1. Are East Asian companies benefiting from Western board practices?
By John Nowland
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2. Introduction
Corporate governance codes (based on Western practices) are telling companies how to improve their governance practices.
Academic research shows that good corporate governance is associated with higher market valuations and better operating performance.
Survey evidence shows that institutional investors are willing to pay more for companies with good governance.
Are East Asian companies doing anything? Are they being rewarded?
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3. Research Questions
Have East Asian companies improved their governance since the crisis?
Which types of companies have improved?
(family versus non-family owned)
Have governance improvements been associated with better performance and higher value?
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4. Literature
Asian crisis highlighted that corporate governance is a problem – Johnson et al. (2000), Mitton (2002), Lemmon and Lins (2003).
East Asian companies have concentrated ownership and weak governance structures – Claessens et al. (2000), Claessens and Fan (2003).
Determinants of corporate governance (size, growth performance, financing needs, ownership) – Klapper and Love (2002), Durnev and Kim (2005).
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5. Literature
Corporate governance and firm value – La Porta et al. (2002), Klapper and Love (2002), Durnev and Kim (2005), Weir et al. (2002).
Corporate governance and performance – (Brown and Caylor (2005), Larcker et al. (2005), Hermalin and Weisbach (2003).
Positive reaction to new governance regulations – Li et al. (2004), Chhaochharia and Grinstein (2005), Zimmerman et al. (2005).
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6. Hypotheses
Governance improvements are related to company characteristics - size, growth, performance, ownership structure and prior standard of corporate governance.
Governance improvements are associated with better operating performance and higher value.
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7. Data
7 East Asian countries – Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Taiwan and Thailand.
Total of 221 non-financial companies with full data from 1998 to 2004.
Board, committee and ownership data from annual reports.
Financial data from Worldscope.
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8. 1 point for Chairman/CEO split, 1 point for each committee.
Governance Variables
Hong Kong
Indonesia
Malaysia
Singapore
South Korea
Taiwan
Thailand
Board Independence
1/3
30%
50%
>=1 director
Sufficient
Chairman/CEO separation
Yes
Mandatory -
Audit committee
Majority indep.
Indep. of insiders
Nomination committee
Some indep.
Remuneration committee
Overall board governance score = 1 point for each independent director,
1 point for Chairman/CEO split, 1 point for each committee.
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9. Methodology Changes in governance measures to company characteristics:
Changes in value and performance to changes in governance measures:
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10. Descriptive Statistics
Hong Kong
Indonesia
Malaysia
Singapore
South Korea
Taiwan
Thailand
Total Assets
7.69
2.03
1.40
2.70
27.19
3.53
2.08
Tobin’s Q
1.80
1.49
1.62
1.47
1.19
1.59
ROA (%)
10.11
14.16
9.75
14.24
11.76
10.36
10.85
Growth (%)
12.90
24.47
11.01
15.87
4.22
17.86
9.06
Leverage
0.21
0.32
0.20
0.31
0.26
Board Size
12.47
6.67
8.85
9.44
11.80
9.48
12.18
Cash Rights
0.41
0.53
0.40
0.37
0.22
0.16
0.33
Wedge
1.17
1.32
1.22
1.00
1.45
1.12
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11. Roughly half family-owned and half not family-owned.
Ownership
Hong Kong
Indonesia
Malaysia
Singapore
South Korea
Taiwan
Thailand
Family
72%
12%
41%
29%
10%
65%
45%
Company 0%
44%
21%
24%
70%
14%
36%
Government
26%
25%
38% 6%
19%
Other 2%
13% 9%
15%
Roughly half family-owned and half not family-owned.
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12. Overall Board Governance
1998
1999
2000
2001
2002
2003
2004 + -
Hong Kong
4.49
4.81
5.00
5.11
5.21
5.83
6.28 37 2
Indonesia
2.44
2.67
3.44
5.89 9
Malaysia
4.92
6.09
6.83
6.95
7.04 56 1
Singapore
6.44
6.38
6.73
7.32
8.23
8.61
8.73 31
South Korea
6.90
7.10
7.40
8.40
8.70
9.70
9.80 7
Taiwan
0.86
0.88
0.92
1.00
1.12
1.31 11
Thailand
5.55
5.91
6.00
6.37
6.82
7.55
7.73 10
Family
3.50
3.63
3.67
4.02
4.34
4.68
4.85 69
Non-family
4.80
6.50
6.87
7.06 92 4
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13. Explanation
Companies from Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand have improved their board governance over the period ( ).
Little change in board governance in companies from Taiwan.
Non-family-owned companies have made bigger improvements to their board governance than family-owned companies.
About 35% of family-owned companies have done nothing!
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14. Pre-existing Governance (in 1998)
BIND
CCSPLIT AC NC RC
ACIND
BOARD c
0.3003
(0.00)
1.7762
0.8169
(0.02)
0.8853
4.7604
SIZE
0.0271
(0.10)
0.0777
(0.60)
0.2286
(0.57)
0.4175
(0.09)
0.0080
(0.63)
0.3193
GROWTH
(0.43)
(0.61)
0.0019
(0.81)
(0.26)
0.0052
(0.67)
0.0001
(0.98)
(0.47)
ROA
(0.96)
0.0059
(0.82)
(0.88)
0.0350
(0.50)
0.0093
(0.78)
(0.41)
0.0063
CASH
(0.03)
(0.12)
0.6440
0.0386
(0.99)
(0.04)
0.1068
(0.42)
CASH2
0.1178
(0.53)
2.7721
(0.54)
3.7383
(0.39)
6.2090
(0.40)
2.3371
(0.32)
WEDGE
(0.24)
(0.15)
0.1421
(0.62)
(0.49)
(0.11)
0.0164
(0.68)
BLOCK
(0.19)
0.5407
(0.33)
1.0189
0.0331
FAMILY
(0.08)
(0.01)
0.4355
(0.65)
0.1288
(0.83)
(0.06)
BSIZE
0.1656
0.0252
(0.64)
0.1331
(0.66)
0.0046
(0.56)
0.1123
XLIST
(0.22)
0.6476
(0.86)
0.1233
Adj/McFadden-R2
0.6757
0.1136
0.1396
0.2559
0.1461
0.6705

15. Determinants of Governance Changes
ΔBIND
ΔCCSPLIT
ΔAC
ΔNC
ΔRC
ΔACIND
ΔBOARD c
0.0472
(0.00)
0.2137
1.0382
SIZE t-1
0.0045
(0.02)
(0.98)
0.0701
(0.68)
(0.38)
(0.88)
0.0838
(0.05)
GROWTH t-1
0.0000
(0.16)
(0.77)
0.0001
(0.96)
0.0006
(0.47)
0.0004
(0.59)
(0.41)
0.0005
ROA t-1
0.0002
0.0189
(0.27)
(0.82)
(0.67)
(0.85)
0.0010
(0.69)
CASH t-1
(0.08)
(0.15)
(0.50)
(0.04)
CASH2 t-1
0.0515
(0.19)
(0.52)
(0.43)
0.0861
(0.29)
0.9559
(0.12)
WEDGE t-1
(0.23)
(0.35)
(0.53)
0.1238
(0.09)
BLOCK t-1
0.0018
(0.28)
(0.21)
0.1241
(0.62)
0.0711
0.0076
FAMILY t-1
(0.39)
0.0425
(0.91)
(0.48)
BSIZE t-1
(0.14)
0.0261
(0.56)
0.0754
(0.71)
(0.54)
Lagged level of y -
Adj/McFadden-R2
0.0975
0.0469
0.0993
0.0910
0.1637
0.1232

16. Explanation
In 1998, larger companies had better board governance and family-owned companies had poorer board governance.
Over the period ( ), companies with worse board governance seemed to be catching up.
Except for family-owned companies, which were less likely to improve their board governance.
Overall, bigger, faster growing, non-family-owned companies with smaller boards and less concentrated ownership were more likely to improve their board governance.
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17. Governance Changes & Value
Where:
(ΔCG = ΔBIND)
(ΔCG = ΔCCSPLIT)
(ΔCG = ΔAC)
(ΔCG = ΔNC)
(ΔCG = ΔRC)
(ΔCG = ΔACIND)
(ΔCG = ΔBOARD) c
(0.60)
(0.39)
(0.23)
(0.32)
(0.12)
0.0226
(0.05)
(0.52)
ΔCG
(0.00)
0.0883
(0.28)
(0.26)
(0.86)
0.0910
(0.20)
(0.18)
ΔCG t-1
0.1381
(0.58)
0.0848
(0.02)
0.2704
(0.08)
0.0460
(0.01)
0.0370
(0.33)
0.0057
(0.80)
ΔSIZE
ΔGROWTH
0.0013
0.0016
ΔROA
(0.74)
0.0017
(0.75)
0.0003
(0.94)
(0.73)
ΔLEV
(0.10)
(0.14)
(0.09)
(0.03)
ΔCASH
(0.68)
(0.71)
(0.70)
(0.25)
(0.69)
ΔWEDGE
(0.49)
(0.53)
(0.50)
(0.55)
(0.77)
(0.51)
ΔBSIZE
(0.54)
0.0058
(0.66)
(0.56)
0.0072
(0.31)
(0.93)
ΔTQ t-1
Adj-R2
0.3243
0.3239
0.3288
0.3235
0.3246
0.3639
0.3236

18. Governance Changes & ROA
Where:
(ΔCG = ΔBIND)
(ΔCG = ΔCCSPLIT)
(ΔCG = ΔAC)
(ΔCG = ΔNC)
(ΔCG = ΔRC)
(ΔCG = ΔACIND)
(ΔCG = ΔBOARD) c
(0.00)
(0.05)
ΔCG
(0.79)
2.2464
(0.09)
1.3022
1.1709
(0.83)
0.4268
(0.01)
ΔCG t-1
1.1733
(0.54)
0.5439
0.4446
(0.19)
(0.75)
0.1800
(0.10)
ΔSIZE
ΔGROWTH
0.0320
0.0319
0.0291
0.0321
ΔLEV
ΔCASH
(0.69)
(0.72)
(0.61)
(0.66)
(0.67)
(0.92)
(0.71)
ΔWEDGE
0.1956
0.1065
(0.89)
0.1048
(0.90)
0.1407
(0.86)
0.1363
(0.87)
0.5173
(0.34)
0.1579
(0.84)
ΔBSIZE
0.4072
(0.15)
0.3913
(0.18)
0.4236
0.4030
0.3975
(0.17)
0.5017
(0.08)
0.2876
(0.32)
ΔROA t-1
Adj-R2
0.4964
0.4972
0.4969
0.4968
0.4965
0.4814
0.4967

19. Explanation
Splitting of the Chairman and CEO positions, creation of nomination committees and improvements in overall board governance are associated with improved operating performance in the current and next periods.
Splitting of the Chairman and CEO positions and creation of audit and nomination committees are followed by a year of share price growth.
Improved board independence and audit committee independence does not have a positive effect on operating performance and firm value.
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20. Conclusions
The average company has improved their board governance since the Asian crisis.
However, this is not the case for family-owned companies and companies in Taiwan.
Splitting of the positions of Chairman and CEO, creation of audit and nomination committees and improvements in overall board governance have a positive relationship with subsequent operating performance and/or market value.
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21. Implications
Investors aren’t willing to immediately pay more for East Asian companies that improve their board governance. They seem to take a wait-and-see approach.
There are measurable benefits for improving board governance.
Another approach needs to be found to entice family-owned companies to improve their governance practices.
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