Financial. Cash Flow Rpt

							Corporatization of Family Companies &
International Corporate Governance
Principles

Syrian Commission on Financial Markets &
Securities
3rd Conference on Investment and Capital
Markets

             William P. Mako
             The World Bank
             3 December 2007
Many well-known public companies
have emerged from family businesses.

Company          Country      Established   Original business
Boeing            U.S.A.         1903       wood products
Ford              U.S.A          1902       automobiles
Corning Glass     U.S.A.         1851       glass
Siemens         Germany          1847       electrical equipment
Ayala           Philippines      1834       plantations
Citibank          U.S.A.         1812       finance
DuPont            U.S.A.         1802       chemicals
Doosan            Korea          1396       retail
Institutional investors can play an important role in
protecting minority shareholders (stock ownership)

                                       U.S.   U.K   South Korea

Banks                                  7%     10%      12%

Insurance, pension, investment funds   39%    58%      14%

Non-financial companies                0%     1%       21%

Individuals                            49%    21%      34%

Other                                  5%     10%      19%
Family businesses go public
for various reasons.

   Good reasons
     Capital for generally-known business purposes
     Family succession, exit
     More professional management
     Capital market discipline  possible by-product

   Bad reasons
     Prestige
     Capital   for hidden business purposes
What can go wrong?
E.g., South Korea, 1990s
   Cross-shareholding and pyramiding
   Family ownership minor, in some cases
   Lack of holding company structure
   Lack of accountability; poor governance
   Public subsidiaries & private subs. juxtaposed
   RPT expropriation of public S/Hs  “growth”
   Cross guarantees on debt; unsustainable debt
   Bad decisions; bad investments; bankruptcy
OECD Principles:
II. Shareholder rights & ownership functions

A.   Basic rights
B.   Extraordinary transactions
C.   Participation in general shareholder meetings
D.   Disclosure of anomalous control arrangements
E.   Free market for corporate control
F.   Free exercise of ownership rights
OECD Principles:
III. The equitable treatment of shareholders

A.   Including protections for minority shareholders
B.   Prohibitions
        Insider trading
        Abusive self-dealing
C.   Disclosures by management and board
        Material interest in any transaction or matter
        Directly, indirectly, or on behalf of 3rd parties
OECD Principles:
V. Disclosure & transparency
A.     Material information, e.g.
        Financial and operating results
        Company objectives
        Major share ownership & voting rights
        Remuneration; info on board members
        Related party transactions
B.     Accounting standards
C.     Annual independent audit
Etc.
OECD Principles:
VI. Responsibilities of the Board
A.   Fully informed, in good faith, diligent
B.   All shareholders treated fairly
C.   Ethical standards
D.   Key functions: e.g.,
        Guidance
        Monitoring
        Hiring/firing CEO
E.   Independent judgment
F.   Timely access to relevant information
Good corporate governance helps firm
performance, even for family-owned firms.
   Gompers, Ishii, Metrick (2001)
       Studied 1500 firms per year during 1990s
       Purchase (sale) of firms with strong (weak) S/H rights: +8.5%
       Correlation between governance index and valuation
   LaPorta, et al (2002)
       Disconnect between cash flow & control rights  RPT tunneling
       Low S/H protection  lower valuation
Corporate governance activism & results:
South Korea, post-crisis
   Activist shareholders (e.g., People’s Solidarity)
       Sued bank for lending to a bankrupt steel maker
       $18 mn. from Samsung for related party shares sale
   Activist funds
       $400 mn. Lazard Korea Corporate Governance Fund
       $211 bn. California Public Employees Retirement
   Results
       Daehan: register; HoldCo; investor relations; up 127%
       LG Corp: reorganized as HoldCo; 10x price rise
       SK Corp: reorganized as Hold Co; up 31% since 7/07