Corporate Governance:
Hong Kong
Presented by: Heidi Sehrt
Ryan Mackenzie
Dana Gayeski
Alexandra Commelin
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Agenda
•
•
•
•
•
•
What is corporate governance?
Hong Kong background and trends
An example of poor corporate governance
An example of good corporate governance
Recommendations
Q&A
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Definitions of Corporate
Governance
• "Corporate governance - which can be defined narrowly as
the relationship of a company to its shareholders or, more
broadly, as its relationship to society -….", from an article in
Financial Times
• "Corporate governance is about promoting corporate
fairness, transparency and accountability" J. Wolfensohn,
president of the World Bank
• “The device that is used to represent the ownership of a
public company…a series of standards, a code of behavior,
tradition…varies from company to company…a moving
target…evolves over time.”, Arthur Levitt
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Criteria for Measuring CG
Discipline/Management
Transparency
Independence
Accountability
Responsibility
Fairness
Social Awareness
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Examples of How CG Can
Effect a Company
Bad:
– Enron
– Worldcom
Good:
– Colgate-Palmolive
– Pfizer
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Background and Trends
• China vs. Hong Kong
– The new mainland regulator (CSRC) has no
say over Hong Kong
– Quarterly vs. bi-yearly reports
– Disclosure requirements
– HK firms have been de-rated in China
(“dishonest discount”)
• Corporate transparence lacking
• Lack of class action suits
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Background and Trends
• Board of directors
– Controlling stakeholders
– Need for “independent” directors
– Minority stakeholders have little or no say
• David Webb’s role
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Problems in Hong Kong
• This is problem in HK and Asia: of 33 stocks on Hang
Seng Index, 32 have a controlling shareholder
• This shareholder can control the composition of the
board, and thus, basically runs the company
• To actually have this power, one needs only 30% (de
facto control), where as Esprit Holdings Ltd has a strong
owner, who controls 59% of shares
• Compared to US and other Western companies, there is
not a lot of dominant shareholders
• Even Bill Gates only has about 20% of Microsoft
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Bad Corporate Governance:
The Boto Scandal
Prior to Scandal
• Boto Holdings Limited started 1983 as Christmas
tree manufacturer
• No affiliations with other Hong Kong
companies
• Massive outperformer
• Gross profit margins 40%
• Sold at five times less than earnings, 10.7% dividend
yield
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Bad Corporate Governance:
The Boto Scandal
The Scandal
• Company wants to go private again, propose
buying out manufacturing division at discount to
price shares trading at
• All that remains is animation business of owner’s
son
• Partnered with Carlyle Group (advisor George
Bush) to squeeze all value out
• 20% down, rest financed by debt
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Bad Corporate Governance:
Outcry of Shareholders
• Demand more compensations, Boto agrees to
leave 25% manufacturing to shareholders, still
no profits
• Restructuring deal passed 53% to 47%
• Passed because conflict of interest
• Ruling groups allowed management to vote
because dominated by people from listed
companies on exchange, who are dominated by
family owners
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Boto Today
• Deal passed because no longer considered
related-party transaction, board and
management did vote
• first deal advised against in over 10 years
• Class-action suits not permitted in Hong Kong
and no contingency fees for lawyers
• Today Boto known as IMI Global Holdings
Limited, computer animation company
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
P/E (ttm):
21.63
EPS (ttm):
1.01
Div & Yield:
0.70
(3.19%)
Esprit Holdings Limited
• Core markets in 40 countries, in all 5 continents
• Acquired WW Esprit trademark rights (Esprit de
Corp) in US and Caribbean in April 2002
• 1st time since 70’s, ownership of Esprit brand ww
under control of one company
• Focus on future expansion (sportswear, clothes
for newborns, toys introduced)
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Good Corporate Governance:
Esprit Holdings Ltd.
• Acquisition of Esprit (US) :
– Provided source of long-term growth
– Ended mgmt fee paid out of listed company
– Enabled this united company to take action against
mgmt in areas where poor performance
– Increased performance of stock, improved CG
relationships
• This, along with increased depreciation of US $
for European customers, greater upside
potential
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Achievements of Success
• Jun 2003: Best Company Investment
Report in the consumer industry in Asia
• May 2003: Best Corporate Governance
and Best Financial Mgmt in HK (no.8)
• Apr 2003: Best in Corporate Governance
in Asia (top 20)
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Management for Successful
Corporate Governance
• May 2003 Esprit was one of the best
managed companies in HK, according to
FinanceAsia
• This is due to its quality directors and
management
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Management of Esprit
• Michael Ying Lee Yuen, Chairman
• Over 25 yrs experience, responsible for overall
direction and formulation of company’s
corporate policies
• John Poon, executive director and group CFO
• Recognized for his corporate governance
capabilities, social service contributions, and
treatment of shs
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Management for Successful
Corporate Governance
• Frederick Ma, HK Secretary for Financial Services
and the Treasury said, stressing the importance
of having good quality directors on company
boards, “Qualifications, training and experience
can be recommended, or required through
legislation or regulation. Integrity has to come
from the business community itself.”
• In other words, HK companies, like Esprit, need
to set the bar for other local companies, and
drive through these reforms
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Esprit Stock Price change over
past 5 Years
• P/E (ttm):23.23
• EPS (ttm):1.005
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
A Premium for Good CG?
• Institutional investors claim to be willing to pay
as much as 30 percent more for shares in
companies that are well-governed
• Companies with better corporate governance
had higher price-to-book ratios
• Companies can expect a 10 to 12 percent boost
to their market valuation by going from worst to
best on any single element of governance
• Investors the world over are looking for the
same basic standards of good governance—and
will pay a premium for shares in companies that
A. Commelin, D. Gayeski, R. Mackenzie, H.
meet them
Sehrt
Esprit Conclusions
• These characteristics coupled with a
corporate transaction that improves the
CG structure often leads to big
outperformance
• HK proven that high CG companies give
higher beta-adjusted returns
• However, if market perception of a
company’s CG declines lose value
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Room for Improvement
• Great international exposure
• But no Quality Management System (QMS), like ISO
9000
• Study done by Tsoi Salahuddin found that only
companies with significant international mkt interests
show commitment to corporate social responsibility (part
of CG).
• In other words, there are local barriers in terms of
incentives to implement CSR strategies, and doing this is
not seen as a competitive advantage for companies
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Reforms Necessary
• Protection of minority shareholders’ rights
• Greater transparency
• Improve board practices
– INDEPENDENT directors
– Refrain from voting when conflicts of interest
exist
• The Standing Committee on Company Law
Reform’s role
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Reforms Necessary
•
•
•
•
•
•
Quarterly reporting
Disclosure of salaries
Publish and dispatch annual reports
Require audit committees
Promote investor education
Promote greater transparency and provide
training for non-executive directors
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Business Roundtable’s Statement of
Corporate Governance :
“Adoption of a set of rules…is not a
substitute for and does not itself assure
good corporate governance.”
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt
Q&A
A. Commelin, D. Gayeski, R. Mackenzie, H.
Sehrt