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PECC Macro Corporate Governance Scorecard Project:
Evaluation of Corporate Governance in East Asian
Economies
Stephen Yan-leung Cheung
and Hasung Jang
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Introduction
• The importance of corporate governance reforms in East Asian Economies
• National, regional and global initiatives
– PECC guidelines for good corporate governance endorsed by APEC in 2001
– OECD principle in 2004
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Corporate Governance:Asian Experience
Source: McKinsey, 2001
Independence and
performance
Capital market liquidity
Transparency and
accountability
CORPORATE CONTEXT
Shareholder environment
INSTITUTIONAL CONTEXT
Inefficient corporate
governance
Reliance on family and
state finance
Underdeveloped and illiquid
investment market
Incentives aligned with
core shareholders
“Insider boards”
Concentrated ownership
Limited market for corporate
control
Limited disclosure
Inadequate minority
protection
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Macro Corporate Governance Scorecard
Two surveys1. Rules and Regulations on Corporate Governance
• Stock-taking exercise• Based on 5 principles
– Rights of shareholders– Equitable treatment of shareholders– Role of shareholders– Disclosure and transparency– Board responsibilities
• Existing rules and regulations on corporate governance
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Macro Corporate Governance Scorecard
1. Rules and Regulations on Corporate Governance
• Research team consists of representatives from each East Asian economies, including China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand
• Institute of Directors or Research Institutes• Assistance from the regulatory agency
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Macro Corporate Governance Scorecard
2. The second survey on
• Market perception on governance practice
• Questionnaire distributed by Investment Fund Association
• Fund managers and analysts with investment exposure in the region
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Macro Corporate Governance Scorecard
3. Objectives
• Two different angles
– existing corporate governance framework
– Investors perception
• Not a finger-pointing exercise
• Mutual learning experience
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Rules and Regulations
• 103 questions
– 55 are used in the scoring
– 48 are used for confirmation
• Common and different features of each economy
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Rules and RegulationsArea of Evaluation
The Rights of Shareholders
Equitable treatment of shareholders
Role of Stakeholders
Disclosure and Transparency
Board Responsibilities
Sum
Number of questions surveyed
39 12 44 20 28 103
Number of questions included in evaluation
16 9 2 15 13 55
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Rules and Regulations
A. Rights of shareholders
• Information available to shareholders
• Voting system
• Shareholder participation
– appointment / removal of directors
– amendments of company articles
– major transactions
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Rules and Regulations
B. Equitable Treatment of Shareholders
• Definition of insiders
• Disclosure of insider transactions
• Penalties on insider trading
• Regulatory framework on related party transaction
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Rules and Regulations
C. Roles of Shareholders
• Employee incentive plan
• Employee safety and welfare
• Employee wage and benefit in the event of insolvency
• Disclosure on environmental issues
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Rules and Regulations
D. Disclosure and Transparency
• Amount of information required to be disclosed in the annual report
• Director shareholding
• Senior management shareholding
• Rotation of audit firm
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Rules and Regulations
E. Board Responsibilities
• Board subcommittee; audit, nomination, and remuneration
• Disclosure on director compensation
• Number of outside directors
• Mandatory training for directors
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Rules and Regulations
Area of Corporate Governance
The Rights of Shareholders
Equitable treatment of shareholders
Role of Stakeholders
Disclosure and Transparency
Board Responsibilities
Sum
Weight 1 30% 10% 5% 15% 40% 100%
Weight 2 20% 20% 10% 20% 30% 100%
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Rules and RegulationsRating result (Weighting 1)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
China Philippines Korea Hong Kong Malaysia Taiwan Indonesia Thailand Singapore
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Rules and Regulations
Rating result (Weighting 2)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
China Philippines Korea Thailand Malaysia Indonesia Hong Kong Taiw an Singapore
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Investor Evaluation
Results
• 10 questions
• 17 fund managers and 8 analysts
• 1 to 5 point scale
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Investor Evaluation1. How do you evaluate overall quality of corporate governance
practiced in each county?2. Shareholder rights are protected.3. Management respects shareholder value.4. Accounting reports including annual and semi-annual reports are
accurate and reliable.5. Disclosures are made timely and adequately.6. Board supervises the management independently and effectively.7. Rules and regulations on corporate governance are enforced
effectively.8. The financial intermediaries including accountants and auditors
can be trusted.9. Legal system including courts and prosecutors are fair and
independent.10. Foreign investors are equally treated as local investors.
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Investor EvaluationScore of sum of all 10 questions
0
5
10
15
20
25
30
35
40
45
Sing
apor
e
Hon
gKo
ng
Taiw
an
Kore
a
Thai
land
Mal
aysi
a
Philip
pine
s
Indo
nesi
a
Chi
na
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Conclusion (1)
• Economies are not significant different from each other in the first survey
• However, there are significant different in the second survey
• Rules and regulations are not that important
• Investor perception are very different
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Conclusion (2)
• Not a finger-pointing exercise
• MUTUAL learning experience
• REFORM not only in rules and regulations
• ALSO in the implementation and enforcement
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