Shareholder Activism in Asia
EU Asia Corporate Governance Dialogue
July 6, 2012
Tokyo
Hasung Jang
Corporate Governance Progress in Asia
for last 10 years
• Financial crisis in 1997 opened new era in
corporate governance development in Asia
• New rules and regulations are introduced
– Board
• Outside directors
• Audit committee
– Shareholder rights strengthened
• Derivative lawsuit
• Class action lawsuit
• Cumulative voting
Corporate Governance Progress in Asia
for last 10 years
• Improvements are mostly in rules and
regulations
• Practices has not improved as much as
regulations did
– Disparity between regulations and practices
– Many laws and regulations exist in the law, but it is
not practiced
– Weak enforcements of regulations
Corporate Governance Regulations
in Asian Countries
Independent
Audit
Director
Committee
1997 2011 1997 2011
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
Derivative Class Action Cumulative
Lawsuit
Lawsuit
Voting
2011
v
v
v
v
v
v
v
v
v
v
2011
2011
Liabilities on
“Shadow“
Directors
2011
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
Data source: ACGA, OECD
Improvements in Corporate Governance
in Asian Countries
• Two Surveys on Corporate Governance
• CG Watch 2010 by CLSA & ACGA
–
–
–
–
–
CG Rules and Practices
Enforcement
Political & Regulatory
IGAAP
CG Cultures
• World Competitiveness by IMD
– Shareholders’ Rights
– Auditing & Accounting Practices
Corporate Governance Evaluation
Asian Economies
Corporate Governance Evaluation
Asian Economies
Shareholders' Rights
IMD WORLD COMPETITIVENESS, 2010-2012
2010-2012 Average,
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Finland
Norway
Denmark
Sweden
Australia
South Africa
Germany
Netherlands
Malaysia
Chile
Singapore
Canada
Switzerland
Luxembourg
Taiwan
Belgium
Austria
Qatar
Brazil
Thailand
8.44
8.11
8.07
7.71
7.60
7.58
7.52
7.47
7.37
7.35
7.31
7.31
7.13
7.13
7.10
7.06
6.97
6.95
6.95
6.90
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Hong Kong
India
Ireland
USA
Lithuania
Israel
Colombia
Estonia
Peru
UK
Czech Rep
France
Spain
New Zealand
Portugal
Indonesia
Philippines
Hungary
Turkey
Jordan
6.88
6.82
6.75
6.75
6.72
6.71
6.67
6.60
6.56
6.55
6.52
6.51
6.47
6.47
6.46
6.40
6.26
6.08
6.07
6.06
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
Mexico
Japan
Poland
Romania
Kazakhstan
Iceland
Greece
Slovak Rep
Argentina
Korea
Italy
Croatia
China
Slovenia
Bulgaria
UAE
Russia
Venezuela
Ukraine
6.06
5.98
5.95
5.94
5.88
5.74
5.65
5.49
5.24
5.18
5.14
5.13
4.75
4.27
4.20
3.87
3.83
3.69
3.53
8
Shareholders' Rights
IMD WORLD COMPETITIVENESS, 2000-2002
2000-2002 Average
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Finland
USA
Australia
Sweden
Canada
Denmark
Norway
UK
Singapore
Ireland
Netherlands
Luxembourg
Germany
Israel
Austria
Chile
Iceland
South Africa
Switzerland
Hong Kong
8.78
8.51
8.45
8.39
8.35
8.30
7.92
7.85
7.85
7.84
7.79
7.65
7.61
7.57
7.52
7.47
7.42
7.36
7.35
7.30
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
New Zealand
Portugal
Belgium
Hungary
Spain
Brazil
France
Taiwan
Malaysia
Greece
Mexico
Turkey
Philippines
Argentina
India
Colombia
Poland
Venezuela
Italy
Slovenia
7.16
6.83
6.72
6.64
6.58
6.57
6.54
6.53
6.37
6.31
6.22
6.17
6.06
5.90
5.89
5.87
5.87
5.74
5.71
5.51
41
42
43
44
45
46
47
48
49
China
Thailand
Estonia
Indonesia
Czech Rep.
Korea
Russia
Japan
Slovak Rep.
5.49
5.43
5.00
4.97
4.74
4.59
4.51
4.19
3.78
9
Shareholders' Rights: Changes from 2000-2002 to 2010-2012
2010-2012 2000-2002
Avg.
Avg.
Changes
Japan
Czech Rep
Slovak Rep
Estonia
Thailand
Indonesia
Malaysia
India
Colombia
Korea
Taiwan
Brazil
Belgium
South Africa
Philippines
Norway
Poland
France
Germany
Turkey
Spain
Chile
Mexico
Switzerland
Denmark
1.79
1.78
1.70
1.60
1.47
1.43
1.00
0.93
0.79
0.59
0.58
0.38
0.34
0.22
0.20
0.19
0.07
-0.03
-0.09
-0.10
-0.11
-0.12
-0.16
-0.22
-0.23
*
*
*
*
*
*
*
*
*
*
*
*
*
5.98
6.52
5.49
6.60
6.90
6.40
7.37
6.82
6.67
5.18
7.10
6.95
7.06
7.58
6.26
8.11
5.95
6.51
7.52
6.07
6.47
7.35
6.06
7.13
8.07
4.19
4.74
3.78
5.00
5.43
4.97
6.37
5.89
5.87
4.59
6.53
6.57
6.72
7.36
6.06
7.92
5.87
6.54
7.61
6.17
6.58
7.47
6.22
7.35
8.30
Changes
Netherlands
Finland
Portugal
Hong Kong
Luxembourg
Singapore
Austria
Hungary
Italy
Greece
Argentina
Sweden
Russia
New Zealand
China
Australia
Israel
Canada
Ireland
Slovenia
UK
Iceland
USA
Venezuela
-0.32
-0.34
-0.37
-0.42
-0.52
-0.53
-0.55
-0.57
-0.58
-0.65
-0.67
-0.68
-0.68
-0.70
-0.74
-0.85
-0.86
-1.04
-1.09
-1.24
-1.30
-1.68
-1.76
-2.05
2010-2012 2000-2002
Avg.
Avg.
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
7.47
8.44
6.46
6.88
7.13
7.31
6.97
6.08
5.14
5.65
5.24
7.71
3.83
6.47
4.75
7.60
6.71
7.31
6.75
4.27
6.55
5.74
6.75
3.69
7.79
8.78
6.83
7.30
7.65
7.85
7.52
6.64
5.71
6.31
5.90
8.39
4.51
7.16
5.49
8.45
7.57
8.35
7.84
5.51
7.85
7.42
8.51
5.74
10
Auditing and Accounting Practices
IMD WORLD COMPETITIVENESS, 2010-2012 Avg.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Finland
Norway
Denmark
Singapore
Sweden
Canada
Switzerland
South Africa
Australia
Luxembourg
Austria
Germany
Hong Kong
New Zealand
Malaysia
Estonia
Netherlands
Qatar
Taiwan
Hungary
8.50
8.44
8.39
8.22
8.08
8.04
7.97
7.93
7.89
7.87
7.84
7.71
7.69
7.67
7.62
7.59
7.55
7.53
7.49
7.44
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Kazakhstan
Belgium
Israel
Chile
UK
USA
India
Colombia
Czech Rep
Japan
Brazil
Thailand
Lithuania
France
Spain
Slovak Rep
Venezuela
Romania
Philippines
Poland
7.37
7.36
7.36
7.23
7.09
7.08
7.05
7.04
7.04
7.00
6.99
6.99
6.94
6.93
6.90
6.87
6.79
6.79
6.78
6.66
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
Jordan
Mexico
Argentina
Iceland
Ireland
Indonesia
Korea
Turkey
Portugal
Peru
Greece
Ukraine
Russia
Italy
China
Croatia
Bulgaria
Slovenia
UAE
6.60
6.53
6.46
6.46
6.44
6.43
6.39
6.29
6.20
6.19
6.12
6.08
6.03
5.70
5.70
5.54
5.11
5.10
4.61
11
CG in Asian Economies
IMD WORLD COMPETITIVENESS, 2010-2012 Avg.
Auditing and accounting
practices
Rank
4
13
15
19
27
30
32
39
46
47
55
2010-2012 Avg.
Singapore
8.22
Hong Kong
7.69
Malaysia
7.62
Taiwan
7.49
India
7.05
Japan
7.00
Thailand
6.99
Philippines
6.78
Indonesia
6.43
Korea
6.39
China
5.70
Shareholders' rights
Rank
2010-2012 Avg.
9 Malaysia
7.37
11 Singapore
7.31
15 Taiwan
7.10
20 Thailand
6.90
21 Hong Kong
6.88
22 India
6.82
36 Indonesia
6.40
37 Philippines
6.26
42 Japan
5.98
50 Korea
5.18
53 China
4.75
12
Why disparity between regulations and
practices?
• Entrenched ownership structure
– Concentrated ownership
• Cross ownership
• Circuitous ownership
• Moral hazard of controlling shareholder
– Family values control right more than share value
– Expropriation of minority shareholders
• Unfair related party transactions
– Tunneling asset through related party transactions
– Stripping business opportunities to private company
owned by the controlling shareholder
Why disparity between practices and
regulation?
• Bank-financing is stronger than capital market
financing
– Banks have its own poor governance problem
– Bank’s capacity of CG risk management is weak
• Enforcements of rules and regulations are weak
– Supervisory agency’s capacity is limited
– Prosecutors are not independent from business
influence & political consideration
– Judges are not properly trained, and are not
independent from interest conflicts & outside influence
Why Shareholders are inactive?
• High barriers in exercising rights
– Difficulties in fact discovery
– High legal cost
– Independent lawyers are scarce
• Establishments have strong influences on
– Politics
– Media
– Prosecutors and judges
Why Shareholders are inactive?
• Individual shareholders
– Speculative short term trading
– Investment horizon is too short
• Institutions shareholders
– Local institutions: Interest conflicts
– Foreign institutions: Lack of long-term commitment
– Pension funds: Political inflences
Shareholder Activism
• Empower Shareholders
– Lower barriers in exercising rights
• Procedures
• Cost
– Provide mechanisms to be active
• Electronic voting
• Cumulative voting
• Class action lawsuit
• Create activist institutional investors
• Public pension fund should be active investor
18
Shareholder activism in Asia
• Shareholder activism in Asia is weak
– Activist investors
• Hong Kong: David Webb
• Korea: Lazard Korea CG Fund
– Quasi-Government Agency
• Taiwan: Securities and Futures Investors Protection
Center
– NGO
• Korea: Solidarity for Economic Reform
• Malaysia: Shareholder Watchdog Group
• Japan: Ombudsman(Osaka)
19
Actions Shareholder Can Take
•
•
•
•
Attending shareholder meetings
Proposing agenda at the shareholders meetings
Public campaign through media
Electing directors
– Proposing outside director candidate
– Proxy fights
• Taking legal actions
– Filing civil lawsuit
• Derivative actions
• Class-Actions
– Filing criminal investigation
20
Activist Investment: Case 1
Sovereign Asset Mgt. vs SK Corp
• Sovereign Asset Management
– Activist foreign investor
• SK corporation scandal in March 2003
– Accounting fraud
– Embezzlements by controlling family
• Sovereign’s investments in SK shares
– Investments of $150 million in March 2003
– Capital gains of $800 million in July 2005
• Sovereign’s strategy
– Proxy fight for management control
– Proposed improvements in corporate governance
20
03
-0
102
20
03
-0
116
20
03
-0
130
20
03
-0
213
20
03
-0
227
20
03
-0
313
20
03
-0
327
20
03
-0
410
20
03
-0
424
20
03
-0
508
20
03
-0
522
20
03
-0
605
20
03
-0
619
Activist Investment: Case 1
Sovereign Asset Mgt. vs SK
120.0
100.0
SK Scandal
80.0
60.0
40.0
20.0
0.0
KOSPI
SK
SKT
SKN
20
03
-0
101
20
03
-0
401
20
03
-0
701
20
03
-1
001
20
04
-0
101
20
04
-0
401
20
04
-0
701
20
04
-1
001
20
05
-0
101
20
05
-0
401
20
05
-0
701
20
05
-1
001
20
06
-0
101
20
06
-0
401
20
06
-0
701
20
06
-1
001
SK Share Price
2003 - 2006
600.0
500.0
400.0
300.0
200.0
Sovereign
left
SK Scandal
100.0
0.0
KOSPI
SK
• Increase
in SK market capitalization
• from $1 billion to $6.3 billion
• Capital Gains
shares
Sovereign:
15%
Rest of shareholders: 85%
capital gains
$800 million
$4.5 billion
Stock price
KOSPI
SK
March 2003
556.33
8,600W
July 2005
1019.01
55,100W
ROR
KOSPI
SK
83.2%
540.7%
SK Share Price
2003 – 2007
1800
1600
1400
1200
Holding Co.
established
1000
800
Sovereign
Left
600
400
200
SK Scandal
0
2003/1/1 2003/5/29 2003/10/24 2004/3/22 2004/8/17 2005/1/12
SK
2005/6/9 2005/11/4 2006/4/3 2006/8/29 2007/1/24 2007/6/21
KOSPI
25
• SK introduced major reforms
in corporate governance in 2007
• If Sovereign stayed until June 2007,
they could have made capital gains of
$2.4 billion out of $150 million investment
Stock price
KOSPI
SK
ROR
KOSPI
SK
March 2003
556.33
8,600W
July 2005
1019.01
55,100W
83.2%
540.7%
June 2007
1733.10
134,500W
211.5%
1463.9%
Alternative Approaches in Korea
• Shareholder Activism
– NGO shareholder activists since 1997
– Group of two dozens volunteer professionals
– Landmark lawsuit cases brought changes
• Korea Corporate Governance Fund
– Established in April of 2006
– Enhancing share value by improving CG
– Long-term commitments in value investment
Activist Investment: Case 2
Korea Corporate Governance Fund
Disclosure of 5% shareholding of Daehan Synthetic Fiber Co.
on August 23, 2006
Index = 100 as of August 22, 2006
350
300
250
200
150
100
Dae Han Synthetic Fiber Co., Ltd
KOSPI
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
Jul-06
Jun-06
May-06
Apr-06
Mar-06
Feb-06
Jan-06
50
Activist Investment: Case 2
Korea Corporate Governance Fund
Tae Kwang Industrial Co., Ltd.
KOSPI
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
Jul-06
Jun-06
May-06
Apr-06
Mar-06
Feb-06
Jan-06
Disclosure of Ownership: September 19, 2006
Index = 100 as of August 22, 2006
Shareholder activism will create wealth with
Justice & Cause for minority investors
Thank you!