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Corporate Governance in Family Controlled Companies:
A Comparative Study between Hong Kong and Thailand
By Saravuth Pitiyasak*
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
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.
* 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
(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
(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