Corporate Governance

Corporate Governance – Principles, Policies and Practices 3e Chapter 17 Corporate Governance around the World

Corporate Governance around the World - In which we consider: - corporate governance in China - corporate governance in India - corporate governance in Russia - corporate governance in Brazil - corporate governance in Hong Kong and Singapore • corporate governance in South Korea • corporate governance in Middle East and North Africa.

Corporate Governance – principles, policies and practices Corporate governance in China

Corporate Governance in China • Forms of incorporation • Company Law 2006 • Private companies (LLCs) • Joint stock companies (JSCs) • Township and village enterprises (TVEs) • Foreign companies (sometimes joint ventures) • State-owned enterprises (not listed) • Public listed companies (not SOEs) • State-owned enterprises (privatized and listed)

Corporate Governance in China TVEs Corporate Governance and Financial Reform In China’s Transition Economy Dr Leng Jing, HKU Hong Kong University Press, 2009

Shareholders Board committees Supervisory Committee Includes worker representatives Main Board at least 1/3 INEDs The enterprise Corporate Governance in China- listed state-owned enterprises

Corporate Governance in China- listed state-owned enterprises The independent directors can: • Approve major related party transactions (those exceeding RMB 3 m. or 5% of the company’s net assets) • Propose to the board the appointment or removal of the accounting firm • Call an interim shareholders’ meeting • Call a meeting of the board of directors • Appoint the external auditor or consulting organization to agree proxies before convening a shareholders’ meeting.

Corporate Governance in China- listed state-owned enterprises The Board of Supervisors can • Oversee finances, due diligence of directors and senior management personnel, safeguards company assets, reduces company’s risks, protects shareholders’ interests • Nominate external auditing firm to the shareholders’ meeting • Members of the board of supervisors have the right to inquire about the operating status of the company with obligation of confidentiality • If necessary, board of supervisors can hire independent institutions to assist in the committee’s work.

Corporate Governance in China- listed state-owned enterprises Board of Supervisors (Supervisory Committee) • The Supervisory Committee combines some elements of the German-style supervisory board (shareholders and employees) with China’s traditional concept of employees as masters of enterprises. • Unlike the German model the supervisory board cannot appoint members of the management board • Company Law does not specify proportion of shareholders’ and employees’ representatives but requires corporate charters to stipulate the proportion • In practice, chairman and vice chairman of Supervisory Boards tend to be leaders of companies’ Communist Party committees.

Corporate Governance in China- listed state-owned enterprises Professor Tong Lu, Director of the Chinese Center for Corporate Governance, Chinese Academy of Social Sciences: Supervisory boards more “decorative” than functional ... room for improvement in effectiveness of board of supervisors. Supervisors generally meet less often than boards of directors and their meetings are less well attended. Published announcements by supervisory boards show that they rarely contest decisions made by boards of directors and company executives. Supervisors unable to supervise directors and managers because supervisors have less professional experience and quality.

State Regulators Stock Exchange listing rules Independent Outside Auditor The Listed Company Corporate Governance in China- listed state-owned enterprises

State Regulation Chinese People’s Political Consultative Conference National People’s Congress State Council Ministries The People’s Bank of China Tax offices Provincial Governments State-owned Assets Supervision and Administration Commission (SASAC) China Securities Regulatory Commission (CSRC) The Listed Company Corporate Governance in China- listed state-owned enterprises

Corporate Governance in China- listed state-owned enterprises • State-owned Assets Supervision and Administration Commission (SASAC) • Holds the China Government shareholding in China’s listed companies (other than those in the finance sector). • Total assets over US$1.56 trillion SASAC is the largest institutional shareholder in the world. 8 in Fortune 500. • Ensures State’s interests represented in activities of listed companies. • Involved in the appointment of top executives.

Corporate Governance in China- listed state-owned enterprises China Securities Regulatory Commission (CSRC) • China Government’s corporate regulator • Issues corporate governance code and other regulations • Liaises with the stock exchanges • Issues regular reports on corporate governance performance in China

Corporate Governance in China- listed state-owned enterprises Information Disclosure by listed companies • In 1993, the Ministry of Finance promulgated 14 Accounting Standards for Business Enterprises (ASBE) to meet the requirements of the market economy • Chinese standards are generally consistent with respective International Accounting Standards (IAS) but have adapted them to local conditions.

Corporate Governance in China- listed state-owned enterprises Listed companies are now required to disclose information regarding corporate governance including (but not limited to): (1) the members and structure of the board of directors and the supervisory board (2) the performance and evaluation of the board of directors and the supervisory board (3) the performance and evaluation of the independent directors, including their attendance at board of directors’ meetings, their issuance of independent opinions, and their opinions regarding related party transactions and appointment and removal of directors and senior management personnel (4) the composition and work of the specialized committees of the board of directors (5) the actual state of corporate governance of the company, the gap between the company’s corporate governance and the Codes, and the reasons for the gap (6) specific plans and measures to improve corporate governance.

Corporate Governance in China PRC Company Law • Original July 1994. New law 1 January 2006 First major overhaul of the statute. Only 14 of the original 230 articles untouched • Law covers two types of limited companies: • Limited liability company (LLC private companies) • Joint stock companies (JSC public companies)

Corporate Governance in China Revised Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors • September 2006 (Replaced earlier provisional rules issued in 2003) • The most far-reaching legislation governing foreign takeovers of domestic enterprises covers investment in both listed and unlisted Chinese companies across all sectors • Cites integrity of national economic security and protection of important local brand names as basis for making anti-monopoly probes into foreign acquisitions of substantial Chinese companies.

Corporate Governance – principles, policies and practices Corporate governance in India

Corporate governance in India Originally member of British Empire (the jewel in the crown of Queen Victoria) • rule of law including company law • reliable judiciary • Bureaucracy Independence from Britain • socialism • large state-owned enterprises • public sector dominates economy • Inefficiency, corruption, nepotism

Corporate governance in India 1990s recognition of need for change • 1992 Securities and Exchange Board created • 1998 first CG code published by Confederation of Indian Industry (Desirable Corporate Governance) • professionally competent, independent non-executive directors' to constitute at least 30% of the board if the chairman is a non-executive director and at least 50% if the chairman and the managing director is the same person • Non-executive directors to 'play a material role in corporate decision-making and maximising long-term shareholder value (becoming) active participants in boards, not passive advisers • No one to hold directorships of over 10 listed companies.

Corporate governance in India 1999 - a government committee, chaired by Shri Kumar Manalam Biria publish National Code on Corporate Governance - reflected international standards • comply or explain CG by principle • code was approved by the Securities and Exchange Board of India (SEBI) • incorporated into stock exchange listing rules.

Corporate governance in India CG standards in India's top-tier listed companies (Infosys, major banks, etc.) - high Commitment to CG code in India’s small and medium capital companies still unconvinced of the value of corporate governance activities and expenditures.

Corporate governance in India 'I find that the legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice. Tata Memorial Lecture in 2002: N. Vittal Central Vigilance Commissioner

Corporate governance in India 2000 - task force chair Dr. Sanjeev Reddy, to 'sharpen India's global competitive edge‘ 2002 (post Enron) high-level committee chair Shri Naresh Chandra to examine corporate auditing and independent directors • independent directors to represent at least 50% of the board of listed companies • strengthened the definition of independence • called for the rotation of audit partners (but not audit firms)

Corporate governance in India 2003 - Securities and Exchange Board (SEBI) to 'evaluate the adequacy of existing corporate governance practices.' chair Shri Narayana Murthy, chairman of Infosys covered: • audit committees • risk management • director remuneration • codes of conduct • role of independent directors

Corporate governance in India 2007 - government issue guidelines on corporate governance in central public sector enterprises covering the composition of boards, audit committees, management of group companies, accounting standards and risk management.

Corporate governance in India Asian Corporate Governance Association assessment of India's corporate governance - 'fair to poor' Current position • Rapid economic growth. Major potential • implementation of best CG practices slow • corruption entrenched • distrust of government high • Ministry of Company Affairs and the Securities and Exchange Board need staff with CG experience.

Corporate Governance around the World Corporate governance in Russia

Corporate governance in Russia Privatization of state enterprises • Many Russian citizens dubious about privatisation holding old soviet beliefs that: • industry should be run by the state • everyone should be guaranteed a job • incomes should be controlled.

Corporate governance in Russia 1990s – state transferred ownership through • free distribution of vouchers to all Russian citizens • investment tenders, with investors making substantial investments to re-develop companies • loan-for-shares auctions - government financed loans for the purchase of shares in public companies that were auctioned.

Corporate governance in Russia Fraudulent practices, violence and social injustice rife Major businesses emerged dominated by relatively few people, many of them now very rich (oligarchs) Some Russian companies floated on foreign stock exchanges, mainly London and New York.

Corporate governance in Russia 1995 – federal law on joint-stock companies 1996 – securities law 1999 – law to protect rights of investors Problems with implementation • State involved in oversight • Directors felt allegiance to major shareholders • Neither directors or courts had experience • Need for director training.

Corporate governance in Russia 1998 – major financial crisis • Default on government bonds • Currency devalued • Oligarchs consolidate power 2000 - Centre for Business Ethics and Corporate Governance founded OECD create Russian Corporate Governance Roundtable World Bank and IFC produce CG manual.

Corporate governance in Russia Under company law and CG code recommendations: • Boards with both management and independent directors • Audit committee reports to board Today • CG codes better understood • Many of the original directors replaced • Director training and experience better • More transparency.

Corporate Governance around the World Corporate governance in Brazil

Corporate governance in Brazil Many companies state-owned or family-dominated Brazilian economy booming Endemic poverty Much corruption 1995 - Brazilian Institute of CG founded 1999 - Brazilian Code of Best Practice of CG (now in 4th edition).

Corporate Governance in Brazil Special aspects of CG in Brazil: • Fiscal Councils • Family Councils • Advisory Boards

Corporate governance in Brazil Fiscal Council to • inspect the work of the board • review the activities of the company • ensure compliance with legal duties • provide an opinion on the annual management report and on board proposals for investment projects, changes to capital, and dividend pay-outs Seen as adding value to the company’s owners by providing independent control.

Corporate governance in Brazil Family councils for family-dominated companies are encouraged by the Brazilian CG code to: • discuss family issues • the alignment of members’ expectations with those of the other shareholders • enable boundaries to be set between family and company interests • preserve longer-term family values • formalize succession planning for family members in management and on the board. • consider issues of inheritance.

Corporate governance in Brazil Brazilian CG code suggests that “the existence of an advisory board, preferably made up of independent members, is good practice An advisory board: • allows independent members to contribute to the organization • gradually improve its corporate governance. The code calls for the advisory board to be guided by the same principles that govern the Board of Directors.

Corporate Governance around the World Corporate governance in Hong Kong and Singapore

Corporate governance in Hong Kong and Singapore British inheritance • rule of law, reliable law courts • education • sound government processes Good centres for business • low taxes • little corruption, strongly policed • excellent business infrastructure and services • business set-up cheap and quick • liquid stock markets • strong corporate and securities regulation.

Corporate governance in Hong Kong and Singapore The Asian family-based model Overseas Chinese firms are: • family-centric with close family control • controlled through an equity stake kept within the family • entrepreneurial often with a dominant entrepreneur • decision making centralised • close personal links emphasizing trust and control • paternalistic in management style • social fabric dependent on relationships and social harmony, • strategically intuitive with business seen as more of a succession of contracts or ventures, rather than strategic plans, brand-creation or quantitative analysis.

Corporate governance in Hong Kong A view of the overseas Chinese-family business: "Instead of strategy, the successful Hong Kong businessman has a modus operandi that is orientated towards the short term: endless opportunism is backed by a determination to narrow the odds. Their empires grow amoebae like, feeding on whatever comes to hand. The only predictable direction of growth is outwards." Far Eastern Economic Review

Corporate governance in Hong Kong Hong Kong stock market • family firms with control firmly kept within the family • mainland China based corporations many with dominant Chinese government control (SOEs) • a few large trading companies and banks Corporate governance a mixture of Anglo-American and Asian ideas.

Corporate governance in Hong Kong Hong Kong corporate governance code • comply or explain principles based • provisions to be followed (or report why not) • plus recommended good practice (optional) • chairman and CEO to be separate • one third board to be independent • minimum of 3 independent under listing rules • independent director not independent after 9 years • appointment of directors to be formal and transparent • audit, nomination and remuneration committees required.

Corporate governance in Singapore Most Hong Kong listed Chinese-family companies are incorporated in Bermuda, the Cayman Islands, or other offshore tax havens • privacy - less disclosure of ownership and financial information • taxation benefits • Financial benefits - movement of funds Hong Kong listing rules and takeover code apply, but other Hong Kong companies’ ordinances may not (other than those applying to overseas companies).

Corporate governance in Hong Kong Hong Kong’s Financial Reporting Council (FRC) became operational in 2007 as an independent statutory body under the Financial Reporting Council Ordinance 2006. Its role is to: • conduct independent investigations into possible auditing and reporting irregularities in relation to listed entities • enquire into possible non-compliance with financial reporting requirements by listed entities • require listed entities to remedy any non-compliance identified.

Corporate governance in Hong Kong The FRC can initiate investigations and respond to issues raised by anyone with information suggesting an auditing or reporting irregularity by a listed company, or non-compliance with reporting requirements The FRC does not itself have disciplinary or prosecution powers Auditing or reporting irregularities identified by the FRC are referred to the HKICPA for follow-up action Non-compliance with reporting requirements are referred to the Securities and Futures Commission or the SEHK.

Corporate Governance – Principles, Policies and Practices 3e