance – The sample comprised 115 large-cap stocks (Average Market Cap: US$4.9bn) spread across 25 Emerging Markets in Asia, LatAm & EMEA regions – Stocks and markets were ranked on Corporate Governance scores that were derived from a Binary Response (Yes/No) questionnaire

Corporate Governance : An Institutional Investor's Perspective6 CLSA Study: Key Findings Stocks with Good Governance Significantly Outperformed the Rest, particularly displaying Greater Resilience during Market Downturns Correlation between Market-wide Governance and Superior Returns for the Market was almost Non- Existent Significant Room for Improvement Implied by the Overall Poor Governance Standards in Emerging Markets

Corporate Governance : An Institutional Investor's Perspective7 Elements of Good Governance From an Institutional Investor’s standpoint, a good Corporate Governance Framework should ensure: 1. Protection of Basic Shareholder Rights 2. Equitable Treatment of All Shareholders 3. Transparency and Disclosure 4. Independence, Responsibility & Accountability of the Board

Corporate Governance : An Institutional Investor's Perspective8 CG : Context is Important ! Relative rather than Absolute Quality of Governance is More Important for the Stock Markets Good Governance is Prized more when it is Scarce A company that voluntarily tries to practice good CG in an unregulated market is likely to be rated higher than another that does just enough to meet statutory requirements in a highly-regulated market Investors react to changes in CG Quality over Time Irrespective of the absolute level, companies that show progressive improvement in governance are likely to be re-rated by the market, implying higher return potential

Corporate Governance : An Institutional Investor's Perspective9 CG in Alliance Capital’s Investment Decisions Recognize CG as a Very Important Investment Parameter, particularly in the Emerging Markets Our in-house Research Team assigns a Quantitative CG Rating to each Company in our Investment Universe, which is Reviewed at Regular Intervals At the outset, CG is used as an Investment Screen Regular Monitoring helps in Responding to Changes in Absolute and Relative Levels

Corporate Governance : An Institutional Investor's Perspective10 CG in South Korea - i Relative to the Extremely Poor Standards of the pre-1997 Economic Crisis Era…. …. there is Visible Improvement in Almost All Aspects of Governance in the Korean Corporate Sector today The Regulatory Bodies and Companies have played their parts…. …. But Korea has also been served uniquely by the PSPD Movement in forcing some of the contentious issues

Corporate Governance : An Institutional Investor's Perspective11 CG in South Korea - ii While a Long Way Forward since 1997, there is Ample Scope for Improvement both in the Depth and Breadth of Governance amongst Korean Companies Market Re-rating is a Slow, Suspicious, and Easily Reversible Process…. ….So Any Lapses in Commitment at this Stage could Seriously Set Back the Ongoing Reduction in the “Korea Discount”

Corporate Governance : An Institutional Investor's Perspective12 CG in State-Owned Enterprises Very Little Focus on CG in Listed SOEs despite their Large Size and Significance in Emerging Stock Markets Conflict of Roles: Government as a Regulator Vs. Government as a Controlling Shareholder Conflict of Objectives in the Long-Term: Maximization of Shareholder Value Vs. Meeting Socio-Economic Obligations Conflict of Tactics in the Short-Term : Populist Politics Vs. Tough Economics