Corporate Governance Asian Experience Stephen Yanleung Cheung Professor

Corporate Governance: Asian Experience Stephen Yan-leung Cheung Professor of Finance (Chair) Department of Economics and Finance City University of Hong Kong October 29, 2002 Stephen Cheung Corporate Governance: Regional Cooperation

Contents 1. Importance of corporate governance 2. Asian experience 3. Regional cooperation 4. Policy recommendations Corporate Governance: Regional Cooperation 2

The Asian Financial Crisis has Underscored the Importance of: u A sound macro-economic policy; and u Financial infrastructure Corporate Governance: Regional Cooperation 3

Corporate Governance in Asia (I) Shareholder environment Concentrated ownership “Insider boards” Reliance on family and state finance INSTITUTIONAL CONTEXT Underdeveloped and illiquid investment market Capital market liquidity Source: Mc. Kinsey, 2001 Inefficient corporate governance Limited market for corporate control Independence and performance Incentives aligned with core shareholders Limited disclosure Inadequate minority protection CORPORATE CONTEXT Transparency and accountability Corporate Governance: Regional Cooperation 4

Corporate Governance in Asia (II) Some commonly repeated cliches within the region (even in Hong Kong) u “I do not need to raise any capital anytime soon. Why should I worry about corporate governance? ” u “I would rather have a higher cost of capital than higher taxes that I would be forced to pay under greater disclosure” u “Why should I appoint independent non-executive directors? My company is well run. ” u “Why should I Corporate own a. Governance: bank if Regional I cannot lend to myself? ” Cooperation 5

Value of Corporate Governance: Regional Cooperation Source: Mc. Kinsey & Co. 6

Benefits of Corporate Governance in Asia (I) Expected market return and anti-director rights Anti-directors rights is an index from 0 to 6, with a higher score indicating better protection for minority shareholders Expected market return is an index from – 0. 2 to +0. 4, with a higher score indicating a higher expected stock. Corporate market performance for 10 Asian places published in the FEER Governance: Regional Cooperation Source: Professor Gul (2001), City University of Hong Kong 7

Benefits of Corporate Governance in Asia (II) Expected market return and rule of law Rule of law is an index from 0 to 10, with a higher score meaning a stronger tradition of law and order. Expected market return is an index from – 0. 2 to +0. 4, with a higher score indicating a Corporate Governance: Regional Cooperation higher expected stock market performance for 10 Asian placed published in the FEER. Source: Professor Gul (2001), City University of Hong Kong 8

Family-Controlled Asian Corporations u Asia: 60% of total market cap held by family-led firms holding more than 20% of the equity of listed companies u Compare this with u US - 18. 3% u Australia - 12. 2% Corporate Governance: Regional Cooperation 9

Case 1: Directors’ Remuneration in Hong Kong u Sample period: 1991 -1995 u 10% companies paid more than the company’s net profits u No relationship between firm performance and directors’ compensation Corporate Governance: Regional Cooperation 10

Case 2: Q-Tech Holdings Ltd (I) u Listed on HKEX on Jan 12, 1998 u Company changed name to Digital World Holdings Ltd on Jan 13, 2000 u 1 Right Issues and 2 placings in 1999 u 2 Right Issues and 3 placings in 2000 Corporate Governance: Regional Cooperation 11

Case 2: Q-Tech Holdings Ltd (II) Corporate Governance: Regional Cooperation 12

Case 3: Peregrine Group (I) u The Peregrine Group was the largest investment banking group in Asia u Best Regional Fixed-income House by Finance Asia in December 1996 u Top book-runner of Asia equity issuer in 1996 by International Financial Review Securities Data and many others Corporate Governance: Regional Cooperation 13

Case 3: Peregrine Group (II) u Statement on 27 th October, 1997 u Major points: u 1. Year to data unaudited net earnings in the equity products had fallen… Peregrine had no material outstanding underwriting commitments. Corporate Governance: Regional Cooperation 14

Case 3: Peregrine Group (III) u Statement on 27 th October, 1997 u 2. All major bank relationships and credit lines were in place u 3. The board confirmed there were currently no discussions taking place with another party to acquire a substantial shareholding in Peregrine. Corporate Governance: Regional Cooperation 15

Case 3: Peregrine Group (IV) Corporate Governance: Regional Cooperation Source: Data. Stream 16

Case 4: Dickson Concepts International Ltd (I) u u u Background It trades in luxury goods u Bvlgari watches u Lighters, pens u Jewellery, fashion products u Warner Bros. Products The operations of the group mainly base in Hong Kong, Asia, UK, European countries and in North Corporate Governance: Regional Cooperation America. 17

Case 4: Dickson Concepts International Ltd (II) u Unusual Transaction u On 30 th December, 1999, the company entered into a consultancy agreement with a related company which is wholly controlled by the director himself. u It was said to be for the design, development, construction, and technological infrastructure of the “Cybermall”. u The fixed fee was HK$130 million. Corporate Governance: Regional Cooperation 18

Case 4: Dickson Concepts International Ltd (III) u Market Reaction u It was clear to be a related party transaction u The director was being criticised for failure to disclose the agreement. u No records of work done for the consultancy u No approval initially from independent shareholders, but was later ratified by them. Corporate Governance: Regional Cooperation 19

Summary of Good Corporate Governance Principles u Right of shareholders u Equitable treatment of shareholders u Role of stakeholders u Disclosure and transparency u Responsibilities of the board Corporate Governance: Regional Cooperation 20

Policy Recommendations u u u (I) Disclosure of information u Financial and non-financial Regional cooperation u Regional sanction u Information sharing u Standardize accounting principles Education u Director u Licensing (continuous training programme) u Mandating training programme Corporate Governance: Regional Cooperation u Investor 21

Policy Recommendations u u u (II) Independence of board Proper evaluation system Audit committee Adoption of international standards u OECD u APEC Political willingness Corporate Governance: Regional Cooperation 22

Crisis Prevention u The nature of crisis has changed u No prediction model u The best medicine is a solid financial infrastructure Corporate Governance: Regional Cooperation 23

Thank You Stephen Cheung Corporate Governance: Regional Cooperation