The Rise of Asian Capital Markets JC de Swaan. Renmin University June 20 th, 2009

Transcription

1 The Rise of Asian Capital Markets JC de Swaan Renmin University June 20 th, 2009

2 AGENDA Why Corporate Governance Matters Key Issues Corporate Governance in Asia Case Studies 1

3 Theory of the Firm Shareholder Value Principal responsibility of a firm is to maximize shareholder value Primary performance metrics should be measures of accounting and economic profit, dividends, and share price Board of directors represent the interests of shareholders Govern the firm by establishing policies Appoint the CEO and review his/her performance Approves annual budget and overall corporate strategy Stakeholder Value Firms should pursue the joint interests of all stakeholders Firms have social responsibilities, including toward: Workers Customers Suppliers Environment Local communities 2

4 Accountability of the Firm Corporate Governance Corporate Social Responsibility Structure of rights and responsibilities among the parties that have a stake in a firm Aguilera & Jackson, 2003 A set of mechanisms through which outside investors protect themselves against expropriation by the insiders LaPorta, Lopez-de-Silanes, Shleifer & Vishny, 2000 A company s responsibility beyond return to shareholders to include an acknowledgment of its responsibilities to a broad range of stakeholders throughout society including employees, customers, business partners, communities, and the environment Business for Social Responsibility 3

5 Why Does Corporate Governance Matter? Will improved corporate governance help business performance? Questions Facing CEOs What are the trade-offs? Will it put the firm at a disadvantage relative to less transparent competitors? Will it improve access to capital? Will it improve share price performance? 4

6 Why Does Corporate Governance Matter? Study Findings La Porta, Lopez-deSilanes, Shleifer, and Vishny (1997) Countries that protect shareholders have more valuable stock markets, larger number of listed securities per capita, and a higher rate of IPO activity than countries with lax shareholder rights La Porta, Lopez-deSilanes, Shleifer, and Vishny (1999) Firms in countries with better shareholder protection have higher valuation than firms in countries with inferior protection Barton, Coombes & Wong (2004) Based on a 2002 McKinsey investor opinion survey, investors were willing to pay a 25% premium for well governed Chinese firms and a 23% premium for well-governed Indian firms With stronger investor protections, investors both shareholders and creditors are willing to pay more for financial assets as protection lowers risk of being expropriated 5

7 AGENDA Why Corporate Governance Matters Key Issues Corporate Governance in Asia Case Studies 6

8 Core Issues Principal agent problem Conflict of interest between principal and agent Jensen & Meckling, 1976 Information asymmetry One party (e.g. senior management) has better information than another party (e.g. shareholders) and uses it to its benefit George Akerlof (1970) Michael Spence (1973) 7

9 Typical Break-Down in Corporate Governance Examples Conflict of interest Senior executives shareholders Controlling shareholder minority shareholders Shareholders/senior executives creditors CEO and other senior executives pursue their own interests at odds with those of shareholders e.g. Perquisites Controlling shareholders pursue interests at odds with minority shareholders e.g. privatizing when share is at lows Shareholders and senior management collude to withhold information from creditors or to swing for the fences Negative Outcomes Expropriation Nepotism Perquisites Siphoning Related-party transactions Diversion of opportunities from the firm Investor dilution Appointment of unqualified family members or friends to positions of responsibility in firm Empire-building Focus on revenues and market share Non-value creating acquisitions to expand scale 8

10 AGENDA Why Corporate Governance Matters Key Issues Corporate Governance in Asia Case Studies 9

11 Corporate Governance in Comparison US China India Japan NOT COMPREHENSIVE Key issues Misaligned interests between senior executives and shareholders Strong corporate governance laws, reinforced in 2002 with SOX But financial crisis has exposed major failings related to pernicious incentives and excessive CEO compensation Misaligned interests between controlling and minority shareholders When state is controlling shareholder When family is controlling shareholder Lack of transparency Selective disclosure Lack of board independence Weak insider trading laws Bankruptcy laws ineffective Frequent corp. scandals Misaligned interests between controlling shareholders (promoters) and minority shareholders Selective disclosure Some corporate scandals though generally seen as having better corporate governance than most Asian countries Pervasive crossholdings Institutional barriers against shareholder activism and hostile take-overs Evidence of collusion between Japanese banks and senior managers of firms to deter competition Recent regulatory changes Source: SOX laws (2002) Company Law (1993, 1999) Securities Law (1998) CSRC s Code of Corporate Governance (2002) Establishment of SEBI in 1992 Multiple committees to review corporate governance La Porta, Lopez-deSilanes, Shleifer, and Vishny; Rajagopalan and Zhang; JCdS Big Bang Laws (1996) 10

12 Shortcomings of Corporate Governance in China 1. High concentration of government ownership and influence 2. Opaque corporate ownership structures Results of 2005 Study 3. Lack of enforcement of minority shareholders rights 4. Lack of adequate financial accounting transparency 5. Lack of board of director independence 6. Lack of shareholder activism Source: HBS Case China Netcom: Corporate Governance in China 11

13 China Regulatory Institutions CSRC Chinese Securities Regulatory Commission Created in 1992 Oversees the Shanghai and Shenzhen exchanges and supervise the behavior of listed companies and their shareholders who are liable for relevant information disclosure in securities markets Objective to match requirements of other developed stock exchanges SASAC State- Owned Assets Supervision and Administration Commission Created in 2003 Oversees the 189 major SOEs and seeks to ensure that they maintain and create value through their restructuring and operations Evaluates their performance and that of their managers Source: HBS Case China Netcom: Corporate Governance in China 12

14 AGENDA Why Corporate Governance Matters Key Issues Corporate Governance in Asia Case Studies 13

15 China SOE Example China Netcom (906 HK Acquired) Key Take-Aways Share Price In HK$ One of two major fixed line telecom 30 companies, listed in HK and NY, now merged into China Unicom Challenge: Listed SOE so potential conflict between parent company which represents interests of State and minority shareholders Examples of best practices 5 independent non-executive directors on board Separation of chairman and CEO roles Creation of various committees Full review of corporate governance practices by McKinsey Source: Bloomberg Areas that can be improved Lack of disclosure Little shareholder activism Financial advisor selection for transaction made by CEO rather than board 14

16 China Small Cap Example Egana (48 HK) Share Price In HK$ Key Take-Aways Challenge Conflict of interest between rogue senior managers and rest of senior management, shareholders, and creditors Evidence of Break-Down in Corporate Governance Creation of fake trading accounts Misrepresentation of actual balance sheet and income statement Lack of independent board members Siphoning Source: Bloomberg 15

17 China Small Cap Example Textile Manufacturer/Retailer Share Price In HK$ Key Take-Aways Challenge Conflict of interest between controlling shareholders and minority shareholders/creditors Evidence of Break-Down in Corporate Governance Related party transactions Creation of fake trading accounts Misrepresentation of actual balance sheet and income statement Nepotism Lack of independent board members Siphoning Displacement of creditors Flight Seizing of assets Source: Bloomberg 16

18 India Example Satyam (SCS IN) Share Price In Rupees Key Take-Aways Largest corporate governance blow-up in Indian history IT Services company founded in 1987 and winner of 2008 Golden Peacock Award for Corporate Governance Founder announced in January 2009 that company s profits had been overstated for several years Question mark remains as to who was involved and how auditors, PwC, did not catch fraud May take 6 months for new auditors to restate accounts Tech Mahindra bought a 31% stake and has an offer outstanding for an additional 20% Source: Bloomberg 17

19 Japan Example Livedoor (4753 JP Delisted) 4753 JP (Delisted) Share Price In Yen Key Points 1,500 1,250 1, Internet service provider based in Tokyo, founded by Takafumi Horie and several student friends in 1995 Fast growth through controversial use of acquisitions and stock swap mergers Founder was high profile, celebrated by many for his Western M&A and capital markets focused approach, reviled by others, particularly among the establishment, for his brashness and aggressive style Offices raided for securities fraud in January 2006 Founder and executives jailed, company delisted in April 2006 Questions remain Source: Bloomberg 18

20 Japan Example TOC (8841 JP) Share Price In Yen Key Take-Aways Failed attempt at a hostile take-over of TOC by KK da Vinci (4314 JP), even though davinci s offer was higher than both share price and TOC Chairman s bid Chairman Otani made a Y800 management buy-out offer in April 2007 to pre-empt davinci from acquiring more than its 10% stake davinci followed with offers at Y1,100 and Y1,308 which failed to garner the targeted 45% ownership as management continued to back the much lower Y800 offer from the chairman Source: Bloomberg 19

21 Japan Example Bull-Dog (2804 JP) Share Price In Yen Key Take-Aways Another high-profile failed attempt at a hostile take-over, this time from a foreign fund, Steel Partners, targeting Japanese sauce maker Bull-Dog Multiple attempts by Steel Partners to gain control where thwarted by Bull- Dog s use of take-over defense Allowed all shareholders except Steel Partners to convert warrants it had issued into common shares, diluting Steel s 10% stake into 3% Tokyo High Court, in backing Bull- Dog s take-over defense, depicted Steel Partners as an abusive acquirer Source: Bloomberg 20