4th Asian Roundtable on Corporate Governance

1. 4th Asian Roundtable on Corporate Governance After the corporate governance crisis: An opportunity for Asian corporations? Stilpon Nestor Principal, Nestor Advisors Ltd. Mumbai, 11-12 November 2002 Nestor Advisors Ltd.

2. The post- crisis macro trends • Institutional investors around the world are now putting governance at the top of their agenda. • Boards and independent directors are assuming increasing responsibilities in the way companies are governed. • Markets and regulators are increasingly focusing on the integrity of corporate advisors and their conflicts of interest Nestor Advisors Ltd.

3. The corporate value dharma Strategic planning Risk management Social responsibility concerns Business plan Management quality Stakeholder issues Executive/board liability Corporate Value Less scope for politics Corporate governance Executive leadership Lower risk to outside investors Alignment of interests Nestor Advisors Ltd.

4. Contestable: Dispersed ownership Highly paid professional executives with short time horizons Large asymmetry between cash flow/control rights Highly developed market, regulatory and judicial mechanisms for contestability of control Change = change in control (real or threatened) Non-contestable Concentrated ownership Long-term “ driver” management control Private benefits of drivers higher but exec. compensation lower. Minimal reliance on outside financial or judicial control contests Change= change in the terms of finance and the driver’s perception of value The non-contestable governance model of pubic companies Nestor Advisors Ltd.

5. Can good governance exist in non-contestable markets? Yes, if: • Legal framework allows driver abuse to be checked • Drivers are willing to take action to improve governance Nestor Advisors Ltd.

6. Why should owner-driven firms be willing to improve governance? • Corresponds to strategic objectives • product market strategy • corporate strategy • human resources strategy Nestor Advisors Ltd.

7. The story of South Telco: background • Dominant fixed line state monopoly in a market that is becoming competitive/no. two in mobile telephony against large local competitors in rapidly maturing market • 70% privatized in South market: 3 tranches since 1994 • ADRs in NYSE • Low level of debt and ROE,ROCE,E/client above average among peer group but valuations below average Nestor Advisors Ltd.

8. Product market strategy: Growth through regional expansion New markets/new risks High investment needs/low retained earnings, difficult access to bank finance, no implicit state guarantee to bond/bank creditors Governance New competences on the board (board decisions driven by politics) An active audit committee with appropriate systems (scandals= increasing vulnerability of top management) Trust by institutions: independence/nomination/remuneration Better investor communication The story of South Telco: strategy and governance Nestor Advisors Ltd.

9. Corporate Strategy: Minority state participation in the medium term Regional acquisitions into state controlled, often listed companies People strategy: Changing from civil servant to service culture Employee shareholders following privatization Governance: Clarify relationship of government (s) as owner (focus on boards not CEO) Minimize interference and political vulnerability of executive through rigorous accountability procedures More performance-related pay More management awareness of shareholder value The story of South Telco: strategy and governance Nestor Advisors Ltd.

10. Why should owner- driven firms be willing to improve governance? • Corresponds to owner/driver strategic objectives: • family= working with the upper tier as well as the company “When Ayala Corporation went public in 1976, we made a very conscious decision that we didn’t want to find ourselves in any conflict of interest. All matters that relate to the family are elevated one level to a single family holding structure. Although it is not a public holding company, its ownership in Ayala corporation is direct and free of the opacity and layering that one might find in other structures. Through that family structure, we choose who will represent us in the governance of the public holding company and act with one voice. … All family members are free to do with (the income from their ownership) as they please so long as they do not invest in ventures that compete with Ayala Corporation’s business. This… ensures that if a partner invests with us, it will not be competing with another entity in which a family member has an interest….The CEOs of all our subsidiaries...are people of the highest calibre who are not from our family and are promoted and rewarded strictly on professional merit...” Jaime Zobel de Ayala,CEO Nestor Advisors Ltd.

11. Do firm strategies to improve corporate governance pay? Yes, they do (Clapper and Love 2001): • One standard deviation firm-level improvement in an less emerging market results in a 33% improvement in Tobin’s q (a measure of market valuation of a firm’s assets ) • One standard deviation improvement in a developed (i.e. OECD) market results in an 18% increase in Tobin’s q. Nestor Advisors Ltd.

12. How to facilitate firm action for better governance? By making virtue evident and investable: • Bovespa CG Segment • Companies accounting for 20% of total market capitalization and 19% of all trading activity have listed in the CG segment • The Corporate Governance segment index fell by -1,58% versus a -23,3% fall for the general BOVESPA index. Nestor Advisors Ltd.

13. Conclusions Good governance is matching: • Driver aspiration/firm strategies with global investor expectations • Local/regional corporate and enforcement cultures with global best practice Creating trust while preserving competitive advantages Nestor Advisors Ltd.

14. Conclusions “Keep things as simple as possible but not a bit more” Albert Einstein Thank you Nestor Advisors Ltd.