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Department of Management Science

COMSATS Institute of Information Technology Lahore



Project:-
Advanced issues in managerial accounting
Submitted To:-
Sir Hamad Rasool Bhullar
Submitted By:-
Abdul Basit
Umar Farooq Bhati
Registration No:-
SP11-MBT-002
SP11-MBT-067
Date of Submission:-
May 22, 2014




Corporate Governance and corporate governance in emerging
economies
Corporate Governance
The definition of corporate governance most widely used is "the system by which companies are
directed and controlled" (Cadbury Committee, 1992). More specifically it is the framework by which the
various stakeholder interests are balanced, or, as the IFC states, "the relationships among the
management, Board of Directors, controlling shareholders, minority shareholders and other
stakeholders".
The OECD Principles of Corporate Governance states:
"Corporate governance involves a set of relationships between a companys management, its board, its
shareholders and other stakeholders. Corporate governance also provides the structure through which
the objectives of the company are set, and the means of attaining those objectives and monitoring
performance are determined."
While the conventional definition of corporate governance and acknowledges the existence and
importance of 'other stakeholders' they still focus on the traditional debate on the relationship between
disconnected owners (shareholders) and often self-serving managers. Indeed it has been said, rather
ponderously, that corporate governance consists of two elements:
1. The long term relationship which has to deal with checks and balances, incentives for manager
and communications between management and investors;
2. The transactional relationship which involves dealing with disclosure and authority.
This implies an adversarial relationship between management and investors, and an attitude of mutual
suspicion. This was the basis for much of the rationale of the Cadbury Report, and is one of the reasons
why it prescribed in some detail the way in which the board should conduct itself: consistency and
transparency towards shareholders are its watchwords.
As fundamentally important as these traits are, we prefer to take a rather broader view, which places
the Cadbury Code and other codes developed since (Combined Code, Sarbanes-Oxley, King, etc) in a
wider context and shows its recommendations emerging naturally in the course of a companys
evolution. In an early book on corporate governance, also published in 1992, one of the creators of this
website developed a definition of corporate governance as consisting of five elements which the board
must consider:
long term strategic goals
employees: past, present and future
environment/community
customers/suppliers
compliance (legal/regulatory)
This definition was endorsed by Sir Adrian Cadbury in his foreword to another of the authors books on
the subject, directed at the smaller company. A few years later in a third book the definition was
extended by describing Five Golden Rules by which a system of good corporate governance should be
operated, and set out a practical methodology for implementing and monitoring (Real World Corporate
Governance - a Programme for Profit Enhancing Stewardship, FT Pitman 1998). We now make this
methodology, expert knowledge and research available using modern internet technologies via this
website.
Separation of Ownership and Control
The corporation, in contrast, for example, to a partnership, separates ownership from operational
control - this concept is, of course, fundamental to any definition of corporate governance and is
commonly referred to as the agency issue, or Agency Theory . It is this separation which creates the
need for systems of independent monitoring and control. Historically, it was the freedom that this
separation created to take much bigger risks in order to expand that prevented for so long the
permission of such organisations to exist, with the potential dangers it implied. And it is this freedom
which has required mechanisms to be constructed to try and prevent it being abused.
DifferentCountries, Different Models
This has led to different systems in different countries, depending on which constituent or interested
party in the companys operations has been given the most importance. In the Anglo-Saxon world, for
example, there has always been a single board of directors consisting of executive and non-executive, or
independent directors. Elsewhere, a two tier structure exists to balance the executive board with
representatives from other stakeholder groups like employees and bankers (like the Aufsichtsrat or
Supervisory Board in Germany).
Definition of corporate governance
The discussion so far has illustrated that a proper definition of corporate governance should not just
describe directors obligations towards shareholders. And we have mentioned that different countries
have different ideas as to what constitutes good corporate governance. Therefore any satisfactory
definition, to be applicable to a modern, global company, must synthesise best practice from the biggest
economic powers into something which can be applied across all major countries. In essence we believe
that good corporate governance consists of a system of structuring, operating and controlling a
company such as to achieve the following:
a culture based on a foundation of sound business ethics
fulfilling the long-term strategic goal of the owners while taking into account the expectations of
all the key stakeholders, and in particular:consider and care for the interests of employees, past,
present and future
work to maintain excellent relations with both customers and suppliers
take account of the needs of the environment and the local community
maintaining proper compliance with all the applicable legal and regulatory requirements under
which the company is carrying out its activities.
We believe that a well-run organisation must be structured in such a way that all the above
requirements are catered for and can be seen to be operating effectively by all the interest groups
concerned. We develop this further in our section on best corporate governance practice. Here we have
set out our assessment of how corporate governance is usually discussed and introduced our own,
which we hope you have found useful. This page serves as a hub to link to a range of issues related to
the definition of corporate governance. For example wedefine business ethics and Corporate Social
Responsibility, different country models and Codes of Conduct.
Why Is Corporate Governance Important?
October 2006- -Good corporate governance helps to prevent corporate scandals, fraud, and potential
civil and criminal liability of the organization. It is also good business. A good corporate governance
image enhances the reputation of the organization and makes it more attractive to customers,
investors, suppliers and, in the case of nonprofit organizations, contributors.
There is some evidence that good corporate governance produces direct economic benefit to the
organization. One study, conducted at Georgia State University and published in December 2004, found
that public companies with independent boards of directors have higher returns on equity, higher profit
margins, larger dividend yields, and larger stock repurchases.(1) This study was consistent with another
study of 250 companies by the MIT Sloan School of Management which concluded that, on average,
businesses with superior information technology (IT) governance practices generate 25 percent greater
profits than firms with poor governance, given the same strategic objectives.(2)
Although the Sarbanes-Oxley Act of 2002 applies almost exclusively to publicly held companies, the
corporate scandals that gave rise to that legislation have increased pressure on all organizations
(including family-owned businesses and not-for-profit organizations) to have better corporate
governance. Private and not-for-profit organizations may feel pressure from lenders, insurance
underwriters, regulators, venture capitalists, vendors, customers, and contributors to be Sarbanes-Oxley
compliant. In addition, some courts and state legislatures may by analogy apply the enhanced corporate
governance practices developed under Sarbanes-Oxley to private and not-for-profit organizations.
Finally, a few provisions of Sarbanes-Oxley do affect private and not-for-profit organizations, such as the
provisions relating to criminal liability for document destruction and for retaliation against
whistleblowers.
Nonprofit organizations are not immune from scandal. Even before there was an Enron, there was the
scandalous bankruptcy of AHERF (the Allegheny Health, Education and Research Foundation), a
nonprofit organization. The scandals involving The Nature Conservancy, the United Way of the National
Capital Area, and PipeVine, Inc., attest to the need for not-for-profit organizations to have at least the
perception of good corporate governance. On August 16, 2005, it was reported in The Wall Street
Journal that Cornell University Medical School agreed to pay $4.4 million in connection with fraudulent
U.S. Government claims that allegedly occurred as a result of Cornell's failure to pay attention to a
whistleblower who was a member of the Cornell faculty.
Private companies that intend to seek capital from financial institutions and institutional investors
should also be sensitive to their corporate governance image, since this image is an important factor in
the ultimate decision to provide capital to the organization. Family-owned private companies benefit
from good corporate governance by avoiding the devastating effects of sibling rivalry and expensive
litigation between family members who have different views concerning the business.


Is Perception Important?
The perception of good corporate governance is an important ingredient of the image of an
organization, whether public, private, or nonprofit.
For example, when The Nature Conservancy, a not-for-profit organization, was perceived to have poor
corporate governance, the public contributions to this organization were substantially reduced.(3)
Private, including family-owned, companies that have a poor reputation for corporate governance are
less likely to be welcomed at financial institutions and will appear less attractive to venture capitalists
and private equity funds. Some investment and private equity funds will not purchase the securities of
public companies that have low corporate governance ratings.
A perception of unethical conduct by an organization can be very costly in legal cases. For example, a
Texas jury rendered a $253 million verdict against Merck & Co. in August 2005 in the first Vioxx case. A
factor in the jury verdict was an in-house training game for Vioxx sales representatives called "Dodge
Ball." The plaintiff's attorney was able to create the impression that this was a game that encouraged
Merck sales representatives to dodge questions from doctors about the safety of Vioxx, despite the
denials by Merck's witness.(4)
Practical corporate governance
Practical corporate governance is the process of developing cost-efficient corporate governance
structures for an organization and instituting "best practices" by weighing costs against benefits. This is
accomplished by analyzing specific risks of the organization, making cost-benefit judgments, and utilizing
the lessons of past corporate scandals. It rejects the mindless "check-the box" mentality of corporate
governance rating groups and some major accounting firms. Rather, the focus is on specific risk analysis,
a cost-benefit analysis, and learning from the past.
The implementation of Section 404 of the Sarbanes-Oxley Act of 2002 is a classic example of
"impractical" corporate governance. Section 404 requires (among other things) that independent
auditors attest to the internal controls of public companies. This requirement imposed a huge cost
burden on public companies because it spawned an expensive "check-the-box" mentality among major
auditing firms. A Securities and Exchange Commission (SEC) commissioner reported that one auditing
firm found 60,000 "key" internal controls at a single company!(5)
As initially interpreted, Section 404 was not tailored to specific organizational risks and did not require a
cost-benefit analysis. Public companies were forced to incur inordinate expense in complying with
Section 404 and had to divert their internal audit efforts into compliance with mind-numbing
documentation requirements that were intended to prevent low-level management frauds, even though
the major frauds that forced the adoption of this requirement were the result of top management
manipulations. Moreover, Section 404 created a monopoly for major auditing firms since only
independent auditors could attest to the internal controls. This tie-in of auditing and attestation services
permitted monopoly pricing by major auditing firms; a public company was in effect forced to change
independent auditors in order to obtain competition in the pricing of the Section 404 attestation
services, and many companies were reluctant to do so.
In May 2005 (and again in November 2005), the SEC and the Public Company Accounting Oversight
Board (PCAOB), to their credit, recognized some of the problems engendered by their own rules and
permitted a top-down, riskbased approach to internal controls, rejecting the "check-the-box"
analysis.(6) As a result of this regrettable episode, corporate governance unfortunately received an
undeserved bad reputation as being synonymous with huge costs and little corporate benefit.
Is corporate governance costly?
Good corporate governance can be performed in a cost-efficient manner by focusing efforts on the
significant risks facing the organization rather than attempting to cover any possible theoretical risk, and
by installing the best cost-efficient practices within the organization. Resources must be concentrated in
areas that have the greatest potential benefit, such as improving the corporate culture and establishing
an effective internal audit function. Creating an ethical, law-abiding culture provides the greatest benefit
for the organization compared to the relatively minimal cost of establishing such a culture. The benefits
of good corporate governance, by avoiding governmental investigations, lawsuits, and damage to the
reputation to the organization, should significantly outweigh the cost of good corporate governance.
The benefits of good corporate governance are longer term, whereas the costs of good corporate
governance are incurred in the short term. Executives who are focused on short-term results may see
only the costs and not the benefits. Consequently, management tends to be skeptical of incurring these
costs and tends to do no more than is legally required.
Boards of directors must be sensitive to management's skepticism of good corporate governance.
Incentives must be provided to management for accomplishing specific corporate governance goals.
These goals should include, at a minimum, the creation of an ethical, law- abiding corporate culture and
the establishment of an effective internal audit function that monitors management on financial issues
as well as operational issues. If the board's compensation incentives to top management are focused
solely on "hitting the numbers," the board must share the blame with management for any subsequent
scandals involving cooking the books.
Directors should also weigh the costs of good corporate governance against their own personal liability.
In January 2005, 10 former directors of WorldCom agreed to contribute $18 million of their personal
funds, which amounted to 20 percent of their combined net worth, as part of a $54 million settlement
with the bankrupt corporation's shareholders.(7) Similarly, 10 former Enron directors agreed to pay $13
million of their own funds, roughly 10 percent of their profits from selling Enron stock, toward the total
$168 million settlement of shareholder claims.(8) In 2004, a former chairman of Global Crossing
personally contributed $30 million to a securities/ERISA (Employee Retirement Income Security Act)
class action settlement.(9)
Can you rely on the outside auditor?
Many audit committees rely almost exclusively on the outside auditor in performing their task of
monitoring management and providing good corporate governance. Unfortunately, there is a serious
disconnect between what directors believe the outside auditor is responsible for and what the outside
auditor believes. Given the large number of corporate scandals that have occurred at organizations
audited by a "Big Four" auditor, it is difficult to understand how any board of directors can place
exclusive reliance on its auditor.
Excerpts from the statement of Mel Dick, the engagement partner responsible for Arthur Andersen's
audit of WorldCom, to the Committee on Financial Services of the U.S. House of Representatives, follow.
These excerpts should cause all boards of directors and their audit committees to reexamine their
exclusive reliance on the outside auditor.
Chairman Oxley, Congressman LaFalce, Members of the Committee:
"I am Mel Dick. I am a graduate of the University of South Dakota. Upon graduation in 1975, I joined
Arthur Andersen as a staff auditor. I was a partner at Andersen until I left Andersen on June 1 of this
year. I have spent the majority of my career working with diverse telecommunications companies.
The Chairman's letter of invitation, faxed to my attorney on the night of July 3, states:This hearing will
focus on the recent announcement that WorldCom overstated profits and understated liabilities in the
amount of $3.9 billion.
The Chairman's letter refers to the disclosure by WorldCom on June 25 that approximately $3.1 billion in
expenses were improperly booked as capital expenditures in 2001 and an additional $797 million of
expenses were improperly booked as capital expenditures in first quarter of 2002. The newspaper
reports that I have read allege that senior financial management at WorldCom improperly transferred
line costs expenses to capital accounts in the company's accounting records.
Let me state clearly and without any qualification that, prior to June 21, 2002, when Andersen was first
contacted about this matter, neither I, nor to my knowledge, any member of the Andersen team had
any inkling that these transfers had been made.
In fact, in connection with our quarterly reviews for March 31, June 30 and September 30, 2001, our
year end audit at December 31, 2001 and our quarterly review for March 30, 2002, the Andersen audit
team specifically asked WorldCom senior financial management whether there were any significant top
side entries. On each occasion, management represented to Andersen that there were no such entries.
The fundamental premise of financial reporting is that the financial statements of a companyin this
case WorldComare the responsibility of the company's management, not its outside auditors.
WorldCom management is responsible for managing its business, supervising its operational and
accounting personnel, and preparing accurate financial statements. It is the responsibility of
management to keep track of capital projects and expenditures under its supervision. The role of an
outside auditor is to review the financial statements to determine if they are prepared in accordance
with Generally Accepted Accounting Principles and to conduct its audit in accordance with Generally
Accepted Auditing Standards, which require that auditors plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
Our audit and our reviews of WorldCom were performed by experienced audit professionals. Our audit
plan was the product of a deliberative and diligent evaluation of a global telecommunications company
with over $100 billion in assets.
As with any audit, we planned our audit of WorldCom in general reliance on the honesty and integrity of
management of the company. One of the key elements of evidence all auditors rely upon are
management's representations. As all auditors do, we also tested and, based on our tests, concluded
that we could rely on the company's management processes and internal controls, including the internal
audit function. We relied on the results of our testing and the effectiveness of these systems in planning
and performing our audit. At the same time, we approached our work with a degree of professional
skepticism, alert for potential misapplication of accounting principles.
Additionally, we performed numerous analytical procedures of the various financial statement line
items, including line costs, revenues, and plant and service in order to determine if there were any
significant variations that required additional work. We
also utilized sophisticated auditing software to study WorldCom's financial statement line items, which
did not trigger any indication that there was a need for additional work.
In performing our work, we relied on the integrity and professionalism of WorldCom's senior
management, including Scott Sullivan, WorldCom CFO and David Myers, WorldCom Controller, and their
staff.
If the reports are true that Mr. Sullivan and others at WorldCom improperly transferred line cost
expenses to capital accounts so as to misstate the company's actual performance, I am deeply troubled
by this conduct. In addition, if reports are true that WorldCom's internal auditors discovered these
entries, I would be very interested to know how and when they discovered these entries.
I do not know the specifics of what Mr. Sullivan did or directed others at WorldCom to do, and I have
not had the opportunity to review the entries that are at issue here. I understand that Mr. Sullivan has
acknowledged that he never told Andersen about the accounting he is said to have employed.
At this point, however, while I can explain our general approach to the WorldCom audit and explain
generally the work that we did, I do not have enough information to comment on the entries that
WorldCom senior financial management are said to have made, or how they were hidden from the
Andersen auditors . . ."(10)
Although the Auditing Standards Board has, since WorldCom, enhanced the duties of the auditor to
detect fraud in Statement of Accounting Standards (SAS) No.99 (effective for audits beginning after
December 15, 2002), it is not clear that auditors no longer have the right to assume that management is
honest. SAS No. 99 does state in Paragraph .13:
The auditor should conduct the engagement with a mindset that recognizes the possibility that a
material misstatement due to fraud could be present, regardless of any past experience with the entity
and regardless of the auditor's belief about management's honesty and integrity. Furthermore,
professional skepticism requires an ongoing questioning of whether the information and evidence
obtained suggests that a material misstatement due to fraud has occurred. In exercising professional
skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less-than-
persuasive evidence because of a belief that management is honest.(11)


Corporate Governance in Emerging Markets
1. Background
The First International Conference on Corporate Governance in Emerging Markets is built on the work
of an informal research network supported by the Global Corporate Governance Forum (GCGF). The
network was kicked off by the one-day workshop on the Future of Research on Corporate Governance in
Developing and Emerging Markets at the World Bank in April 2002. The network has evolved over the
years with support from GCGF as it has financed the organization of one global and five regional
meetings.
1
The network was reinvigoration in 2007 with the preparations for the First International
Conference. A Call for Papers was issued with contribution from both senior scholars of the Network-
focusing on research gaps and practitioners- focusing on priorities for practice.

The conference was held in November 16-19, 2007 with participation of more than 100 researchers
from 30 countries. The objective of the conference was to take stock of ongoing research on corporate
governance in emerging markets and the expanding research in developing countries. More than 40
academic papers were presented and discussed and 4 keynote speeches were delivered. It attracted
researchers from all key emerging markets and brought them together with internationally
acknowledged senior members of the network. Unique was the involvement of GCGFs Private Sector
Advisory Group (PSAG) members as reflective practitioners which facilitated a lively debate between
scholars and practitioners.
2. Conference summary
The conference addressed two sets of broad issues: the impact of corporate governance on various
aspectsvaluation, performance, access to finance, etcat both the country- and firm-level; and the
impact and the drivers of corporate governance reforms, what is their effects, why do reforms (not)
occur? We first provide a short summary of the papers highlighting their contributions to what is
already known. A detailed account of each paper is provided in the individual sessions summaries. We
then discuss the lessons of the conference for the EMCGN.




a. The impact of corporate governance
The impact of corporate governance can be measured at the country and firm level. Both approaches
were used in papers presented, often with new data covering new countries, and using new
methodological approaches.
Country-level Evidence on the Relationship between CG Quality and performance
Starting with the country level studies, one study found improvements in corporate governance quality
in most countries, with convergence in corporate governance quality and a positive impact of these
improvements on traditional measures of real economic activity (Nicola, Laeven and Ueda (2007)).
Another study showed that measures of financial openness, political risk, local banking sector and stock
market development, and "push" factors together with equity market openness explain almost half of
the variation in the degree of segmentation of equity markets (Bekaert, Harvey, Lundblad and Siegel,
2008). This finding suggests that corporate governance reforms can help emerging markets integrate
with global financial markets and thereby lowers their risk-adjusted cost of capital. It relates to the
theory paper of Yavuz (2007) that explains why the effects of investor protection on the cost of equity
cannot be fully diversified even in integrated markets and why investor protection is different from
other country-specific factors that affect the cost of equity. This paper not only justifies many previous
empirical findings but also provides a new prediction: the effect of minority investor protection on the
cost of equity is stronger in countries with larger GDP and higher GDP growth volatility. The results of
Sarkar (2007), however, are somewhat at odds with this prediction. While he documents improvements
in legal shareholder protection measures from 1970 to 2005 in India, he argues that these are not
causally related to the degree of Indias financial development.
Firm-level Evidence on the Relationship between CG Quality, Performance and Valuation
While country level evidence is useful to document broad patterns, such studies do not always identify
the channels. Firm level studies can more directly find effects of corporate governance reform and
enhanced corporate governance practices on valuation and operational performance, sources and ease
of financing, and reduced level of expropriation. Such studies have shown that the channels through
which corporate governance adds value include: (i) improved operating performance (productivity,
return on assets, etc.), (ii) lower cost of capital and higher valuations, and (iii) better access to external
finance. Many such studies exist for developed countries, but only recently has similar evidence been
documented for emerging markets, transition economies, and other developing countries. Several of
these studies were presented at the conference.
For the Ukraine, Zheka (2007) constructs an overall index of corporate governance and shows that it
predicts firm level productivity in Ukraine. The results imply that a one-point-increase in the index
results in around 0.4%-1.9% increase in performance; and a worst to best change predicts a 40%
increase in companys performance. Using data on companies in many African countries, including
Ghana, South Africa, Nigeria and Kenya, Kyereboah-Coleman (2007 (forthcoming)) shows that better
governance practices are associated with higher valuations and better operating performance. Baker,
Godridge, Gottesman and Morey (2007) using a unique dataset from Alliance Bernstein, an international
asset management company, with monthly firm-level and country-level governance ratings for 22
emerging markets countries over a five year period, report a significantly positive relation between firm-
level (and country-level) corporate governance ratings and market valuation, suggesting lower cost of
equity for better governed firms. Finally, Kowalewski, Stetsyuk and Talavera (2007) construct a
Transparency and Disclosure Index (TDI) to measure the quality of the corporate governance for listed
Polish firms and show that a higher TDI is associated with a higher level of dividend payouts. They also
document that concentrated share ownership and deviations from the one-share-one-vote principle
lead to lower dividend payout ratios. Since dividends affects firm value, this evidence supports that
better corporate governance practices are associated with higher valuations.
Another related line of research studies how changes in the corporate governance framework and other
reforms affect firms performance and valuation. Choi, Lee and Park (2007) take advantage of a unique
experiment arising from the first target announcement of the so-called Korean Corporate Governance
Fund, which has the explicitly stated goal of investing in companies whose stocks are undervalued due
to governance problems and generating profits by actively addressing those problems. The authors find
that companies whose governance structure empowers corporate insiders at the expense of outside
shareholders experience a more positive stock price reaction to the Funds first target announcement.
This provides direct evidence that worse (better) firm level governance is associated with lower (higher)
valuations.
Importance of Easier Access to External Finance
In addition to studies that address the first two channels (i.e., improved operating performance and
lower cost of capital), some have focused on better access to finance as a third potential channel
through which improved corporate governance translates into better economic performance. One such
contributions is by Gugler and Peev (2007) who analyze the investment decisions of 25,000 firms in 15
transition economies over the period 1993-2003. They report that investment becomes less sensitive to
the availability of internal funds over the transition years and that ownership changes induce further
declines in this sensitivity. They also document hardening of the so-called soft budget constraints for
state owned firms and more efficient investment by foreign companies, a finding which highlights the
differences in the identity of owner categories.
The importance of external finance as a corporate governance channel is also documented for China by
Du, Rui and Wong (2007) where the government-guided financial resource allocation favors large-scale
state-owned enterprises (SOEs). Smaller SOEs and most non-state enterprises are at a disadvantage in
securing external financing and thus have an incentive to acquire controlling stakes in listed companies,
which have more access to external financing. Consistent with this motive to seek sources of financing
rather than operationally based value adding synergies, the paper shows that the post-acquisition
financing activities, in general, do not help to improve the operational performance of target companies
and retard or even worsen the earnings performance. Corporate governance is also important for access
to equity forms of finance. Kim, Sung and Wei (2007) show that international investors display a strong
aversion to high-ownership-control disparity firms in Korea, highlighting a further channel through
which bad governance practices hurt the availability of external finance.
Evidence of Expropriation
Corporate governance also matters for minority shareholders that otherwise can be exposed to
expropriation by large shareholders. Three papers provide evidence of such expropriation at the firm
level. Deng, Gan and He (2007) using detailed data from China's share issue privatization, report two
expropriation channels: one is through related-party transactions, including assets sales, transfer pricing
of goods and services, and extracting trade credits; the other is through dividend policies so that
corporate resources are kept in the firm and under their control. Not surprisingly, expropriation
significantly reduces firm valuation and performance. Joh and Ko (2007) examine how ownership and
control structures affect share repurchases in Korea. Firms more likely adopt corporate payout programs
and increase the magnitude of repurchases when insider ownership is high and control rights are weak,
while foreign ownership reduces the amount of share repurchases. Additionally, the market responds
negatively to share repurchase announcements by firms with low insider ownership and low control
rights. These results suggest that incumbent insiders adopt repurchases to protect their control
positions. And Bae, Baek and Kang (2007) show that during the 1997 Korean financial crisis, firms with
weak corporate governance experience a larger drop in equity price, but a larger rebound during the
post-crisis recovery period. Their results confirm earlier studies which suggest that controlling
shareholders' incentives to expropriate minority shareholders go up (down) during the crisis (boom)
period due to the fall (increase) in expected return on investment and are consistent with the view that
controlling shareholders' expropriation incentives create a relation between corporate governance and
firm value.
b. The drivers of Corporate Governance Reforms
While the evidence that better corporate governance is associated with better outcomes from the
perspective of countries and firms is mounting, there is still a suspicion that this relationships is due to
other factors and merely reflects that better countries and better firms have better performance and
better corporate governance (practices), but there is no causal relationship from corporate governance
to performance. As such there is need for more evidence on how corporate governance reforms can
lead to improvements in performance. And, most importantly, as also highlighted by the practitioners
at the conference, there remain many puzzles on the lack of reforms by countries. And it is also
surprising that many corporations do not yet adopt better corporate governance practices. It remains
hard to introduce the legal and institutional changes which would enhance good governance, support
efficient financial markets and protect minority shareholders. And many corporations do not see the
rewards, in part because the domestic institutional environment and financial markets do not yet
sufficiently support corporate governance. The reason that many emerging markets do not yet take
steps to achieve the economic advantages should be sought in their political systems.
Importance of Reforms
While large scale reforms can be blocked in many countries by insiders (managers and owners) of
corporations, a number of papers presented at the conference show that reforms had substantially
positive effects. Atanasov, Black, Ciccotello and Gyoshev (2006) analyzes the impact of changes in
Bulgarian securities law in 2002 on two common forms of financial tunneling, dilutive equity offerings
and below-market freeze-outs. After adoption of new laws in 2002 restricting both forms of tunneling,
minority dilution via equity issuances virtually disappears, and the mean price of freeze-outs (measured
by price/sales ratio) quadruples. Black and Khanna (2007) analyze India's adoption of major governance
reforms (Clause 49) requiring among other things, audit committees, a minimum number of
independent directors, and CEO/CFO certification of financial statements and internal controls. They
document that reforms benefited more those firms that need external equity capital and cross-listed
firms, suggesting that local regulation can sometimes complement, rather than substitute for firm-level
governance practices. Beltratti and Bortolotti (2007) document a similar positive impact from
improvements in the regulatory regime in the context of the Non-tradable Share Reform in China.
Further evidence on the importance of the regulatory environment is provided by Farooq and Ahmed
(2007) in the context of Pakistan.
Market Pressures
Changes are not just due to (lack of) reform. Much improvement in corporate governance has come
about as a result of market pressures. But these can remain limited without some other legal or
regulatory supports. An example of such market induced changes is provided by Dewenter, Kim and Lim
(2007) who analyze the outcome of regulatory competition in the context of Koreas two stock
exchanges KSE and KOSDAQ. They show that successive efforts to tighten the regulation of the delisting
rules ended up with no clear winner. Other examples of market induced changes include voluntary
adoptions of higher corporate governance quality by Brazilian firms joining Bovespas New Market
(Silveira, Leal, Carvalhal-da-Silva and Barros (2007)), the use of tag-along rights by Brazilian companies
controlling owners to increase investor protection for non-controlling owners (Bennedsen, Nielsen and
Nielsen (2007)), and decisions to cross-list in a better investor protection country (Ke, Rui and Yu
(2007)). While these changes added value, they were also helped by legal and regulatory changes.
More generally, it is important to differentiate between firm-level and country-level corporate
governance and to investigate whether there is substitutability or complementarity between rules and
practices. Chhaochharia and Laeven (2007) find that many firms choose to adopt governance provisions
beyond those adopted by all firms in the country, and that these higher corporate governance practices
are positively associated with firm valuation. These results indicate that the market rewards companies
that are prepared to adopt governance attributes beyond those required by laws and common
corporate practices in the home country. Aggarwal, Erel, Stulz and Williamson (2006) also analyze the
links between country-level and firm-level governance mechanisms. They report that investment in
firm-level governance is higher when a country becomes more economically and financially developed
and better protects investor rights, supporting the complementarity view.
Bruno and Claessens (2007), however, find that for companies with poor corporate governance
practices, there is very little or no impact of better country-level investor protection and for companies
with good corporate governance practices, there is a discount from better investor protection, as there
are costs involved with (too) high standards. There are other examples of problems and frictions in the
regulatory environment. Tian and Megginson (2007) focus on distortions imposed by the government in
the Chinese initial public offering market in the form of pricing caps, IPO quotas and lockup
contracts lead to a severe IPO underpricing. Effectively, their analysis suggests that the Chinese
government pursues its political interests at the expense of its financial interests. Another paper
(Cheung, Rau and Stouraitis (2007)) shows that political motives are behind tunneling such as related
party transactions between Chinese publicly listed firms and their state owned enterprise (SOEs)
shareholders.
One common theme of the papers presented in the conference is the need for enforcement. Some
contributions implicitly confirm the notion that under weak enforceability most of the governance
mechanisms, whether required by rules of voluntary corporate governance practice, will be ineffective.
Whether this leads to the superiority of firm-level practices compared to publicly provided mechanisms
depends on the degree of complementarities between these two factors. As such enforcement can be
important as a determinant of improved country- as well as firm level performance.
3. The lessons of the conference

Besides the substance lessons, there are three lessons from the conference and the format that was
followed.

Networking among academics is very valuable to exchange methodology, data, and research
experience. The large number of papers with authors belonging to different institutions in
different countries and the lively discussions after academic and practitioner presentations
confirm the importance of networking.
Practitioners can add value as they can introduce real life perspectives and help guide research.
The open discussion forum on boards was a good example of such an interaction. After Bernard
Blacks academic presentation on the issue of a causal link between board structures and firm
performance, Paulina Beato gave examples from her professional life suggesting that the reason
why most boards in emerging markets are not functioning well can be explained by the fact that
they are not independent. This view is also supported by some of the participants of the forum,
leading to discussions that range from how econometric methods capture such effects, to
identifying the top priorities in corporate governance reform in emerging markets.
There is a large leverage of key agents and sponsors. For many young scholars from emerging
markets, the conference was a milestone in capturing the state of the art research and for
joining the debate on corporate governance in emerging markets. The post-conference
evaluations of the participants revealed that the conference was rated as excellent in terms of
not only contributing to our understanding of CG in emerging markets, but also in terms of
encouraging collaboration between senior and junior researchers, and opening new research
perspectives. This was only possible thanks to the generous financial support provided by
Global Corporate Governance Forum at IFC and Asian Institute of Corporate Governance (AICG)
of Korea, as well as to the organizational efforts of the host; Corporate Governance Forum of
Turkey (CGFT) at Sabanc University.

All in all, we believe that these factors demonstrate how the conference has filled a gap that other
academic conferences would not be able to fill both in terms of the mix of papers selected for
presentation and the involvement of practitioners.
List of papers presented at the conference:

Aggarwal, Reena, Isil Erel, Rene M. Stulz, and Rohan Williamson, 2006, Differences in Governance
Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences, Available
at http://ssrn.com/abstract=954169.
Atanasov, Vladimir, Bernard Black, Conrad S. Ciccotello, and Stanley B. Gyoshev, 2006, How Does Law
Affect Finance? An Empirical Examination of Tunneling in an Emerging Market, ECGI - Finance
Working Paper No. 123/2006.
Bae, Kee-Hong, Jae-Seung Baek, and Jun-Koo Kang, 2007, Do Controlling Shareholders Expropriation
Incentives Derive a Link between Corporate Governance and Firm Value? Evidence from the
Aftermath of Korean Financial Crisis, Available at SSRN: http://ssrn.com/abstract=1089926.
Baker, Edward, Benjamin Godridge, Aron Gottesman, and Matthew Morey, 2007, Corporate Governance
Ratings in Emerging Markets: Implications for Market Valuation, Internal Firm-Performance,
Dividend Payouts and Policy, Paper presented at the International Research Conference on
Corporate Governance in Emerging Markets, Istanbul, 15-18 November.
Bekaert, Geert, Campbell R. Harvey, Christian T. Lundblad, and Stephan Siegel, 2008, What Segments
Equity Markets?, Available at SSRN: http://ssrn.com/abstract=1108156.
Beltratti, Andrea, and Bernardo Bortolotti, 2007, The Nontradable Share Reform in the Chinese Stock
Market: The Role of Fundamentals, Paper presented at the International Research Conference
on Corporate Governance in Emerging Markets, Istanbul, 15-18 November.
Bennedsen, Morten, Kasper Meisner Nielsen, and Thomas Vester Nielsen, 2007, Private Contracting and
Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market,
Paper presented at the International Research Conference on Corporate Governance in
Emerging Markets, Istanbul, 15-18 November.
Black, Bernard S., and Vikramaditya S. Khanna, 2007, Can Corporate Governance Reforms Increase Firm
Market Values? Event Study Evidence from India, Journal of Empirical Legal Studies 4, 749-796.
Bruno, Valentina, and Stijn Claessens, 2007, Corporate Governance and Regulation: Can There Be Too
Much of a Good Thing?, CEPR Discussion Papers 6108.
Cheung, Yan-Leung, Raghavendra Rau, and Aris Stouraitis, 2007, The helping hand, the lazy hand, or the
grabbing hand? Government shareholders in publicly listed firms in China, Paper presented at
the International Research Conference on Corporate Governance in Emerging Markets, Istanbul,
15-18 November.
Chhaochharia, Vidhi, and Luc Laeven, 2007, Corporate Governance, Norms and Practices, ECGI - Finance
Working Paper No. 165/2007.
Choi, Jung Yong, Dong Wook Lee, and Kyung-Suh Park, 2007, Corporate governance and firm value:
Endogeneity-free evidence from Korea, Paper presented at the International Research
Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18 November.
Deng, Jianping, Jie Gan, and Jia He, 2007, Privatization, Large Shareholders Incentive to Expropriate, and
Firm Performance, Paper presented at the International Research Conference on Corporate
Governance in Emerging Markets, Istanbul, 15-18 November.
Dewenter, Kathryn, Chang-soo Kim, and Ungki Lim, 2007, Race to the top among stock exchanges:
Theory and evidence, Paper presented at the International Research Conference on Corporate
Governance in Emerging Markets, Istanbul, 15-18 November.
Du, Julan, Oliver M. Rui, and Sonia M.L. Wong, 2007, Financing-Motivated Mergers and Acquisitions:
Evidence from Corporate China, Paper presented at the International Research Conference on
Corporate Governance in Emerging Markets, Istanbul, 15-18 November.
Farooq, Omar, and Sheraz Ahmed, 2007, Do Governance Reforms Increase Information of Analysts
Stock Recommendations? Evidence From a Newly Emerging Market, Paper presented at the
International Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-
18 November.
Gugler, Klaus Peter, and Evgeni Peev, 2007, Ownership Changes and Investment in Transition Countries,
ECGI - Finance Working Paper No. 169/2007, Available at SSRN:
http://ssrn.com/abstract=961782.
Joh, Sung Wook, and Young Kyung Ko, 2007, Ownership Structure and Share Repurchases in an
Emerging Market: Incentive Alignment or Entrenchment?, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Ke, Bin, Oliver Rui, and Wei Yu, 2007, The effect of cross listing on the sensitivity of managerial
compensation to firm performance, Paper presented at the International Research Conference
on Corporate Governance in Emerging Markets, Istanbul, 15-18 November.
Kim, Woochan, Taeyonn Sung, and Shang-Jin Wei, 2007, Home-country Ownership Structure of Foreign
Institutional Investors and Control-Ownership Disparity in Emerging Markets, Paper presented
at the International Research Conference on Corporate Governance in Emerging Markets,
Istanbul, 15-18 November.
Kowalewski, Oskar, Ivan Stetsyuk, and Oleksandr Talavera, 2007, Corporate Governance and Dividend
Policy in Poland, Paper presented.
Kyereboah-Coleman, Anthony, 2007 (forthcoming), Corporate Governance and Firm Performance in
Africa: A Dynamic Panel Data Analysis, Studies in Economics and Econometrics.
Nicola, Gianni De, Luc Laeven, and Kenichi Ueda, 2007, Corporate Governance Quality: Trends and Real
Effects, IMF Working Papers, No 06/293, Avaiable at
http://www.imf.org/external/pubs/ft/wp/2006/wp06293.pdf.
Sarkar, Prabirjit, 2007, Does Better Corporate Governance lead to Stock Market Development and
Capital Accumulation? A Case Study of India, Paper presented at the International Research
Conference on Corporate Governance in Emerging Markets, Istanbul, 15-17 November
(Jadavpur University, Kolkata, India).
Silveira, Alexandre Di Miceli da, Ricardo Pereira Cmara Leal, Andr Luiz Carvalhal-da-Silva, and Lucas
Ayres B. de C. Barros, 2007, Evolution and Determinants of Firm-Level Corporate Governance
Quality in Brazil, Paper presented at the International Research Conference on Corporate
Governance in Emerging Markets, Istanbul, 15-18 November.
Tian, Lihui, and William L. Megginson, 2007, Regulatory Underpricing: Determinants of Chinese Extreme
IPO Returns, Paper presented at the International Research Conference on Corporate
Governance in Emerging Markets, Istanbul, 15-18 November.
Yavuz, M. Deniz, 2007, Why does Investor Protection Matter for the Cost of Equity?, Paper presented at
the International Research Conference on Corporate Governance in Emerging Markets, Istanbul,
15-17 November.
Zheka, Vitaly, 2007, Does Corporate Governance Causally Predict Firm Performance? Panel Data and
Instrumental Variables Evidence, Available at http://ssrn.com/abstract=877913.