Forum on Government-Business Relations and Corporate Governance

1. Forum onGovernment-Business Relations and Corporate Governance International Conference on Corporate Governance in Asia and China Shanghai, March 12 2005

2. Panel Discussion • Understand the relations between business and government • Importance of public in corporate governance • Effects of political rent seeking in firms • How to improve governance in rent-seeking society?

3. Outline • The inseparability between politics and business in Asia • Political connections, rent seeking, and corruption • Public governance – a first order factor missing in the corporate governance debate • Cases and research evidence on the effects of rent seeking on corporate governance • Implications for corporate governance reforms

4. The Inseparability between Business and Politics • Powerful business tycoons can significantly influence government policies • They may even directly engage in politics • Conversely, politicians (or their offspring) often become business tycoons • Asking business people in Asia, few would deny relationships or connections with government important • Particularly so in sectors heavily regulated by governments, including telecommunication, public utilities, transportation, banking and finance, property development, … the list goes on • In China, almost every sector is heavily regulated, and hence political connections are very important!

5. Asia as A Rent Seeking Society • Business tycoons seeking rents from governments • Politicians seeking rent from business • Vast grey areas of laws and weak (selective) enforcement make rent seeking highly rewarding • Perceived corruption levels of a few Asian economies are high

6. Corruption in Asian Economies(Source: Transparency International: mean Corruption Perception Index 1992-2000)

7. Public governance and corporate governance • The quality of public governance is of first order importance in shaping the governance of the corporate sector • However, it is largely ignored in corporate governance debates in Asia and around the world • In the following, we use a few examples and research results to illustrate the point

8. Political connections have “value” • One way to examine the effects of public governance on corporations is to look at the stock price effects of corporations linked to corrupted government officers when they got caught

9. Pervasive corruption in China • According to China’s official record, during 1997-2002, there are totally • 861917 corruption cases under investigation • 842760 corruption cases concluded • 846150 people punished by communist laws, of which 137711 expelled from the communist party • Among the punished communist party members, • 28996 county （县）level • 2422 intermediate（厅,局）level • 98 provincial （省, 部）level or above

10. Recent high-level Corruption cases in China • Corrupted Provincial Leaders

11. Cumulative abnormal stock return around initial disclosure of corruption cases (Daily CAR[-10, 20]) The sample include China’s listed companies whose senior managers were found to have bribed the caught politicians

12. Cumulative abnormal stock return around initial disclosure of corruption cases (Daily CAR[-10, 20]) The sample include China’s listed companies whose senior managers were former or current colleagues of corrupted politicians

13. Rent seeking hurts corporate transparency • Why some Asian companies failed to produce reliable financial information? • Why corporate transparency in Asia is low, despite new laws and regulations requiring more disclosure? • Why do Asian investors seldom read financial reports? • Disclosure of proprietary information can be costly, even investors agree • Fan and Wong, Journal of Accounting and Economics, 2002

14. Opacity Premium in AsiaSource: PricewaterhouseCoopers

15. Corruption in Asian Economies(Source: Transparency International: mean Corruption Perception Index 1992-2000)

16. Boards do not work • Weak governance and low professionalism of Chinese firms • Over a decade since China’s opening up its stock markets, the governance function and the degree of professionalism of listed companies’ management and boards of directors remain weak compared to the western standard. • Chinese boards are populated with politicians (current or ex-government bureaucrats)

17. Boards of directors are weak in governance: the case of China (Chen, Fan, Wong, 2004) Board size 9.22 (range 5 to 19) Manager directors 34% Largest shareholder 53% Minority shareholders 0% Politicians 32% Central govt 4% Local govt 19% Others 9%

18. Boards of directors are weak in governance: the case of China (Chen, Fan, Wong, 2004) Directors from unaffiliated firms (“expert” directors) 18% Professionals 5% Academics 14% Woman directors 5% Age 47 Education Between Junior college and university

19. Corruption and board professionalismShougang Group in ChinaPercentage of Directors that Are Professionals – Corruption Case

20. Political connection hurts performance(Fan and Wong, 2005) • Share issue privatizations around the world are associated with improved firm performance • Megginson and Netter, 2001; Djankov and Murrell, 2002; Chong and Lopez-De-Silanes, 2003 • China is an exception

21. Figure 1: Cumulative market-adjusted compound stock returns Post-IPO stock return performance (CAR) of 625 China’s partially privatized firms

22. Figure 3: Cumulative market-adjusted compound stock returns Post-IPO stock return performance (CAR) distinguished by whether CEOs are politically connected

23. What did we find? • Appointments of politically-connected CEOs hurt accounting and stock performance of newly privatized firms. • Politically connected CEOs have boards populated with politicians and have lower degrees of professionalism. • Their presence is related to regional macroeconomic conditions, i.e., unemployment and government fiscal deficit. • Overall, the results are consistent with the grabbing hand view – politicians seek rents from listed firms

24. ImplicationsWhat should be the focus of corporate governance reforms in China and Asia? • No firm-level quick fix please • No more new laws and regulations cut-and-pasted from formula books • Focusing on country-level institutional factors, such as fighting corruption, will payoff

25. Questions for Panel Discussion • What is the state of business-government relations in China, Asia, and the world? • Does public sector governance matter to corporate governance? • How does rent seeking and corruption affect • corporate ownership structures? • corporate governance practices? • corporate transparency? • independent/monitoring boards of directors? • In a rent seeking society, • what does “good corporate governance” mean? • how can we win trust from investors? • How can we improve corporate governance? • what is a successful formula for corporate governance reform?