1. business and industrial
2. company
3. annual report

Corporate
Governance
in Asia:
Related Party
Transactions
www.sasin.edu
1
Why Corporate Governance?
Corporations
Low Investor’s
Confidence
High
Cost of Capital
Poor Corporate
Governance
Economy
Society
Corruptions
Underdevelopment
of Financial
Market
Low
Efficiency
Low Growth
Low
Competitiveness
Unequal & Unjust
Society
Low Investment
Low Performance
Low Value
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2
1
QUALITY OF GOVERNANCE KEY
CONCERN FOR INVESTORS
“In evaluating Asian companies for potential investment, how important is the quality of
corporate governance relative to financial issues?”
17
More
50
Same
22
43
39
36
46
38
44
33
30
22
20
19
17
Japan
Taiwan
Thailand
Korea
Indonesia
Malaysia
33
43
24
Total
Total
Japan
•
34
48
Less
Percent
42
Taiwan
Thailand
Korea
Indonesia
Malaysia
Investor survey
– 54 investors in Asia with US$600 billion under management
– 30 US and European investors surveyed with US$450 billion under management
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3
What has Asia achieved during last 10 years
Financial crisis in 1997 posed a beginning of new era in
corporate governance development in Asia
Broad range of corporate governance reforms in many
economies
Globally compatible rules and regulations are
introduced
Enhance transparency and accountability
Strengthen minority shareholders’ right
Most of emerging market economies adopted
outside director and audit committee as a part of
mandatory requirement. Exception is Japan,
Convergence of corporate governance regulations in
Asian economies
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2
Convergence of Corporate
Governance in Asia
Asian Corporate Governance Association, 2004
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5
What have we achieved for last 10 years
We improved quality of corporate governance significantly for
last 10 years.
10 years ago, even experts in the market never heard of the
word of ‘corporate governance’
Now, it became a word of street
Hong Kong and Singapore played leading role in setting the
high standard of practices.
Other economies have also improved a lot, and are catching
up
However, despite improvements, quality of practices is still far
behind that of developed markets
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3
Corporate Governance Ranking
among 48 countries in MSCI,
CG score by WEF Competitiveness Report, 2008
Rank
Score
Rank
Score
1
Sweden
6.23
21
Malaysia
5.28
2
Finland
6.05
22
Korea
5.23
3
Denmark
6.03
24
Japan
5.15
3
New Zealand
6.03
27
India
4.98
5
Norway
5.98
29
Taiwan
4.85
5
Singapore
5.98
30
Indonesia
4.68
7
Australia
5.95
30
Thailand
4.68
8
Austria
5.88
33
Philippines
4.65
8
Netherlands
5.88
42
Pakistan
4.35
10
Canada
5.85
44
China
4.28
13
Hong Kong
5.75
47
Russia
3.93
15
UK
5.65
48
Argentina
3.83
16
US
5.63
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7
What we have achieved during last 10 years
CG Survey Results on 9 East Asian Economies
Rules are Regulations are fairly the same across
economies
Quality of practices, however, are quite different
among economies
Significant disparity between rules and practices
Implications
Causality: Countries with poor practices introduced more
regulations
Without proper enforcements, rules and regulation does not
mean much
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4
Corporate Governance Scoring Results on 9
East Asian Economies
Regulations
Investor Perception on
Quality of CG Practices
China
0.79
17.03
Philippines
0.76
19.75
Korea
0.66
26.11
Hong Kong
0.66
39.24
Malaysia
0.64
25.25
Taiwan
0.63
26.26
Indonesia
0.63
17.60
Thailand
0.63
25.64
Singapore
0.61
40.18
Source: Stephen Cheung & Hasung Jang , 2008, “Scorecard on corporate governance in East Asia: A comparative study”
International Financial Review, vol. 9
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OECD Guide on Fighting Abusive RPT
Regulatory framework to monitor RPTS
Definitions of connected persons and related parties
Thresholds for Board and Shareholders’ approval
RPT disclosure policies to investors
Role of External Auditor
Role of Independent Directors and Independent
Advisors
Independence of Independent Directors
Shareholding voting mechanism and process
Legal Redress for the minority shareholders
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5
Related Party Transactions –
Types of Abusive Related Party Transactions
Injection of assets
Cross guarantees and loans to associates
Privatization and sale of assets
Transfer of wealth schemes
Recurring Related party Transactions – Revenue
rather than capital/ Asset transactions
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Definitions – Who are Related Parties
Family Relationships
Spouse, brother, sister, mother, father, son and
daughter
Cousin, step sister, mother in-law, auntie, uncle
Grandparent, grandson, second cousins
Company relationships
Parent / holding company, subsidiary
Associates of the holding company
Associates of the listed entity
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6
I Own You, You Own Him, He Owns Me: The Lee Family’s
Samsung Dynasty
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
13
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Page 13
Examples of related party transactions under FASB and IASB.
FASB
IASB
Services received or furnished, such as
accounting, management, engineering and
legal services;
Sales, purchases and transfers of realty and
personal property;
Use of property or equipment by lease or
otherwise;
Borrowings and lendings;
Guarantees;
Inter-company billings based on allocations
of common costs
Rendering or receiving of services;
Leases;
Purchases or sales of property and other assets;
Purchases or sales of goods;
Transfers of research and development;
Transfers under license agreements;
Transfers under finance agreements (including
loans and equity contributions in cash or in
kind);
Provisions of guarantees or collateral;
Settlement of liabilities on behalf of the entity
or by the entity on behalf of another party.
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
www.sasin.edu
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Threshold for Shareholder Approval
China
Singapore
Indonesia
Korea
Malaysia
India
Value above
RMB30million
or 5 per cent of
NTA
Single
transaction
5 per cent of
group latest
audited NTA
No specific
thresholds, but
law requiring
RPTs to be
approved by
independent
shareholders.
Shareholder
approval not
required, only
notification after
board approval.
5 per cent of
relevant ratios
or
RM250,000.
Shareholder
approval not
required
Only Board
Approval.
Recurring
transaction
5 per cent on
aggregate basis
in one financial
year
Asset ratio
Profit ratio
Consideration
Ratio
Revenue Ratio
Transaction
S$100k and
below is
exempted
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
15
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Page 15
RPT Disclosure Policies
Timely and Adequate Information is important to
investors/ shareholders.
Malaysia, Singapore and Hong Kong Thresholds established for making announcements to
shareholders
A circular is tabled at AGM for revenue and recurring
items to be approved by shareholders.
Company Practice
Some companies disclose their RPT policies and
procedures in the annual report; example- Bank of China
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
www.sasin.edu
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Recurring RPT Disclosure – SGX requirement
General Mandate from shareholders at AGM
RPT is revenue or trading in nature Circular to Shareholders
The nature of the transactions
Methods for determining transaction prices
Independent financial advisors opinion
Opinion from audit committee if different from IFA
“interested persons” will abstain from voting on the
resolution
Aggregate value of the transactions
RRPT
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
17
17
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Recurring RPT in Malaysia–
Announcement if deviation is >10 per cent
Announcement
Date
Cumulative
Value of
Transaction
(RM’000)
*
% of deviation
since prev. ann.
Based on
mandated
amount
Announcement ?
31-Apr-09
(AGM)
1,500
-
-
31-Aug-09
1,680
12%
Yes
30-Sep-09
1,800
8%
No
30-Oct-09
1950
18%
Yes
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www.sasin.edu
source:bursa Malaysia
* period should be from previous AGM to the next AGM
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A sampling of related-party transactions disclosed to the Hong Kong
Exchange
Listed company
Nature of disclosed transaction
C Y Foundation Group Ltd
Acquisition of 100% of a company owned by chairman and
his spouse
Wo Kee Hong (Holdings) Ltd
Purchase of a unit of vintage Ferrari from a director and
controlling shareholder
Great Wall Motor Co Ltd
Acquisition of companies in China
China Resources Logic Ltd
Acquisition of China Resources Gas Ltd
Sino Union Petroleum &
Chemical International Ltd
Acquisition of HK$600 million worth of shares from the
Chairman of the Board
Central China Real Estate Ltd
Acquisition of 100% of CCRE Forest Peninsula from a
connected person
Lippo China Resources Ltd
Joint announcement of continuing connected transactions
(tenancy agreement)
Hong Kong Chinese Ltd
Honghua Group Ltd
Continuing connected transactions (sales and purchases
framework agreements)
Advanced Semiconductor
Manufacturing Corp Ltd
Continuing connected transactions (product sales,
technology transfer and software licensing)
Zhongda International
Holdings Ltd
Continuing connected transactions (sales of products and
raw materials)
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
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Page 19
Role of External Auditor
External Auditors complement the role of the Board in
monitoring and curbing abusive RPTs.
ISA 550 – Auditing Standard – guide to auditing RPT
Are they arms length transactions?
Is the pricing right for both recurring and one – off deals?
What is the best method to identify RPTs?
Are RPTs reported by the company complete?
Are there missing transactions?
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
www.sasin.edu
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Valuation Report Requirements - Malaysia
Requirement of valuation report on real estate
irrespective on the mode of sale/purchase
consideration (cash or securities) for RPT:
all transaction which are ≥ 5% of the relevant
percentage ratio
Valuation report to be submitted to Bursa not
later than 1 month before the submission of
circular/draft circular (as the case maybe)
Valuation must comply with SC’s Valuation
Guidelines
Significant change – issuer/ valuer must update
valuation report
Bursa
Refer valuation report
to SC
May request for a
valuation report on
any assets
May appoint second
opinion valuer
Valuation Report
must not > 6
months old
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source- bursa malaysia
Board and Shareholder Approval
Board Approval - Interested Directors must not be allowed
to vote.
Shareholder Approval - Interested shareholders must not be
allowed to vote.
This practice is followed in Singapore, Malaysia, Hong
Kong, China and Indonesia.
Independent Directors to approve RPT where controlling
shareholders are usually the related party.
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Case Role of Independent Director
Case study: Satyam – an Indian company – provides computer network and
outsourcing services to Coca Cola, Citigroup, Nissan Motors and Quantas.
Employs 53,000 staff in Bangalore, Chennai and Hyderbrad. Listed on NYSE
and won the Golden Peach Ward by World Council of CG in 2007.
Chairman Raju ( Major Shareholder ) proposed to Board of Directors to buy
two related companies Maytas Infrastructure and Maytas Property for USD1.6
billion on 16 Dec 2008. They seek only Board Approval – shareholder
approval not required. BOD approved the deals. There are 6 INEDS and some
are prominent businessmen and an academic. Nevertheless the Board
approved it in the morning.
At Analyst briefing later that day –
Investors questioned the deal. What questions would you ask?
What is the role of Independent Non Executive Directors in the approval
process of this transaction?
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Page 23
Satyam’s fall from grace
Stock Price (rupee)
250
200
150
100
50
Source: NSE, CFA Institute
www.sasin.edu
29 Jun 09
14 Jun 09
30 May 09
15 May 09
30 Apr 09
15 Apr 09
31 Mar 09
16 Mar 09
1 Mar 09
14 Feb 09
30 Jan 09
15 Jan 09
31 Dec 08
16 Dec 08
1 Dec 08
0
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Role of Independent Director
Case Study: CNOOC.CNOOC was listed in Hong Kong in 2001. It holds
exclusive rights to PRC offshore oil and natural gas exploration rights as stated in
prospectus when listed. It also provides technical services to its parent company.
CNOOC called for an EGM in 2005.
CNOOC asked for raising of caps for continuing transactions for technical
services provided to the parent company. It also asked for reclassifying of
technical services into 3 categories; exploration services, oil and gas development
and marketing and management.
CNOOC’s parent gave CNOOC a non compete undertaking at time of listing.
CNOOC sought minority shareholder approval to give consent to the parent to
engage in competing business, both onshore and offshore.
How would you respond to the EGM notice for both the transactions? What
information and reports would you want to review in deciding on your vote?
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Page 25
Shareholder Voting Mechanism
Case Study: CNOOC. In 2004, shareholder approval was sought to deposit
RMB6.6billion cash to CNOOC Finance for a 3 year period. This amounts to
16.6% of NTA of CNOOC. The EGM will be held on 29 April 2004, right after
the Easter holidays in Hong Kong. You just received the notice as an investor
with only one week to respond.
As an investor what information would you require to make a decision on your
vote?
This case also bring up another practical issue to address. Voting process and
voting proxies. What are your views on how this can be improved?
Source: Kha Loon Lee, CFA Center for Financial Market Integrity, 2009
www.sasin.edu
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The Way Forward
Investors
Issuers
Regulators
www.sasin.edu
Advisors
Markets
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