You are on page 1of 16

Corporate Governance in Emerging Markets

New Thinking on the Impact of Strong Corporate Governance on Sustained Growth, Firm Value and Economic Confidence

8 December 2011 British Consulate-General, 1 Supreme Court Road, Hong Kong

Held with the support of


Overview As part of its long term programme on corporate governance in emerging markets, the International Centre for Financial Regulation, with the support of the British-Consulate General, is holding a one day conference to present some of its new research on this topic and to discuss the outcomes of the high level roundtables held in the Middle East and South Asia earlier in the year. The conference is being staged at the British Consulate-General, 1 Supreme Court Road, Hong Kong on 8 December 2011 and we are delighted that UKTI and the British Foreign and Commonwealth Office continue to support our programme in this crucial area of regulation and reform. The ICFR is particularly interested in developing a clear understanding of both the macroeconomic and micro-economic benefits of robust yet practical governance structures. For a corporation, does good governance have a long term demonstrable effect on board performance, company performance and firm value? For an economy, how can effective governance widen and deepen financial markets by improving attractiveness and reducing risk for investors? This invitation-only event, entitled Corporate Governance in Emerging Markets - New Thinking on the Impact of Strong Corporate Governance on Sustained Growth, Firm Value and Economic Confidence will feature debates led by the ICFR and some of the worlds leading thinkers on this subject who have submitted papers to the ICFR to further our research. There will be ample opportunity to contribute to the debate and we believe that discussion amongst a diverse yet expert audience will be an essential part of this short yet focused conference. The main objective of this programme is to inform and support policy decisions and practice development across the emerging markets. The ICFR is solely focused on practical and implementable outcomes from its work. As such, we believe that this programme will be of significant benefit to market participants, the official sector, sponsors and the markets themselves. ICFR events and research are recognised as being of consistently high quality, content rich, and significantly contribute to the crucial debate on global financial regulation. We would also like to thank the Eversheds, Asian Corporate Governance Association, Deloitte, the Hong Kong Securities Institute, the Institute of Chartered Accountants in England and Wales, and the Law Society of Hong Kong for their invaluable assistance in staging this event. Venue British Consulate-General, 1 Supreme Court Road, Hong Kong.
2 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

08:30 09:00 Registration Coffee and light refreshments Introduction to the ICFR Series on Corporate Governance by Charles Taylor, Chief Operating Officer, International Centre for Financial Regulation. Mr Taylor will explore the findings of the ICFR governance programmes recently held in the Middle East and South Asia as well as trends in governance from the Developed Markets. This session will highlight the different pressures on governance faced by these markets and the varied responses to these. In response, Jamie Allen, Secretary General, Asian Corporate Governance Association will give his view of the governance issues facing the East Asia market and the likely regulatory response. Both Mr Taylor and Mr Allen will take questions and encourage debate among the delegates. 10:00 11:15 Rethinking Corporate Governance: from Shareholders Interests to Stakeholders Interests Does the firm only exist to increase or maximise shareholders wealth or should managers also seek to serve the interests of employees, customers, suppliers, government, creditors and broader society? Dr Sumanjeet Singh, Assistant Professor, University of Delhi, India will explore this question using the findings from his recent paper and will discuss the need for balance and conciliation when defining good corporate governance structures. In response Hugh Gozzard, Principal, Deloitte will consider the conclusions of Dr Singhs paper and their potential influence on governance policy and practice in Hong Kong and beyond and call on the audience for questions and discussion. 11:15 11:45 11:45 13:00 Refreshment Break Stakeholder or Shareholder? Corporate Governance, Firm Performance and Labour Welfare Based on a rich set of data from a study of 1,268 Chinese firms, Ninghua Zhong, Department of Finance, Hong Kong University of Science and Technology, will discuss the relationship between higher levels of corporate governance, higher profitability and better labour welfare. In response Derek Jackson, Founder, GRC Asia, will consider these findings and their application to the wider financial sector and chair the audience debate arising from Mr Zhongs presentation. 13:00 14:15 Lunch

09:00 10:00

3 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

14:15 15:30

Governance: Board Structure and Effective Performance Nicholas Emmerson, Partner, Eversheds LLP and Charles Taylor will lead the afternoon session on board structure and performance. Mr Emmerson will deliver the findings of the Eversheds Board Report published earlier this year and consider their applicability to board structures in different emerging markets. They will call on Dr Supriti Mishra, Associate Professor, IMI, Orissa, India and Dr Pitabas Mohanty, Professor, XLRI, Jharjhand, India to present their paper on the relationship between good governance and firm performance using evidence from the Indian economy. They will discuss the three dimensions of governance namely the legal dimension, the board dimension and the proactive dimension and their findings that companies that perform well in these dimensions do indeed report better financial performance. The speakers will encourage a debate on these issues with the delegates.

15:30 16:00

Conclusions, messages to policy makers and next steps Barbara Ridpath, Chief Executive and Charles Taylor, Chief Operating Officer, International Centre for Financial Regulation will draw conclusions from the days conference and will discuss these with the delegates before highlighting the key messages that this programme can pass to policy makers across the emerging markets.

16:00 17:00

Networking and refreshments

4 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

Bibliography and Background Information

In order to inform the debate the ICFR has prepared a short bibliography that will help the delegates gain further insight into some of the current thinking on corporate governance.

General Governance Resources The EU Corporate Governance Framework

European Commission, April 2011 The European Commission launched a public consultation which addressed different ways in which corporate governance of European companies can be improved. The consultation covered a number of issues ranging from: i) how to improve the diversity and functioning of the boards of directors, ii) monitoring and enforcement of existing national corporate governance codes, and iii) how to improve the engagement of shareholders. The ICFR response to this consultation is available at:

Does Governance Travel Around the World? Evidence from Institutional Investors
ECGI Finance Working Paper, No. 267/2010 Aggarwal, R. et al., 2010 This paper analyses the effect that institutional shareholders have on corporate governance by looking at holdings in companies from 23 countries from 2003-2008. Their findings suggest that there is a positive association between international institutional investment and firm-level governance. However, the origins of both the institution and the firm are crucial: when the institution comes from a country with strong shareholder protection, they are more effective in promoting good governance; when firms are based in a jurisdiction with weak shareholder protection; foreign institutional investors play a decisive role. Firms with higher institutional ownership are more likely to terminate poorly performing CEOs, as well as exhibit improvements in valuation over time. The results suggest that international portfolio investment by institutional investors promote good corporate governance practices around the world.

Synthesis Report (International Finance Corporation). Second International Research Conference on Corporate Governance in Emerging Markets
Ararat, M. et al., July 2009$FILE/SynthesisRepor t_9101309.pdf This synthesis report of the Second Internal Research Conference on Corporate Governance in Emerging Markets provides summaries of all eight plenary sessions and keynote speeches at the event. A range of topics were discussed, including the relationship between corporate governance and firm value, that between stakeholders and cultural values, and more direct studies into, for example, Brazilian corporate governance. The first keynote speech argued that it is misguided to 5 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

superimpose governance tools onto emerging economies from elsewhere. The second specifically looked at corporate governance in India and highlights further research areas to address weaknesses embedded in the Indian governance system.

Corporate Governance Externalities

ECGI Finance Working Paper, No. 195/2008 Acharya, V. and Volpin, P., 2008 This paper discusses the problems of externalities in the managerial labour market. A firms governance is both a product of the firm itself, but one which affects and is affected by the choices of other competing firms. The paper argues that where firms have weaker governance, they will pay managers more as a means of incentivising them. This leads to firms with better governance paying an equivalent amount. This externality leads to underinvestment in governance in the economy at large, and therefore a reduction in standards. The paper suggests that the traditional method to guard against such negative externalities the creation of universal standards of auditing and disclosure may turn out to be too onerous to be carried out effectively. As such, it goes on to suggest two market-based methods of maintaining governance levels: forcing firms to disgorge excess cash, which would create the need to raise external capital, and encouraging shareholders to take and maintain a strong role in the firm.

Governance of Financial Institutions Principles for Enhancing Corporate Governance

Basel Committee for Banking Supervision (BCBS), March 2010 Subsequent to the 2006 guidance document, the crisis has highlighted a number of corporate governance failures and lapses. As such, the Committee decided to reassess and revise the 2006 principles. The themes that the Committee discuss as key to the governance of financial firms are the following : (1) the role of the board; (2) the qualifications and composition of the board; (3) the importance of an independent risk management function, including a chief risk officer or equivalent; (4) the importance of monitoring risks on an on-going firm-wide and individual entity basis, (5) the board's oversight of the compensation systems; and (6) the board and senior management's understanding of the bank's operational structure and risks. The principles also emphasise the importance of supervisors regularly evaluating the bank's corporate governance policies and practices as well as its implementation of the Committee's principles.

Final Document on Principles for Enhancing Corporate Governance

BCBS, October 2010 The Basel Committee for Banking Supervision (BCBS) issued a final set of principles for enhancing good corporate governance standards for financial institutions. BCBS see corporate governance as a key aspect of ensuring good supervisory guidance both for individual financial institutions and the entire global financial system. The first set of Principles discussed above, were published in March 2010 and focused on issues such as the importance of an independent risk management function, 6 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

the importance of monitoring risks on an on-going firm-wide and individual entity basis, the board's oversight of the compensation systems and the board and senior management's understanding of the bank's operational structure and risks. The final document released in October 2010, discusses such issues as the need for the Board to approve and monitor the overall business strategy of the bank, its risk exposure, the ability to manage these risks and oversee an internal controls system. An important foundation of good governance is the creation of a culture that supports and incentivises professional and responsible behaviour that promotes integrity of all employees, including senior management.

Effective Corporate Governance (Significant Influence Controlled Functions and the Walker Review)
Financial Services Authority (FSA), September 2010 A previous consultation paper on the above topic, which was published by the FSA in January 2010, generated 74 responses from trade associations, professional bodies and regulated firms. This September 2010 paper highlights that most respondents agreed with the proposals, but points out that those who did not support them, had concerns about the increase in administrative burden and costs on firms. A new framework is being discussed stemming from the Walker Review. This is an equality impact assessment (EIA) for approving and supervising significant influence functions (SIFs). The FSA proposes a more intrusive approach which focuses more on the competence and capability of candidates, looking not only at the merit of each individual director, but also the extent to which the governing body encourages appropriate behaviour and culture to improve the outcomes for both firms and consumers.

Corporate Governance in Financial Institutions and Remuneration Policies - Green paper

European Commission, June 2010 This green paper explores different ways of improving the functioning, composition and skills of boards of directors, strengthening risk management-related functions, expanding the role of external auditors and strengthening the role of supervisory authorities in the governance of financial institutions. The place and role of shareholders is also considered. The Commission invited all interested parties to express their views on the considerations set out below. Each of the options explored could lead to the development of measures on corporate governance in financial institutions.

Corporate Governance in Financial Institutions: Lessons to be Drawn from the Current Financial Crisis, Best Practices, Green Paper
European Commission, June 2010 The question of the adequacy and appropriateness of the current corporate governance framework for financial institutions is a challenging one for stakeholders and public authorities alike. There is no straightforward answer. A meticulous and careful examination of the failure of the current system of checks and balances is needed. The purpose of this review is not to recast entirely the existing corporate governance framework for financial institutions. It is rather about adjustments to expand 7 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

and detail further corporate governance principles where needed, fine-tune the balance between soft and hard law, and ensure a strict monitoring of voluntary practices and adequate enforcement of legislation. The current system of checks and balances must be significantly strengthened.

Corporate Governance of Banks after the Financial Crisis Theory, Evidence, Reforms
ECGI Law Working Paper, No. 130/2009 Mlbert, P., April 2009 Poor corporate governance of banks has increasingly been acknowledged as an important cause of the recent financial crisis despite stringent prudential regulation of their capital and risk. There have been numerous reforms to improve banks corporate governance, either proposed or implemented at the national, supra- and international levels. This paper takes stock of relevant theory and examines recent reforms in light of the empirical evidence. The first part considers the particulars of banks corporate governance and what makes them different from generic firms: the latter is not subject to prudential regulation/supervision, whereas banks are. The following part provides an overview of the numerous reform initiatives in light of emerging empirical research on the corporate governance-failure hypothesis. It concludes with reflections on the lessons from banks governance for the corporate governance of generic firms, arguing that banks corporate governance should not provide the generalised way forward for all firms.

Banks: Regulation and Corporate Governance Framework

Corporate Ownership & Control, Vol. 5, No. 2, 2008 Ungureanu, M.C., 2008 This paper considers why the corporate governance of banks is different to that of other sectors. The reasons include the specificity of banks, the volatility of the financial markets, and the need to simultaneously consolidate and diversify and their role in financial stability. Moreover, the amount of regulatory oversight placed on all banking systems across the world also affects the type of governance that banks have. The paper outlines the specific attributes of banks that influence their regulatory and supervisory environment, and considers what impact this has on corporate governance standards.

Enhancing Corporate Governance for Financial Institutions: The Role of International Standards
ESRC Centre for Business Research, University of Cambridge, Working Paper No. 196 Alexander, K. and Duhmale, R., March 2001 This paper looks at the tension between the need for universal standards for governance of financial institutions in order to guard against systemic risk and the reality that different structural approaches exist, and work best, in different countries. Despite its age, the study is perhaps worth revisiting since it discusses how international standards should be tempered by domestic regulation. Systemic risk will be contained best by recognising the difference in customs, practices, legal and industrial structures between nations, and tailoring international principles accordingly. 8 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

Governance in Asia ACGA White Paper on Corporate Governance in India

Asian Corporate Governance Association (ACGA), January 2010 This paper aims to provide constructive and detailed suggestions for the broadening and deepening of sound corporate governance in India. Although there have been numerous recent reforms in some areas of governance (for instance, in the area of company boards, independent directors, and disclosure and accounting standards), there are certain areas that still need to be addressed; for example, the accountability of controlling shareholders and the governance of the audit profession. The White Paper focuses on five key areas: shareholder meetings and voting, related-party transactions, preferential warrants, corporate disclosure and the auditing profession, and detailed suggestions as to how governance in each area can be improved.

Best Practices in Asian Corporate Governance

Asian Productivity Organization (APO), 2007 This book looks at best practices in corporate governance across a number of countries in Asia. Although no one country can claim superiority in all facets of corporate governance, this book highlights that a number of Asian countries have made steady progress in specific aspects. For example it includes significant advances achieved by the following countries in key corporate governance areas: Malaysia, the general regulatory and institutional environment; India, public enterprise management; Japan, board effectiveness and ownership structure; Singapore, transparency and disclosure; Republic of China, network organisations; Vietnam, equitisation; and the Philippines, corporate social responsibility. Considering the context in which the corporate governance efforts of the APO have been formulatedfirms are the centrepiece of interventions, but backed up by strong government policiesthe essays in this book demonstrate that good governance laws and regulations, on the one hand, and good firm practices, on the other, both result in better performance and higher productivity.

Corporate Governance in China: Current Practices, Economic Effects and Institutional Determinants
CESifo Economic Studies, Vol. 52.2/ 2006, 425-453 Liu, Q., 2006 This article provides a preliminary survey of the growing literature on the Chinese listed firms corporate governance. The paper is structured around three themes: 1) What are the current corporate governance practices in China? 2) How do these corporate governance practices affect the Chinese listed firms valuation and various corporate decisions? 3) How does Chinas unique institutional setting pre-determine the governance model adopted in China? The evidence indicates that the current governance practices adopted in China can be best described as a control-based model, which contrasts strikingly with the market-oriented model commonly used in the US and UK, and championed by most corporate governance advocates. The evidence also shows that Chinese

9 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

firms, whose corporate governance practices deviate from the control-based model, demonstrate stronger performance, and tend to make decisions in line with the shareholders interest.

Corporate Governance in India Evolution and Challenges

ICFAI Journal of Corporate Governance, October 2005 Chakrabarti, R., 2005 The author outlines the importance of corporate governance to the financial development of developing countries: research has established that financial development is largely dependent on a countrys investor protection. Chakrabarti notes that despite Indias possession of one of the best corporate governance laws, governance has been adversely affected owing to poor implementation of the law together with socialistic policies of the Indian pre-reform era. The Indian corporate landscape continues to be marred by factors such as the concentrated ownership of shares, and the pyramiding and tunnelling of funds amongst group companies. However, the author also examines certain changes since this period of liberalisation: for example, he notes such efforts to overhaul the system as the SEBIs amendment to Clause 49 of the Listing Agreement (dealing with corporate governance), and the evolution of governance of Indian banks towards a more market-based structure.

Law, Finance, and Economic growth in China

Allen, F. et al., April 2005 (2).pdf This paper examines China in the context of the literature on the so-called law-finance-growth nexus. This body of literature argues that a well-developed legal and financial system is a prerequisite for healthy economic growth, and that countries whose legal systems are based on English common-law have an advantage over countries whose legal systems have a French civil-law origin, in that shareholders and creditors are better protected in the former rather than in the latter countries. However, for much of the last few decades, China has not had strong legal or financial infrastructure, yet has achieved very high growth rates. This marks China out as a significant counterexample to the law-finance-growth received wisdom. The Chinese private sector is taken to demonstrate that alternative mechanisms of corporate governance, based on reputation and relationships, can form an effective part of a good business environment. The paper thus contributes to the corporate governance literature which stresses that the local and the personal are important, and that there is not a simple recipe for economic growth. As the paper concludes, there are important factors connecting law, institutions, finance, and growth that are not well understood.

10 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

Ownership structure, corporate governance, and firm value: evidence from East Asian financial crisis
The Journal of Finance, Vol. 58, No. 4, pp. 1445-1468 Lemmon, M.L. and Lins, K.V., 2003 This paper studies the effect of ownership structure on firm value during the East Asian financial crisis that began in July 1997. The crisis represents a negative shock to the investment opportunities of firms in these markets that raises the incentives of controlling shareholders to expropriate minority shareholders. Moreover, the large separation between cash flow and control rights that arises from the use of pyramidal ownership structures and cross-holdings in these markets suggests that insiders have both the incentive and the ability to engage in expropriation. Using data from over 800 firms in East Asian countries the authors find evidence consistent with this view. They conclude that that corporate ownership structure plays an important role in determining the incentives of insiders to expropriate minority shareholders during times of declining investment opportunities.

Institutional Investors and Corporate Governance in India

National Stock Exchange of India Research Initiative Paper No. 15 Mohanty, P., May 2003 The author uses nineteen measures of corporate governance to develop a corporate governance index as applied to Indian firms. It is found that this corporate governance index is positively associated with financial performance measures such as Tobins Q. Moreover, it seems to be the case that Indian development financial institutions have tended to lend money to companies with better corporate governance; the same applies for investors of mutual funds.

Governance in Middle East and Africa Proposals Relating to Corporate Governance and Remuneration Standards Applicable to Authorised Persons
Dubai Financial Services Authority (DFSA), June 2011 The Dubai Financial Services Authority (DFSA) released a consultation paper on Corporate Governance and Remuneration Standards. This consultation proposed enhancements to corporate governance standards relevant to authorised firms and authorised market institutions. Proposals to enhance DFSA corporate governance standards arose as a result of enhancements adopted by international standard setting bodies, specifically: the FSB, BCBS, IAIS and IOSCO. The DFSA asserts that the proposed enhancements will strengthen the prudent and sound management of financial institutions within the Dubai International Financial Centre (DIFC). ICFR response to this consultation paper is available at:

11 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

Policy Briefing on Improving Corporate Governance of Banks in the Middle East and Africa Region
Organisation for Economic Co-Organisation and Development (OECD), November 2009 This document was published by the OECD to provide targeted recommendations to policy makers, banking supervisors, banking associations and individual banks in the MENA region on corporate governance. It is the culmination of two years of discussions by the MENA-OECD taskforce, and lays out 74 guidelines as to how corporations can implement improved governance policies. These guidelines are based on the standard OECD principle documents, and include suggestions on the themes of board performance, transparency, remuneration, conflicts of interest, and how to incorporate such principles into state-owned, family owner and Sharia compliant banking groups.

Corporate Governance in MENA Countries: Improving Transparency and Disclosure

Lebanese Transparency Association, Beirut, December 2004 Saidi, N., 2004 This document reviews the use of corporate governance as a key for the modernisation of the Middle East and Africa: it argues that having strong governance practices will encourage the flow of new investment and provide a foundation for meaningful reform in the economic sector and elsewhere in society. The author discusses the inherent difference between business structures in the West, the Middle East and Northern Africa and how international standards should reflect the realities of doing business in such countries in order to gain universal acceptance. International standards must therefore embrace local realities and be supported by training and education at a national level.

Governance in Latin America White Paper on Strengthening the Role of Institutional Investors in Latin American Corporate Governance
World Bank, OECD and IFC, December 2009 This document is a product of the 10th meeting of the Latin American Corporate Governance Roundtable, held in December 2009; it is a draft version, with the full version expected to be released in early 2010. The recommendations in the paper include ensuring that any legal provisions intended to provide minority shareholders with the opportunity to elect directors should be workable in practice, there should be sufficient incentives for institutional shareholders to exercise their ownership functions in an informed and effective way, and institutional investors need to disclose their policies on voting to the public and their beneficiaries on a regular basis.

12 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

Corporate Governance in Latin America: A Functional Analysis

Reyes, F., August 2007 This paper argues that general principles of corporate governance (such as the OECD Principles) will be difficult to implement in Latin America, due to the lack of a significant separation between ownership and control. As a result, governance principles should focus not only on directors duties, but also upon effective protection of minority shareholders and other stakeholders against the undue appropriate ion of corporate assets by block-holders. A key contributing factor to this line of argument is the weakness of the legal structure in Latin America, and the comparative lack of enforceability in particular.

13 | Corporate Governance in Emerging Markets Hong Kong, 8 December 2011

Other Links
Asian Corporate Governance Association: The International Corporate Governance Network: European Corporate Governance Institute: The French Corporate Governance Institute: The American Corporate Governance Institute: Hawkamah: The Institute for Corporate Governance: Abu Dhabi Center for Corporate Governance:

About the ICFR

The International Centre for Financial Regulation is the only independent, non-partisan organisation to be exclusively focused on best practice in all aspects of financial regulation internationally. Operating in developed and emerging markets, we deliver our work through research, events and training, that seeks to be practical and focussed on outcomes. We believe in the promotion of efficient, orderly and fair markets which offer appropriate protection for investors and retail consumers alike. Financial centres of the future should be based upon sound principles of regulation, with supervisors, regulators and participants who act in the interest of all stakeholders. We intend to play a crucial part in facilitating this.

The International Centre for Financial Regulation 5th Floor 41 Moorgate London EC2R 6PP United Kingdom Telephone: +44 (0) 20 7374 5560 Facsimile: +44 (0) 20 7374 5570 E-mail: Website: Twitter: icffr