The corporate governance crisis: An opportunity for Asian by HC120622222112


									   4th Asian Roundtable on
    Corporate Governance

After the corporate governance
crisis: An opportunity for Asian

           Stilpon Nestor
      Principal, Nestor Advisors Ltd.

               Nestor November 2002
     Mumbai, 11-12Advisors Ltd.         1
    The post- crisis macro trends
   Institutional investors around the world are
    now putting governance at the top of their
   Boards and independent directors are
    assuming increasing responsibilities in the
    way companies are governed.
   Markets and regulators are increasingly
    focusing on the integrity of corporate
    advisors and their conflicts of interest

                     Nestor Advisors Ltd.          2
      The corporate value dharma
          Strategic planning
          Risk management
          Social responsibility concerns
                                      Business plan
                                                                                Management quality

                                                                                Stakeholder issues

                                                                                  Executive/board liability
                                     Corporate Value
                                                                                Less scope for politics

                  Corporate governance                   Executive leadership

Lower risk to outside investors
Alignment of interests

                                         Nestor Advisors Ltd.                                     3
  The non-contestable governance
     model of pubic companies
Contestable:                              Non-contestable
 Dispersed ownership                      Concentrated ownership
 Highly paid professional                 Long-term “ driver”
  executives with short time                management control
  horizons                                 Private benefits of drivers
 Large asymmetry between                   higher but exec.
  cash flow/control rights                  compensation lower.
 Highly developed market,                 Minimal reliance on outside
  regulatory and judicial                   financial or judicial control
  mechanisms for                            contests
  contestability of control

Change = change in control (real or       Change= change in the
   threatened)                              terms of finance and the
                                            driver’s perception of value
                              Nestor Advisors Ltd.                      4
Can good governance exist in non-
      contestable markets?
Yes, if:
  • Legal framework allows driver abuse to
    be checked
  • Drivers are willing to take action to
    improve governance

                 Nestor Advisors Ltd.        5
Why should owner-driven firms be
 willing to improve governance?
   Corresponds to strategic objectives
    • product market strategy
    • corporate strategy
    • human resources strategy

                   Nestor Advisors Ltd.   6
        The story of South Telco:
   Dominant fixed line state monopoly in a
    market that is becoming competitive/no.
    two in mobile telephony against large local
    competitors in rapidly maturing market
   70% privatized in South market: 3
    tranches since 1994
   ADRs in NYSE
   Low level of debt and ROE,ROCE,E/client
    above average among peer group but
    valuations below average

                     Nestor Advisors Ltd.     7
 The story of South Telco: strategy
          and governance
Product market strategy:                     Governance
  Growth through regional                  New competences on the
   expansion                                 board (board decisions
   • New markets/new risks                   driven by politics)
   • High investment                        An active audit committee
     needs/low retained                      with appropriate systems
     earnings, difficult access              (scandals= increasing
     to bank finance,                        vulnerability of top
   • no implicit state guarantee             management)
     to bond/bank creditors
                                            Trust by institutions:
                                            Better investor

                            Nestor Advisors Ltd.                         8
 The story of South Telco: strategy
          and governance
Corporate Strategy:                             Governance:
 Minority state participation            Clarify relationship of
  in the medium term                       government (s) as owner
 Regional acquisitions into               (focus on boards not CEO)
  state controlled, often                 Minimize interference and
  listed companies                         political vulnerability of
People strategy:                           executive through rigorous
 Changing from civil servant
                                           accountability procedures
  to service culture                      More performance-related
 Employee shareholders                    pay
  following privatization                 More management
                                           awareness of shareholder

                          Nestor Advisors Ltd.                      9
    Why should owner- driven firms be
     willing to improve governance?
   Corresponds to owner/driver strategic objectives:
     • family= working with the upper tier as well as the company

     “When Ayala Corporation went public in 1976, we made a very conscious
       decision that we didn’t want to find ourselves in any conflict of
       interest. All matters that relate to the family are elevated one level to
       a single family holding structure. Although it is not a public holding
       company, its ownership in Ayala corporation is direct and free of the
       opacity and layering that one might find in other structures. Through
       that family structure, we choose who will represent us in the
       governance of the public holding company and act with one voice. …
       All family members are free to do with (the income from their
       ownership) as they please so long as they do not invest in ventures
       that compete with Ayala Corporation’s business. This… ensures that if
       a partner invests with us, it will not be competing with another entity
       in which a family member has an interest….The CEOs of all our
       subsidiaries...are people of the highest calibre who are not from our
       family and are promoted and rewarded strictly on professional
                                               Jaime Zobel de Ayala,CEO

                                  Nestor Advisors Ltd.                         10
   Do firm strategies to improve
   corporate governance pay?
Yes, they do (Clapper and Love 2001):
  • One standard deviation firm-level
    improvement in an less emerging
    market results in a 33% improvement in
    Tobin’s q (a measure of market
    valuation of a firm’s assets )
  • One standard deviation improvement in
    a developed (i.e. OECD) market results
    in an 18% increase in Tobin’s q.

                 Nestor Advisors Ltd.    11
   How to facilitate firm action for
       better governance?
By making virtue evident and investable:
 Bovespa CG Segment

  • Companies accounting for 20% of total market
    capitalization and 19% of all trading activity
    have listed in the CG segment
  • The Corporate Governance segment index fell
    by -1,58% versus a -23,3% fall for the general
    BOVESPA index.

                    Nestor Advisors Ltd.         12
Good governance is matching:
  • Driver aspiration/firm strategies with
    global investor expectations
  • Local/regional corporate and
    enforcement cultures with global best

    Creating trust while preserving
        competitive advantages
                  Nestor Advisors Ltd.       13

“Keep things as simple as possible but
  not a bit more”
                  Albert Einstein

               Thank you

                Nestor Advisors Ltd.     14

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