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R. real. a university for the. world. Are East Asian companies benefiting from Western board practices?. By John Nowland. R. real. a university for the. world. Introduction.
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R real a university for the world Are East Asian companies benefiting from Western board practices? By John Nowland
R real a university for the world 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?
R real a university for the world 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?
R real a university for the world 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).
R real a university for the world 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).
R real a university for the world 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.
R real a university for the world 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.
R real a university for the world Governance Variables Overall board governance score = 1 point for each independent director, 1 point for Chairman/CEO split, 1 point for each committee.
R real a university for the world Methodology • Changes in governance measures to company characteristics: • Changes in value and performance to changes in governance measures:
R real a university for the world Descriptive Statistics
R real a university for the world Ownership Roughly half family-owned and half not family-owned.
R real a university for the world Overall Board Governance
R real a university for the world Explanation • Companies from Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand have improved their board governance over the period (1998-2004). • 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!
R real a university for the world Explanation • In 1998, larger companies had better board governance and family-owned companies had poorer board governance. • Over the period (1998-2004), 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.
R real a university for the world 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.
R real a university for the world 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.
R real a university for the world 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.
