Why Corporate Governance is Important in APEC Economies

Transcription

1 2008/SOM3/EC/WKSP/007 Agenda Item: 2 Why Corporate Governance is Important in APEC Economies Submitted by: Chile Workshop on Corporate Governance Lima, Peru 17 August 2008

2 Why Corporate Governance is Important in APEC Economies Héctor J. Lehuedé Advisor to the Chilean Minister of Finance APEC Workshop on Corporate Governance Lima, August 17, 2008

3 Disclaimer This presentation expresses my own views only and does not necessarily reflect the views of the Ministry, the Minister, or other members of the Staff.

4 An idea for this morning: Trade is the first stage of integration. Financial integration may follow suit. Corporate governance is key to that.

5 APEC and trade

6 APEC economies APEC, is the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia- Pacific region. APEC economies account for approximately 55% of world GDP and about 49% of world trade. APEC has promoted the reduction of tariffs and other trade barriers, dramatically increasing exports of goods and services across the region.

7 Intra-region trade Our economies have become good trade partners but that is only part of the picture.

8 More regional players Earnings contributed by foreign affiliates weight more every day in the total earnings of regional players. In the case of Chilean listed corporations with Latin American investments, they have increased on average 43,5% in a year.

9 Trade integration As trade increases, trust, networks and alliances are build among players of this Asia-Pacific market. A reliable and efficient supplier may become a joint venture partner or a potential takeover project. It may become convenient to grant credit to a trustworthy buyer, helping him increase its market share in its domestic economy. As proposed, trade may be the first stage of integration among markets; financial integration may follow suit if we allow it.

10 The capital market

11 From trade to capital markets Trade integration poses an extraordinary challenge for domestic enterprises with exporting capabilities. But it also imposes high competitive standards. As increasing competitiveness becomes crucial, efficiency and innovation strategies demand investment and quick responses. Access to equity or debt financing, at the lowest possible cost and in a timely fashion, can make the difference between success and failure for our entrepreneurs.

12 From capital markets to governance Capital markets allocate financing from domestic and foreign savings, to enterprises seeking means to produce more, better, cheaper, goods and services. The most efficient capital markets clear better, financing the most competitive enterprises. But those markets compete for financing supply and demand, as much as enterprises fight for market share. Literature is clear on the key role of investor protection and sound corporate governance rules, as unparalleled track to enhance the attractiveness of capital markets.

13 Governance and investment As reported by McKinsey & Company's Global Investor Opinion Survey, corporate governance is at the heart of investment decisions: Majority of investors are prepared to pay a premium for high governance standards More than 60% of investors say they avoid companies and some avoid entire countries with poor governance.

14 Governance vs. financials

15 Financial Integration

16 From trade to financial integration Increasing trade raises the number of exporters who turn to the capital market to finance innovation and efficiency, in an attempt to produce competitive products or to associate with trade partners. Capital markets compete for being the chosen platform for financing, adopting better corporate governance practices that will attract both domestic and foreign investors, FDI and portfolio investment. As a result, consumers are rewarded with better, cheaper, goods and services; while investors obtain safer returns.

17 From trade to financial integration There is correlation between trade volume, FDI and Portfolio investment flows. Chile is one example. Chile (flow) FDI in million USD Portfolio inv. And volume trade in million USD Total flows FDI Total flows portfolio investment Volume traded Source: International Financial Statistics, IMF/annual data available for Chile.

18 From trade to financial integration But that is true for Australia too. Australia (flow) Q1 1997Q4 1998Q3 1999Q2 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 Volume trade in million USD FDI and portfolio inv. in million USD Volume traded Total flows FDI Total flows portfolio investment Source: International Financial Statistics, IMF/annual data available for Australia.

19 From trade to financial integration And for Singapore. Singapore (flow) Volume traded in million USD FDI and portfolio investment in million USD Volume traded (flow) Total flows FDI Total flows portfolio investment Source: International Financial Statistics, IMF/annual data available for Singapore.

20 From trade to financial integration And for Canada, just to name a few economies. Canada (flow) Volume traded in million USD FDI and portfolio investment in million USD Volume traded (flow) Total flows FDI Total flows porfolio investment Source: International Financial Statistics, IMF/annual data available for Canada.

21 From trade to financial integration Million USD Million USD The correlation is also present when we look for the stock of FDI and portfolio investment Chile Foreign assets locally owned (stock) Local assets owned by foreigners (stock) Volume traded (flow) 2002 Singapore Volume traded (flow) Foreign assets locally owned (stock) Local assets owned by foreigners (stock) Assets in million USD Volume traded in million USD Q1 1997Q Q3 1999Q2 2000Q1 2000Q4 Australia 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 Foreign assets locally owned (stock) Local assets owned by foreigners (stock) Volume traded (flow) Canada Q3 Volume traded (flow) Foreign assets locally owned (stock) Local assets owned by foreigners (stock) Volume trade in million USD FDI and portfolio investment in million USD

22 APEC corporate governance

23 The role of corporate governance Corporate governance aims to reduce the cost for investors to coordinate and monitor the administration of the enterprise, preventing an agency problem. In many Asian and Latin American economies, that has been solved by the emergence of a controlling shareholder that closely supervises the administration. But those controlling shareholders pose a new threat of minority shareholder expropriation, that also needs to be handled carefully. This is particularly true when minority shareholders increase their bearing and number.

24 A domestic public policy issue Institutional investors, particularly private pension funds, manage the savings of many individuals, becoming a progressively more relevant player in the capital market. In the case of Chile, pension funds invest the savings of 50% of the population and, together with other institutional investors, handle funds equivalent to 100% of Fixed income stock ownership 18% Institutional investors Others 82% the Chilean GDP. Source: Deutsche Bank, data for 2007

25 An international public policy issue Chilean institutional investors hold 82% of fixed income stock and are responsible for 58% of daily trading of shares. 42% Stock volume (daily traded) Source: Deutsche Bank, data for % Institutional investors Others Those funds need protection while invested in their domestic capital market, but also when invested abroad. Then, agreement on minimum standards and best practices, compliance with basic corporate governance principles and monitoring across the region, become essential for all economies involved.

26 APEC corporate governance Standards of corporate governance are highly monitored. APEC is doing fine. It s average score in protecting investors is even higher than the OECD average, according to the 2008 World Bank Doing Business report Protecting Investors Disclosure Index APEC Countries Director Liability Index Shareholder Suits Index Investor Protection Index OECD

27 Corporate governance at APEC But there is still strong variance among APEC Economies. Apec countries OECD APEC countries Australia Brunei Canada Chile China Colombia Hong Kong, Indonesia Japan Korea Malaysia Mexico New Zealand Papua New Peru Philippines Russia Singapore Thailand United States Vietnam Disclosure Index Investor Protection Index Source: Doing Business 2008

28 The moving benchmark Best practices are being constantly improved and APEC economies are part of the reform trend. Investor Protection Index Change between ,5 2 1,5 1 0,5 0 Australia Canada Chile China Colombia Hong Kong, Indonesia Japan Korea Malaysia Mexico New Zealand Papua New Peru Philippines Russia Singapore Thailand United States Vietnam -0,5-1 Source: Doing Business 2008

29 The role of reform Best practices extend with the WB ROSC, the OECD Principles of Corporate Governance, and initiatives like this workshop.

30 Reform in Chile In 2001 we had a key reform on public tender offers. This year we passed a major reform to our pension system, improving the governance of pension funds. We are halfway through with a corporate governance reform that promotes self-regulation, faster disclosure, more independent directors and harsh controls for insider trading. Another bill of law is updating the governance of SOEs. We are revising the structure of our securities regulator. We are in the middle of the OECD accession review. and we are happy to be that busy.

31 An that was the idea: Trade is the first stage of integration. Financial integration may follow suit. Corporate governance is key to that. And this is important in APEC economies. Thank you,

32 Why Corporate Governance is Important in APEC Economies Héctor J. Lehuedé Advisor to the Chilean Minister of Finance APEC Workshop on Corporate Governance Lima, August 17, 2008