Shareholder Activism in Asia

EU Asia Corporate Governance Dialogue

July 6, 2012Tokyo

Hasung Jang

Corporate Governance Progress in Asia for last 10 years

• Financial crisis in 1997 opened new era in cor-porate governance development in Asia

• New rules and regulations are introduced– Board

• Outside directors• Audit committee

– Shareholder rights strengthened• Derivative lawsuit• Class action lawsuit• Cumulative voting

• Improvements are mostly in rules and regu-lations

• Practices has not improved as much as regulations did– Disparity between regulations and practices– Many laws and regulations exist in the law, but

it is not practiced – Weak enforcements of regulations

Corporate Governance Progress in Asia for last 10 years

Corporate Governance Regulations in Asian Countries

Indepen-dent

DirectorAudit

CommitteeDeriva-

tive Law-suit

Class Ac-tion Law-

suit

Cumula-tive Vot-

ing

Liabilities on

“Shadow“Directors

1997201119972011 2011 2011 2011 2011China v v v vHong Kong v v v v vIndia v v v v vIndonesia v v v vKorea v v v v v vMalaysia v v v v v v vPhilip-pines v v v v vSingapore v v v v v vTaiwan v v v v v vThailand v v v v vData source: ACGA, OECD

Improvements in Corporate Governance in Asian Countries

• Two Surveys on Corporate Governance• CG Watch 2010 by CLSA & ACGA

– CG Rules and Practices– Enforcement– Political & Regulatory– IGAAP– CG Cultures

• World Competitiveness by IMD– Shareholders’ Rights– Auditing & Accounting Practices

Corporate Governance EvaluationAsian Economies

Corporate Governance EvaluationAsian Economies

8

Shareholders' RightsIMD WORLD COMPETITIVENESS, 2010-2012

2010-2012 Average,

1 Finland 8.442 Norway 8.113 Denmark 8.074 Sweden 7.715 Australia 7.60

6South Africa 7.58

7 Germany 7.52

8Nether-lands 7.47

9 Malaysia 7.3710 Chile 7.3511 Singapore 7.3112 Canada 7.31

13Switzer-land 7.13

14Luxem-bourg 7.13

15 Taiwan 7.1016 Belgium 7.0617 Austria 6.9718 Qatar 6.9519 Brazil 6.9520 Thailand 6.90

21 Hong Kong 6.8822 India 6.8223 Ireland 6.7524 USA 6.7525 Lithuania 6.7226 Israel 6.7127 Colombia 6.6728 Estonia 6.6029 Peru 6.5630 UK 6.5531 Czech Rep 6.5232 France 6.5133 Spain 6.47

34New Zea-land 6.47

35 Portugal 6.4636 Indonesia 6.4037 Philippines 6.2638 Hungary 6.0839 Turkey 6.0740 Jordan 6.06

41 Mexico 6.0642 Japan 5.9843 Poland 5.9544 Romania 5.94

45Kaza-khstan 5.88

46 Iceland 5.7447 Greece 5.6548 Slovak Rep 5.4949 Argentina 5.2450 Korea 5.1851 Italy 5.1452 Croatia 5.1353 China 4.7554 Slovenia 4.2755 Bulgaria 4.2056 UAE 3.8757 Russia 3.8358 Venezuela 3.6959 Ukraine 3.53

9

Shareholders' RightsIMD WORLD COMPETITIVENESS, 2000-2002

2000-2002 Average

1 Finland 8.782 USA 8.513 Australia 8.454 Sweden 8.395 Canada 8.356 Denmark 8.307 Norway 7.928 UK 7.859 Singapore 7.85

10 Ireland 7.84

11Nether-lands 7.79

12Luxem-bourg 7.65

13 Germany 7.6114 Israel 7.5715 Austria 7.5216 Chile 7.4717 Iceland 7.42

18South Africa 7.36

19Switzer-land 7.35

20 Hong Kong 7.30

21New Zea-land 7.16

22 Portugal 6.8323 Belgium 6.7224 Hungary 6.6425 Spain 6.5826 Brazil 6.5727 France 6.5428 Taiwan 6.5329 Malaysia 6.3730 Greece 6.3131 Mexico 6.2232 Turkey 6.1733 Philippines 6.0634 Argentina 5.9035 India 5.8936 Colombia 5.8737 Poland 5.8738 Venezuela 5.7439 Italy 5.7140 Slovenia 5.51

41 China 5.4942 Thailand 5.4343 Estonia 5.0044 Indonesia 4.9745 Czech Rep. 4.7446 Korea 4.5947 Russia 4.5148 Japan 4.19

49Slovak Rep. 3.78

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Shareholders' Rights: Changes from 2000-2002 to 2010-2012

Japan 1.79 * 5.98 4.19Czech Rep 1.78 * 6.52 4.74Slovak Rep 1.70 * 5.49 3.78Estonia 1.60 * 6.60 5.00Thailand 1.47 * 6.90 5.43Indonesia 1.43 * 6.40 4.97Malaysia 1.00 * 7.37 6.37India 0.93 * 6.82 5.89Colombia 0.79 * 6.67 5.87Korea 0.59 * 5.18 4.59Taiwan 0.58 * 7.10 6.53Brazil 0.38 6.95 6.57Belgium 0.34 7.06 6.72South Africa 0.22 * 7.58 7.36Philippines 0.20 6.26 6.06Norway 0.19 8.11 7.92Poland 0.07 5.95 5.87France -0.03 6.51 6.54Germany -0.09 7.52 7.61Turkey -0.10 6.07 6.17Spain -0.11 6.47 6.58Chile -0.12 7.35 7.47Mexico -0.16 6.06 6.22Switzerland -0.22 * 7.13 7.35Denmark -0.23 8.07 8.30

Netherlands -0.32 * 7.47 7.79Finland -0.34 * 8.44 8.78Portugal -0.37 6.46 6.83Hong Kong -0.42 6.88 7.30Luxembourg -0.52 * 7.13 7.65Singapore -0.53 * 7.31 7.85Austria -0.55 * 6.97 7.52Hungary -0.57 * 6.08 6.64Italy -0.58 * 5.14 5.71Greece -0.65 * 5.65 6.31Argentina -0.67 * 5.24 5.90Sweden -0.68 * 7.71 8.39Russia -0.68 * 3.83 4.51New Zealand -0.70 * 6.47 7.16China -0.74 * 4.75 5.49Australia -0.85 * 7.60 8.45Israel -0.86 * 6.71 7.57Canada -1.04 * 7.31 8.35Ireland -1.09 * 6.75 7.84Slovenia -1.24 * 4.27 5.51UK -1.30 * 6.55 7.85Iceland -1.68 * 5.74 7.42USA -1.76 * 6.75 8.51Venezuela -2.05 * 3.69 5.74

Changes

2010-2012 Avg.

2000-2002 Avg.

Changes2010-2012

Avg.

2000-2002 Avg.

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Auditing and Accounting PracticesIMD WORLD COMPETITIVENESS, 2010-2012 Avg.

1 Finland 8.502 Norway 8.443 Denmark 8.394 Singapore 8.225 Sweden 8.086 Canada 8.04

7Switzer-land 7.97

8South Africa 7.93

9 Australia 7.89

10Luxem-bourg 7.87

11 Austria 7.8412 Germany 7.7113 Hong Kong 7.69

14New Zea-land 7.67

15 Malaysia 7.6216 Estonia 7.59

17Nether-lands 7.55

18 Qatar 7.5319 Taiwan 7.4920 Hungary 7.44

21Kaza-khstan 7.37

22 Belgium 7.3623 Israel 7.3624 Chile 7.2325 UK 7.0926 USA 7.0827 India 7.0528 Colombia 7.0429 Czech Rep 7.0430 Japan 7.0031 Brazil 6.9932 Thailand 6.9933 Lithuania 6.9434 France 6.9335 Spain 6.9036 Slovak Rep 6.8737 Venezuela 6.7938 Romania 6.7939 Philippines 6.7840 Poland 6.66

41 Jordan 6.6042 Mexico 6.5343 Argentina 6.4644 Iceland 6.4645 Ireland 6.4446 Indonesia 6.4347 Korea 6.3948 Turkey 6.2949 Portugal 6.2050 Peru 6.1951 Greece 6.1252 Ukraine 6.0853 Russia 6.0354 Italy 5.7055 China 5.7056 Croatia 5.5457 Bulgaria 5.1158 Slovenia 5.1059 UAE 4.61

12

CG in Asian EconomiesIMD WORLD COMPETITIVENESS, 2010-2012 Avg.

Auditing and ac-counting practices

Shareholders' rights

Rank 2010-

2012 Avg.Ran

k 2010-

2012 Avg.4 Singapore 8.22 9 Malaysia 7.37

13 Hong Kong 7.69 11 Singapore 7.3115 Malaysia 7.62 15 Taiwan 7.1019 Taiwan 7.49 20 Thailand 6.9027 India 7.05 21 Hong Kong 6.8830 Japan 7.00 22 India 6.8232 Thailand 6.99 36 Indonesia 6.4039 Philippines 6.78 37 Philippines 6.2646 Indonesia 6.43 42 Japan 5.9847 Korea 6.39 50 Korea 5.1855 China 5.70 53 China 4.75

Why disparity between regulations and practices?

• Entrenched ownership structure– Concentrated ownership • Cross ownership• Circuitous ownership

• Moral hazard of controlling shareholder– Family values control right more than share value– Expropriation of minority shareholders

• Unfair related party transactions – Tunneling asset through related party transactions– Stripping business opportunities to private company

owned by the controlling shareholder

Why disparity between practices and regulation?

• Bank-financing is stronger than capital market financing– Banks have its own poor governance problem– Bank’s capacity of CG risk management is weak

• Enforcements of rules and regulations are weak– Supervisory agency’s capacity is limited– Prosecutors are not independent from business in-

fluence & political consideration– Judges are not properly trained, and are not inde-

pendent from interest conflicts & outside influence

Why Shareholders are inactive?

• High barriers in exercising rights– Difficulties in fact discovery– High legal cost– Independent lawyers are scarce

• Establishments have strong influences on– Politics– Media– Prosecutors and judges

Why Shareholders are inactive?

• Individual shareholders– Speculative short term trading– Investment horizon is too short

• Institutions shareholders– Local institutions: Interest conflicts– Foreign institutions: Lack of long-term com-

mitment– Pension funds: Political inflences

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• Empower Shareholders– Lower barriers in exercising rights

• Procedures• Cost

– Provide mechanisms to be active• Electronic voting • Cumulative voting• Class action lawsuit

• Create activist institutional investors• Public pension fund should be active in-

vestor

Shareholder Activism

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• Shareholder activism in Asia is weak– Activist investors

• Hong Kong: David Webb• Korea: Lazard Korea CG Fund

– Quasi-Government Agency• Taiwan: Securities and Futures Investors Protection

Center– NGO

• Korea: Solidarity for Economic Reform• Malaysia: Shareholder Watchdog Group• Japan: Ombudsman(Osaka)

Shareholder activism in Asia

20

Actions Shareholder Can Take• Attending shareholder meetings• Proposing agenda at the shareholders

meetings• Public campaign through media• Electing directors– Proposing outside director candidate– Proxy fights

• Taking legal actions– Filing civil lawsuit

• Derivative actions• Class-Actions

– Filing criminal investigation

Activist Investment: Case 1 Sovereign Asset Mgt. vs SK Corp

• Sovereign Asset Management– Activist foreign investor

• SK corporation scandal in March 2003– Accounting fraud – Embezzlements by controlling family

• Sovereign’s investments in SK shares – Investments of $150 million in March 2003– Capital gains of $800 million in July 2005

• Sovereign’s strategy– Proxy fight for management control– Proposed improvements in corporate governance

Activist Investment: Case 1Sovereign Asset Mgt. vs SK

0.0

20.0

40.0

60.0

80.0

100.0

120.0

KOSPI SK SKT SKN

SK Scandal

SK Share Price2003 - 2006

0.0100.0200.0300.0400.0500.0600.0

KOSPI SK

Sovereignleft

SK Scan-dal

Stock price RORKOSPI SK KOSPI SK

March 2003 556.33 8,600W

July 20051019.0

155,100

W 83.2% 540.7%

• Increase in SK market capitalization • from $1 billion to $6.3 billion

• Capital Gains shares capital gains Sovereign: 15% $800 million Rest of shareholders: 85% $4.5 billion

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SK Share Price2003 – 2007

0

200

400

600

800

1000

1200

1400

1600

1800

2003/1/1 2003/5/29 2003/10/24 2004/3/22 2004/8/17 2005/1/12 2005/6/9 2005/11/4 2006/4/3 2006/8/29 2007/1/24 2007/6/21

SK KOSPI

SK Scandal

Sover-eignLeft

Holding Co.established

Stock price RORKOSPI SK KOSPI SK

March 2003 556.33 8,600W

July 2005 1019.01 55,100W 83.2% 540.7

%

June 2007 1733.10 134,500W 211.5% 1463.9

%

• SK introduced major reforms in corporate governance in 2007• If Sovereign stayed until June 2007, they could have made capital gains of $2.4 billion out of $150 million invest-ment

Alternative Approaches in Korea• Shareholder Activism– NGO shareholder activists since 1997– Group of two dozens volunteer professionals– Landmark lawsuit cases brought changes

• Korea Corporate Governance Fund– Established in April of 2006– Enhancing share value by improving CG– Long-term commitments in value investment

Activist Investment: Case 2Korea Corporate Governance Fund

Disclosure of 5% shareholding of Daehan Synthetic Fiber Co.on August 23, 2006

Index = 100 as of August 22, 2006

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Dae Han Synthetic Fiber Co., Ltd KOSPI

Activist Investment: Case 2Korea Corporate Governance Fund

Disclosure of Ownership: September 19, 2006Index = 100 as of August 22, 2006

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Tae Kwang Industrial Co., Ltd. KOSPI

Shareholder activism will create wealth with Justice & Cause for minority in-

vestors

Thank you!