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Effective Corporate Governance in Asia
Panelist: Joseph P.H. Fan
Professor of Accountancy and FinanceDeputy Director, Center for Institutions and Governance
Chinese University of Hong Kong
Prepared for panel discussion at the APEC High Level Conference on Structural Reform, September 8-9, 2004,
Tokyo
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Outline
Why some Asian companies failed to produce reliable financial information?Auditor, audit committee, and audit supervisory agencySelf-enforcement: the importance of reputation building in weak institutional environmentsUltimate solution: institutional reforms
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Why some Asian companies failed to produce reliable financial information?
Complex organizational and ownership structuresCovering up: difficulties of putting investors’ interests before family interestRelationship-based business dealings, rent seeking, or even corruptionPrevent predation and expropriation (sometimes by governments) in weak property rights systemsIf these institutional constraints cannot be relieved, it would be difficult to improve corporate transparency even with new accounting standards, laws, and regulations
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C h e n g Y u T u n g
C h o w T a i F o o k E n te rp r is e s L td
A s e a n R e s o u rc e sH o ld in g L im ite d *
(0 0 2 2 )3 4 %
IM C H o ld in g L td . *( 0 1 5 8 )
2 7 %
N e w W o r ld D e v e lo p m e n tC o m p a n y L td . *
( 0 0 1 7 )3 7 .8 %
L e e H u n gD e v e lo p m e n t *
( 0 0 6 8 )6 %
P a u l Y . IT C C o n s t ru c t io nH o ld in g s L td . *
( 0 4 9 8 )2 0 .2 %
« n µ Ø § ë ¸ ê ª Ñ
F e r g u rs o n H o te lH o ld in g s L td .
4 7 .3 %
Q u e e n s w a y H o te lL td .
2 4 .8 %
N e w W o r ld C h in aL a n d L td . *
( 0 9 1 7 )7 2 .0 5 %
N W D ( H o te ls ) In v .L td .6 4 %
N e w W o r ldT e le p h o n e
H o ld in g s L td .9 5 %
N e w W o r ldS e rv ic e s L td .
5 0 %
N e w W o r ldC y b e r B a s e *
( 0 2 7 6 )3 4 .7 4 *
N e w W o r ld In f r a s t ru c tu reL td .*
(0 3 0 1 )6 0 .6 4 %
P a u l Y . P ro p e r t ie sM a n a g e m e n t L td
1 0 0 %
A s ia In fo rm a t io nR e s o u rc e s (H o ld in g s )
L td .*(8 0 2 5 )
1 3 .8 8 %
B e i j in g B e id a J a d e B irdU n iv e rs a l S c i- T e c h C o . L td .*
(8 0 9 5 )7 .2 6 %
P a u l Y . R e a lE s ta te A g e n c y
L td1 0 0 %
A irC o m m u n ic a t io n s
(A s ia ) L td .
D y n a m ic W inA s s e ts L td .
C y b e r Q u e s t L td .
N e w W o r ld F ir s tF e r r y S e rv ic e s
( M a c a u ) L td .1 0 0 %
V a s t E a r n g ro u pL td (a s u b s id ia r y
o f N e w W o r ldD e v . C o . L td )
K w o o n C h u n gB u s H o ld in g s
L td .*(0 3 0 6 )
2 1 .0 3 %
N e w W o r ld R is kM a n a g e m e n t
8 5 %
W a i K e e H o ld in g s L td .*(0 6 1 0 )
1 6 .5 4 %
N e w W o r ld F ir s tH o ld in g L td .
1 0 0 %
T a i F o o k S e c u r i tyG ro u p L td . *
( 0 6 6 5 )2 0 %
K w o o n C h u n gC y b e r L td .
1 0 0 %
N e w W o r ld F ir s t F e r r yS e rv ic e s L td .
1 0 0 %
N e w W o r ld F ir s t B u s S e rv ic e sL td .
1 0 0 %
C h o n g q in gT o u r is m (G ro u p )
C o . L td .6 0 %
T a i F u n g C o a c h &T ra d e T ra v e l
1 0 0 %
N e w L a n ta o B u sC o . ( 1 9 7 3 ) L td .
9 9 .9 %
S u n d a r t T im b e rP ro d u c ts C o . L td .
6 5 %
N g o K e eC o n s tru c t io n C o .
L td .1 0 0 %
G ra n d e u r B u ild in gM a te r ia l
(H o ld in g s ) L td .1 0 0 %
Z e n P a c if icC o n s t ru c t io n L td .
1 0 0 %
R o a d K in gIn f ra s tru c tu re L td .*
(1 0 9 8 )4 9 .1 9 %
C h o n g q in g I r o n &S te e l C o . L td .*
(1 0 5 3 )3 %
P a c i f ic P o r ts C o .L td .*
(0 6 5 9 )2 5 %
S h e n y a n g P u b licU ti l i ty C o . L td . *
( 0 7 4 7 )9 %
C S X W o r ldT e rm in a ls H o n g
K o n g L td .3 3 .3 4 %
A s ia C o n ta in e rT e rm in a ls L td .
3 6 .3 3 %
A T L L o g is t ic sC e n tre H o n g
K o n g L td .3 9 %
S h e n y a n g S h a n h a iH o t E le c t r ic ity C o .
L td .1 1 .1 1 %
Q in g h u a Z ig u a n gT e c h n o lo g y V e n tu re
In v . C o . L td .2 2 .5 %
S h e n y a n gD e v e lo p m e n t R e a l
E s ta te C o . L td .9 9 %
S h e n y a n g W a te rC o . L td .9 9 .3 7 %
U n ith a i S h ip y a rd& E n g in e e r in g
L td .2 5 %
W a n B o n g C o .L td .
1 0 0 %
* - P u b l ic i ty l is te d C o . in H o n g K o n g
C h o w T a i F o o kN o m in e e
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Percentage of listed Asian companies affiliated with business groups(Source: Claessens, Fan, Lang, 2002)
0
10
20
30
40
50
60
70
80Hong KongIndonesiaJapanSouth KoreaMalaysiaThe PhilippinesSingaporeTaiwan ThailandAll economies
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Percentage of listed companies that are diversified (with multiple segments)
0
10
20
30
40
50
60
70
80Hong KongIndonesiaJapanSouth KoreaMalaysiaThe PhilippinesSingaporeTaiwanThailandAll Economies
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The Formosa Group (Taiwan) of the Wang’s Family
Nan Ya Plastics
37.20%2.15%
4.93%
4.75%
4.08%
Wang’s family
Investment Companies and other entities
FormosaPlastics
Formosa Chemicals and Fiber
Formosa Taffeta
8.41%12.97% 18.66%
3.57%
36.44%13.13% 13.12%
4.44%
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Why some Asian companies failed to produce reliable financial information?
Complex organizational and ownership structuresCovering up: difficulties of putting investors’ interests before family interestRelationship-based business dealings, rent seeking, or even corruptionPrevent predation and expropriation (sometimes by governments) in weak property rights systemsIf these institutional constraints cannot be relieved, it would be difficult to improve corporate transparency even with new accounting standards, laws, and regulations
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Family control
0
10
20
30
40
50
60
70
80
Percentage of firms controlled by families
HKIndonesiaS. KoreaMalaysiaSingaporeTaiwanThailandEast AsiaJapanAll
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Asia’s corporate governance problems are often induced by country level institutional constraints
Weak disciplinary market forceHostile takeovers are rare in AsiaIn china, state shares are not freely transferableProduct markets are heavily regulated in some economies
Weak laws and public enforcementSignificant increase in the quantity of laws, but enforcement is weak
Corruption and weak public governance in many Asian economiesThese country institutional factors affect the nature of business dealings in Asia and shape corporate governance practices
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Corruption and corporate transparency
Why corporate transparency in Asia is low, despite new laws and regulations requiring more disclosure? Why do Asian investors seldom read financial reports?Disclosure of proprietary information can be costly, even investors agreeFan and Wong, Journal of Accounting and Economics, 2002
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Opacity Premium in AsiaSource: PricewaterhouseCoopers
0
2
4
6
8
10
12
14
Economy
ChinaTaiwanHong KongIndonesiaJapanKorea (South)SingaporeThailand
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Corruption in Asian Economies(Source: Transparency International: mean Corruption Perception Index 1992-2000)
0123456789
Economy
ChinaTaiwanHong KongIndonesiaJapanKorea (South)SingaporeThailand
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Corporate governance roles of external auditors in Asia
ImportantAcademic research (Fan and Wong, Journal of Accounting Research) has found that high quality auditors improve the credibility of accounting information to investors and help strengthening corporate governance in East Asia
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Market Share of Big-Five and Big-Five Affiliated Auditors in Asia, US, and UK
0102030405060708090
100
Economy
TaiwanHong KongIndonesiaJapanKorea (South)MalaysiaPhilippinesSingaporeThailandUnited StateUnited Kingdom
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Auditor oversight agency and audit committee
Audit oversight bodyAgree that creating an audit oversight body is important. Does the agency have strong disciplinary power?Will Asian governments and courts respect and help enforce the disciplinary actions recommended by the audit overseeing agency?It may be unrealistic to rely on auditors as gatekeepers
Will an audit committee help in Asia?Yes if one can bypass institutional constraints
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Boards of directors are weak in governance: the case of China (Chen, Fan, Wong, 2004)
Board size 9.22 (range 5 to 19)Manager directors 34%Largest shareholder 53%Minority shareholders 0%Politicians 32%
Central govt 4%Local govt 19%Others 9%
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Boards of directors are weak in governance: the case of China (Chen, Fan, Wong, 2004)
Directors from unaffiliated firms(“expert” directors) 18%
Professionals 5%Academics 14%Woman directors 5%Age 47Education Between Junior college
and university
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Corruption and board professionalismShougang Group in ChinaPercentage of Directors that Are Professionals –
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Corruption CaseCorruption Case
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Corporate governance in weak institutional environments: what work?
Reputation building, in my view, is the most important self-enforcing mechanism of corporate governance
Reputation of profitabilityReputation of accountabilityThe two do not always go hand in hand
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How do Asia’s public corporations build reputation?
Repeated transactions that show good results and reliabilityBonding (borrowing someone else’s reputation)
Foreign partners in joint ventures or strategic allianceForeign listingsInformation intermediaries, such as rating agencies, financial analysts, and external auditors
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Reputation ratings
Corporate Reputation Rating
http://www.ratingresearch.com/
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Where else do we find reputation at work?
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The CEO that holds a bible – does it work?
He is the CEO of a listed micro-electronic company in TaiwanHe always holds a bible in front of media and prays before company meetingsHe was recently married to a daughter of Mr. Wang Young-Ching, the chairman of Formosa Group, and the “god of management” in TaiwanHis company has been involved in various law suits involving stealing trade secrets from competitors. He and his wife are prosecuted by the Taiwan court for 4 years in prison and monetary penaltiesBorrowing the reputation from the two gods, will he and his company prevail?
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ConclusionsSustainable growth of corporations and economy as a whole is the ultimate reward of effective corporate governanceReputation is the most important corporate governance mechanism in Asia that all corporations should seek to establish with their stakeholdersBut there is a limitation of the self-enforcing solution. The ultimate solution is institutional reform that improve public governance and law enforcement