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					Corporate Governance
        part 1

                      พิสิฐ ลี้อาธรรม

                  วันที่ 13 มีนาคม 2551
Table of contents

   Who are stakeholders?
   CG crisis
   Punishment
   Responses
   UK experience
Stakeholders

 ผู้ถือหุ้นรายใหญ่และรายย่อย
 เจ้าหนี้/ suppliers
 สรรพากร/ regulators
 พนักงาน
 ลูกค้า
 ประชาชน
Relationships among stakeholders

   Corporate governance is about the
    relationships among management, the board
    of directors, shareholders, and other
    stakeholders in a company.
   How firm‟s decision making structures are
    organized, the priorities of these structures
    and the structures‟ effect on shareholders.
ข้อเปรียบเทียบระหว่างรัฐบาลกับ
บริษัทมหาชน

        รัฐบาล                  บริษัท
    ประชาชนผู้ออกเสียง       ผู้ถือหุ้นจากสาธารณะชน
                        
                                มหาชน
   สภาผู้แทนราษฎร          คณะกรรมการบริษัท
   นายกรัฐมนตรี            ผู้จัดการใหญ่
   ข้าราชการประจา          พนักงานบริษัทมหาชน
   คณะกรรมการตรวจเงิน      ผู้สอบบัญชี
    แผ่นดิน
     ระบบการถ่วงดุล หรือ Checks and Balances
     บริษัทมหาชนซึ่งระดมเงินจากประชาชนควรได้รับ
     การตรวจสอบและติดตาม
Multi-tiered cg approach in stock market


1. Mandatory listing rule requirements
2. A voluntary Code of CG with compliance or
   explain provisions
3. Recommended best practices
Annual Reports are windows for stakeholders
   to understand the company‟s cg
Market discipline

   Information extension/ investors‟
    decision/free flows of information
   Capital and human resource management
   Market entry, competition, profit maximization
   Financial gain/loss based on business risk
    appetite and managerial skills
   Must be supported by the judicial and
    accounting systems
Triple bottom lines

   Financial profit
   Social profit
   Environment profit
CG crisis


    US in 2002
    Eurozone
    Japan
US and Europe are also faced with
CG problems

   Big corporations in the US in energy and
    telecommunications sectors were in trouble
    in late 2001-2002 because of corporate
    governance issues. Enron and World Com
   Excessive stock option and executive
    compensation drove companies to inflate
    and falsify financial results.
   This led to stock market declines and
    bankruptcy of big corporations in the US as
    well as the demise of one of the world top 5
    accounting firms, Arthur Andersen.
Enron

   One of the top power companies in the US
    stock market
   Scandal was exposed in 2001.
   Ken Lay, the CEO of Enron was prosecuted.
Example: WorldCom :$11billion fraud
     WorldCom was the second largest US long
      distance company filed for Chap 11 Bankruptcy

      protection on July 22, 2002.
     WorldCom was traded at $64.5 per share in June 1999,
      fell to 83 cents on 27 June 2002, just before the scandal
      broke out. It was traded at 0.8 of 1 cent at begin July 2002.
     It had improperly booked $3.85 billion over 15 months
      starting in 2001.
     WorldCom asset in the book worth $104 billion, but
      accountants estimated the real value to be $8 billion. Huge
      investment by WorldCom led to an outstanding of $32
      billion bond and bank loans. The WorldCom bankruptcy
      dwarfed Enron‟s $70 billion case
     Vast over capacity in fiber optic as a consequence of over
      optimism about new economy.
     Former 12 directors of WC to pay $25 million fine.
Ebbers was sentenced

   To surrender all his wealth: $40 million. Only
    to keep some funds to pay for legal bills and
    a spouse allowance.
   It was a criminal case; he was to serve 25
    years jail sentence for the $11 billion fraud at
    Worldcom.
US corporate good governance
was in question

   Global Crossing Ltd (25.5 billion), XO
    communications($8.5 billion), Qwest Communications
    International, Tyco International Lid., Imclone Systems,
    Xerox Corp. Johnson&Johnson are in trouble.
   Adelphia Communications ($24.4 billion asset): The
    founder and former CEO and his two sons were arrested
    in July 2002. They were accused of stealing hundred of
    millions US dollar from the company.
   Stock market prices in the US were volatile in July 2002
                                     g
                                      g
                                     g
    Investment funds were moving out of stock into bond and
                                      o
    money market fund in June-July 2002.
    More Bad governance discovered
   Global Crossing Ltd (25.5 billion),
    XO communications($8.5 billion),
    Qwest Communications International,
    Tyco International Lid., Xerox Corp.
    Johnson&Johnson are in trouble.
   Adelphia Communications ($24.4 billion asset):
    The founder and former CEO and his two sons
    were arrested in July 2002. They were
    sentenced to 15 and 25 years in jail upon being
    accused of stealing hundred of millions US
    dollar from the company. g
                               g
                               g
                               o
                       Bad governance
                       uncovered
   US corporate frauds were uncovered

    –   Falsify contingency debt:
    –   overstate revenue: Enron, AoL Qwest (for network
        capacity swap)
    –   overstate sale: Dynegy, Enron
    –   understate expenditure: Worldcom
    –   book fake management fee: Adelphia communications
    –   borrow from the company for personal use
Arthur Andersen with 28 000 staff

 ArthurAndersen LLP has
surrendered its licenses to practice
accounting in the US by end Aug
02, marking the end of the 89 year
history of one of the top 5
accounting firms. Reason: It
 shredded the Enron documents.
Sabanes-Oxley Act
  US created a law (Sabanes-Oxley
  Act) on July 30th 2002 that would
  be used to crack down on
  corporate fraud and document
  shredding.
 There were criminal penalties and harsh
  jail terms for executives.
 It also set up an independent board, with
  subpoena power to oversee accounting
  firms.
 No company loans to executives.
 No conflict of interest for auditors and
  consultants. New rules for financial analysts.
Critique on SB Act

   An auditor with no independency would produce a
    bad audit, but so would one who was so
    independent that he did not understand the company
    and its industry.
   Consulting services provide the badly needed
    knowledge.
   High compliance cost: 70,000 man-hours for each
    big corporate, often by most senior staff.
   Could be more flexible and less costly.
AIG –Accounting improprieties

   Deficient internal control.
   Net worth could be reduced by $2.7 billion.
   Insufficient transfer of risks to re insurers,
   Improper valuation of assets
   Maurice Greenberg, its decade long CEO resigned
    in March 2005. He was to testify under oath to
    regulators
   Share prices dropped by 30% since mid Feb 05 to
    April 05. Market cap declined by $60 billion.
European scandals

   In Italy, Parlamat was in trouble
   In the Netherlands, the retailer- Ahold NV
    fired its CEO and CFO for accounting
    irregularities in Feb 2003. Ahold overstated
     profit by US$1 billion.
   The news eroded the market cap by 63%
    within one day upon releasing the news.
Royal Ahold settled suit for e945 million

   The biggest securities class action settlement in the US
    was worth US$1.1 billion.
   In May 2006, the Dutch court found 2 top executives
    guilty of fraud and fined them each e225k, with 9 month
    suspended sentence. No personal enrichment found.
   Defendants argued about control while there were side
    letters
   US accounting fraud carries much tougher sentences.
    Enron exec faced up to 30 years imprisonment.
Japan SEC get tough with GCG

   Kanebo was delisted from Tokyo Stock Exchange in
    May 2005 because it has overstated its profits for
    years.
   In December 2004, Seibu Railways was delisted
   Since late 2004 to May 2005, TSE has delisted 3
    companies for willfully misleading investors,
    compared to non since 1980.
   Matsushita and Canon set up disclosure and
    compliance committees.
   Zero tolerance towards corporate misdeeds.
punishment
SK Corp sued by Fund manager

   Sovereign Asset Management, based in
    Monaco, sued SK Corp, Korea‟s largest oil
    refinery to hold a SSM. AF-Nov 2004.
   SAM, holds 14.9%, request to hold a special
    shareholder meeting to oust the CEO was
    rejected by the SK‟s board.
   The CEO was sentenced in 2003 to 3 years
    in prison for illicit dealings and accounting at
    SK. He was freed on bail pending an appeal.
Insiders in the stock market

   Imclone‟s founder was jailed 7 years
   Martha Stuart was implicated.
   UK recently jailed an insider- “The Walrus”
    for 5 years. A compliance officer of CSFB
    who had accessed to the details of deals
    before they were made public, passed on
    information to his own circle of 4 old school
    friends.
Daewoo founder jailed for 8.5 years

   Daewoo founder was charged for the largest fraud case in
    Korea history. His wealth of $19 billion was confisticated.
   Kim Woo Choong, was charged with ordering his executives o
    inflate Daewoo‟s assets by Won 41 trillion or $40 billion in
    1997-98 to obtain loans during the crisis.
   The 69 year old tycoon, was also accused of illegally borrowing
    9.8 trillion won , using the company‟s inflated asset value
   He also faced the charges of smuggling $3.2 billion abroad and
    failing to inform the authorities of $15.7 billion in overseas
    transactions.
   Daewoo with $82 billion debt went bankrupt. 360,000 personnel
    used to work for Daewoo.
   He built his empire from $5000 bank borrowing in 1967.
Collusion in memory chips

   Hynix Semi-conductor from Korea paid a $185
    million fine in 2005. Infineon Technologies AG of
    Germany paid $160 million in 2004.
   Samsung, the world‟s largest makers of computer
    memory chips was fined $300 million for participating
    in a worldwide price fixing conspiracy that damaged
    competition and raised computer prices during 1999-
    2002. It was announced in Dec 2005. It was the
    second largest fine in a criminal anti trust case. Its
    president and other executives can face further
    prosecution.
France fined 3 mobile operators for
price collusions

   The mobile operators: SFR, Bouygues and
    Orange were fined $628 million for illegally
    collusion on prices during 1997-2003.
   They have shared commercial data and froze
    their market shares to reduce competition
    pressures on prices.
   It is the biggest ever fine imposed by the
    French authorities.
Anti trust case against De Beers

   De Beers agreed to pay $250 million to settle
    the majority of civil class action suits. It has
    faced anti-trust cases in the US since 1945.
   Final approval by the US District Court in
    New Jersey in 2006.
Asbestos-related diseases
compensations

   James Hardie Industries Ltd. Agreed to pay more
    than US$2.2 billion to the victims in Australia over
    the next 40 years. This will replace the fund set up in
    2001 that ran out of money.
   It used asbestos as a fire retardant in wallboard and
    other products until it was banned in 1984. Up to
    45,000 Australians would suffer by 2021 as they
    exposed through James Hardie products
KPMG auditors were fined by SEC

   Four US auditors involved in auditing Xerox
    were fined in Feb 2006. They were not
    allowed to audit public companies for a
    number of years.
   Xerox was engaged in fraudulent
    manipulations of leases for its equipment,
    inflating profits. It was a wide-ranging four-
    year scheme to defraud investors.
Responses
Dell and its financial statement

   Audit committee identified accounting errors, evidence of
    misconduct, and deficiencies in the financial control on March
    29th, 2007.
   Accruals, reserves, and other balance sheet items are
    investigated.
   Dell share fell by 8% immediately after the announcement.
    Even though it recovered but still off by 2% in the afternoon
    trade.
   It is faced with investigation into its accounting practices by the
    SEC and the US Attorney.
   It has delayed its filing with the SEC. It damaged employees as
    the company suspended payments into their retirement funds.
Principles for responsible investment

   Environment, social and corporate
    governance (ESG)
   UNEP Finance Initiative and the UN Global
    Impact
   Signatory is engaged on a voluntary basis
   Mainstream and sustainable investment
   Different from SRI that screens out the non
    compliance.
Canadian experiences

   Nortel failure is related to the executive
    compensation. It is linked to quarterly result
    and thus led to distorting balance sheets.
International responses

   CalPERS :proxy voting to raise the weight of social
    issues
    OECD Principle on corporate governance.
   Transparency International Annual Report
   Institute of Management and Development (IMD):
    World Competitiveness Yearbook, a chapter on
    corporate governance that ranks countries.
   Investors are willing to pay premia for better
    governance
Acceptance of directorship

   As the director risk mounts, the acceptance
    of being a director is becoming trickier
   A survey of Fortune 1000 boards found that
    29% of US directors declined board seats in
    2004, as compared to 13% in 2003.
   In Germany, nearly a third of directors
    declined a new position, up from 11% in
    2003.
Assurance of integrity and
financial vitality

   Would-be directors in US are more careful in the
    aftermath of corporate fraud. They do not want to
    risk their life time developed reputation and good
    name.
   Protracted due diligence, they sign confidentiality
    pledges and get access to corporate secrets.
   Potential directors owe it to themselves to go
    through the due diligence process.
   Indemnification of the board members against legal
    claims arising from official duties
IMD: World competitive yearbook

   Right and responsibility of shareholders
   corporate credibility
   corporate board
   shareholder value
   insider trading
   social responsibility
   industrial relations
   customer orientation
Governance Metrics International in
New York

   It conducted a survey in March 2005 on company
    transparency
   Japan companies scored an average 3.49 out of 10.
   The UK companies topped the list with 7.39.
   It was found that share price and return of well
    governed companies outperformed poor governed
    companies by 15% during 2000-2004.
International pressure

   Trade standard: non tariff discrimination
   Consumer right and protection
   Insurance for company and directors
   Environment awareness
World Bank measures governance

   “Governance Matters IV: New Data, New
    Challenge”
   6 indicators:
    –   Voice and accountability
    –   Political instability and violence
    –   Government effectiveness
    –   Regulatory burden
    –   Rule of law
    –   Control of corruption
   http://www.worldbank.org/wbi/governance/govdata/
PERK’s ranking

   Perk, an international consulting firm on political and
    economic risks, ranked corporate governance
    standard in Asian countries in June 2003 as follows:
    –   Singapore
    –   Japan
    –   Hong Kong
    –   Korea and Malaysia
    –   The Philippines
    –   Thailand, Indonesia and India
    –   China and Viet Nam
Www.foleylardner.com/pg/b_secu/
regulation fd.html

   But no definition on the „materially‟
   Information that affects investment decision
       operation result
       acquisition and joint venture
       change of assets
       new products
       change of customers or suppliers
       change of management
       matters about the assets of issuers
       bankruptcy and rehab
2006 Asian roundtable on CG

   Held in Bangkok during 13-15 Sep 06
   Organized by OECD, World Bank, Thai
    capital market
   CG development in Thailand, Singapore,
    Taiwan
   Enforcement and regulations
UK experiences
Corporate governance in the UK-role
of investors-Christine Farnish

   Good and appropriated tax regime/eet
   Corporate governance interest
     –   Tulip mania cir 17th century
     –   South sea bubble cir 18th century
     –   Railways cir 19th century
     –   1929 crash
     –   1970s in the US- audit committee
     –   1980s greenmail in the US, public pension fund activism by Calpers
     –   Late 1980s Robert Maxwell

     Shareholder interests should be safe guarded
     To manage their risk/their value of investment to hold
     Long term returns vs short term returns
UK regime

 A voluntary, not a descriptive a la SA Act
 Listed companies to follow listing rules- combined
  codes, good practice code
 It evolves, flexible, as market condition develops
 Powerful institutional investors who are active:
  NAPF,
 Comply or explain- not in the regulatory regime
Transparent and understood by shareholders
An Effective Board

   Conflicts of interests
   Disclosure
   Should be good for the business/ an effective
    board
   Board to create value/ all the options
    evaluated
   Challenge the mgt about risk and opportunity
UK: Corp governance policy
   A template that they can use
   A guidance about votes, engage their fund managers
   Shareholder committee/ shareholders‟ activism
   Chairman and ceo
    –   Different roles and be separated
   Independent NEDs
    –   At least 1/3 completely independent and hold the mgt to accounts
    –   Code now requires 50% on board
    –   Independence: 9 years
    –   Independent mind
   Renumeration committees
    –   mostly NEDs
UK Non Executive Directors (NEDs)

   Specific skills sets
   Being Objective
   Independence
   Challenge
   Senior independent director
    –   Investors can go to if there is a question about the
        chairman
Summary

   stakeholders
   CG crisis
   Punishment
   Responses
   UK experience
The end




   Pisit@Leeahtam.com

				
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