Forum onForum onGovernment-Business Relations and Government-Business Relations and

Corporate GovernanceCorporate Governance

International Conference on International Conference on Corporate Governance in Asia and Corporate Governance in Asia and

ChinaChinaShanghai, March 12 2005Shanghai, March 12 2005

22

Panel DiscussionPanel Discussion

Understand the relations between Understand the relations between business and governmentbusiness and government

Importance of public in corporate Importance of public in corporate governancegovernance

Effects of political rent seeking in Effects of political rent seeking in firmsfirms

How to improve governance in rent-How to improve governance in rent-seeking society?seeking society?

33

OutlineOutline

The The inseparabilityinseparability between politics and between politics and business in Asiabusiness in Asia• Political connections, rent seeking, and Political connections, rent seeking, and

corruptioncorruption Public governancePublic governance – a first order factor – a first order factor

missing in the corporate governance missing in the corporate governance debatedebate

CasesCases and and research evidenceresearch evidence on the on the effects of rent seeking on corporate effects of rent seeking on corporate governancegovernance

ImplicationsImplications for corporate governance for corporate governance reformsreforms

44

The The Inseparability Inseparability between between Business and PoliticsBusiness and Politics

Powerful business tycoons can significantly Powerful business tycoons can significantly influence government policiesinfluence government policies

They may even directly engage in politics They may even directly engage in politics Conversely, politicians (or their offspring) often Conversely, politicians (or their offspring) often

become business tycoonsbecome business tycoons Asking business people in Asia, few would deny Asking business people in Asia, few would deny

relationships or connections with government relationships or connections with government important important

Particularly so in sectors heavily regulated by Particularly so in sectors heavily regulated by governments, including telecommunication, public governments, including telecommunication, public utilities, transportation, banking and finance, utilities, transportation, banking and finance, property development, … the list goes onproperty development, … the list goes on

In China, almost every sector is heavily regulated, In China, almost every sector is heavily regulated, and hence political connections are very important!and hence political connections are very important!

55

Asia as A Rent Seeking SocietyAsia as A Rent Seeking Society

Business tycoons seeking rents from Business tycoons seeking rents from governmentsgovernments

Politicians seeking rent from businessPoliticians seeking rent from business Vast grey areas of laws and weak Vast grey areas of laws and weak

(selective) enforcement make rent (selective) enforcement make rent seeking highly rewardingseeking highly rewarding

Perceived corruption levels of a few Perceived corruption levels of a few Asian economies are highAsian economies are high

66

Corruption in Asian EconomiesCorruption in Asian Economies(Source: Transparency International: mean Corruption Perception (Source: Transparency International: mean Corruption Perception

Index 1992-2000)Index 1992-2000)

0

1

2

3

4

5

6

7

8

9

Economy

ChinaTaiwanHong KongIndonesiaJapanKorea (South)SingaporeThailand

77

Public governancePublic governance and corporate and corporate governancegovernance

The quality of public governance is of The quality of public governance is of first order importance in shaping the first order importance in shaping the governance of the corporate sectorgovernance of the corporate sector

However, it is largely ignored in However, it is largely ignored in corporate governance debates in corporate governance debates in Asia and around the worldAsia and around the world

In the following, we use a few In the following, we use a few examples and research results to examples and research results to illustrate the pointillustrate the point

88

Political connections have “value”Political connections have “value”

One way to examine the effects of One way to examine the effects of public governance on corporations is public governance on corporations is to look at the stock price effects of to look at the stock price effects of corporations linked to corrupted corporations linked to corrupted government officers when they got government officers when they got caughtcaught

99

Pervasive corruption in ChinaPervasive corruption in China

According to China’s official record, during According to China’s official record, during 1997-2002, there are totally 1997-2002, there are totally • 861917 corruption cases under investigation861917 corruption cases under investigation• 842760 corruption cases concluded842760 corruption cases concluded• 846150 people punished by communist laws, 846150 people punished by communist laws,

of which 137711 expelled from the communist of which 137711 expelled from the communist partyparty

• Among the punished communist party Among the punished communist party members,members,

28996 county 28996 county （县）（县） levellevel 2422 intermediate2422 intermediate （厅（厅 ,, 局）局） levellevel 98 provincial 98 provincial （省（省 , , 部）部） level or abovelevel or above

1010

Recent high-level Corruption Recent high-level Corruption cases in Chinacases in China

Corrupted Provincial LeadersCorrupted Provincial Leaders

1111

Cumulative abnormal stock return around initial disclosure Cumulative abnormal stock return around initial disclosure of corruption cases (Daily CAR[-10, 20]) of corruption cases (Daily CAR[-10, 20])

The sample include China’s listed companies whose senior The sample include China’s listed companies whose senior managers were found to have managers were found to have bribedbribed the caught politicians the caught politicians

CAR of Firms with ONLY Briber Connectionobsday

-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20

-30

-25

-20

-15

-10

-5

0

5

10

1212

Cumulative abnormal stock return around initial disclosure Cumulative abnormal stock return around initial disclosure of corruption cases (Daily CAR[-10, 20]) of corruption cases (Daily CAR[-10, 20])

The sample include China’s listed companies whose senior managers The sample include China’s listed companies whose senior managers were former or current were former or current colleaguescolleagues of corrupted politicians of corrupted politicians

CAR of Firms with ONLY Colleague Connectionobsday

-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20

-30

-25

-20

-15

-10

-5

0

5

10

1313

Rent seeking hurts corporate Rent seeking hurts corporate transparencytransparency

Why some Asian companies failed to Why some Asian companies failed to produce reliable financial information? produce reliable financial information?

Why corporate transparency in Asia is low, Why corporate transparency in Asia is low, despite new laws and regulations requiring despite new laws and regulations requiring more disclosure? more disclosure?

Why do Asian investors seldom read Why do Asian investors seldom read financial reports?financial reports?

Disclosure of proprietary information can Disclosure of proprietary information can be costly, even investors agreebe costly, even investors agree

Fan and Wong, Journal of Accounting and Fan and Wong, Journal of Accounting and Economics, 2002Economics, 2002

1414

Opacity Premium in AsiaOpacity Premium in Asia Source: PricewaterhouseCoopersSource: PricewaterhouseCoopers

0

2

4

6

8

10

12

14

Economy

ChinaTaiwanHong KongIndonesiaJapanKorea (South)SingaporeThailand

1515

Corruption in Asian EconomiesCorruption in Asian Economies(Source: Transparency International: mean Corruption Perception (Source: Transparency International: mean Corruption Perception

Index 1992-2000)Index 1992-2000)

0

1

2

3

4

5

6

7

8

9

Economy

ChinaTaiwanHong KongIndonesiaJapanKorea (South)SingaporeThailand

1616

Boards do not workBoards do not work

Weak governance and low professionalism Weak governance and low professionalism of Chinese firms of Chinese firms • Over a decade since China’s opening up its Over a decade since China’s opening up its

stock markets, the governance function and stock markets, the governance function and the degree of professionalism of listed the degree of professionalism of listed companies’ management and boards of companies’ management and boards of directors remain weak compared to the directors remain weak compared to the western standard. western standard.

Chinese boards are populated with Chinese boards are populated with politicians (current or ex-government politicians (current or ex-government bureaucrats) bureaucrats)

1717

Boards of directors are weak in Boards of directors are weak in governance: the case of China governance: the case of China

(Chen, Fan, Wong, 2004)(Chen, Fan, Wong, 2004)

Board sizeBoard size 9.22 (range 5 to 19) 9.22 (range 5 to 19)

Manager directorsManager directors 34%34%

Largest shareholderLargest shareholder 53%53%

Minority shareholdersMinority shareholders 0%0%

PoliticiansPoliticians 32%32%

Central govtCentral govt 4%4%

Local govtLocal govt 19%19%

OthersOthers 9%9%

1818

Boards of directors are weak in governance: Boards of directors are weak in governance: the case of China the case of China

(Chen, Fan, Wong, 2004)(Chen, Fan, Wong, 2004)

Directors from unaffiliated firmsDirectors from unaffiliated firms

(“expert” directors)(“expert” directors) 18%18%

ProfessionalsProfessionals 5%5%

AcademicsAcademics 14%14%

Woman directorsWoman directors 5%5%

Age Age 4747

EducationEducation Between Junior Between Junior college college and and university university

1919

Corruption and board professionalismCorruption and board professionalismShougang Group in ChinaShougang Group in China

Percentage of Directors that Are Professionals – Percentage of Directors that Are Professionals –

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Corruption CaseCorruption Case

2020

Political connection hurts performancePolitical connection hurts performance (Fan and Wong, 2005)(Fan and Wong, 2005)

Share issue privatizations around the Share issue privatizations around the world are associated with improved world are associated with improved firm performance firm performance • Megginson and Netter, 2001; Djankov Megginson and Netter, 2001; Djankov

and Murrell, 2002; Chong and Lopez-De-and Murrell, 2002; Chong and Lopez-De-Silanes, 2003Silanes, 2003

China is an exceptionChina is an exception

2121

Post-IPO stock return performance Post-IPO stock return performance (CAR) of 625 China’s partially privatized (CAR) of 625 China’s partially privatized

firmsfirms

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Month after IPO

Ret

urn

mean of total sample firms

Figure 1: Cumulative market-adjusted compound stock returns

2222

Post-IPO stock return performance (CAR) Post-IPO stock return performance (CAR) distinguished by whether CEOs are distinguished by whether CEOs are

politically connectedpolitically connected

-45.00%

-40.00%

-35.00%

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Months after IPO

Ret

urn

mean of firms whose CEOsare potically connected

mean of firms whose CEOsare not potically connected

Figure 3: Cumulative market-adjusted compound stock returns

2323

What did we find?What did we find? Appointments of politically-connected CEOs Appointments of politically-connected CEOs

hurt accounting and stock performance of newly hurt accounting and stock performance of newly privatized firms.privatized firms.

Politically connected CEOs have boards Politically connected CEOs have boards populated with politicians and have lower populated with politicians and have lower degrees of professionalism.degrees of professionalism.

Their presence is related to regional Their presence is related to regional macroeconomic conditions, i.e., unemployment macroeconomic conditions, i.e., unemployment and government fiscal deficit.and government fiscal deficit.

Overall, the results are consistent with the Overall, the results are consistent with the grabbing hand view – politicians seek rents grabbing hand view – politicians seek rents from listed firmsfrom listed firms

2424

ImplicationsImplicationsWhat should be the focus of corporate What should be the focus of corporate

governance reforms in China and Asia?governance reforms in China and Asia?

No firm-level quick fix pleaseNo firm-level quick fix please No more new laws and regulations No more new laws and regulations

cut-and-pasted from formula bookscut-and-pasted from formula books Focusing on country-level Focusing on country-level

institutional factors, such as fighting institutional factors, such as fighting corruption, will payoffcorruption, will payoff

2525

Questions for Panel DiscussionQuestions for Panel Discussion

What is the state of business-government relations in What is the state of business-government relations in China, Asia, and the world?China, Asia, and the world?

Does public sector governance matter to corporate Does public sector governance matter to corporate governance?governance?

How does rent seeking and corruption affect How does rent seeking and corruption affect • corporate ownership structures?corporate ownership structures?• corporate governance practices?corporate governance practices?• corporate transparency?corporate transparency?• independent/monitoring boards of directors?independent/monitoring boards of directors?

In a rent seeking society, In a rent seeking society, • what does “good corporate governance” mean?what does “good corporate governance” mean?• how can we win trust from investors?how can we win trust from investors?• How can we improve corporate governance?How can we improve corporate governance?• what is a successful formula for corporate governance what is a successful formula for corporate governance

reform?reform?