Corporate Governance: Asian Experience

1. Corporate Governance:Asian Experience Stephen Yan-leung Cheung Professor of Finance (Chair) Department of Economics and Finance City University of Hong Kong December 14, 2001

2. Contents • Importance of corporate governance • Asian experience • Regional cooperation • Policy recommendations

3. The Asian Financial Crisis has underscored the importance of • A sound macro-economic policy; and • Financial infrastructure

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

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

6. Value of corporate governance Source: McKinsey & Co.

7. 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 market performance for 10 Asian places published in the FEER Source: Professor Gul (2001), City University of Hong Kong

8. 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 higher expected stock market performance for 10 Asian placed published in the FEER. Source: Professor Gul (2001), City University of Hong Kong

9. Family-controlled Asian Corporations • Asia: 60% of total market cap held by family-led firms holding more than 20% of the equity of listed companies • Compare this with • US - 18.3% • Australia - 12.2%

10. Case 1: Directors’ remuneration in Hong Kong • Sample period: 1991-1995 • 10% companies paid more than the company’s net profits • No relationship between firm performance and directors’ compensation

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

12. Case 2: Q-Tech Holdings Ltd (II)

13. Case 2: Q-Tech Holdings Ltd (III)

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

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

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

17. Case 3: Peregrine Group (IV) Source: DataStream

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

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

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

21. Summary of good corporate governance principles • Right of shareholders • Equitable treatment of shareholders • Role of stakeholders • Disclosure and transparency • Responsibilities of the board

22. Policy recommendations (I) • Disclosure of information • Financial and non-financial • Regional cooperation • Regional sanction • Information sharing • Standardize accounting principles • Education • Director • Licensing (continuous training programme) • Mandating training programme • Investor

23. Policy recommendations (II) • Independence of board • Proper evaluation system • Audit committee • Adoption of international standards • OECD • APEC • Political willingness

24. Crisis prevention • The nature of crisis has changed • No prediction model • The best medicine is a solid financial infrastructure

25. Thank You