Title: Emerging Market Finance: Lecture 5: Corporate Governance Issues
1Emerging Market FinanceLecture 5 Corporate
Governance Issues
- Separation between ownership and control
- How can property rights be protected for all
shareholders? - Incentive issues how to ensure that managers
will make the right decisions?
2Historically Speaking
- Back in 1700 or even 1800, corporate governance
was not a big problem, and necessary institutions
were not demanding yet - Because there were mostly family businesses
3Ownership structures of public companieswhich
form is the best?
- Diverse ownership with many small shareholders
extreme separation between ownership and control - Family-controlled some separation between
ownership and control, with a family being the
controlling shareholder.
4Problems with Dispersed Ownership
- The Enron example
- The case of Investment Privatization Funds
(IPF) in the Czech Republic and Russia - Key reason it may not be worth any shareholders
efforts to mind the firms business, because each
shareholder holds too small a stake.
5But, the scale and scope of modern corp. requires
large financing, even arms-length financing. It
takes a lot to support publicly traded
corporations or stock market!
Regulators (SEC)
The Court
Public Corp.
Investors Millions
Stock market
The Board
The Press Mkt Partic.
Auditors Others
6Internal governance design issuePositive
Incentives to Resolve Conflicts between
Management Shareholders
- Design 1 performance-based bonus
- Design 2 give shares to CEO and other top
executives - Design 3 stock options
7In the U.S., how much did the CEO get for each
10,000 of Shareholder Value Increase?
Shares owned by CEO
Bonus
Stock Options owned by CEO
In Total
8Do Executive Incentives Make any Performance
Difference?
Diff in ROE
Diff in Stock Returns
Two groups of companies used (1) public
companies for which the board required the CEO to
hold a minimum level of shares and (2) firms in
the same industry but without minimum
shareholding requirement for CEO
9Absent of Reliable Institutions
- What can the shareholders do?---- One way is to
have large shareholders or concentrated
ownership, so that someone cares!
10(No Transcript)
11(No Transcript)
12Problems with concentrated ownership The case of
Long-Fa Corp in China
- On May 25, 2000, there were two Legal-Person
Share transfers - 10.7 million shares from the largest shareholder
to Nan-Du Group at 4.38 per share (to become 3rd
largest shareholder) - 12.87 million shares to another firm at 2.19 per
share (to become 2nd largest shareholder)
13Question Why Pay More on Same Day?
10.7 million shares _at_ 4.38
Largest Shareholder
Nan-Du
(Paid 23.43 million more)
12.87 million shares _at_ 2.19
Another shareholder
Past 3rd Shareholder
14The first related-party asset swap Sept. 2000
Sell 49.5 of Nan-Du Network _at_ assessed value
117.1 million. Book value 63.21 million
Nan-Du
Long-Fa Corp.
Sell Long-Fa Ski Resort _at_ assessed value 76.1
million. Book value 75.43 million
15Second related-party Transaction May 2001
Sell 37 of Nan-Dus Cable Company _at_ assessed
value 83.72 million. Book value 35.93 million
Long-Fa Corp.
Nan-Du
16After the Tunneling Efforts
- Long-Fa Corps earnings dropped 25 from 2000 to
2001 - Revenues dropped 15.2
- Its ROE dropped to 2.56 in 2002.
- After selling its worst assets to Long-Fa Corp.
Nan-Du decided to sell its holdings of Long-Fa _at_
2.8 per share, in March 2002.
17Another common problem
- Voting (control) rights often do not correspond
to cashflow rights you pay the same price for
a share, but do not get the same rights as the
controlling shareholder does on a per-dollar
basis - The use of pyramid holding structure to commit
the least cash but hold a controlling position
18Case of the Ayala family in the Phillipines
Claessens, Djankov Lang (2000, J. of Fin. Econ.)
19Case of the Li family in Hong Kong
20Back to Dispersed Ownership Any mechanisms to
make shareholders more active?
- Class action suits an efficient way for outside
shareholders to play a more active role - Market for corporate control hostile takeovers