วันที่ 13 มีนาคม 2551
Table of contents
Who are stakeholders?
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.
ระบบการถ่วงดุล หรือ Checks and Balances
Multi-tiered cg approach in stock market
1. Mandatory listing rule requirements
2. A voluntary Code of CG with compliance or
3. Recommended best practices
Annual Reports are windows for stakeholders
to understand the company‟s cg
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
Triple bottom lines
US in 2002
US and Europe are also faced with
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.
One of the top power companies in the US
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
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
Investment funds were moving out of stock into bond and
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
US corporate frauds were uncovered
– Falsify contingency debt:
– overstate revenue: Enron, AoL Qwest (for network
– 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.
US created a law (Sabanes-Oxley
Act) on July 30th 2002 that would
be used to crack down on
corporate fraud and document
There were criminal penalties and harsh
jail terms for executives.
It also set up an independent board, with
subpoena power to oversee accounting
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
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
Share prices dropped by 30% since mid Feb 05 to
April 05. Market cap declined by $60 billion.
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
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
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
Zero tolerance towards corporate misdeeds.
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
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
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
France fined 3 mobile operators for
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
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.
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.
Dell and its financial statement
Audit committee identified accounting errors, evidence of
misconduct, and deficiencies in the financial control on March
Accruals, reserves, and other balance sheet items are
Dell share fell by 8% immediately after the announcement.
Even though it recovered but still off by 2% in the afternoon
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
UNEP Finance Initiative and the UN Global
Signatory is engaged on a voluntary basis
Mainstream and sustainable investment
Different from SRI that screens out the non
Nortel failure is related to the executive
compensation. It is linked to quarterly result
and thus led to distorting balance sheets.
CalPERS :proxy voting to raise the weight of social
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
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
Assurance of integrity and
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
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
Governance Metrics International in
It conducted a survey in March 2005 on company
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.
Trade standard: non tariff discrimination
Consumer right and protection
Insurance for company and directors
World Bank measures governance
“Governance Matters IV: New Data, New
– Voice and accountability
– Political instability and violence
– Government effectiveness
– Regulatory burden
– Rule of law
– Control of corruption
Perk, an international consulting firm on political and
economic risks, ranked corporate governance
standard in Asian countries in June 2003 as follows:
– Hong Kong
– Korea and Malaysia
– The Philippines
– Thailand, Indonesia and India
– China and Viet Nam
But no definition on the „materially‟
Information that affects investment decision
acquisition and joint venture
change of assets
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
CG development in Thailand, Singapore,
Enforcement and regulations
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
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:
Comply or explain- not in the regulatory regime
Transparent and understood by shareholders
An Effective Board
Conflicts of interests
Should be good for the business/ an effective
Board to create value/ all the options
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
– At least 1/3 completely independent and hold the mgt to accounts
– Code now requires 50% on board
– Independence: 9 years
– Independent mind
– mostly NEDs
UK Non Executive Directors (NEDs)
Specific skills sets
Senior independent director
– Investors can go to if there is a question about the