Corporate
Governance in Family Controlled Companies:
A Comparative Study between Hong Kong and Thailand
By
Saravuth Pitiyasak*
I.
INTRODUCTION
The
Asian Financial Crisis1 has fueled a lot
of interest in its causes. The lack of corporate governance is one cause
blamed for the crisis. However, the literature on this issue is not unanimous.
Some research studies have pointed out that the Asian Financial Crisis
has been attributed to the poor governance in the corporate sector due
to the ownership concentration. For example, Lang and Leslie (2000) point
out that most of the companies in Asian Countries are controlled by a
few groups of families.2 These groups of
families had used extensive corporate pyramids to systematically exploit
wealth from minority shareholders.3 In sum,
they argue that there is a negative link between the ownership concentration
and corporate governance.4
On
the other edge of the spectrum, however, scholars have for almost seventy
years studied on the topic of the link between ownership concentration
and corporate performance and found that a more concentrated ownership
can consequently lead to better performance.5 They argue that there is a positive link between the ownership concentration
and corporate governance.
The
two preceding contradictory studies have brought an inspiration to this
paper. It begins by looking at the link between the corporate governance
and the corporate performance, the case of the Asian Financial Crisis.
It then makes a comparative study of the regulatory framework of corporate
governance in family controlled companies between Hong Kong and Thailand,
and examines as to whether there are any measures in relation to corporate
governance in family controlled companies that Thailand and Hong Kong
can learn from each other.
II.
Corporate Governance and Corporate Performance: The case of Asian Financial
Crisis
A.
Corporate Governance and Corporate Performance
Because
of the difficulty to prove statistically the link between corporate governance
and corporate performance6, consensus in
the literature on this issue cannot be reached.
On
one edge of the spectrum, some research studies argue that there is no
link between (some aspects of) corporate governance and corporate performance.
In Dalton (1998 and 1999), the study finds that it simply does not appear
that there is any evidence of the relationship between board composition
and financial performance.7 Nor is there
any evidence of relationship between number of directors and the financial
performance.8 In addition, in Bhagat and
Black (1999), the study finds that there is no convincing evidence that
increasing board independence, relative to the norms that currently prevail
among large American firms, would improve firm performance.9
On
the other edge of the spectrum, some research studies counter-argue that
there is a link between the corporate performance and corporate governance.
Bain and Band (1996) point out that companies and other enterprises with
a professional and positive attitude to governance are stronger and have
a greater record of achievement.10 Besides,
the Toronto Stock Exchange (1994) has an opinion that there are both a
direct and an indirect relationship between corporate governance and corporate
performance.11
B.
Asian Financial Crisis: Ownership Concentration and Corporate Performance
The
research on the topic of ownership concentration (an aspect of corporate
governance) and corporate performance dates back almost seventy years
to Berle and Means (1932).12 They show that
diffuse ownership gives significant power to the hands of managers whose
interests do not coincide with the interest of shareholders.13 A more concentrated ownership can consequently lead to better performance.14 Shleifer and Vishny (1986) argue that large shareholders better monitor
mangers, which in turn increases corporate performance.15 In their study in 1997, they suggest that the benefits from concentrated
ownership may be relatively larger in countries that are less developed,
less property rights are not well defined and/or protected and enforced
by judicial systems.16 Honderness and Sheehan
(1988)17, and Barclay and Holderness (1989)18 also support the argument that large shareholders better monitor management
and thereby improve corporate performance. In sum, the studies on this
edge of the spectrum have found a positive relation between ownership
concentration and corporate performance.
On
the other edge of the spectrum, however, some research studies have found
negative relation between ownership concentration and corporate performance.
La Porta et al. (1999) have found that when the majority shareholders
effectively control corporations, their policies may result in expropriation
of minority shareholders by not paying out dividends and transferring
profits to other companies they fully own.19 In addition, Lang and Leslie (2000) have found that the Asian Financial
Crisis has been attributed to 'crony capitalism': the control of the companies
by a few groups of families.20 They have
expropriated wealth from minority shareholders by setting unfair terms
for intra-group sales of goods and services and transfers of assets and
control stakes.21
C.
Summary
For
some finger pointing on poor corporate governance as a cause of the Asian
Financial Crisis, the fact is that before the crisis, Asia looked macro-economically
sound. Asian countries had enjoyed a high growth rate, high savings rate
and highest reserves in the world. There were no noticeable inflation,
no fiscal deficits, and on overall balance of payments deficit. These
facts obviously indicate that corporate performance in corporate sectors
in Asia is second to none to the rest of the world. As a result, it was
hard for anyone to establish the negative link between corporate governance
and corporate performance in Asia since the corporate performance in Asia
had been very good in regardless of good or bad corporate governance.
Corporate
governance, however, is of very important. McKinsey (1996) found that
institutional investors would pay a premium of about 11 percent for good
corporate governance.22 Besides, Deminor
(1997) has found that the markets with corporate governance standards
produce a lower market risk, and therefore, they attract more international
capital.23 In addition, the institutional
investors such as CalPERS assume that there is a positive link between
corporate governance and corporate performance.24 CalPERS publish lists of star companies and company to avoid.25 This classification significantly affects the share prices of the listed
companies. As a result, countries wishing to attract the foreign investments,
have to make their best efforts in strengthening their corporate governance.
Recognizing
the significance of the corporate governance, Hong Kong even experiencing
less impact from the crisis compared to the other Asian countries26,
has made a great effort in strengthening its corporate governance in order
to maintain its position as an international financial center.27 Like Hong Kong, Thailand, as the first domino of the Asian Financial crisis
has also launched a lot of measures immediately after the crisis to reform
its corporate governance in order to restore investors' confidence and
to speed up its recovery from the deep recession.
Part
2
_______________________________________________________________
*
Law Lecturer, Sukhothai Thammathirat Open University, Thailand. LL.B (1st
Hons) (Chulalongkorn University, Thailand), LL.M (University of Sydney,
Australia), SJD Candidate (University of Hong Kong, China)
(1)
The Asian Financial Crisis first arose in Thailand in July 2, 1997, moved
to devastate Indonesia in October 1997, and hit Korea in late November
1997. After that the crisis went global to cripple Russian economy, pressured
Brazil currency and destabilized the Latin America economies.
(2)
Lang, Larry., and Leslie Young., (November 2000). 'Minority Interest Majority
Concern' Company Secretary, volume 10, No.11
(3)
Brooker, Matthew., 'Asia elite milk minority' (September 29, 2000) South
China Morning Post
(4)
Lang, Larry., and Leslie Young., (September 29, 2000). 'Family control
and the Asian crisis' South China Morning Post
(5)
Berle, A.A., Means, G.C., (1932). The Modern Corporation and Private
Property
(6)
Corporate Governance, Class materials in Corporate Governance and Shareholder
Remedies, CGSR.4/900(SG), Faculty of Law, University of Hong Kong, 26
December 2000, at 1 [hereinafter CGSR.4/900(SG)]
(7)
Dalton, Dan R., Catherine M. Daily, Alan E. Ellstrand, and Jonathan L.
Johnson., (1998). 'Metal-Analytic Reviews of Board Composition, Leadership
Structure, and Financial Performance <http://asp.thecorporatelibrary.net/patterson/LinkDetail.asp?CatalogID=14289>
(8)
Dalton, Dan R., Catherine M. Daily, Alan E. Ellstrand,., and Jonathan
L. Johnson, (1999). 'Number of Directors and Financial Performance: A
Meta-Analysis <http://asp.thecorporatelibrary.net/patterson/LinkDetail.asp?CatalogID=14605>
(9)
Bhagat, Sanjai., and Bernard S. Black, (1999). Uncertain Relationship
Between Board Composition and Firm Performance <http://asp.thecorporatelibrary.net/patterson/LinkDetail.asp?CatalogID=14088>
(10)
Bain and Band, (1996), cited in CGSR.4/900(SG), note 6
(11)
The Toronto Stock Exchange (1994), cited in CGSR 4/900(SG), note 6
(12)
Berle, A.A., Means, G.C., (1932). The Modern Corporation and Private
Property
(13)
Ibid.
(14)
Ibid.
(15)
Shleifer, Andrei. and Vishny Robert., (1986). 'Large Shareholders and
Corporate Control' Journal of Political Economy, 94 at 461-488
(16)
Shleifer, Andrei., and Vishny Robert., (1997). 'A survey of corporate
governance' Journal of Finance, 52 at 737-783
(17)
Holderness, C. and Sheehan D., (1988). 'Corporate Governance: Voting Rights
and Majority Rules' Journal of Financial Economic, 20 at 203-235
(18)
Barclay, Michael and Clifford Holderness, (1989). 'Private Benefits from
Control of Public Corporations' Journal of Financial Economics, 25 at
371-395
(19)
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Rober
W. Vishny, (1999). 'Law and Finance' Journal of Finance
(20)
Lang, Larry, and, Lessie Young (September, 20, 2000). ' Family control
and the Asian crisis' South China Morning Post
(21)
Ibid.
(22)
McKinsey(1996), cited in CGSR.4/900(SG), note 6
(23)
Ibid. at 2
(24)
Ibid. at 3.
(25)
Ibid. at 3
(26)
Tsui, Judy., and Ferdinand A. Gul, 'Corporate Governance and Financial
Transparencies in the Hong Kong Special Administrative Region of The People's
Republic of china', The Second Asian Roundtable on Corporate Governance,
31 May - 2 June, 2000, Organization for Economic Co-operation and Development
(27)
Asian Corporate Governance Association, 'Building Stronger Boarders and
Companies in Asia', A Concise Report on Corporate Governance Policies
and Practices, January 2000, at 8 |