CORPORATE GOVERNANCE for ASIAN PUBLICLY LISTED FAMILY-CONTROLLED FIRMS CORPORATE GOVERNANCE for ASIAN PUBLICLY LISTED FAMILY-CONTROLLED FIRMS © 2017 CFA Institute

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ISBN: 978-1-942713-45-6 Contents

I. Introduction 1 II. Corporate Governance for Asian Publicly Listed Family Firms 8 2.1. Proportion of Family Firms in the Economy 8 2.2. Size of Family Firms in Asia 11 2.3. Life Cycle of Asian Family Firms 15 2.4. Mechanisms Financing Growth of the Asian Family Firm 17 2.5. Professionalization in Asian Family Firms 19 2.6. Part II Summary 20 III. Defining a Publicly Listed Family Firm 22 3.1. What Is a Publicly Listed Family Firm? 22 3.2. Does One Size Fit All? 24 3.3. The Familiness Construct and Mapping of Family Firms 26 3.4. Conflicts Encompassing Family Firms 28 3.5. Part III Summary 31 IV. Concerns of Publicly Listed Family Firms 32 4.1. Pros and Cons of the Family Firm Model 32 4.2. Impact on Firm Value and Performance 34 4.3. Impact of Corporate Governance 38 4.4. Part IV Summary 48 V. Case Studies 49 Case Study I: Bangladesh—Corporate Governance Structure in an Emerging Market 51 Case Study II: Chinese Taipei (Taiwan)—Verification, Confirmation, and Information Risk 54

Case Study III: China PRC—Considering the Risk of Tunneling 57 Case Study IV: Hong Kong (SAR, China)—Dominating the Nomination Committee 60 Case Study V: Indonesia—Contrasts of the Dual-Board Structure 63 Case Study VI: India—Value Creation and Performance via Diversity 66 Case Study VII: Malaysia—Philanthropy for the Family or the Family Firm 69 Case Study VIII: Mongolia—Corporate Governance Structures in a Frontier Capital Market 72 Case Study IX: Pakistan—Board Structure and Avenue for Tunneling 75 Case Study X: Philippines—Influencing Executive and Director Compensation 78 Case Study XI: Singapore—Returns to Shareholders of Free Cash Flows 81 Case Study XII: South Korea—Impact of Family and Social Controversies 84 Case Study XIII: Thailand—The Board and Internationalization 87 Case Study XIV: Vietnam—Influences in a Non-Traditional Capitalist Market 90 5.1. Part V Summary 93 VI. Concluding Remarks and Recommendations 100 Bibliography 102

iv WWW.CFAINSTITUTE.ORG I. Introduction

This report was prepared as background for the OECD Asian Roundtable on Corporate Governance meeting in Bangkok, Thailand in October 2015. It covers the 14 jurisdictions participating in the OECD Asian Roundtable.1

Evidence documented in the literature during the past decade indicates that family capitalism continues to play a prominent underlying role in the economic foundation of many economies, including developed economies (e.g., Colli 2003; James 2006; Colli and Rose 2008). The prominence offamily firms is most evident within Asia. Some (e.g., Kachaner, Stalk, and Bloch 2012; Wooldbridge 2015) suggest that the economic success of family firms in Asia has put the concept of “family” back into capitalism.

During the past decades, Asia has been the world’s most dynamic and rapidly evolving region. Family firms have been championed as a pivotal factor in driving the economic development and success of the region. And the significance of Asian family firms is expected to rise. For example, as shown in Figure 1.1, Wooldbridge (2015) predicts that by 2025, the number of firms in Asia with revenue exceeding USD 1 billion will be nearly equivalent to that of developed economies globally. This represents an approximate four- fold increase since 2010. Family firms will represent the overwhelming (approximately 75%–80%) bulk of Asian entities with revenue exceeding USD 1 billion by 2025.

It is easy to develop a complacent admiration for the past and future economic success of Asian family firms. There is, however, a growing concern in some quarters about a rapidly gathering set of dark clouds that may soon overtake a substantial number of publicly listed Asian family firms, with numerous strong headwinds that many entities are ill prepared to face. One major challenge, for example, is the looming first generational change for a large majority of family firms across Asia during the next decade. It is predicted that only 30% of these firms will remain successful during the second generation and only 5%–10% in the third generation (Fan, Wong, and Zhang 2012; Fernandez-Araoz, Iqbal, and Ritter 2015).

1The OECD Asian Roundtable on Corporate Governance, established in 1999, is a regional forum for decision makers to exchange experiences and advance the corporate governance reform agenda in 14 countries and regions across Asia, including Bangladesh, China, Chinese Taipei (Taiwan), Hong Kong SAR (China), India, Indonesia, Korea, Malaysia, Mongolia, Pakistan, Philippines, Singapore, Thailand, and Vietnam.

Figure 1.1. Future Growth

The future is rosy Companies with over $1bn revenue

16000

12000

8000

4000

0 2010 2025*

*Forecast Developed

Emerging market of which: family-owned

Source: Wooldbridge (2015).

Another significant challenge is the slowing capacity for growth in the region and the competition associated with more intensive internationalization. Much of the rise of Asian economies during the past several decades has been from a point of low economic development when labor and production costs were low. As the economic prosperity of many Asian economies begins to mirror that of developed economies, growth is slowing as labor and production costs increase, thus reducing a major competitive advantage Asian firms could exploit previously. To remain competitive in internationalized markets, Asian family firms will need to have the flexibility and willingness to be more innovative in developing new products and more adaptive in shifting into new markets while controlling costs that may include the discarding of nonproductive assets. A strong cultural preference to maintain a founder’s legacy may weaken the ability of Asian family firms to adequately adjust to future economic pressures.

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Predictions about the decline in the future value of Asian family firms in the wake of a forthcoming wave of generational change and preserving a founder’s legacy (which may hinder swift innovation) are just two challenges that raise serious questions about the underlying corporate governance structure of these entities. An increasing number of Asian family firms are accessing capital markets to aid in funding expansion and growth. There is greater pressure on these entities to have a corporate governance structure in place to meet international standards and investor expectations. Although the number of Asian publicly listed family firms has expanded substantially, the market capitalization of these firms is only a small proportion of the total market capitalization in the region. There is pressure on Asian publicly listed family firms to grow in order to generate greater value for minority shareholders.

Prior research (e.g., Claessens, Fan, and Lang 2000; Fan, Wei, and Xu 2011; Bennedsen, Fan, Jian, and Yeh 2015) suggests a high propensity among Asian publicly listed family firms to intensify family control by stacking senior management with family members and/or dominating the board with family members. Also, the use of complex, pyramidal organizational ownership structures—such as those identified by the Wooldbridge (2015) with respect to the Samsung Group (Figure 1.2)—in some Asian economies also contributes to concerns about the underlying corporate governance structure supporting future development.

A solid corporate governance framework is essential for a family firm to cope with the challenges of balancing the advantages and disadvantages of family involvement in the business. Combining governance, management, and ownership in the hands of the family can bring benefits, but the centralized decision-making structure inevitably brings risks. Good corporate governance practices can help family firms include different perspectives on the board that can mitigate the risks. Moreover, sound corporate governance practices can help family firms balance the interests of different stakeholders that are essential to the entity’s long-term sustainability.

Corporate governance is about enhancing performance and growth, both at the individual firm level and the national level. For example, a significant guiding objective underpinning the G20/OECD Principles of Corporate Governance (OECD 2015; hereafter, the Principles) is that the “corporate governance framework should be developed with the view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and well-functioning markets.” Another pivotal objective of a corporate governance system is to ensure the protection and equitable treatment of all shareholders. The Principles protect and facilitate the exercise of shareholders’ rights, stating that “the corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders.”

Figure 1.2. Organizational Structure of Samsung Group

A spider’s web Corporate structure of Samsung Group, simplified version, September 2014

7.2 4.8 4.0 23.7 Samsung Cheil SEMCO C&T Industries* 1.5 5.0

7.9 8.0 3.5 19.3 17.1 22.6 6.2 Samsung Samsung Samsung SDS Electronics Life Insurance

1.3 15.0 37.5 19.1

Samsung Samsung Samsung Fire & Card SDI Marine Insurance

34.4

Listed Unlisted 0.0 % stake

*Formerly Samsung Everland. Source: Wooldbridge (2015).

While sharing a concentrated-ownership affinity with other business types, family firms have unique underlying features that can have a major bearing on corporate governance characteristics and firm performance. A family firm, for example, is established to func- tion within the parameters of, and to serve the interests of, a single-family identity. In contrast, a state-owned enterprise (SOE) is formed to operate within the sphere of a given government (that can shift and change routinely depending on changes in the ruling party) policy with the express role of yielding benefits to society (as compared with a

4 WWW.CFAINSTITUTE.ORG I. Introduction

single-family identity).2 Also, a family firm is more likely to be established on the premise of control being retained solely within the family sphere for the long term. Thus, continuous generational succession is a prominent focus. In comparison, concentrated partnerships are more likely to have a shorter life expectancy, with less emphasis on succession than on effective exit strategies of the major partners.

Even though many people acknowledge the substantial number of family firms and their economic importance, various prominent commentators have given limited credence to the family firm model. For example, Chandler (2004) suggested that family firms were relics that would find it increasingly difficult to access capital and talent to compete in the modern era. Wooldbridge (2015) stated that Peter Drucker (one of the most prominent authorities and influences in the development of philosophical and practical foundations of the modern business entity)3 believed that professional management and knowledge workers were the lifeblood engines of business, with family units being of limited consequence. Given the “devalued” perception of the family model, emphasis on the ownership/control separation paradigm, and management–shareholder agency problems, there is an expansive gap in the corporate governance literature within the context of family firms.

This report adopts the perception that diverse ownership and concentrated ownership offer positive economic benefits and can mutually exist within various institutional structures. In adopting this perception, this report takes the position that the overall corporate governance framework should offer the flexibility to accommodate multiple structures.

With family firms being such an important element of the economic fabric of many Asian economies, it is essential to develop a greater understanding of the existing corporate governance features of family firms within the region and of the associated risks and threats to minority shareholders of this business form. Such understanding can better enhance the policy response in developing an effective corporate governance framework that can assist in protecting the interests of minority shareholders while building the economic performance of the family firm for all shareholders and stakeholders.

A key issue requiring substantial attention in developing a corporate governance framework to better accommodate the family firm business form—and to protect minority shareholder interests—is a need to understand the extent of family firm diversity. Although it may be simple to assume family firms are a homogeneous group, research suggests this may be problematic, as some family firms appear to be more “family” than

2The OECD guidelines on corporate governance (OECD 2005, 2015) highlight this focus in defining key rationales for state ownership in a private enterprise. 3Denning (2014), for example, referred to Peter Drucker as one of the founders of modern management.

others (Bennedsen et al. 2015). To date, aside from Bennedsen et al., there is limited (if any) effective mapping of the potential diversity of family firms across Asia (or globally). Such understanding is critical in determining whether family firms can be treated as either a homogeneous or a heterogeneous group.

Another question that needs to be investigated is what type of corporate governance mechanisms are being adopted across Asia by family firms. Currently, there is a lack of a comprehensive and systematic analysis across economies within the region to determine whether corporate governance approaches are being used uniformly or in isolation. Without such insights, it is difficult to develop a coherent framework that can be used across the region.

In a similar vein, it is important to delve deeper into understanding the concerns of minority shareholders of Asian family firms and whether existing corporate governance structures of family firms in the region magnify the risks of majority family owners. Development of an effective framework should concentrate on creating mechanisms that promote value creation opportunities while protecting minority shareholders from exploitation by majority owners. A significant lack of understanding exists in this domain.

There are growing questions about whether the corporate governance system underpinning Asian publicly listed family firms is appropriate to assist in promoting future growth while also protecting the interests of minority shareholders. Prior research indicates that family firms have a variety of unique characteristics that differentiate them from non– family firms, including features related to corporate governance. For example, the literature suggests that the long-term horizon and closer alignment of principal–agent interests in family firms enhance corporate governance practices. However, research also suggests that the same features are problematic in that they increase the risks of a lack of transparency, entrenchment, and wealth expropriation from minority owners.

Substantial moves have been made across Asia to strengthen corporate governance standards with the development and introduction of codes of best practices in many countries. There is a significant demand, however, to further investigate whether policymakers need to develop differentiated corporate governance recommendations that focus specifically on enhancing the qualities of family firms. Rather than treat publicly listed family firms as a homogeneous group, it is imperative to highlight corporate governance features that either enhance or impede performance and value across different types of publicly listed family firms.

6 WWW.CFAINSTITUTE.ORG I. Introduction

There is also a void in the literature concerning regulatory responses or approaches to corporate governance of family firms. Further analysis would have significant importance in enhancing the understanding of key corporate governance issues facing Asian family firms. Findings would be invaluable in providing the foundation to develop recommendations and guidelines that can assist in fortifying the corporate governance standards and practices of Asian family firms, which would increase long-term value for all stakeholders, reduce the cost of equity, and lower information risk through enhanced transparency.

The document is organized as follows. Part II highlights the significance of family firms in Asia and the mounting need to tailor corporate governance practices pertinent to this organizational structure.

The discussion in Part II also seeks to highlight the need for greater research and understanding of corporate governance issues pertinent to publicly listed family firms in Asia. Part III aims to demonstrate and discuss pivotal underlying characteristics of publicly listed family firms. The narrative presents a proposed definition of publicly listed family firms for the analysis in this paper. This part also introduces thefamiliness construct and develops two models to depict how different subgroups of publicly listed family firms can be constructed using the dimensions of governance, management, and ownership.

Part IV focuses initially on how characteristics of publicly listed family firms may enhance or impede the influence of corporate governance on firm value and performance. The -dis cussion then centers on how the corporate governance system can be developed to improve firm value while protecting minority interests. Part V presents a series of case studies of publicly listed family firms across 14 economies in Asia. Finally, conclusions and recommendations are outlined in Part VI.

The main objective of Part II is to highlight the current state and trends associated with Asian publicly listed family firms. The discussion outlines the various motivations and incentives for policymakers to investigate corporate governance practices of publicly listed family firms in the region. The analysis will provide a template that emphasizes the importance of Asian policymakers’ developing corporate governance policies to address concerns related to publicly listed family firms across the region.

2.1. Proportion of Family Firms in the Economy Throughout the 20th century, various managerial capitalism advocates argued that the family capitalism model was seriously flawed. For example, Fama and Jensen (1983) suggested that the failure to separate ownership and control adversely impacts operating competitiveness, leading to reduced performance, particularly as the enterprise grows.

Using these arguments, managerial capitalism advocates (e.g., Landes 1949; Chandler 1990) contended that family firms were archaic relics of an earlier era and would become increasingly supplanted in the modern era. The myth that family firms would be unable to grow beyond a certain size was also perpetuated during this period.

Despite the criticism and predictions, family firms remain the dominant organizational structure in most economies globally. James (2006, pp. 1–2) stated that the family firm “has played and continues to play a decisive role in the form of economic organization characterized by the legal transfer of ownership rights.”

Others have also dispelled the myth that family firms could not grow beyond a certain size. Miller and Le Breton-Miller (2005), for example, highlighted several major large and world-leading entities that are family firms, including Armani, Cargill, DuPont, Fidelity, Ford Motors, Home Depot, IKEA, Michelin, Porsche, and Walmart.

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Table 2.1. Family Firms as Percentage of All Listings

Economy %

China 13 Chinese Taipei (Taiwan) 35 Hong Kong (SAR, China) 62 India 67 Indonesia 61 Malaysia 62 Philippines 66 Singapore 63 South Korea 58 Thailand 66 North Asia 42 South Asia 64.2 Total 55.3

Source: Credit Suisse (2011).

The precise proportion of family firms in the national, regional, and global economies remains highly debatable.4 Some research (e.g., Kayser and Wallau 2002) has suggested that family firms compose only 15%–20% of entities in an economy, while others have put the percentage as high as 70%–85% (e.g., Gersick, Davis, Hampton, and Lansberg 1997; Chrisman, Chua, and Litz 2004).

With respect to publicly listed entities, a comprehensive survey by Credit Suisse (2011) encompassing 3,568 publicly listed Asian firms (with a market capitalization of at least USD 50 million) indicated that 55.3% are family firms.5 The report (see Table 2.1) indicated that the proportion of publicly listed family firms was higher in South Asia than in North Asia (64.2% versus 42.0%).

4A formal definition of a publicly listed family firm is provided in Section 3.1. For reference, that definition is provided here: A publicly listed family firm is an entity (a) that has issued securities via an IPO and those shares currently trade on at least one open stock exchange or OTC market and (b) whereby the family exerts material significant influence over the entity’s operational policies, day-to-day activities, and future strategic direction via the family’s governance involvement, management participation, or ownership voting rights or a combination thereof. 5The Credit Suisse (2011) study covers 10 of the 14 economies at the center of this report. Analysis of the proportion of family firms among publicly listed entities in Bangladesh, Mongolia, Pakistan, and Vietnam has not been forthcoming. Furthermore, updates on proportions in the other 10 economies have not yet been developed.

Table 2.2. Family Firm Market Capitalization to Total Market Capitalization

Family Firm Market Cap Family Firms as % of Total Economy (USD millions) Market Cap

China 416,524 11.1 Chinese Taipei (Taiwan) 453,552 49.3 Hong Kong (SAR, China) 652,178 26.2 India 762,279 46.8 Indonesia 175,155 49.1 Malaysia 158,428 39.0 Philippines 131,609 83.2 Singapore 311,564 54.0 South Korea 555,318 51.5 Thailand 133,128 48.4 North Asia 2,077,572 25.2 South Asia 1,672,161 49.2 Total 3,749,733 32.2

Source: Credit Suisse (2011).

The proportion of family firm market capitalization to total market capitalization in Asian economies further highlights the economic importance of this organizational structure. As Table 2.2 shows, the market capitalization of family firms represents, on average, 32.2% of total market capitalization across the 10 Asian economies surveyed. The proportion is again higher across South Asian economies (49.2%) than North Asian economies (25.2%). It is important to note that proportions vary across national boundaries, likely reflecting pivotal institutional structures and levels of economic development. For instance, the political system in China, which has yielded a high number of state-owned enterprises, likely accounts for the lower percentage of family firm market capitalization to total market capitalization. The fact that the Philippines is an emerging economy may explain the higher proportion observed there.

While the absolute number of publicly listed family firms in Asia has grown, it is worth noting the continued prevalence of representation in such traditional business sectors as consumer goods, industrials, and financials. This is in line with prior research that suggests the family firm organizational structure is well adapted to industry sectors where fixed and operational costs are high and a long-term strategic vision is preferred.

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The Credit Suisse (2011) report found that only in India, South Korea, and Chinese Taipei (Taiwan) is there a tendency for a greater concentration of publicly listed family firms in information technology sectors. The open willingness to adopt technology and to develop a technology-driven infrastructure in India, South Korea, and Chinese Taipei (Taiwan) underscores the move of publicly listed firms into the information technology sector.

Finally, there is little evidence that publicly listed family firms in Asia have been successful in entering such capital-intensive industry sectors as telecommunications and utilities. Regulatory constraints are likely a disincentive (Credit Suisse 2011).

2.2. Size of Family Firms in Asia There are notable examples of large Asian family firms as active and prominent players in the global markets, from Samsung Electronics in South Korea to Tata Consultancy in India. Relative to other major economic regions (i.e., Europe and North America), however, the proportion of large Asian family firms remains underrepresented. For example, as shown in Figure 2.1, only 16.4% of the 500 largest family firms globally (as ranked by total revenue in the Global Family Business Index developed by the University of St. Gallen’s Center of Family Business) are in Asia (Forbes 2015). Comparatively, 49.8% and 26.8% of family firms listed in the Global Family Business Index are in Europe and North America, respectively (Figure 2.1).

Across the 14 economies at the center of this analysis, 74 family firms are listed in the Global Family Business Index. India has the highest number of family firms in the Global Family Business Index (25 of 74 firms, or 33.78%), followed closely by Hong Kong (SAR, China, 15, or 20.27%). Bangladesh, Mongolia, Pakistan, and Vietnam do not have a single representative entity among the largest 500 family firms in the Global Family Business Index. Figure 2.2 provides a breakdown of the percentage of large family firms in each of the economies analyzed in this report with at least one family firm listed in the Global Family Business Index.

Table 2.3 provides a breakdown of the constituents of the Global Family Business Index by region for several major characteristics (family ownership percentage, age, revenue, and number of employees).

Relative to Europe and North America, the largest family firms in Asia are, on average, younger by approximately two decades and yield lower revenues. With respect to the number of employees, the average for large Asian family firms is substantially below the

Figure 2.1. Percentage of Largest 500 Family Firms in the Global Family Business Index by Region

North America 26.80%

Europe 49.80%

Asia 16.40%

South Oceania America 0.80% 4.20% Africa/Middle East 2.00%

Source: University of St. Gallen’s Center of Family Business, “Global Family Business Index” (2015): http://familybusinessindex.com.

average for North American counterparts but on par with European entities. A finding of significant interest is that the average percentage of family ownership in the largest Asian family firms is the lowest across the six regions listed in Table 2.3.

With respect to the 14 OECD Asian Roundtable economies, the average age (58 years to 87 years) and revenue (USD 8.90 billion to USD 13.93 billion) are substantially lower, on average, than for family firms in OECD economies. Again, the average number of employees across both the 14 economies studied and the OECD is quite comparable

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Figure 2.2. National Percentage of 74 Asian Family Firms on Global Family Business Index

Indonesia Singapore 4.05% Thailand 1.35% 4.05% Philippines 5.41%

Malaysia India 6.76% 33.78%

China 6.76%

South Korea 8.11%

Chinese Hong Kong Taipei (SAR, China) (Taiwan) 20.27% 9.46%

Source: Global Family Business Index (2015).

(39,101 to 41,407). Also, the average percentage of family ownership of large OECD family firms is distinctly higher than that of large family firms across the 14 economies.

Figure 2.3 illustrates a breakdown of the “Global Family Business Index” (2015) constituents by the four key characteristics of age, revenue, family-ownership percentage, and number of employees across 10 of the 14 economies studied.6

6Bangladesh, Mongolia, Pakistan, and Vietnam have no family firms listed in the Global Family Business Index for 2015 (see http://familybusinessindex.com/). Consequently, these economies are not shown in Figure 2.3.

Table 2.3. Key Characteristics of Global Family Business Index Constituents by Region

No. of % of Family No. of Region Firms Sample Ownership Years Revenue (USD) Employees

Africa/Middle 10 2.00 55.78% 58 5,850,000,000 28,541 East Asia 82 16.40 52.79% 64 8,958,536,585 37,212 Europe 249 49.80 74.27% 88 11,885,140,562 36,768 Oceania 4 0.80 87.55% 48 3,800,000,000 8,295 North America 134 26.80 72.80% 86 18,391,791,045 53,649 South America 21 4.20 66.64% 70 14,042,857,143 62,171 Overall 500 100.00 69.77% 82 13,054,200,000 42,040 OECD 405 81.00 73.21% 87 13,927,901,235 41,407 Non-OECD 95 19.00 55.11% 59 9,329,473,684 44,738 Study Economies 75 15.00 52.29% 58 8,897,333,333 39,101

Source: Global Family Business Index (2015).

The average age of large family firms in the economies studied (aside from Hong Kong (SAR, China), Indonesia, and the Philippines) is lower than that of large family firms from nonstudy economies listed in the Global Family Business Index for 2015. Average revenue for nonstudy Global Family Business Index 2015 constituents is higher than that of each of the 10 economies studied with at least one representative listed in the index. Aside from South Korea and Chinese Taipei (Taiwan), average revenue is generally substantially lower, on average. As for the number of employees, the averages in India and the Philippines (82,580 and 78,136) are substantially higher than the average for family firms in non-OECD Asian Roundtable economies (42,558). In contrast, the average number of employees in South Korea and Chinese Taipei (Taiwan)—8,179 and 15,945—is significantly lower. The higher (lower) employee numbers in India and the Philippines [South Korea and Chinese Taipei (Taiwan)] may be attributable to the higher concentration of labor-intensive (high-technology) industries in these economies. Finally, the average family-ownership percentage for large family firms in all the 14 economies highlighted in Figure 2.3 is substantially lower than that of large family firms in other regions. This observation implies that large family firms in Asia have a more diverse ownership than large family firms in other regions.

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Figure 2.3. “Global Family Business Index” (2015) Constituents

150

120

China Chinese Hong Kong India Indonesia Malaysia Philippines Singapore South Thailand 14 Non-study Taipei Korea Taskforce (Taiwan) Nations

Age (Years) Revenue (USD 00 million) Employee ('000) Family Ownership (%)

Source: Global Family Business Index (2015). 2.3. Life Cycle of Asian Family Firms Table 2.3 and Figure 2.3 highlight the relative youth of Asian family firms, with most tracing their origins to the period immediately following World War II. In contrast, counterparts in other regions (such as Europe and North America) have a far longer history.

The Credit Suisse (2011) report further reinforces the perception that Asian family firms have shorter life cycles than their global counterparts. As shown in Table 2.4, more than a third of the publicly listed family firms in Asia at the end of 2010 had undertaken their initial public offering (IPO) after 2000. The growth in post-2000 family firm listings is highest in China (157.01%), Singapore (97.78%), and Hong Kong (SAR, China) (95.48%) and lowest in the Philippines (16.22%). On a regional basis, the growth in post-2000 family firm listings is greater in North Asia than in South Asia. Overall, the proportion of post-2000 family firm listings to the total number of listed family firms in Asia is 38.43%, with the highest percentage in China (61.09%) and the lowest in the Philippines (13.95%). Table 2.4 clearly indicates that from a life-cycle perspective, the large majority

Table 2.4. Increase in Listed Family Firms, 2000–2010

No. at No. at % ∆ since Economy End-2000 End-2010 ∆ No. % + 2000

China 107 275 168 157.01 61.09 Chinese Taipei (Taiwan) 256 405 149 58.20 36.79 Hong Kong (SAR, China) 354 692 338 95.48 48.84 Indonesia 92 150 58 63.04 38.67 India 507 663 156 30.77 23.53 Malaysia 187 262 75 40.11 28.63 Philippines 74 86 12 16.22 13.95 Singapore 135 267 132 97.78 49.44 South Korea 367 585 218 59.40 37.27 Thailand 118 183 65 55.09 35.52 North Asia 1,084 1,957 873 80.54 44.61 South Asia 1,113 1,611 498 44.74 30.91 Overall 2,197 3,568 1,371 62.40 38.43

Source: Credit Suisse (2011).

of publicly listed family firms in Asia are predominantly first- or second-generation entities. In contrast, studies have indicated that most European and North American family firms are fourth-generation (or older) entities at a more mature stage of their respective life cycles.

Family succession is a major concern among founders of Asian family firms. A Deloitte- SMU (2013) survey found that more than 90% of Asian family firm founders held the view that succession by a family member was important. The strength of the patriarchal system in Asia is likely to ensure that the first/founder generation will seek to control the family firm as long as possible. Nonetheless, the overwhelming majority of Asian family firms will face a major generational shift in the next 20 years. The survey noted that of the Asian firms surveyed, 85% expected to undergo a generational succession within five years (i.e., by 2018). Of the family firms surveyed, nearly 70% had yet to undergo a generational change from the founder to second-generation members.

There are similar sayings from different cultures to the effect that family wealth never lasts beyond three generations. Simply put, the first generation creates the wealth, the second generation preserves the wealth, and the third generation destroys the wealth. The Hay

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Group (2012) estimated that 70% of Asian family firms fail to survive the second generation and that 90% fail by the third generation. The Hay Group analysis, using different sources, suggests that the lifespan of family firms has declined from 50–60 years (approximately two or three generations) at the start of the 1990s to only 24 years (approximately one and a half generations). There is now a higher probability that a third-generation successor will not take control of the firm than that such a successor will destroy the firm.

With family firms’ shorter listing history, interaction with minority shareholders, and conformity to capital market and investor expectations on transparency, there is an increased risk (relative to older counterparts in Europe and North America) that many Asian family firms will undergo a significant transitional change from the founding generation. How this succession is handled will clearly influence the Asian family firm’s future prosperity. For a publicly listed family firm, the need for key corporate governance mechanisms to be in place is paramount in protecting the interests of not only the family but also the minority shareholders.

2.4. Mechanisms Financing Growth of the Asian Family Firm Between 2000 and 2010, the total market capitalization of Asian family firms grew significantly (21.3% compounded). As indicated in Table 2.4, this significant increase can be explained in part by the substantial increase in the number of family firms across the region that undertook an IPO between 2000 and 2010. The economic development of Asia following the Asian Financial Crisis of 1997–1998 also contributed to this growth. A major driving force behind the significant increase in market capitalization of publicly listed Asian family firms was an entrepreneurial desire to use capital market funding to expand growth in new markets.

A survey of family firms by PricewaterhouseCoopers (2014) indicated that nearly 68% of family firms worldwide have at least some of their sales in international markets, with this figure expected to increase to 76% within five years. Internationalization of sales is particularly prevalent in Asia. As shown in Figure 2.4, just over 36% of sales in 2014 by Asian family firms were generated from exports, with this figure having grown by 5.7% during the previous five years.7 International sales for family firms are highest in Singapore, Hong Kong (SAR, China), and Chinese Taipei (Taiwan). International sales

7The 2014 PwC Family Business Survey did not cover Bangladesh, Mongolia, Pakistan, the Philippines, South Korea, Thailand, and Vietnam.

Figure 2.4. Exports – Sales and Growth

Singapore

Malaysia

Indonesia

India

Hong Kong

Chinese Taipei (Taiwan)

China

010203040506070

Export %Increase Past 5 Years

Source: PricewaterhouseCoopers (2014).

appear to be of least significance currently to Chinese family firms. During the five years prior to 2014, the growth in family firm international sales was highest in Singapore and Malaysia and lowest in Hong Kong (SAR, China).

Findings from a UOB-SMU (United Overseas Bank/Singapore Management University) report illustrate close parallels to the findings shown in Figure 2.4 (Koh, Ling, Kong, and Ejercito 2013). Specifically, more than 45% of family firms surveyed in Indonesia (49%), Singapore (55%), Malaysia (69%), and Thailand (71%) indicated that the pursuit of expansion into new international markets was a priority. The proportion of family firms in China with international market expansion as a priority was lower (29%). The results of the UOB-SMU survey reinforce the view that internationalization is a major factor underpinning the growth of family firms in Asia—and is expanding. However, its significance varies across countries.

Aside from sales in international markets, the general underlying sales strategy of the family firm will dictate the level of growth. The PwC Family Business Survey

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(PricewaterhouseCoopers 2014) reported that seeking quicker and more aggressive growth to ensure the long-term success of the family firm was more prominent in some Asian economies than in others. For example, 57% of Chinese and 40% of Indian family firms were focused on the pursuit of more aggressive and rapid growth as a priority. In contrast, in Chinese Taipei (Taiwan) and Hong Kong (SAR, China), only 10% and 13% of family firms expressed a strategy that focused on quick and aggressive growth.

So, while Chinese and Indian family firms may not appear to be as focused on international sales as their counterparts in Hong Kong (SAR, China), Singapore, and Chinese Taipei (Taiwan), these (Chinese and Indian) family firms do prioritize a strategy of quick and aggressive growth. 2.5. Professionalization in Asian Family Firms Research clearly indicates a strong preference among Asian family firm founders for family-management succession (Hay Group 2012; Koh et al. (2013); Economist Intelligence Unit, 2014). As noted earlier, the Deloitte-SMU (2013) report indicated that of the Asian family firms surveyed, nearly 85% were likely to undergo a generational succession within five years, with the majority being from founder to second generation.

Despite the reported preference among Asian family firms for family-management succession, Asian family firms are also increasingly recognizing that to meet future business pressures (e.g., internationalization of markets), more steps must be taken to professionalize the entity (e.g., appointment of more professional nonfamily managers rather than family members). The PwC Family Business Survey (PricewaterhouseCoopers 2014) reported that nearly 40% of Asian family firms expressed the view that professionalizing the entity during the next five years (i.e., from 2015 to 2020) was a major challenge facing the entity. The survey also indicated, however, that the drive for family firm professionalization is not uniform across Asia. Respondents from Chinese Taipei (Taiwan) and China, for example, viewed professionalization as less of a priority than in Hong Kong (SAR, China) and Singapore.

With ever-increasing internationalization of the global markets, pressure on Asian family firms continues to escalate. As firms age and grow, the need for greater professionalism will only add to the pressure. Asian family firms have recognized these trends. For example, a survey of Southeast Asian family firms by the Economist Intelligence Unit (2014) found that 18% of respondents felt nonfamily professionals would control key executive positions in 10 years; furthermore, 30% of respondents felt the board would be predominantly composed of nonfamily members within a decade. However, as the Hay Group (2012) noted, efforts to professionalize the family firm may be double-edged.

Although professionalization (including the employment of more nonfamily professional management and inclusion of nonfamily members on the board) can assist in boosting the firm’s effectiveness and efficiency, these steps could also lead to greater agency costs (e.g., incentives to align interests of professional management with those of family owners) and integrity costs (e.g., loss of “face” by family owner owing to intense questioning by nonfamily board members). A balancing of strategies to harmonize family culture and values with greater “external” professionalism is recommended to ensure more effective future value creation.

2.6. Part II Summary The discussion in this section highlighted several pivotal features of family firms in Asia. These features underpin the motivations and need for a more comprehensive analysis and understanding of corporate governance as it affects publicly listed family firms in the region. The significant increase in the number and size of publicly listed family firms across the region over the past 10–15 years provides an impetus for the analysis of corporate governance practices of Asian family firms. These firms are predominantly in their early-growth stages and will likely be the large publicly listed firms of the future, which underscores the need for greater understanding of the impact of corporate governance mechanisms and practices. Because the trend of Asian family firms to undertake an IPO may continue, it is important to ensure that corporate governance policies are in place to help firms face the heightened regulatory environment and scrutiny that come with being listed. Analysis of the factors contributing to the success (or failure) of current Asian publicly listed family firms is vital in developing the most appropriate recommendations.

As shown in Table 2.3, the average percentage of family ownership of Asian publicly listed family firms is substantially lower than that of their European and North American counterparts, which affects Asian publicly listed family firms in two key ways. First, Asian publicly listed family firms have a large and more widely dispersed minority ownership that potentially exposes these entities to greater majority/minority owner conflicts. It also creates an increased need for development of corporate governance practices to protect minority shareholders. Second, if Asian majority family owners wish to expand their operations while retaining control of the entity, they may need to rely more on creditors as they have less “bandwidth” for selling a further equity stake. This could lead to greater shareholder/creditor conflicts. Alternatively, the family could retain control by including more family members in management and governance roles, which could lead to a higher risk of entrenchment and nepotism that can impinge on minority shareholders. Thus, there are incentives to develop corporate governance recommendations to address these concerns.

20 WWW.CFAINSTITUTE.ORG II. Corporate Governance for Asian Publicly Listed Family Firms

It is noted several times in Part II that Asian publicly listed family firms have a relatively short history of being publicly listed and of interactions with minority shareholders. This characteristic has possibly resulted in the development of less mature and effective governance practices and mechanisms, which may set these firms at a disadvantage when addressing rapidly changing business conditions and the pressures of internationalization. Furthermore, the discussion highlighted the fact that over the next several years, many Asian publicly listed family firms will face succession issues. The overwhelmingly preferred option is succession by a family member. Many Asian publicly listed family firms, however, recognize the need and the pressure to professionalize by engaging outside professional management as part of future succession plans. The forthcoming wave of succes- sions and the international pressure to professionalize provide further incentives for Asian policymakers to investigate and understand the corporate governance practices of publicly listed family firms in the region.

A primary focus of Part III is to determine an appropriate definition of a publicly listed family firm and to decide whether this organizational structure should be viewed as a homogeneous group. Finally, the discussion considers the difficulties that policymakers may face in developing a one-size-fits-all set of corporate governance policies for publicly listed family firms.

3.1. What Is a Publicly Listed Family Firm? There is little dispute in the literature on the definition of a publicly listed entity.8 In simple terms, an entity is recognized as being publicly listed if it has issued securities via an IPO and those securities are traded on at least one open stock exchange or in the over- the-counter market. Individual and institutional shareholders are the owners of a publicly listed entity. Ownership for each shareholder is traditionally in proportion to the amount of stock owned as a percentage of all outstanding stock. Being publicly listed offers an entity advantages over other organizational structures (e.g., greater access to debt markets and the ability to sell future equity stakes). A publicly listed entity, however, is subject to more regulation, public scrutiny, and reduced founder control.

Consensus on a definition of family firm has been quite problematic. Handler (1989, p. 258) stated that “defining the family firm is the first and most obvious challenge -fac ing family business researchers.” Nonetheless, despite expansion in the depth and range of family firm research, more than 25 years after Handler’s statement, no universally accepted definition exists. The lack of a clear and accepted definition of family firm can have significant impacts. For example, it can act as a detriment to the ability to consolidate and compare research findings, making it harder for policymakers to develop appropriate strategies and policies. Also, the proportion of family firms recognized in the economy can swing dramatically depending on the definition used (Westhead and Cowling 1998), which can influence the opinions of policymakers on whether an issue is important and whether action should be taken.

8Although the term “publicly listed” is used throughout this document, the terms “publicly traded,” “public,” and “public limited” are considered equivalent to “publicly listed,” and the terms are interchangeable.

22 WWW.CFAINSTITUTE.ORG III. Defining a Publicly Listed Family Firm

Operationally defining the object at the center of any analysis (in this case, the family firm) is a fundamental requirement. Countless operational definitions of family firm have been constructed and applied in the literature. The overwhelming emphasis of many of these definitions is that for an entity to be considered a family firm, the family must exert control (or at least significant influence) over the entity’s strategic policies and decision- making processes.

Ownership is the most commonly cited factor in family firm definitions for determining whether the family exerts significant influence and/or control. However, various ownership benchmarks have been applied. For example, Ang, Cole, and Lin (2000) used a benchmark of at least 50% ownership by the family for an entity to be identified as a family firm. Barth, Gulbrandsen, and Schonea (2005) used an ownership benchmark of 33%, while La Porta, Lopez-de-Silanes, and Shleifer (1999) and Faccio and Lang (2002) applied a cutoff of 20%. Others have applied broad cutoffs of 10% (e.g., Smith and Amoako-Adu 1999; Maury 2006) or 5% (e.g., Gomez-Mejia, Larraza-Kintana, and Makri 2003).

The involvement of family members in the corporate governance system and processes of the entity is another common factor applied in various definitions to identify a family firm. Maury (2006) suggested that one key characteristic of a family firm is whether a family member of the controlling shareholder holds the position of honorary chairperson, chairperson, or vice chairperson. Perez-Gonzalez (2006) used the presence of the founder as a director as one of the criteria for determining the identity of a family firm. Villalonga and Amit (2006) used a similar benchmark.

The participation of family members in the senior management of an entity is another frequently cited factor routinely applied in operational definitions of family firm. McConaughy, Matthews, and Fialko (2001), Anderson and Reeb (2003, 2004), and Fahlenbrach (2009) argued that if the founder, or a member of the founder’s family, holds the position of CEO, then the entity should be classified as a family firm. Baraontini and Capiro (2006) suggested that if a family member holds the position of COO, that would also warrant the entity’s being categorized as a family firm.

It is beyond the scope of this report to establish a consensus definition of a publicly listed family firm. However, to give the analysis focus, the following definition is proposed:

A publicly listed family firm is an entity (a) that has issued securities via an IPO and those shares currently trade on at least one open stock exchange or OTC market and (b) whereby the family exerts material significant influence

over the entity’s operational policies, day-to-day activities, and future strategic direction via the family’s governance involvement, management participation, or ownership voting rights or a combination thereof.

3.2. Does One Size Fit All? A large proportion of family firm research has focused on determining whether practices, standards, and performance differ between family firms and non–family firms. This- lit erature has highlighted several stereotypical differences between the two groups. Table 3.1, which summarizes some of the major differences, clearly supports the perception that the family firm organizational structure has significant and unique differences from non– family firms.

Although the literature frequently highlights the differences between family firms and non–family firms, less attention has been given to potential differences among family firms. Some research has been conducted to identify possible contrasts between publicly listed and private family firms. However, many studies tended to perceive publicly listed family firms as a homogeneous group.

Table 3.1. Stereotypical Comparisons of Family Firms and Non– Family Firms

Family Firms Characteristic Non-Family Firms References

Family members Career Salaried managers Galambos (2010) Long-term career Short-term career Benedict (1968) horizon horizon Ownership and control Governance Ownership/control split Sirmon et al. (2008) united External board influ- Parada et al. (2010) Internal board domi- ences Gedajlovic et al. (2004) nance Transparency disclosure Opaqueness, secrecy Entrenched, long Leadership High turnover with Oswald et al. (2009) tenured market discipline Jorissen et al. (2005) Trained on the job Formally educated Perez-Gonzalez (2006) Succession draws on Succession draws on kinship pool large pool

(continued)

24 WWW.CFAINSTITUTE.ORG III. Defining a Publicly Listed Family Firm

Table 3.1. Stereotypical Comparisons of Family Firms and Non– Family Firms (continued)

Family Firms Characteristic Non-Family Firms References

Autocratic Management Delegation to profes- Greenhaigh (1994) Emotional, intuitive sionals Zellweger and Rent seeking, stifling Rational, analytical Astrachan (2008) innovation Innovative Morck and Yeung Organic, mutual Formalized, ‘command (2003) accommodation and control’ Zhang and Ma (2009) Embedded in kinship Networks External ties based on Ingram and Lifschitz networks resources (2006) Role diffusion Distinct business family Lomnitz and Pérez- Personalized social spheres Lizaur (1987) responsibility Impersonal social Muntean (2009) responsibility Concentrated, kinship Ownership Dispersed, non-kin- Achmad et al. (2009) based ship-based Morck et al. (2005) Cash flow/ownership No cash flow/ownership Andres (2008) rights wedge rights wedge Nondiversified Well diversified Ascription, nepotism Rewards Achievement, merit Beehr et al. (1997) based based Ram (1994) Family members Employees: perfor- Chua et al. (2009) indulged mance based Particularistic criteria Universalistic criteria Noneconomic outcomes Returns Largely economically Chrisman et al. (2010) important defined Anderson and Reeb Private benefits for No private benefits (2003) family Minority shareholders Martínez et al. (2007) Minority shareholders protected exploited

Source: Stewart and Hitt (2012).

If publicly listed family firms can be treated as a homogeneous group, the task of policymakers to develop effective corporate governance policy recommendations is simplified. By treating all publicly listed family firms as a homogeneous group, policymakers can develop a one-size-fits-all strategy that can be applied to all parties and be perceived to have the same impact.

Conversely, if publicly listed family firms are a diverse heterogeneous group, the ability to apply a one-size-fits-all approach is more complicated. A singular approach to corporate governance recommendations may benefit one sector of publicly listed family firms but impose unnecessary costs on another sector. It is nearly impossible to develop a set of policy recommendations that will benefit all publicly listed family firms if this organizational structure is to be considered a heterogeneous group. Nevertheless, it is important to determine a balancing point in establishing flexibility in recommendations or in developing a set of differentiated policies.

3.3. The Familiness Construct and Mapping of Family Firms Although a substantial proportion of research analysis has treated publicly listed family firms as a homogeneous group, some (Shanker and Astrachan 1996; Westhead and Cowling 1998; Tsang 2002; Basco and Rodriquez 2009; Nordqvist and Melin 2010) have challenged this perception in coining and developing the familiness construct. Derived primarily from a resource theory perspective of the firm, “familiness refers to the idiosyncratic firm level bundle of resources and capabilities that are generated when the family and the business interact and co-exist in unison” (Irava and Moores 2010, p. 9).9 A pivotal implication of the familiness construct is that the extent to which a family may use its resources and capabilities in directing and driving the entity is likely to vary from family firm to family firm. Furthermore, different families may have different visions of how the firm is to be -con trolled and passed on to subsequent generations. Using the familiness construct, one can infer that publicly listed family firms cannot and should not be viewed as a single, homogeneous bundle. Rather, a publicly listed family firm may be more of a family firm relative to another publicly listed family firm.

9While definitions of familiness abound and the term has become widely acknowledged and accepted within the family firm literature (see Chrisman et al. 2005; Moores and Craig 2005; Nordqvist 2005), the precise context of the term is not properly understood. Indeed, the dimensions, antecedents, and consequences of the familiness construct have been very much unattended, leaving the term ill defined (Moores 2009). This review does not seek to resolve these limitations. Given the importance of the term in the literature, however, it is important to identify it in the discussion.

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An analytical research approach developed by Bennedsen et al. (2015) provides a useful technique to assist in distinguishing between different publicly listed family firm subgroups under the proposed definition of family firm outlined earlier. The technique postulated by Bennedsen et al. allows for family firms to be categorized within a two- dimensional framework, which is based on the dimensions of ownership and management.

Table 3.2 is constructed by drawing on the Bennedsen et al. framework but limiting the focus solely to a publicly listed family firm domain. The dimension of ownership is retained in line with the Bennedsen et al. approach, spanning from closely held to diluted ownership. The second dimension in Table 3.2 is a synthesis between governance involvement and management participation. The family involvement/participation dimension aims to capture the family’s ability to control the entity via actions of human resource personnel.

Starting in the top-left corner and going clockwise, the first subgroup (“Tightly Held”) highlighted in Table 3.2 encompasses publicly listed family firms where family interest in governance, management, and ownership is strong, with diminished reliance on nonfamily members for oversight, supervision, and equity financing. With respect to the second subgroup (“Delegated/Closely Held”), the family interest in the publicly listed family firms encompasses governance and direct ownership. However, the responsibility for day-to-day decision making and supervision is placed in the hands of nonfamily professionals.

Family ownership among publicly listed family firms in the “Diluted/Governance Controlled” (bottom-right corner) subgroup is attenuated but allows the family to still wield significant influence. The responsibility for day-to-day decision making and supervision is placed in the hands of nonfamily professionals. The family exerts control via significant active participation in the entity’s governance—holding key board and subcommittee positions (e.g., chairperson, chair of audit/remuneration/nomination subcommittees) and composing a majority of the board.

Finally, entities in the “Diluted/Management Driven” (bottom-left corner) subgroup exhibit attenuated family ownership levels that still allow the family to wield significant influence. With the active participation of family members in the day-to-day decision making and supervision of operations and in taking on senior management roles (e.g., CEO, CFO), the family can retain substantial influence. Involvement in the governance structure (e.g., family members as directors) will further support the family’s position.

Owing to greater family interest in the entity with respect to the three dimensions of governance, management, and ownership, family firms in the “Tightly Held” subgroup are likely to be highly family-centric. In contrast, family firms in the “Diluted/Governance

Table 3.2. Four Major Categories and Characteristics of Publicly Listed Family-Controlled Firms

Founding Family Participation in Management Active Delegated

Ownership > Tightly Held Delegated /Closely Held ■ ■ 50% ■ Controlling ownership (greater ■ Controlling ownership (greater than 50%) than 50%) ■ ■ ■ Active founding family participa- ■ Delegated authority to nonfamily tion in senior management (e.g., professional management ■ CEO, CFO, COO) ■ Governance participation on board ■ ■ Governance participation on board and subcommittee by founding and subcommittee by founding family members family members Ownership = Diluted/Management Driven Diluted/Governance Controlled ■ ■ 20%–50% ■ Significant ownership (greater ■ Significant ownership (greater than than 20% but less than 50%) 20% but less than 50%) ■ ■ ■ Active founding family participa- ■ Delegated authority to nonfamily tion in senior management (e.g., professional management ■ CEO, CFO, COO) ■ Governance participation on board ■ ■ Governance participation on board and subcommittee by founding and subcommittee by founding family members in senior roles (e.g., family members executive chairman) ■ ■ Founding family members on board and subcommittee of parent public entity form a majority

Source: Adapted from Bennedsen et al. (2015).

Controlled” subgroup are likely to be the least family-centric because of reduced family ownership and management delegation. The two remaining subgroups lie between the two poles established by the “Tightly Held” and “Diluted/Governance Controlled” subgroups. 3.4. Conflicts Encompassing Family Firms The literature on modern-era diversely owned publicly listed corporations has focused on the interaction between professional management and shareholders. Interactions between shareholders and creditors, and between professional management and creditors, have also warranted analysis but to a lesser extent than the professional management/shareholder link. Although the literature tends to confine the list of key actors associated with

28 WWW.CFAINSTITUTE.ORG III. Defining a Publicly Listed Family Firm

modern-era diversely owned publicly listed corporations to shareholders, professional management, and creditors, relationships associated with family firms are viewed as more complex. Since the seminal work of Tagiuri and Davis (1982), systems theory researchers have sought to depict the underlying subsystems associated with family firms and how the interactions of actors within each subsystem may affect the entity.

Four major subsystems (family, governance, management, and ownership) are frequently cited in the literature. Figure 3.1 illustrates a four-circle model that depicts the four major subsystems as they may pertain to a publicly listed family firm. The model shown in Figure 3.1 suggests that many actors may be associated with a publicly listed family firm. The set of actors includes those having a major direct involvement with the entity (Sectors A–E). For example, a Sector A individual not only is a family member with a direct ownership stake but is also employed by the entity and is part of the formal governance structure. Such an individual is likely to have a pivotal role in determining the entity’s strategic policies, objectives, and day-to-day operations. In contrast, other actors (as depicted by

Figure 3.1. Four-Circle Family Firm Subsystem

Family

F G C

Management J BDA L Governance

E IH

Ownership

Sectors K and M) may have only an indirect impact. For example, a Sector K individual does not have an ownership stake in the entity nor plays a management or governance role. However, owing to a family association (e.g., blood relative of the majority founding owner), the individual may derive a benefit by association.

Figure 3.1 also highlights a few major agency conflicts that may emerge between the different actors associated with publicly listed family firms:

■ ■ Agency Problem I: shareholder versus manager ■ ■ Agency Problem II: controlling family shareholder versus minority shareholders ■ ■ Agency Problem III: family insiders versus family outsiders ■ ■ Agency Problem IV: family owner versus family manager ■ ■ Agency Problem V: shareholder versus creditor ■ ■ Agency Problem VI: family manager versus family board member ■ ■ Agency Problem VII: professional manager versus family board member

The precise relevance and impact of the agency problems listed here are likely to vary depending on the underlying governance, management, and ownership structure of the publicly listed family firm. For example, publicly listed family firms categorized as “Tightly Held” (Table 3.2) are likely to have family members as both owners and managers. Consequently, Agency Problem I is likely to be less of an issue because the interests of owners and managers will be naturally aligned. Agency Problem II is probably more detrimental because the majority family shareholders may seek to use their private-benefits position to expropriate wealth from minority shareholders.

In contrast, for publicly listed family firms in the “Diluted/Governance Controlled” subgroup (Table 3.2), Agency Problem II will be of limited consequence as family owners will have a lower ability to exploit private benefits over other shareholders. Agency Problems I and VII, however, are likely to be more prominent as there will be a need for increased monitoring by the principal (family) board member to prevent the professional manager from acting in his own self-interest.

Just as Figure 3.1 illustrates the point that publicly listed family firms should not be perceived as a homogeneous group, Figure 3.1 demonstrates further that (1) the underlying

30 WWW.CFAINSTITUTE.ORG III. Defining a Publicly Listed Family Firm

governance, management and ownership structure and (2) the interaction of the family with these dimensions will influence the type of agency conflicts that are likely to be of greatest significance. The type of pertinent agency problem will vary across publicly listed family firms, increasing the difficulty of developing a one-size-fits-all set of corporate governance recommendations. Rather, it further suggests that flexibility is required to allow publicly listed family firms with different governance, management, and ownership structures to create a system that best addresses the agency conflicts pertinent to them.

3.5. Part III Summary The lack of consensus on a definition of publicly listed family firm is a major hurdle to the development of corporate governance practices and standards designed to aid this organizational structure in creating value for all stakeholders while protecting minority shareholder interests. A review of numerous definitions applied in the literature indicates that family governance participation, management involvement, and ownership interest are the three primary factors used to categorize a publicly listed entity as a family firm. An operational definition based on these three dimensions is then proposed.

The discussion highlighted thefamiliness construct and illustrated the important point that publicly listed family firms should not be perceived solely as a homogeneous group. Figure 3.1 provides an example of how the governance, management, and ownership structure may affect the family’s influence on the publicly listed family firm. The model suggests that it may be difficult to develop a one-size-fits-all set of corporate governance recommendations for publicly listed family firms. Rather, recommendations may need to offer flexibility to cater to the different underlying characteristics and agency problems affecting various subgroups.

Part IV highlights the major concerns of publicly listed family firms related to value creation and financial performance. The discussion will also seek to highlight how corporate governance mechanisms can assist in improving the financial performance and value creation of publicly listed family firms.

4.1. Pros and Cons of the Family Firm Model A family firm is a powerful and complex organizational structure that creates both opportunities and challenges due to the overlap of family culture, values, and principles and the realities of the business environment. It has been argued that when the family and business systems are effectively aligned, the family firm can create significant value for all stakeholders. However, aligning the two systems can prove problematic.

The major positive and negative outcomes of the family firm model are summarized in Table 4.1.

Table 4.1. Summary of Major Positive and Negative Outcomes of Family Firm Model

Positive Features Negative Features

Agency costs Reduced agency costs due to closer Increased agency costs alignment of principal–agent from family member objectives opportunism, shirking, Reduced agency costs resulting from and adverse selection due greater sharing of values between to altruism family members, creating heightened Greater agency costs due trust to conflicting goals and objectives as firm grows and more family members are involved in entity

(continued)

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Table 4.1. Summary of Major Positive and Negative Outcomes of Family Firm Model (continued)

Positive Features Negative Features

Physical and/or financial Family can offer physical and/or Family members may assets financial assets to be used in support- use assets meant for the ing the firm firm for personal reasons, thereby draining the firm of those resources Stakeholder relationships Increased stakeholder efficiencies as Owing to a desire to family may develop relationships with maintain the “family” employees, suppliers, and customers, nature of the firm, family thereby creating goodwill members may negate key stakeholder relationships due to a distrust of outsiders’ potential alternative motives Human resource Family members can bring unique For senior positions, being management human resource traits to the firm due a family member tends to prior training and desires to be rated before merit, experience, and expertise Branding Focus on “branding” and family Complexity of family reputation building can create posi- relationships may lead to tive image conflicts that can undermine the firm name and brand Managerial efficiency Centralization of decision making, Desire to secure family increased flexibility, and lower trans- succession could promote action costs can promote managerial suboptimal decision efficiencies making versus market- determined managerial choices Investment decisions Long-term time horizons for invest- Pressure to conform to ment decisions can enhance growth traditionally engrained family-driven business practices can stifle innovation and adaption

Sources: Adapted from Gersick et al. (1997), Arregle, Hitt, Sirmon, and Very (2007), and De Massis, Chirico, Kotlar, and Naldi (2013).

In short, the family system seems to be driven more by emotions and personal relationships while the business system is controlled by economics. The interplay between enhanced family cohesion and desire for business accomplishment that can arise from the overlap of the two systems may yield exceptional business performance. Nonetheless, the interplay may come at a tremendous cost. Without effective coordination, actions and decisions that may benefit the firm could undermine family values, leading to conflicts that threaten and ultimately destroy firm value.

A solid corporate governance structure is essential for a family firm to cope with the challenges of balancing the advantages and disadvantages of family involvement in the business. Combining governance, management, and ownership in the hands of the family can bring benefits, but the centralized decision-making structure inevitably brings risks. Good corporate governance practices can help family firms include different perspectives on the board that can mitigate the risks. Moreover, sound corporate governance practices can help family firms balance the interests of different stakeholders that are essential to the entity’s long-term sustainability.

4.2. Impact on Firm Value and Performance Numerous academic and professional studies have examined the impact of the family firm model on firm performance and value, reaching a broad range of conclusions. Some studies have found a positive association between family firms and superior firm value and performance (Burkart, Panunzi, and Shleifer 2003; Anderson and Reeb 2003, 2004; Villalonga and Amit 2006, 2010). Other studies have documented a negative or indiffer- ent association (e.g., Westhead and Howorth 2006; Castillo and Wakefield 2006).

The conflicting results can be attributed, in part, to the application of different definitions of family firm. Others argue that they are due to variations in the level of family involvement in governance, management, and ownership. Perhaps the essential factor, however, is to recognize that each family firm is potentially a unique mix of intrinsic advantages and disadvantages, and that the attributes of the family that provide positive influences can easily be cancelled out by problems with the family firm model.

One literature stream argues that the family firm model provides an entity with crucial stability, ownership continuity, and management structure to implement long-term investment strategies that maximize the long-term value of the firm. The model enables family firms to perform more effectively than short-term, profit-oriented non–family firms.

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It is also commonly argued that modern-era publicly listed diversely owned corporations incur agency costs to align principal–agent interests. Conversely, publicly listed family firms are viewed as more immune to these costs owing to overlapping family ownership and management roles. Family firms, therefore, are thought to be at a competitive advantage, with streamlined and efficient monitoring mechanisms and reduced administrative costs.

The strength and depth of support within the family network are vital characteristics in fostering increased loyalty toward the entity and greater motivation toward long-term sustainable growth. The potential closer affinity within the family unit may also aid in boosting communication that will assist in the decision-making process, thereby boosting firm value and performance relative to nonfamily counterparts with more cumbersome and bureaucratic organizational structures.

Although acknowledging the benefits of the family firm model, researchers have also sought to highlight various roadblocks that can arise. For example, one argument suggests that strong, culturally predetermined family values can restrain the development of capitalist economic activities that require greater individualistic entrepreneurship and the absence of nepotism. Some of the major disadvantages of the family firm model that can impede overall firm performance and value are summarized as follows:

1. Diluted family values and identity. A strong set of binding values is considered a hall- mark of a family firm’s success. As the family firm grows and ages, additional family members are likely to be indoctrinated into the family firm. Introduction of more family members with different needs and perceptions can dilute the initial underlying set of values of the entity. Any resulting shift or dilution may lead to a loss of identity with the firm, particularly among the founding generation. Increased fragmentation of the values of the family firm can reduce the motivation of family members, leading to declines in performance.

2. Legacy preservation. Several recent reports (e.g., Deloitte-SMU 2013; PricewaterhouseCoopers 2014) indicate that Asian family firms acknowledge a need to prioritize innovation and development of new markets and products to propel future growth. With numerous Asian publicly listed family firms confronting succession issues in the next several years, there is escalating pressure to persist with long- established strategies, market focus, and products to preserve the legacy established by the founding generation. A desire to preserve the firm’s legacy could place the family firm at a competitive disadvantage in rapidly changing internationalized markets that can harm long-term firm value and performance.

3. Inability of existing entity leader to relinquish control. Given a cultural preference to continue to work, a high proportion of founders of Asian family firms continue to work and control the entity into old age, with limited incentive for change. The Credit Suisse (2011) report indicated that founders in senior management positions tend to view the entity more favorably than outsiders do. The persistent longevity of the founders, lack of incentive to instigate change, and the perception that the entity is progressing well could lead to a stagnation in the firm’s growth that affects not only the family but also other stakeholders (including minority shareholders). Furthermore, the reluctance of the existing family firm leader to relinquish control may result in missed opportunities or a slow realization of negative and inefficient forces affecting the firm.

4. Cultural biases. In many cultures in Asia, there is a distinct preference for the family firm’s ownership to be transferred to a male successor. And there is an engrained cultural mistrust of outsiders by the family unit. Because of these biases, the board and senior management of many Asian family firms are inevitably male and “family heavy.” Moreover, these biases can intensify the risks of nepotism. Numerous studies have demonstrated the benefits of diversity on the board and within senior management. For an expanding publicly listed family firm, a reluctance to emphasize diversity or reduce a culture of mistrust of outsiders can lead to declining performance, valuation, and external stakeholder relationships.

5. Transparency. Both management and boards of directors rely on sound, effective met- rics and clear objectives to make value-adding contributions to publicly listed family firms. In addition, investors are unlikely to act without an appropriate level of financial information and control. Publicly listed family firms that are likely to need to employ professional management and engage with minority shareholders will be under pressure to provide sufficient information. Nevertheless, Asian publicly listed family firms have been plagued with a preference for keeping information inside the firm. A lack of transparency by family insiders may (1) leave professional management unable to make appropriate operational and strategic decisions, (2) alienate outside family members, and (3) intensify minority shareholder distrust. Conflicts arising from a lack of transparency can lead to missed investment opportunities and an increased cost of capital.

6. Internal and external family conflicts. A divergence of perspectives and visions among family insiders (particularly across generational divides) can lead to an increased risk of conflicts that can paralyze operations and future opportunities as the firm becomes increasingly inward looking and fragmented. It is important for the family unit to separate external family conflicts from the business. If conflicts between external

36 WWW.CFAINSTITUTE.ORG IV. Concerns of Publicly Listed Family Firms

family members can be transferred into the business system, the economic decision- making process may be hampered and the firm’s reputation can also be damaged.

7. Lack of oversight. A publicly listed family firm should naturally be held to account by the disciplinary mechanisms of the capital market. Nonetheless, researchers have found that family control is a potential overriding factor that may ultimately prompt the firm to ignore market expectations. A reluctance to sufficiently engrain an oversight culture within the firm can lead to increased complacency, resistance to change, internal self-dealing, and the prioritization of family interests to the detriment of all shareholders. Without sufficient and balanced oversight, there is an increased risk that firm performance and value will decline.

8. Corporate/family social responsibility. Owing to a close affinity between the family name and the corporate identity of a family firm, there is an implicit onus on family members (particularly those most directly associated with governance, management, and ownership) to be aware of the potential impact of their personal actions in society. For instance, the family firm may receive negative publicity and scrutiny that destroy corporate branding and reputational capital if a family member commits irresponsible, malicious, and detrimental acts in public even if such acts are com- pletely divorced from the operations of the family firm. Family members, therefore, may need to be more proactive in ensuring that their public conduct does not have undue consequences for the firm.

9. Unfair related-party transactions. The value of the publicly listed family firm (particularly from the perspective of minority shareholders) is at risk from majority ownership expropriation in using unfair and nonproductive related-party transactions. For example, the majority ownership could use their private benefits (from ownership, and involvement in management and governance) to authorize the sale to (from) a separate privately held and controlled family entity at lower (higher) standard prices. If sales to the privately held and controlled family entity are finalized using credit that is highly flexible (or no efforts are made to reclaim overdue receivables) the sale can act as a quasi-loan to the family. Minority owners of the publicly listed family firm are being effectively deprived of value creation opportunities due to merchandise sales (purchases) being under/overvalued and reductions in available free cash that can be used in productive investments.

The summary of key disadvantages of the family firm model underpins the need for an effective corporate governance system to assist the family firm in better meeting various challenges that may be detrimental to the entity’s performance and value. The corporate governance system should seek to protect and promote the interests of not only the

family but also minority shareholders, particularly if the family firm is publicly listed. It is important to recall, however, that while the corporate governance system should aim to shield the family firm from the potential negatives of family ownership, the system’s mechanisms and processes should not unduly offset (or impose costs on) the potential benefit of the family’s involvement in governance, management, and ownership.

4.3. Impact of Corporate Governance Mainstream business theories regard the creation of wealth as the primary goal of any entity. This view generally defines a business purely in economic terms. Researchers (e.g., Ward 1988; Stafford et al. 1999; Olson et al. 2003; Kraus, Harms, and Fink 2011) have challenged this perception, arguing that there is a greater likelihood of tradeoffs between economic and noneconomic goals in establishing and developing a family firm. Sharma (2004) rationalized that the success of a family firm depends on the effective management of the family’s goals relative to the business. Specifically, if the entity becomes a vehicle for creating value for the family while the family is able to add to the firm’s value, then greater corporate prosperity should follow (Chua, Chrisman, and Sharma 2003).

Villalonga and Amit (2010) described two main theoretical streams to show why a family firm might be established over other organizational forms. The first stream—termed competitive advantage theories—is based on the notion that family control is optimal for both family and nonfamily shareholders and that family members have an incentive to maximize wealth for the firm. In contrast, private benefits of control theories suggest that concentrated family ownership is an optimal organizational structure only for family shareholders and that family owners look to maximize value to address their own self- interest even if it is to the detriment of nonfamily shareholders.

If the motives of the majority family ownership are consistent with competitive advantage theories, the emphasis of the corporate governance system is on helping to further improve the performance and value of the family firm for all stakeholders. However, if the underlying motive of the majority family ownership is to expropriate wealth from minority owners via the advantage of the family’s private benefits, the emphasis of the corporate governance system will be on control and monitoring.

The literature describes two main avenues through which the corporate governance system can influence firm value and performance. The first avenue relates to the ability of the corporate governance system to reduce the family firm’s cost of capital, and the second relates to the mechanisms to prevent the waste of capital.

38 WWW.CFAINSTITUTE.ORG IV. Concerns of Publicly Listed Family Firms

4.3.1. Cost of Capital Reduction

The underlying cost of capital of a firm is derived from the source of funding used to finance the entity. Financing can be solely from equity (i.e., cost of equity) or debt (i.e., cost of debt) or an equity/debt combination (i.e., weighted average cost of capital, or WACC).

For the overwhelming majority of publicly listed family firms, the WACC represents the cost-of-capital hurdle rate that the entity must overcome to generate value for shareholders. By reducing the WACC, a publicly listed family firm would face a lower hurdle rate, thereby making it easier to create value for shareholders. Monitoring costs and information risk are two key factors underpinning a publicly listed family firm’s WACC.

4.3.1.1. Reducing Monitoring Costs

There are contrasting views on how the presence of family within the management and governance structure of a family firm affects resource valuations. Some stress that the interaction is positive while others point out the potential for abuse that disadvantages minority shareholders. In developing an appropriate corporate governance system, it is important to determine whether the interaction improves or hinders monitoring, as well as the appropriate balance.

The general underlying presumption of studies examining the influence of family firms on resource valuations is that the involvement of the family is positive. It is often argued that family firms are more likely than non–family firms to adopt long-term time horizons, concentrate on establishing better human resource practices, and build a better brand reputation by strengthening relationships with customers and suppliers. In addition, it is argued that there is a closer alignment of principal–agent interests when there is family participation in management.

In principle, family involvement in the entity is thought to aid in reducing the need for monitoring mechanisms, which helps reduce the cost of capital and leads to higher firm performance and value. That is, family firms have a valuation premium attached to their assets relative to non–family firms.

Many studies, spanning different economies and regions, have supported this presumption. Anderson and Reeb (2003), for example, found in a study of firms listed on the S&P 500 Index that family firms had a higher Tobin’s q than non–family firms. Using a sample of Norwegian publicly listed firms, Mishra, Randoy, and Jenssen (2001) also

found a positive association between the level of family control in family firms and firm value as measured by Tobin’sq . In a study of firms from 13 economies in western Europe, Maury (2006) reported that family firms had higher values of Tobin’sq than did non–family firms. Studies have also used the price-to-book ratio rather than Tobin’s q as a proxy for resource valuations. McConaughy et al. (2001) found that family firms in the United States had higher price-to-book ratios than did non–family firms. Villalonga and Amit (2006) also reported a positive influence of family ownership on price-to-book ratios.

Others, however, have argued that the structure of the family firm can enhance opportunities for the majority family ownership to use its private-benefits advantage to exploit minority shareholders. Prior studies (e.g., Franks and Meyer 2001; Nennova 2003; Dyck and Zingales 2004) suggest that the majority family ownership can strengthen its control over a publicly listed family firm through three main structural methods: (1) issue of dual-class shares, (2) pyramid group structures, and (3) cross-holdings and interlocking directorships.

Participation of family members in management and governance can also prompt negative reactions. For example, if senior management of the family firm is heavily embedded with family members, many of whom are perceived to be unqualified for the appointed role, perceptions of managerial entrenchment may escalate. The risk of expropriation of the wealth of minority shareholders by the majority family ownership will ultimately be viewed as leading to higher costs of capital (and thus to reduced firm performance and value).

Similarly, if an overwhelming majority of the board are family members who hold pivotal governance roles (e.g., chair of the board or of audit/nomination/remuneration committee), the risk that the majority family ownership will exploit the interests of minority shareholders will be greater. For example, if the family effectively controls the board and the remuneration committee, that could lead to excessive and unjustified remuneration payments to family managers—payments that could have been used for the benefit of minority shareholders.

Some research has found that concentrated family ownership can have negative consequences for minority shareholders. Cronqvist and Nilsson (2003) found that firms in which the family was a minority shareholder had lower Tobin’s q values relative to non– family firms. Perez-Gonzalez (2006) found that family firms that appointed a family member as the CEO-elect had a lower price-to-book ratio, on average, than family firms that appointed a nonfamily member as the future CEO.

40 WWW.CFAINSTITUTE.ORG IV. Concerns of Publicly Listed Family Firms

It is clear from the literature that an effective corporate governance system needs to balance the benefits and costs of family ownership. Imposition of too restrictive a mechanism may subject the family firm to unnecessary monitoring costs that impinge on the interests of not only the family but also minority shareholders. Alternatively, without sufficient oversight mechanisms, the minority shareholders are at risk of being exploited by the majority family ownership. A point not defined (or discussed) in the literature is the appropriate balance of corporate governance mechanisms that would simultaneously reduce the burden of monitoring costs on the family firm and enhance the protection of minority owners from exploitation by majority owners.

4.3.1.2. Information Risk, Transparency, and Information Quality

Financial information plays an essential role in the finance and investment spectrum as the pivotal basis for the decision making of numerous stakeholders (e.g., shareholders, investors, regulators, suppliers). Without reliable and relevant financial and nonfinancial information, the financial decision-making process faces a huge impediment. If questions about the quality of financial and nonfinancial information escalate the risk to shareholders, investors, and suppliers of debt, this will lead to a higher cost of capital.

The precise impact of the interplay between controlling family ownership and the quality of information remains questionable (Miller and Le Breton-Miller 2005). One train of thought is that if there is an incentive to extract wealth from minority shareholders, the level and quality of information may be low (Fama and Jensen 1983; Shleifer and Vishny 1997; Lemmon and Lins 2003) as the majority family ownership seeks to con- ceal the extent of the wealth expropriation (Morck, Shleifer, and Vishny 1988; Arregle, Hitt, Sirmon, and Very 2007). Family managerial entrenchment will only serve to further reduce earnings quality and informativeness (Yeo, Tan, Ho, and Chen 2002; Habbershon, Williams, and MacMillan 2003).

Alternatively, others argue that the greater focus on the entity’s long-term viability relative to non–family firms, combined with a deeper emotional attachment to the entity, gives majority family owners less incentive to withhold information from minority shareholders (Chrisman, Chua, and Zahra 2003; Villalonga and Amit 2006). If family members are active in management, there is a closer alignment of principal–agent interests, which some suggest will further increase the level, quality, and information value of disclosures (Anderson and Reeb 2003). Finally, advocates of stewardship theory argue that family members have an incentive to disclose more information to build the reputation capital of the family firm. Consistent with this line of thought, it is proposed

that family firms have an incentive to be more open and to disclose information across a broader set of issues.

If the family effect on disclosure practices and patterns intensifies (decreases), the asym- metrical information gap between insiders (i.e., family) and outsiders (i.e., minority shareholders, creditors) and the information risk will be higher (lower). Under these circumstances, investors and creditors will have a higher (lower) expected return, which will increase (decrease) the cost of capital and lead to lower (higher) levels of firm performance and value.

The extent of earnings management and the quality of earnings are two important benchmarks that could indicate the propensity of majority family ownership to use the financial accounting system to expropriate wealth from minority shareholders (Ali, Chen, and Radhakrishnan 2007; Prencipe, Markarian, and Pozza 2008). To date, only a sparse quantity of family firm earnings management and earnings quality research has been conducted, with mixed and inconsistent empirical findings. Studies drawing on US or UK data found that the level of earnings management (earnings quality) was lower (higher) in family firms than in non–family firms.10 In contrast, studies using European data found that the level of earnings management (earnings quality) was higher (lower) in family firms than in non–family firms.11 In a study of Japanese family firms, Ebihara, Kubota, Takehara, and Yokota (2012) found that the quality of earnings is higher for family firms than for non–family firms.

While the majority family ownership may intentionally use the financial reporting system to undermine the interests of minority shareholders (e.g., less informative disclosures, earnings management), other practices may have unintended negative consequences. The level of conservatism—a primary accounting principle—is thought to differ between family firms and non–family firms. With a high ownership stake, multi-generational time horizon, and lack of portfolio diversification, family owners are likely to be at a higher risk of agency and litigation costs (Anderson and Reeb 2003; Chen, Chen, and Cheng 2008). Consequently, it is suggested that family firms are more likely to prefer conservative financial accounting practices.

Some argue (see Penman and Zhang 2002) that the adoption of conservative accounting practices—particularly in a continuous reporting environment, as found in many capital

10Wang 2006; Ali et al. 2007; Tong 2008; Jiraporn and Datalt 2009; Cascino, Pugliese, Mussolino, and Sansone 2010. 11Prencipe et al. 2008; Prencipe, Bar-Yosef, Mazzola, and Pozza 2011.

42 WWW.CFAINSTITUTE.ORG IV. Concerns of Publicly Listed Family Firms

markets globally—will bias estimates and historical valuations. Furthermore, the quality of earnings will be reduced, leading to a higher cost of capital and lower firm performance. Minority shareholders can be further disadvantaged because the reduced asset valuations underlying the family firm and lower earnings quality could lead to a slower appreciation in stock price. Minority shareholders, therefore, may need to wait longer for any substantial stock return.

To date, there are few studies of conservatism and family firms. Chen, Liang, and Zhu (2012) found that accounting conservatism increases with non-CEO family ownership. Li, Wang, Wu, and Xiao (2015) showed that accounting conservatism is significantly higher in family firms than in state-owned firms. Although there is still some debate on how accounting conservatism affects earnings quality, the limited empirical research suggests that family firms’ adoption of conservative accounting practices tends to differ from that of other entities.

Development of an effective corporate governance system to encourage family firms to engage more actively and openly with minority shareholders is imperative. Such engagement; the disclosure of more timely, informative, and transparent information; and the adoption of accounting practices that do not bias valuations downward will reduce information risk for not only minority shareholders but also family owners and other stakeholders. Identifying mechanisms that promote greater transparency and are suitable for different family firms, however, is a major void in our current understanding that needs to be addressed more actively.

4.3.2.Capital Waste Reduction

Capital acquired and generated by an entity should be used for the benefit of the firm and all its shareholders. It is also important that the entity seek to use the most efficient amount of capital required to meet its needs and objectives. The use of more capital than required can result in excessive expenditures, efficiency operations, and a reduction in the return to shareholders. The use of excess capital beyond the entity’s needs can also provide fertile ground for abuses by majority owners and management that may be detrimental to the firm. It is also of vital importance that appropriate mechanisms and procedures be in place to ensure that capital is used in projects that will most benefit the entity and its shareholders.

4.3.2.1. Reduction in Free Cash Flow

The generation of free cash flows is often viewed positively by capital market participants. However, the generation of excessive levels of cash flows can also provide the incentive for majority owners and management to expropriate wealth from minority shareholders. Jenson (1986) argued that where management has more cash than needed to fund all positive net present value projects (i.e., excess free cash flow), there is an incentive for management to waste the excess cash on unprofitable investments and projects. In an environment where excess free cash flows are being generated, agency costs are likely to be more intensive and management will have less need to seek financing in the capital market. Therefore, it will be under less monitoring pressure from capital providers.

Excess free cash flows can be of concern in a family firm setting. The long-term orientation, desire to develop a generational legacy, and focus on enhancing reputational capital provide the incentive among majority family owners to prefer that free cash flows be retained for reinvestment in the family firm (Vandamaele and Vancauteren 2013). The tendency to retain free cash flows is particularly strong during the firm’s earlier generational stages, when the CEO is a family member or the family dominates the board (Michaely and Roberts 2012).

From the perspective of minority owners,12 if there are excess free cash flows, the preference is for the return of capital via dividends or share buybacks (Villalonga, Amit, Trujillo, and Guzman 2014). If the majority family owners prefer to retain earnings to invest in nonproductive projects rather than increase the dividend payout or participate in share buybacks, that is a form of expropriation of minority owners’ wealth. The return on capital from excess free cash flows would enable minority owners to invest in outside projects that could aid in diversifying their portfolios and in the accumulation of further wealth.

Agency conflicts between majority family owners and minority owners over nonpayment of dividends or participation in share buybacks with excess free cash flows can have negative impacts for the family firm. For example, any conflict—particularly if it occurs in a public domain—could undermine the family firm’s reputational capital and raise questions about its stability. It could also prompt calls for the introduction of costly mechanisms to monitor

12While the discussion mentions minority owners only, it is important to remember that outside family members can also be affected negatively by inside family members who prefer to retain excess free cash flows rather than increase the dividend payout. If outside family members rely on dividend income from the firm, decisions to retain excess free cash flows will expropriate wealth from the outside family members in much the same way as with minority shareholders.

44 WWW.CFAINSTITUTE.ORG IV. Concerns of Publicly Listed Family Firms

the majority family owners. These monitoring mechanisms can increase the underlying cost of capital of the family firm, which can lead to lower firm performance and value.

Prior research suggests that analysis of excess free cash flows among Asian family firms with respect to dividend payouts and share buybacks is of interest. Faccio, Lang, and Young (2001) found that Asian group-affiliated entities (including family firms) pay -sig nificantly lower dividends than their European counterparts, which increases the motivation among Asian family firms to expropriate wealth from minority owners. Some research (e.g., Jensen 1986; Almeida and Wolfenzon 2006) suggests that pyramidal ownership structures are likely to lead to an overinvestment of retained earnings by the majority family owners if there are excess free cash flows. This overinvestment in the family group may result in a destruction of value and a loss to the minority owners. Pyramidal ownership structures are a feature of family firms in Asia.

Majority family ownership—particularly where family members dominate management and the board of directors—may use its position of power to use any excess free cash flow to pursue projects that benefit family interests rather than the entity. Some in the philanthropy literature have suggested that it is often difficult to determine whether acts of charity and corporate social responsibility conducted under the guise of the family firm are actually personal benefits to the majority family owners.

Specifically, the decision regarding which philanthropic projects a family firm will undertake (and to which excess free cash flows will be directed) will more than likely be determined by the majority family owners, not by the shareholders. This is particularly true if the family dominates management and the board. Consequently, the majority family owners may push philanthropic projects with an eye toward personal family interests whereby the reputation of the family is more likely to be enhanced than that of the entity. Redirecting excess free cash flows to support philanthropic projects aligned with the family interests and from which the family derives benefits is ultimately another form of expropriation of minority shareholders’ wealth.

Effective corporate governance mechanisms are necessary to ensure that the interests of minority shareholders are protected when there are incentives for majority family owners to use excess free cash flows for nonproductive and personal projects. Such mechanisms should seek to ensure that the magnitude of excess free cash flows in the family firm is limited.

4.3.2.2. Limiting Diversion of Cash Flows

Developing an understanding of key corporate governance factors that can assist in limiting the expropriation of wealth from minority shareholders via the diversion of cash flows is warranted considering the continued risk of tunneling. Although prior research generally supports a positive association between family ownership and resource valuations, some have expressed concern that without appropriate governance measures, there is serious potential for the family firm to expropriate asset values from the firm to the benefit of the family (or family members) and to the detriment of minority shareholders. Family units derive only a portion of their cash flows from the publicly listed group entity but retain a control interest. Moreover, most of the portfolio wealth of the majority family owners is tied to the family firm. Therefore, there are significant incentives for the family to divert cash flows to maximize their own private benefits at the expense of the minority owners.

The divergence of corporate interests (i.e., in the form of cash flows and assets) to the private benefit of the controlling family can be achieved through various schemes with contrasting objectives. For instance, as Ehrhardt and Nowak (2003) reported, a controlling family could direct free cash flows of the firm to specific social and philanthropic activities that are of interest to the family rather than the firm. Alternatively, rather than seeking to boost the intangible reputation of the brand by using family firm resources, the family can receive financial and economic benefits.

Tunneling is the term commonly associated with such diversionary actions. Johnson, La Porta, Lopez-de-Silanes, and Shleifer (2000, p. 22) defined tunneling as “the transfer of resources out of a company to its controlling shareholder.” Numerous studies have reported evidence of tunneling by family firms and other large block holders across a range of economies within different contexts.13 It should be noted that although the dominant view is that tunneling is widespread—particularly in Asia—there are some (see, e.g., Chang and Shin 2007) who argue that the evidence of tunneling is not unanimous.

Tunneling by majority family owners may take different forms. Cash flow tunneling, for example, can take the form of the sale of the output of a publicly owned family firm at prices below the market rate to another firm directly owned and controlled by the family.

13These include: Atansaov (2005; Bulgaria); Goa and Kling (2008; China); Aharony, Wang, and Yuan (2010; China); Cheung, Rau, and Stouraitis (2006; Hong Kong (SAR, China)); Bertrand, Mehta, and Mullainathan (2002; India); Weinstein and Yafeh (1998); Bae, Kang, and Kim (2002; South Korea); Baek, Kang, and Lee (2006; South Korea); Bergstrom and Rydqvist (1990; Sweden); and Atanasov, Black, Ciccotello, and Gyoshev (2006; United States)

46 WWW.CFAINSTITUTE.ORG IV. Concerns of Publicly Listed Family Firms

Alternatively, the publicly owned family firm may purchase output from a firm directly owned and controlled by the family at inflated prices.

If family members are employees and/or board members of the publicly owned family firm, another method of cash flow tunneling is to pay excessive salaries, bonuses, and fees to employed family members. The tunneling of assets typically involves the transfer of ownership rights from the publicly owned family firm to an entity owned fully by the family at deflated prices. Finally, tunneling can be in the form of equity, such as the sale of new shares to the family at below-market prices, delisting the entity and taking it private, and the issuing of loans to the family via a business venture that if it fails, will result in the loans not having to be repaid by the family.

Related-party transactions are increasingly seen as evidence of the possible propensity for tunneling. Consequently, the relationship between family firm ownership and related- party transactions has had increased attention since the work of Johnson et al. (2000). Almeida and Wolfenzon (2006), for example, found that in several economies, a single individual or family controls a large number of firms that tend to expropriate the wealth of minority shareholders with ease despite the attention of regulators.

Concerns about related-party transactions are particularly prevalent in Asia (e.g., OECD 2009) as the heightened use of cross-listing or pyramidal organizational structures in the region may precipitate greater tunneling via related-party transactions. Claessens et al. (2000) found that in East Asian economies, control enhanced via cross-holdings leads to greater promotion of the transfer of assets to family firms outside the publicly owned family firm. This result is consistent with Bertrand, Mehta, and Mullainathan (2002), Gordon, Henry, and Palia (2004), and Cheung et al. (2006). Using a sample of Chinese firms, Aharony, Wang, and Yuan (2010) found that related-party transactions can be used to facilitate the tunneling of profits and assets by controlling interests, including family block holders.

In recognizing the potential risk of tunneling via related-party transactions, policymakers globally (e.g., OECD 2015) have sought to introduce new regulations and policy recommendations to protect the interests of minority shareholders. Nonetheless, the threat of tunneling—especially in Asia—remains a significant concern where majority family owners have the incentive, means, and ownership structures to enhance their ability to divert cash flows.

4.4. Part IV Summary The family firm provides unique corporate governance challenges. Part IV highlighted several key concerns surrounding the performance and value of family firms that may be perpetuated due to the lack of an appropriate governance structure. The discussion in Part IV highlighted the important role that corporate governance can play in improving the financial performance and value of the family firm—and how such a system can enhance the interests of all stakeholders, particularly minority shareholders. By reducing the cost of capital (via lower monitoring costs and information risk, with greater transparency) and capital waste (via limiting the buildup of free cash flows and the diversion of cash flows), the corporate governance system can enhance performance. Moreover, an effective corporate governance system in a family firm can help reduce the threat of wealth expropriation by majority family owners.

48 WWW.CFAINSTITUTE.ORG V. Case Studies

The discussion in Part IV highlighted different risks and concerns facing Asian publicly listed family firms. An effective corporate governance system is viewed as paramount in balancing the interests of the majority family ownership against threats of expropriation of minority shareholders’ wealth. Value creation and improved stock performance are considered essential outcomes of an effective corporate governance system. By reducing the cost of capital and capital wastage, the corporate governance system can enhance the return to all shareholders and provide increased confidence and security to minority owners.

The ability to spread a uniform corporate governance blanket across all family firms would present an ideal situation. As discussed in Part III, however, family firms are not necessarily a homogeneous group that a one-size-fits-all corporate governance system could benefit. To develop greater insights into the corporate governance practices of various Asian family firms, a set of case studies was undertaken. In total, 14 case studies were developed, one in each of the OECD Asian Roundtable economies.

For each case study, four publicly listed family firms were examined regarding an individual issue that may affect the interests of minority shareholders. For example, in the case of Hong Kong (SAR, China), the focus was on the nomination committee and how potential dominance by family members and key insiders may make it difficult to elect independent directors who might provide a stronger voice in protecting minority shareholders. The Singapore case study concentrated on the policies and practices governing the return of free cash flows to shareholders.

Efforts were made to identify at least one prominent publicly listed family firm in each economy that fit one of the four categories defined in Table 3.2. Family firms were identified by OECD Asian Roundtable members. Where there were no suggestions of a publicly listed family firm in a given economy that fit a specific category, efforts were made to find a suitable representative. Owing to data limitations or a lack of suitable candidates, case studies may not cover examples of all family firm subgroups. Regardless, the case studies presented do provide invaluable insights into the recent practices and issues of Asian family firms, as well as areas indicating that the interests of minority owners are at higher risk and may need more attention from policymakers.

The case study for each economy is presented in two parts. The first part of each case study discusses the main observations summarized from an analysis of publicly available

information related to the four publicly listed family firms in each economy and to the corporate governance issue being addressed. The second part of each case study provides a snapshot of key underlying socio-economic (e.g., population, GDP) and capital market (e.g., total market capitalization) features. An overview of each publicly listed family firm is also shown, along with a graphical presentation of each entity’s cumulative stock performance during the last five years from 2010 to the end of 2014 (aside from Bangladesh, where data availability limited the return analysis to the last five quarters). Because the data are extracted from different sources, the authors apologize should the facts reported be inaccurate.

50 WWW.CFAINSTITUTE.ORG V. Case Studies

Case Study I: Bangladesh—Corporate Governance Structure in an Emerging Market Bangladesh provides interesting and challenging contrasts to other Asian capital markets. The average age of the four Bangladesh publicly listed family firms examined tended to be younger than in more developed capital markets like Hong Kong (SAR, China), Malaysia, and Singapore. In the case of Bangladesh, succession concerns plaguing family firms in other Asian economies may not be as immediately pronounced.14 In contrast to other Asian capital markets, several Bangladesh publicly listed family firms appear to have begun as spinoffs or management buyouts of established foreign entities. ACI Limited, for example, emerged from a divestiture in 1992 by an earlier established publicly listed entity. Meanwhile, Renata Limited originally began as a subsidiary of Pfizer Limited (i.e., Pfizer [Bangladesh] Limited) before a transfer of ownership to Bangladesh ownership in 1993. Prior foreign heritage may be fortuitous for such Bangladesh publicly listed family firms as difficulties of theentrepreneurial family founder stage are bypassed and international management and governance standards may already be embedded.

Board size of the four Bangladesh publicly listed family firms examined is comparable with other Asian capital markets (e.g., Singapore, Malaysia, and India) but less than that observed in Hong Kong (SAR, China) and the Philippines. Board independence, however, tends to lag that of main Asian capital markets. Of the 4 Bangladesh publicly listed family firms examined, the highest level of board independence was 30% (i.e., 3 independent directors on a board of 10 members) for ACI Limited, while Orion Pharma Limited had only a solitary independent director on a board of 6 (i.e., 16.67%). Other Asian capital markets tend to average 33% to 50% [e.g., Singapore, Hong Kong (SAR, China)] with some exceeding 50% (e.g., India).

A major feature of the four Bangladesh publicly listed family firms reviewed was the overweighting of family members on the board of directors compared to many economies within Asia. For two entities (Orion Pharma Limited and Square Textiles Limited), more than 50% of the board were family relatives while it was approximately 40% for ACI Limited and Renata Limited. The percentage in other Asian economies analyzed tends not to exceed 30%. Interestingly, in respect to gender diversity, Bangladesh publicly listed family firms appear to outshine counterparts in other Asian economies. For Orion Pharma Limited, 50% of the board were female, while Renata Limited had the lowest proportion of female directors (25%). In other Asian capital markets [e.g., Chinese Taipei (Taiwan), Hong Kong (SAR, China), the Philippines, Singapore], the percentage

14For Renata Limited, the founding family member (Syed Humayun Kabir) passed away in July 2015.

of female directors is between 8% and 12%. It is noted, however, that many female directors are family members, which could negate some of the potential benefits of greater board diversity.

A feature of the corporate governance structure of Bangladesh publicly listed family firms of possible concern is the lack of board subcommittees. All four Bangladesh publicly listed family firms reviewed had an audit committee but none had a remuneration or nomination committee, which have become established components of the corporate governance fabric of publicly listed family firms in other Asian economies. The void in board subcommittees is potentially heightened by the observation that publicly listed family firms in other Asian economies have been proactive in establishing other subcommittees (e.g., corporate governance, corporate social responsibility, risk management) to address investor concerns. The current lack of prominent subcommittees among Bangladesh publicly listed family firms could raise concerns about the lack of monitoring and oversight that can protect the interests of minority shareholders.

Finally, a change in the underlying Dhaka Stock Exchange benchmark index in 2013 (i.e., DSEX Index and DS30 Index, established in January 2013; DGEN Index was used prior but ceased in July 2013) provides a current headwind for investors in comparing the performance of Bangladesh publicly listed family firms with that of other Asian counterparts across a longer window of several years.

52 WWW.CFAINSTITUTE.ORG Bangladesh Cumulative Abnormal Returns

Population: 155,000,000 150%

GDP (2014): USD 173.82 billion 120% Avg. Gross GDP ∆ 11.22% (11.15%) 90% (2010–2014 Gov’t Debt to GDP: 18% 60%

Exchange: Dhaka Stock 30% Exchange Main Index: DSE Broad Index 0% (DSEX) –30% Index End-2014: 4,864.96 –60% Avg. Market ∆ 9.17% (9.17%) Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 (CAGR) 2010–2014: Square Textiles Limited ACI Limited Market Cap USD 34.475 billion Renata Limited DSEX Index End-2014: Orion Pharma Limited Mkt Cap Avg. ∆ 9.99% (5.96%) (CAGR) 2010–2014: No. of Listed Firms 546 (445) Overview Select Family Firms End-2014 (2010): Company Name: ACI Limited Company Name: Renata Limited Mkt Concentration N/A (N/A) Family (% Owned): Dowla (25.0%) Family (% Owned): Kabir (51.0%) End-2014 (2010) Founded: 1995 (Original 1968) Founded: 1993 Family Firm Mkt N/A Revenue: USD 144.87 million Cap End-2014 Revenue: USD 336.80 million (Est.): Industry: Chemicals Industry: Pharmaceuticals Competitiveness 3.71 (109) Assets: USD 285.96 million Assets: USD 188.31 million Index (Rank): Chairman M. Anis Ud Dowla Chairman Syed Humayun Kabir (End-2014): (Deceased July 2015) Corruption Index 25 (109) (End-2014): (Rank): CEO (End-2014): Dr. Arif Dowla CEO (End-2014): Syed S. Kaiser Kabir Innovation Index 24.4 (129) Type: DO/FM/FG Type: CH/CC (Rank): 5Yr CAR: 138.31% 5Yr CAR: 4.49% Legal System: Mix Common/ Company Name: Orion Pharma Limited Company Name: Square Textiles Limited Muslim Law Family (% Owned): Karim (32.56%) Family (% Owned): Chowdhury (45.92%) Hofstede’s 80/20/60/72 Founded: 1965 (Listed 1996) Cultural Score Founded: 1994 Revenue: USD 143.63 million (PD/Ind/UA/LTO): Revenue: USD 28.88 million Industry: Pharmaceuticals Political Rights/ 4/4 (Partly Free) Industry: Textiles Assets: USD 334.62 million Civil Liberties: Assets: USD 27.78 million Chairman Mohammad Obaidul (End-2014): Karim Chairman Samuel S. (End-2014): Chowdhury CEO (End-2014): Golam Mohiuddin MD (End-2014): Tapan Chowdhury Type: DO/FM/FG Type: DOFM/FG 5Yr CAR: –29.38% 5Yr CAR: –34.82%

Case Study II: Chinese Taipei (Taiwan)—Verification, Confirmation, and Information Risk Recent profession-based surveys of Asian family firms (e.g., PricewaterhouseCoopers 2014) indicate that family owners recognize the importance of expanding the entity’s international base. From an international stakeholder perspective, the greater the uncertainty and/or cost of data collection, the higher the expected return that will increase the cost of equity to the firm. Development of technology and database libraries has provided international stakeholders greater avenues to assess firms in other economies and regions.

Cheng Shin Rubber Industries Company Limited has operations in Asia, Europe, and North America. Between 2010 and 2014, the firm’s share price outperformed the broader Chinese Taipei (Taiwan) market index by more than 40% despite flat revenues (and net income since 2012). Ruentex Industries Limited is engaged in the manufacture, retail, and trading of textile products. Like Cheng Shin Rubber Industries Company Limited, the share price of Ruentex Industries Limited outperformed the broader Chinese Taipei (Taiwan) market index from 2010 to 2014, although to a more moderate degree (approximately 7%).

The stock performance of Cheng Shin Rubber Industries Company Limited and Ruentex Industries Limited may be perceived as potential viable investment opportunities for a foreign investor. However, the current direct web portals for Cheng Shin Rubber Industries Company Limited (http://www.cst.com.tw/) and Ruentex Industries Limited (www. ruentex.com.tw) are entirely in Chinese without an English translation. Although Cheng Shin Rubber Industries Company Limited does provide an English website via its Maxxis trading name (http://www.maxxis.com/), corporate and financial details are not included. Ruentex Industries Limited does not provide any other alternative website. Presently, Cheng Shin Rubber Industries Company Limited provides no English-equivalent financial or nonfinancial disclosures to the TWSE Market Observation Post System (MOPS) (http://www.twse.com.tw/en/).

Both Formosa Plastics Corporation and Foxconn Technology Group Limited provide English-equivalent web portals. The former (i.e., Formosa Plastics Corporation) does provide some discussion on key nonfinancial information such as corporate governance, sustainability, and products. In respect to financial information, only select details are reported (e.g., capital, assets, revenue), and this information is dated (being for 2010– 2013). A link to comprehensive financial and nonfinancial reports is not provided.

Like Formosa Plastics Corporation, the Foxconn Technology Group Limited web portal discusses key financial and nonfinancial investor-related issues. Importantly, Foxconn

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Technology Group Limited does provide access to complete annual (for 2002–2014), quarterly, and corporate social responsibility (CSR) reports. Of concern, however, is the attribution of names with respect to certain documents. Annual reports, for example, are attributed to the Hon Hai Precision Industry Company Limited, but the CSR documents are attributed to Foxconn Technology Group Limited. Although Foxconn Technology Group Limited and Hon Hai Precision Industry Company Limited are, in principle, the same entity, the interchangeable use of names can provide confusion, uncertainty, and difficulties for international stakeholders wishing to verify information.

Reliance on reputable third-party providers of financial information (e.g., Bloomberg, Reuters, EMIS) may not be fortuitous for international stakeholders. For example, Bloomberg lists Lee Chih-Tsuen as the chairman of Formosa Plastics Corporation since 2006, while Reuters lists the chairman as Li Zhi Cun since 2011. In the case of Cheng Shin Rubber Industry Company Limited, the chairman is listed as Lo Tsai-Jen by MOPS, Luo Cai Ren by Reuters, and Luo Jie by Bloomberg. Variations in such details only raise questions in the minds of international stakeholders about the relevance and reliability of information. To verify information, an international stakeholder may need to resort to costly information-gathering sources. Lack of consistency and the uncertain availability of key financial and nonfinancial information may hamper efforts of the family firm to further internationalize its reach.

(Taiwan) 80% Population: 23,730,000 60% GDP (2014): USD 489.21 billion GDP per Capita USD 39,600.00 40% (2014): 20% Avg. Gross GDP ∆ 4.30% (4.10%) (2010–2014): 0% Gov’t Debt to GDP: 40.98% –20% Exchange: Taiwan Stock Exchange –40% 2010 2011 2012 2013 2014 2015 Main Index: Taiwan Weighted Stock Index Ruentex Industries Limited Cheng Shin Rubber Industry Co. Ltd (TAIEX) Foxconn Technology Group Limited Taiwan Weighted Stock Exchange Index End-2014: 9,218.50 Formosa Plastics Corporation Avg. Market ∆ 1.89% (0.99%) (CAGR) 2010–2014: Market Cap USD 850.943 Overview Select Family Firms End-2014: billion Company Name: Cheng Shin Rubber Company Name: Foxconn Technology Mkt Cap Avg. ∆ 2.17% (0.98%) Industry Co. Limited Group Limited (CAGR) 2010–2014: Family (% Owned): Chen (52.8%) Family (% Owned): Gou (12.28%) No. of Listed Firms 880 (784) Founded: 1967 (Listed: 1987) Founded: 1974 (Listed: 1996) End-2014 (2010): Revenue: USD 4,256.514 Revenue: USD 2,767.919 million Mkt Concentration 59.59% (31.13%) million Industry: Technology End-2014 (2010) Industry: Automotive Parts Assets: USD 4,321.889 Family Firm Mkt USD 420 billion Assets: USD 5,604.471 million million Cap End-2014 Chairman Lo Tsai-Jen Chairman Terry Gou Tai Ming (Est.): (End-2014): (End-2014): (Appointed: 1974) Competitiveness 5.25 (14) CEO (End-2014): Chen Yun Hwa CEO (End-2014): Terry Gou Tai Ming (Appointed: 1974) Index (Rank): Type: CH/CH Type: DO/FM/FG Corruption Index 61 (35) 5Yr CAR: 40.08% 5Yr CAR: 11.30% (Rank): Company Name: Formosa Plastics Innovation Index N/A Corporation Company Name: Ruentex Industries Limited (Rank): Family (% Owned): Wang (39%) Family (% Owned): Samuel Yin (51.4%) Legal System: Mix Civil/ Founded: 1954 (Listed: 1964) Founded: 1973 (Listed: 1977) Customary Law Revenue: USD 7,145.840 million Revenue: USD 298.411 million Hofstede’s 58/17/69/93 Industry: Plastics Cultural Score Industry: Consumer Products Assets: USD 14,222.683 (PD/Ind/UA/LTO): million Assets: USD 4,281.060 million Political Rights/ 1/2 (Free) Chairman Lee Chih-Tsuen Chairman Wang Qi Fan (Appointed: 1985) Civil Liberties: (End-2014): (End-2014): CEO (End-2014): Jason Lin Jian Nan CEO (End-2014): Xu Zhi Zhang (Appointed: 2001) Type: DO/DA/FG Type: CH/DA 5Yr CAR: –30.49% 5Yr CAR: 7.67%

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Case Study III: China PRC—Considering the Risk of Tunneling Since early June 2015, the China capital market has endured a period of turmoil that has rattled domestic and international markets and shaken investor confidence. It has also renewed concerns about the quality of financial and nonfinancial information disclosed by Chinese firms. Such concerns are not new, having followed prior scandals (e.g., Sino- Forest Corporation). Even investments by major reputable international firms have not been immune. Caterpillar Incorporated, for example, was forced to take a substantial impairment cost in 2013 following the USD 800 million acquisition of Siwei Limited in mid-2012, when it was discovered that Siwei’s senior management had overinflated assets across multiple years.

The risk that insiders (e.g., management, controlling majority shareholders) might extract firm value disproportionate to their economic ownership (self-dealing or tunneling) is perceived to be high in China (Jiang, Lee, and Yue 2010; Rui 2014a and 2014b). The need for reliable and relevant information is paramount to assess the risk of tunneling.

In the case of Shanghai-listed Joeone Company Limited—described as a closely held and controlled family firm—the ability to directly obtain timely information (usable by international investors) is difficult. While Joeone Company Limited had an English-equivalent web portal, no financial information was detailed and disclosures ended in 2012. In principle, the English-equivalent web portal focused on promoting the firm’s products and items for sale. The Chinese-equivalent site examined also did not present financial information, although company announcements were dated in 2015. The lack of effective disclosure increases the information risk associated with Joeone Company Limited and with a reliance on third-party sources whose information cannot be readily verified.

Information for the other three Chinese publicly listed family firms examined is generally more directly accessible. However, information is typically dated, with financial disclosures often more than 12 months old and announcements from 6–9 months old. The age of available information raises relevant concerns that likely prompt increased information risks. Nonetheless, the availability does enable scope for comparative analysis and assessment of third-party information.

Tunneling may take various forms (Atanasov et al. 2014). The level of related-party transactions is viewed as one possible barometer of tunneling risk. Related-party sales to total revenue for BYD Company Limited—a diluted-ownership, family-managed family firm—was low at 0.75% in 2012, growing to 0.90% in 2013. In contrast, for Shanghai

Fosun Pharmaceutical (Group) Company Limited (a diluted-ownership family firm with delegated management authority but family governed), related-party sales to total revenue was 6.52% in 2013, having risen slightly from 2012 (6.37%). As for Sany Heavy Industry Company Limited (a delegated-authority but closely held family firm), the ratio of related-party purchases to cost of goods sold jumped from 2012 to 2013 (11.78% to 16.82%), implying a higher potential for tunneling.

In regards to China, the level of “Other Receivables” (as a proportion of total assets) is another key barometer of tunneling risk (Jiang et al. 2010). Of the three entities examined for which financial information is available, the Other Receivables/Total Assets ratio is highest for BYD Company Limited (9.64% in 2013 and 11.11% in 2012). The risk of tunneling via Other Receivables appears to jump from 2012 to 2013 for Sany Heavy Industry Company Limited (3.30%, rising to 7.14%). As for Shanghai Fosun Pharmaceutical (Group) Company Limited, the ratio is low, declining from 2.53% in 2012 to 2.02% in 2013. Overall, tunneling risk is potentially highest for Sany Heavy Industry Company Limited and mixed for the remaining two entities.

58 WWW.CFAINSTITUTE.ORG China PRC Cumulative Abnormal Returns

Population: 1,367,820,000 120 GDP (2014): USD 10,360.10 100 billion 80 GDP per Capita USD 3,866.00 60 (2014): 40 Avg. Gross GDP ∆ 15.54% (15.41%) 20 (2010–2014): 0 Gov’t Debt to GDP: 22.40% –20 Exchange: Shanghai Stock –40 Exchange –60 Main Index: Shanghai SE –80 Composite Index 2010 2011 2012 2013 2014 2015 Index End-2014: 3,234.68 Shanghai Fosun Pharmaceutical (Group) Co. Ltd BYD Company Limited Sany Heavy Industry Company Limited Shanghai SE Index Avg. Market ∆ 6.97% (3.60%) Joeone Co. Ltd (CAGR) 2010–2014: Market Cap USD 3,932.528 End-2014: billion Overview Select Family Firms Mkt Cap Avg. ∆ 12.59% (9.69%) Company Name: Sany Heavy Industry (CAGR) 2010–2014: Company Name: BYD Company Limited Company Limited No. of Listed Firms 995 (894) Family (% Owned): Wang (36.56%) Family (% Owned): Liang (57.12%) End-2014 (2010): Founded: 1995 Founded: 1994 Mkt Concentration 54.68% (33.31%) Revenue: USD 8,916.2 million Revenue: USD 4,873.11 million End-2014: Industry: Automotive Industry: Machinery Family Firm Mkt USD 437 billion Cap End-2014 Assets: USD 15,139.22 million Assets: USD 10,147.70 million (Est.): Chairman Wang Chuanfu Chairman Wu Jia Liang (End-2014): (End-2014): Competitiveness 4.89 (28) CEO (End-2014): N/A Index (Rank): CEO (End-2014): Wang Chuanfu Type: DA/CH Corruption Index 36 (100) Type: DO/FM (Rank): 5Yr CAR: 49.99% 5Yr CAR: –68.75% Innovation Index 46.6 (29) Company Name: Joeone Company Company Name: Shanghai Fosun Limited Pharmaceutical (Rank): (Group) Co. Ltd Legal System: Mix Civil/ Family (% Owned): Information Unavailable (U/A %) Family (% Owned): Guo (48.34%) Customary Law Founded: Information Founded: 1994 Hofstede’s 80/20/30/87 Unavailable Revenue: USD 1,936.41 million Cultural Score Revenue: USD 2,055.60 million (PD/Ind/UA/LTO): Industry: Pharmaceuticals Industry: Apparel/Textile Political Rights/ 7/6 (Not Free) Assets: USD 5,689.81 million Assets: USD 5,131.5 million Civil Liberties: Chairman Guo Guang Chang Chairman Lin Congying (End-2014): (End-2014): CEO (End-2014): Liang Xinjun CEO (End-2014): Lin Congying Type: DO/DA/FG Type: CH/CC 5Yr CAR: 58.04% 5Yr CAR: –30.35%

Case Study IV: Hong Kong (SAR, China)— Dominating the Nomination Committee Nomination committees are increasingly a fundamental component of the corporate governance structure of publicly listed firms but may also act as an effective mechanism for maintaining family control via appointment of outside directors potentially sympathetic to the family. Of the four Hong Kong (SAR, China) publicly listed family firms assessed, the history of nomination committees is mixed. For Henderson Land Development Limited and New World Development Company, the establishment of a nomination committee is relatively recent (2011 and 2012, respectively) while longer for Li & Fung Limited and Sun Hung Kai Properties Limited (2001 and 2005, respectively).

From 2012 to 2014, the nomination committee’s composition remained constant in three firms. Interestingly, the addition of an extra member in 2014 to the nomination committee of Li & Fung Limited involved inclusion of a central executive family member (William Fung Kwok Lun, Executive Group Chairman). Such additions may be perceived by minority shareholders and investors as moves to strengthen family influence over the nomination process. Given that the five-year CAR for Li & Fung Limited is substantially below that of the three other family firms reviewed, minority shareholders may prefer a truly independent nomination committee that could seek to nominate board candidates that could better aid in rebuilding the entity’s declining performance and value.

A troublesome observation may be the role of prominent family members in undertaking a pivotal position on the nomination committee. Specifically, the founders and present Executive Chairman (until mid-2015) of Henderson Land Development Limited (Lee Shau Kee) and of New World Development Company Limited (Henry Cheng Kar- Shun) have been the nomination committee chairmen since the subcommittees’ inception in 2011 and 2012, respectively. The presence of the founder/executive chairman on the nomination committee alone may impede efforts to appoint directors who may seek to protect the interests of minority shareholders further. With the founders in the role of nomination committee chairman, the likelihood of other subcommittees favoring family preferences is heightened.

Prior affiliations may call into question the allegiances of independent directors on the nomination committee that may affect the subcommittee’s perceived independence. For example, Lee Luen-Wai, John—former partner at Price Waterhouse (now PricewaterhouseCoopers)—is an independent director of New World Development Company Limited since 2004. PwC has been the independent auditor (or joint) since at least 2011. Franklin McFarlan—independent director (1999–2015) and nomination

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committee member (2011–2015) of Li & Fung Limited—was a faculty professor at the Harvard Graduate School of Business Administration since 1973. Victor Fung Kwok King and William Fung Kwok Lun (key family members and entity executives) both achieved graduate degrees from Harvard University. While such affiliations may not prompt actual impairment of independence, they could cast a shadow in the minds of minority shareholders about a perceived reluctance to appoint outside directors.

Family presence on the nomination committee could also be associated with questionable designations of board members. Leung Hay Man, for example, has been a director of Henderson Land Development Limited since 1981 and was redesignated as a nonexecutive in 2004 and then as an independent nonexecutive director in 2012. Alexander Au Siu Kee was the CFO of Henderson Land Development Limited from 2005 to 2011, before being designated as an independent nonexecutive director in 2012. The length of tenure of Mr. Leung and the past work affiliation of Mr. Au raise questions about their independence and the overall level of board independence. The presence of the founder and pivotal executive (Lee Shau Kee) as nomination committee chairman could hamper objections to such redesignations that potentially undermine the essence of board independence.

China) 40%

Population: 7,230,000 20% GDP (2014): USD 291.00 billion 0% GDP per Capita USD 34,222.00 –20% (2014): –40% Avg. Gross GDP ∆ 6.34% (6.33%) –60% (2010–2014): Gov’t Debt to GDP: 32.00% –80% Exchange: Hong Kong (SAR, –100%

China) Stock –120% Exchange 2010 2011 2012 2013 2014 2015 Main Index: Hang Seng Sun Hung Kai Properties Limited Henderson Land Development Limited Index End-2014: 23,605.04 New World Development Limited Hang Seng index Avg. Market ∆ 1.67% (0.34%) Li & Fung Limited (CAGR) 2010–2014: Market Cap USD 3,233.030 Overview Select Family Firms End-2014: billion Company Name: Henderson Land Company Name: New World Mkt Cap Avg. ∆ 5.61% (4.50%) Development Limited Development Limited (CAGR) 2010–2014: Family (% Owned): Lee (64.9%) Family (% Owned): Cheng (41.7%) No. of Listed Firms 1,752 (1,413) Founded: 1976 Founded: 1970 End-2014 (2010): Revenue: USD 3,015.61 million Revenue: USD 729.05 million Mkt Concentration 70.76% (35.25%) Industry: Real Estate Industry: Real Estate End-2014 (2010): Assets: USD 39,739.35 million Assets: USD 46,642.25 million Family Firm Mkt USD 847 billion Chairman Lee Shau Kee Chairman Cheng Kar-Shun, Henry Cap End-2014 (End-2014): (Appointed: 1976) (End-2014): (Appointed: March 2012) (Est.): CEO (End-2014): Lee Shau Kee Competitiveness 5.45 (7) (Appointed: 1976) CEO (End-2014): Cheng Chi-Kong, Adrian (Appointed: March 2012) Index (Rank): Type: CH/CC Type: DO/FM/FG Corruption Index 74 (17) 5Yr CAR: 29.76% 5Yr CAR: 7.77% (Rank): Company Name: Li & Fung Limited Company Name: Sun Hung Kai Properties Family (% Owned): Fung (30.4%) Innovation Index 56.8 (10) Limited Founded: 1906 (Rank): Family (% Owned): Kwok (43.4%) Revenue: USD 19,288.50 million Legal System: Mix Common/ Founded: 1963 (Listed 1972) Industry: Dist. — Discretionary Customary Law Revenue: USD 9,690.32 million Assets: USD 8,477.02 million Hofstede’s 68/25/29/61 Industry: Real Estate Cultural Score Chairman William Fung Assets: USD 71,877.16 million (PD/Ind/UA/LTO): (End-2014): (Appointed: May 2012) Chairman Kwok Ping-kwong, CEO (End-2014): Spencer Fung Political Rights/ 5/2 (Partly Free) (End-2014): Thomas (Appointed: (Appointed: July 2014) Civil Liberties: December 2011) Type: DO/FM/FG CEO (End-2014): Kwok Ping-kwong, 5Yr CAR: –110.70% Thomas Type: DO/FM/FG 5Yr CAR: –16.74%

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Case Study V: Indonesia—Contrasts of the Dual-Board Structure The corporate governance system in Indonesia stands in stark contrast to many other Asian economies using a dual-board approach (i.e., board of commissioners and board of directors). Analysis of four Indonesian publicly listed family firms indicates quite a diverse range in corporate governance practices. Gudang Garam PT, a closely held and controlled family firm, has more than double the number of members on the board of directors than on the board of commissioners (i.e., seven director members to three commissioners). In contrast, PT Medco Energi International Limited (family firm with diluted family- owned, delegated authority with family governance) has six members on the board of commissioners but only four board of director members. The commissioner/director ratios for Lippo Karawaci Tbk PT and PT Astra International Tbk are more closely balanced.

The overall extent of independence of the board of commissioners is also mixed.15 The board of commissioners of Lippo Karawaci Tbk PT comprises 75% independent members. Conversely, the proportion of independent commissioners to total commission membership is approximately 33% for the other three entities. Independence of the board of commissioners of Gudang Garam PT is potentially more compromised than for PT Medco Energi International Limited and PT Astra International Tbk because a family member is the President Commissioner. Also, the board of commissioners comprises only three commissioners, which limits possible objecting voices to insiders. PT Medco Energi International Limited and PT Astra International Tbk have 11 and 6 board of commission members, respectively.

Board committee structures also vary. Gudang Garam PT has only formed an audit committee, whereas PT Medco Energi International Limited has five committees (audit, nomination, remuneration, risk management, and corporate governance). Lippo Karawaci Tbk PT and PT Astra International Tbk have formed the audit, remuneration, and nomination committees. Members of the audit committee of family firms in other Asian economies are overwhelmingly also board members. In the case of Indonesia, the use of outside members appears prevalent. The audit committees of Gudang Garam PT (three members) and PT Astra International Tbk (four members) include one member who is neither a board nor a commission member. For PT Medco Energi International Limited and Lippo Karawaci Tbk PT, two of the three audit committee members are not members of the board of directors or board of commissioners.

15None of the board of directors of the four Indonesian publicly listed family firms had an independent member.

Remuneration and nomination committee independence is questionable. For PT Astra International Tbk, none of the remuneration and nomination committee members are independent, and the chair is a family member. As for Lippo Karawaci Tbk PT, two independent commissioners are members of the remuneration and nomination committees; but the president commissioner is the chair of both subcommittees. An independent commissioner is a member of the nomination committee of PT Medco Energi International Limited, but no independent commissioners are appointed to the remuneration committee.

Interestingly, the board of commissioners and board of directors of the four entities examined generally demonstrate greater diversity than many other Asian economies. Aside from Lippo Karawaci Tbk PT, one member of the board of commissioners of the other three entities is female. In the case of PT Medco Energi International Limited, two of the four board members are female. For PT Astra International Tbk, more than 50% of the board of commissioners are non-Indonesian citizens. Both Gudang Garam PT and PT Medco Energi International Limited also have one commissioner who is a non- Indonesian citizen. Besides Gudang Garam PT, one member of the board of directors of each of the other three entities is not a citizen of Indonesia.

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Population: 249,860,000 60%

GDP (2014): USD 888.54 billion 40% GDP per Capita USD 1,866.00 20% (2014): Avg. Gross GDP ∆ 11.55% (10.49%) 0% (2010–2014): –20% Gov’t Debt to GDP: 25.02% –40% Exchange: Stock Exchange of Jakarta –60% Main Index: Jakarta Composite –80% Index 2010 2011 2012 2013 2014 2015 Index End-2014: 5,166.98 PT Medco Energi Internasional Tbk Gudang Garam PT Avg. Market ∆ 9.10% (8.68%) PT Astra International Tbk Jakarta Composite Index (CAGR) 2010–2014: Lippo Karawaci Tbk PT Market Cap USD 422.127 billion End-2014: Overview Select Family Firms Mkt Cap Avg. ∆ 5.18% (4.03%) PT Astra (CAGR) 2010–2014: Company Name: Gudang Garam PT Company Name: International Tbk No. of Listed Firms 506 (420 Family (% Owned): Wonowidjojo (78.2%) Family (% Owned): Keswick (35.7%) End-2014 (2010): Founded: 1958 Founded: 1957 Mkt Concentration 60.22% (43.37%) Revenue: USD 4,862.84 million USD 15,040.82 End-2014 (2010): Revenue: Industry: Consumer Products million Family Firm Mkt USD 207 billion Assets: USD 4,343.51 million Industry: Automotive Cap End-2014 President Susilo Wonowidjojo Assets: USD 17,600.72 million (Est.): (End-2014): President Competitiveness 4.57 (34) Prijono Sugiarto CEO (End-2014): Susilo Wonowidjojo (End-2014): Index (Rank): Type: CH/CC CEO (End-2014): Prijono Sugiarto Corruption Index 34 (107) 5Yr CAR: 6.13% Type: DO/DA/FG (Rank): Lippo Karawaci Tbk Company Name: 5Yr CAR: –2.28% Innovation Index 31.8 (87) PT PT Medco Energi (Rank): Company Name: Family (% Owned): Wijaya (≈20%–22%) Internastional Tbk Legal System: Mix Civil/Common/ Founded: 1990 Panigoro (Not Muslin Law Family (% Owned): Revenue: USD 868.82 million Available) Hofstede’s 78/14/48/62 Founded: 1980 Cultural Score Industry: Real Estate Revenue: USD 750.72 million (PD/Ind/UA/LTO): Assets: USD 2,814.30 million President Industry: Oil and Gas Political Rights/ 2/4 (Partly Free) Ketut Budi Wijaya (End-2014): Civil Liberties: Assets: USD 2,702.4 million CEO (End-2014): Ketut Budi Wijaya President Lukman Mahfoedz Type: DO/FM/FG (End-2014): 5Yr CAR: 43.20% CEO (End-2014): Lukman Mahfoedz Type: DO/DM/FG 5Yr CAR: –22.06%

Case Study VI: India—Value Creation and Performance via Diversity Much has been made of the possible negative influence of family management and board entrenchment and the development of nepotism within a family firm. A strong argument can be made that a diverse board of directors is one mechanism to alleviate such fears and that diversity can enhance firm value and performance. Past research and professional commentary have argued for greater gender diversity, citing a positive correlation. Female board representation is generally low globally, but this issue is particularly acute in Asia. A 2014 Securities and Exchange Board of India regulation stipulated that by 31 March 2015 (originally 30 September 2014), all listed firms must have at least one female director. This requirement is also stipulated in the Indian Companies Act (Section 149(1), 2013). Many Indian-listed firms have come under intense pressure for either failing to comply with the requirement or for not fully embracing the essence of the requirement by appointing female family members without due process or diligence.

All four Indian publicly listed family firms reviewed had at least one female director by the end of 2014. HCL Technologies Limited has had one nonexecutive independent female director since 2010 and added another nonexecutive nonindependent female director in 2012. From 2011 to 2014, the share performance of HCL Technologies Limited substantially outperformed the broader Indian capital market (i.e., a CAR of about 150%). JSW Steel Limited and Wipro Limited added a nonexecutive independent director in 2012 and 2013, respectively. In contrast, Reliance Industries Limited, the largest of the four Indian entities by revenue and assets, added only a nonexecutive nonindependent female director in mid-2014 who is the spouse of the majority owner. Interestingly, the share performance relative to the broader market of Reliance Industries Limited between 2011 and 2014 was the lowest of the four Indian entities (CAR = –41.11%).

Gender is but one aspect of the diversity puzzle that should be considered. The composition of directors on the board of HCL Technologies Limited tends to favor individuals with an electrical engineering or accounting background (nearly 80% of the board). In contrast, directors of Reliance Industries Limited tend to have backgrounds in chemical engineering and law. The work and educational background of directors of JSW Steel Limited and Wipro Limited tended to be more dispersed. With increased market internationalization and a drive by family firms to increase foreign sales, there is an argument for the board to include international members. HCL Technologies Limited is again a leading light, with 30% of the board having a predominantly foreign-based background and influence. Reliance Industries Limited and Wipro Limited also have at least one director with an extensive foreign background.

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Director and committee experience on boards of other publicly listed entities (local and/ or foreign) is also seen as a possible beneficial factor in enabling directors to draw on a broader set of experiences and enable greater networking opportunities for the entity. Two directors (Amal Ganguli and Keki Mistry) of HCL Technologies Limited sit on the board of more than 10 Indian publicly listed firms, while Ramanathan Srinivasan sits on the board of more than 10 foreign publicly listed firms. The level of directorships of board members of the three other Indian entities is generally below that of HCL Technologies Limited but still highlights diversity. Finally, age dispersion may be a key diversity factor. Of the four Indian firms examined, only HCL Technologies Limited disclosed the age of directors. Relative to other capital markets (e.g., Singapore, Hong Kong (SAR, China), Philippines), the average age of HCL Technologies Limited directors is lower with a greater spread.

Overall, family representation on boards of Indian family firms is lower than observed in other key Asian capital markets. The evidence of board diversity across various factors may imply a preference of Indian publicly listed family firms for benefits of diversity over family crowding.

Population: 1,239,000,000 200% GDP (2014): USD 2,066.90 billion 150% GDP per Capita USD 1,263.00 100% (2014):

Avg. Gross GDP ∆ 9.00% (8.65%) 50% (2010–2014): Gov’t Debt to GDP: 67.72% 0% Exchange: Bombay Stock Exchange –50% Main Index: S&P BSE Sensex Index –100% 2010 2011 2012 2013 2014 2015 Index End-2014 27,241.78 Avg. Market ∆ 9.87% (7.93%) Wipro Limited HCL Technologies Limited (CAGR) 2010–2014: Reliance Industries Limited S&P BSE Sensex Index Market Cap USD 1,558.300 JSW Steel Limited End-2014: billion Mkt Cap Avg. ∆ 3.53% (-1.15%) Overview Select Family Firms (CAGR) 2010–2014: No. of Listed Firms 5,294 (5,034) Company Name: HCL Technologies Company Name: Reliance Industries End-2014 (2010): Limited Limited Mkt Concentration 89.68% (30.61%) Family (% Owned): Nadar (61.8%) Family (% Owned): Ambrani (45.3%) End-2014 (2010): Founded: 1976 Founded: 1966 Family Firm Mkt USD 729 billion Revenue: USD 5,359.80 million Revenue: USD 58,905.80 million Cap End-2014 Industry: Technology (Est.): Industry: Oil and Gas Assets: USD 5,066.00 million Competitiveness 4.20 (71) Assets: USD 79,153.90 million Chairman Shiv Nadar Index (Rank): (End-2014): Chairman Mukesh Ambani (End-2014): Corruption Index 38 (85) CEO (End-2014): Anant Gupta (Rank CEO (End-2014): Mukesh Ambani Type: CH/CC Innovation Index 33.7 (76) Type: DO/FM/FG 5Yr CAR: 150.85% (Rank): 5Yr CAR: –41.11% Company Name: JSW Steel Limited Legal System: Mix Common/ Company Name: Wipro Limited Muslim/Customary Family (% Owned): Jindal (38.5%) Family (% Owned): Azim Premji (73.5%) Law Founded: 1982 Founded: 1945 Hofstede’s 77/48/40/51 Revenue: USD 8,316.50 million Cultural Score Revenue: USD 7,367.10 million Industry: Diversified Industrial (PD/Ind/UA/LTO): Industry: Technology Assets: USD 13,489.30 Political Rights/ 2/3 (Free) million Assets: USD 9,414.50 million Civil Liberties: Chairman Sajjan Jindal Chairman Azim Premji (End-2014): (End-2014): CEO (End-2014): Sajjan Jindal CEO (End-2014): T. Kurien Type: DO/FM/FG Type: CH/CC 5Yr CAR: –25.77% 5Yr CAR: –2.21%

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Case Study VII: Malaysia—Philanthropy for the Family or the Family Firm Determining whether philanthropic actions of a family firm benefit the family or the entity can be difficult to decipher. In the case of the four publicly listed Malaysian family firms analyzed, the extent of disclosure-related philanthropic actions varies substantially.

Melewar Industrial Group Berhad’s 2011–2014 Annual Reports highlight the entity’s commitment to enhancing value for the community in which it operates. These reports also indicate assistance provided for the employment of physically disabled employees. However, it is only in the 2014 Annual Report that the entity formally acknowledges (in a single line) that it contributes funds to orphanages and charitable organizations. Names of organizations and amounts contributed are not disclosed (nor on the entity’s website). It is noted in the entity’s annual reports that the executive chairman (Dato Ya’acob) and his wife (Datin Ezurin Yusnita), an executive director, are trustees of the Budimas Charitable Foundation. There is no formal disclosure of an association between the entity and the foundation. However, an independent search indicates both the entity and the foundation share the same headquarters address. The lack of disclosure on organizations assistance, amount of contributions, and possible entity/foundation overlaps raises unnecessary uncertainty that could be troublesome to investors and minority shareholders.

At the opposite end of the spectrum, YTL Corporation Berhad provides extensive disclosure on the entity’s philanthropic activities. Specifically, YTL Corporation Berhad disclosed philanthropic information for the past eight years via a separate sustainability report. Details of charitable and philanthropic activities in the 2014 Sustainability Report, for example, exceed 30 pages, with lengthy discussions, pictures, and diagrams. Quantitative nonfinancial information helps illustrate the benefits derived from the philanthropic activities of YTL Corporation Berhad. Of some potential concern, however, is the lack of clarity on the precise financial cost of all philanthropic activities. There is no disclosure on the total financial amount donated during the year, with actual financial amounts for only some select activities. Lack of disclosure on precise financial contributions may raise uncertainty about total resources diverted. Also, reference is made to personal contributions by the majority family ownership. The relevance of such disclosures is questionable as to whether contributions truly benefit the entity or the majority ownership.

Philanthropic information disclosed in the annual reports of IOI Corporation Berhad from 2011 to 2014 averaged two to three per year. This information is also supported by date/time disclosures listed on a separate page of the entity’s website. Disclosures specify

clearly the activities undertaken and areas targeted. The financial cost is also disclosed on a total ongoing basis rather than a specific yearly total. This form of disclosure could be misleading if interpreted incorrectly as it may suggest the family firm contributed more in the year than it did. Philanthropic activities are predominantly conducted via the entity’s charity arm (i.e., Yayasan Tan Sri Lee Shin Cheng). Naming the charity arm after the founder may be problematic as benefits of philanthropic activities may be more closely associated with the founder and founding family than with IOI Corporation Berhad. Further, it may raise questions on whether activities are at the behest of the entity or the majority family ownership.

The 2010–2014 CARs of Melewar Industrial Group Berhad and Berjaya Corporation Berhad are comparable, exceeding –90%. Whereas Melewar Industrial Group Berhad provided limited philanthropic disclosures, information supplied by Berjaya Corporation Berhad is lengthy, with key specifics. For instance, Berjaya Corporation Berhad (from at least 2011) detailed total charity donations and amounts to each individual beneficiary. Philanthropic activities for Berjaya Corporation Berhad are predominantly undertaken by the Berjaya Cares Foundation, which also provides a clearer link between the entity and philanthropic activities than potential links to the majority family ownership.

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Population: 30,400,000 40% GDP (2014): USD 327.00 billion 20% GDP per Capita USD 7,304.00 0% (2014): –20% Avg. Gross GDP ∆ 10.34% (10.08%) –40% (2010–2014 –60% Gov’t Debt to GDP: 52.80% –80% Exchange: Bursa Malaysia –100% Main Index: FTSE Bursa –120% Malaysia KLCI –140% Index End-2014: 1,764.44 2010 2011 2012 2013 2014 2015

Avg. Market ∆ 4.03% (3.82%) YTL Corporation Berhad Berjaya Corporation Berhad (CAGR) 2010–2014: Melewar Industrial Group Berhad FTSE Bursa Malaysia KLCI Market Cap USD 459.004 IOI Corporation Berhad End-2014: billion Mkt Cap Avg. ∆ 3.43% (2.95%) Overview Select Family Firms (CAGR) 2010–2014: Company Name: Berjaya Corporation Company Name: Melewar Industrial No. of Listed Firms 905 (956) Berhad Group Berhad End-2014 (2010): Family (% Owned): Tan (36.6%) Family (% Owned): Abdullah (36.5%) 73.23% (36.15%) Mkt Concentration Founded: 1984 Founded: 1972 End-2014 (2010): Revenue: USD 2,579.77 million Revenue: USD 196.40 million Family Firm Mkt USD 179 billion Industry: Gaming, Lodging, F&B Industry: Iron and Steel Cap End-2014 (Est.): Assets: USD 5,900.75 million Assets: USD 197.78 million Competitiveness 5.15 (20) Chairman Robin Tan Yeong Ching Chairman Ya’acob bun Tunku Tan (End-2014): (Appointed: February (End-2014): Sri Abdullah (August Index (Rank): 2012) 2008) Corruption Index 52 (50) CEO (End-2014): Robin Tan Yeong Ching CEO (End-2014): En Azlan bin Abdullah (Rank): (Appointed: January (Appointed: June 2011) 2011) Innovation Index 45.6 (33) Type: DO/FM/FG Type: DO/FM/FG (Rank): 5Yr CAR: 95.60% 5Yr CAR: –91.27% Legal System: Mix Common/ Company Name: YTL Corporation Berhad Muslin/Customary Company Name: IOI Corporation Berhad Family (% Owned): Yeoh (48.7%) Law Family (% Owned): Lee (44.9%) Founded: 1955 Hofstede’s 100/26/36/41 Founded: 1969 Revenue: USD 5,694.81 million Cultural Score Revenue: USD 3,520.04 million (PD/Ind/UA/LTO): Industry: Utilities Industry: Consumer Products Political Rights/ 4/4 (Partly Free) Assets: USD 17,493.17 million Assets: USD 4,393.64 million Civil Liberties: Chairman Yeoh Tiong Lay Chairman Lee Shin Cheng (End-2014): (Appointed: January (End-2014): (Appointed: July 1981) 1985) CEO (End-2014): Lee Yeow Chor CEO (End-2014): Francis Yeoh Sock Ping (Appointed: January (Appointed: April 1988) 2014) Type: DO/FM/FG Type: DO/FM/FG 5Yr CAR: –9.47% 5Yr CAR: –27.28%

Case Study VIII: Mongolia—Corporate Governance Structures in a Frontier Capital Market Because Mongolia is a frontier economy, it is not necessarily surprising that availability of information regarding Mongolian publicly listed firms is highly limited and varied. The Mongolian GDP (USD 12.02 billion) and total market capitalization of publicly listed firms (USD 709 million at the end of 2014) are the smallest of the 14 Asian economies examined. At the end of 2014, there were 237 firms listed on the Mongolian Stock Exchange (MSE), of which 201 were defined as private; 15, state-contributed; and 21, state-owned. New listings on the MSE are infrequent, with only 11 initial and 9 secondary public offerings since 2005. As the primary capital market institution in Mongolia, the MSE provides an array of general basic market information (i.e., market statistics and overview) consistent with that provided by other Asian stock markets. In respect to individual listed firms, the MSE details trading data but more general information (e.g., board directors, ownership levels) is not documented.

Major publicly available foreign financial source providers (e.g., Bloomberg, Reuters) generally do not actively report on Mongolian-listed firms. Information on Mongolian- listed firms can be gleaned from fee-paid services (e.g., Euromoney Institutional Investor Company), although the details frequently do not exceed those of publicly available sources. From an international investor perspective, therefore, to comprehensively assess the constituents of the Mongolian stock market—particularly in the context of details beyond those of financials such as competency of the board—will be costly. Such costs place a burden on development of the market.

Owing to the limited availability of information, there is difficulty in determining the family firm status of each publicly listed entity. To gauge an overview of the nature of the Mongolian capital market, four publicly listed firms—all constituents of the MSE- 20 Index—were examined. The stock performance of all four firms from 2010 to 2014 exceeded that of the MSE-20 Index. Math Impex Shareholding Company had the highest CAR percentage during the period (262.88%), while Gobi Joint Stock Company had the lowest (55.74%).

All four firms operated web portals that supplemented information supplied by the MSE. At the end of 2014, APU Joint Stock Company was the likely standard-bearer for investor relations of Mongolian publicly listed firms. Voted the “Best Publicly Traded Company of 2014” by the MSE, APU Joint Stock Company was the only firm of the four examined that detailed its board of directors of nine members, three of whom were independent directors. APU Joint Stock Company also detailed the composition of its respective board

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committees (audit, nomination, and performance appraisal). The board and committee structure of APU Joint Stock Company suggests conformity with practices in other Asian capital markets, although corporate governance practices among other Mongolian publicly listed firms are questionable.

APU Joint Stock Company and Gobi Joint Stock Company were the only two of the four Mongolian publicly listed entities examined that documented information on the breakdown of shareholdings and major shareholders. These two entities (APU Joint Stock Company and Gobi Joint Stock Company) were also the only firms to present financial information (e.g., balance sheet, income statement) and details of dividend declarations and payments. While there is a trend among Asian publicly listed firms to discuss corporate social responsibility issues and sustainable reporting, only APU Joint Stock Company and Gobi Joint Stock Company referred to such issues. None of the Mongolian publicly listed firms discussed, presented, or provided links to any formalized annual reports.

Population: 2,990,000 300% GDP (2014): USD 12.02 billion 250%

GDP per Capita USD 1,901.00 200% (2014): 150% Avg. Gross GDP ∆ 23.54% (21.29%) (2010 – 2014): 100% Gov’t Debt to GDP: 51.70% 50%

Exchange: Mongolian Stock 0% Exchange –50% Main Index: MSE Top-20 Index –100% Index End 2014: 14,814.45 2010 2011 2012 2013 2014 2015 Avg. Market ∆ 2.91% (0.09%) (CAGR) 2010 Suu (Milk) Joint Stock Company APU Joint Stock Company – 2014 Makhimpex Shareholding Company MSE - 20 Gobi Joint Stock Company Market USD 708.750 Capitalization End million 2014 Overview Select Family Firms Mkt Cap Avg. N/A Company Name: APU Joint Stock Company Name: Math Impex ∆ (CAGR) 2010 Company Shareholding Company – 2014: Ownership %: Tuul International Ownership %: No Information Available Number of Listed 237 (201) Limited (51.72%) Founded: 1946 Firms End 2014 Founded: 1992 Revenue: USD 10.462 million (Pte): Revenue: USD 112.78 million Industry: Commerce Mkt Concentration N/A (N/A) Industry: Beverages Assets: USD 9.727 million End 2014 (2010): Assets: USD 178.63 million Chairman (End No Information Available Family firm Mkt N/A Chairman (End Batsaikhan Purev 2014): Cap End 2014 2014): CEO (End 2014): B. Badmaa (Est.): CEO (End 2014): Erdenebileg Tseveenjav Type: Non-determinable Competitiveness 3.83 (98) Type: Non-determinable Index (Rank): 5Yr CAR: 262.88% 5Yr CAR: 81.43% Corruption Index 39 (80) Company Name: Suu (Milk) Joint Stock Company (Rank): Company Name: Gobi Joint Stock Company Ownership %: No Information Available Innovation Index 37.5 (56) Ownership %: No Information Available 1958 (Rank): Founded: Founded: 1981 USD 21.693 million Legal System: Mix Civil/Muslin Revenue: Revenue: USD 37.467 million Law Industry: Consumer Products Industry: Consumer Products Hofstede’s N/A Assets: USD 24.693 million Cultural Score Assets: USD 53.419 million Chairman (End No Information Available (PD/Ind/UA/LTO): Chairman (End No Information Available 2014): 2014): Political Rights/ 1/2 (Free) CEO (End 2014): No Information Available Civil Liberties: CEO (End 2014): Baatarsaikhan Tsagaach Type: Non-determinable Type: Non-determinable 5Yr CAR: 250.91% 5Yr CAR: 55.74%

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Case Study IX: Pakistan—Board Structure and Avenue for Tunneling Pakistan provides an interesting kaleidoscope for an array of corporate governance issues pertaining to family firms. While at the end of 2014 there were 557 firms listed on the Karachi Stock Exchange, a substantial proportion frequently formed a larger common group (e.g., Engro Corporation, Fazal Group). Of the four Pakistan publicly listed family firms examined, three (Cherat Cement Limited, Dewan Cement Limited, and Sapphire Textiles Limited) are components of a larger chain of publicly listed firms within a single group.

Although the boards of all four Pakistan publicly listed family firms examined had a majority of nonexecutive directors—ranging from 57.14% (Dewan Cement Limited) to 87.50% (Cherat Cement Limited)—the presence of independent directors is minimal. National Foods Limited is the only entity with more than a single independent director on the board (i.e., two independent directors representing 28.57% of the board). In the case of Sapphire Textiles Limited, an independent director was not added to the board until 2014.

Family presence on the board is high, ranging from a low of 28.57% for National Foods Limited to 87.50% for Sapphire Textiles Limited. Each firm examined had two primary board committees: (1) audit committee and (2) human resource and remuneration committee. An independent director was the chair of the audit committee of three entities but not that of Sapphire Textiles Limited. The chair of the human resource and remuneration committee was an independent director only for National Foods Limited. Overall, family presence on the two board committees was strong across all four entities, implying an ability of the family to influence financial accounting and executive remuneration decisions. At least one family member had a senior executive position in all the firms examined except for National Foods Limited.

Relative to other Asian economies, Pakistan publicly listed entities are more transparent regarding executive remuneration. For example, each firm reported the specific amount of remuneration to the CEO and aggregate amounts paid to directors and executives. This transparency affords greater scope to determine the potential for excessive remuneration levels. The average CEO remuneration to net income for the four entities examined was 2.07% in 2014, a decline from 3.07% in 2012. Much of the decline can be attributed to a 41% reduction in the remuneration of the CEO of National Foods Limited from 2012 to 2014 despite steady increases in the underlying net income. The ratio of CEO remuneration to net income was generally flat for the other three entities.

Other tunneling risks are also highlighted from an examination of the four Pakistan publicly listed family firms. For example, from 2012 to 2014, loans to executives (some of whom could be family members) of Sapphire Textiles Limited (a closely held and managed family firm) increased 149%, rising from 3.27% of net income to 8.90%. The executive loan/net income ratio for Dewan Cement Limited (a family firm with diluted ownership but family managed and governed) was virtually consistent from 2012 to 2014, at approximately 1.25%, but entertainment expenses doubled during the same period, from 0.61% of net income to 1.36%. Interestingly, National Foods Limited formally states as part of the firm’s Code of Ethics and Business Practices that excessive business gifts and entertainment are unfair practices. Consistent with this policy, the entertainment expenses of National Foods Limited are immaterial.

The potential to use company funds to boost family identity rather than firm identity is also highlighted. Cherat Cement Limited, for example, made donations in 2014 amount- ing to 0.21% of net income but explicitly declared that all donations were to charities with which directors and executives had no formal association. Conversely, 92.79% of total 2014 company donations of Sapphire Textiles Limited (equivalent to 1.93% of net income) were made to family-affiliated charities. This raises the specter that funds donated will ultimately be used in and benefit the interest of the controlling family more than that of the broader firm ownership.

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Population: 188,000,000 300% GDP (2014): USD 246.88 billion 250%

Avg. Gross GDP ∆ 8.15% (7.98%) 200% (2010–2014): 150% Gov’t Debt to GDP: 64.30% 100% Exchange: Karachi Stock Exchange 50%

Main Index: KSE-100 Index 0% 31,993.01 Index End-2014: –50% Avg. Market ∆ 28.86% (27.72%) –100% (CAGR) 2010–2014: 2011 2012 2013 2014 2015 Market Cap USD 74.819 billion End-2014: Sapphire Textiles Limited Cherat Cement Limited Mkt Cap Avg. ∆ 23.46% (22.73%) National Foods Limited KSE - 100 (CAGR) 2010–2014: Dewan Cement Limited No. of Listed Firms 557 (638) End-2014 (2010): Overview Select Family Firms Mkt Concentration N/A Company Name: National Food End-2014 (2010): Company Name: Cherat Cement Limited Limited Family Firm Mkt N/A Family (% Owned): Faruque (20.63%) Family (% Owned): Majeed (39.05%) Cap End-2014 Founded: 1970 (Est.): Founded: 1981 Revenue: USD 97.316 million Competitiveness 3.41 (129) Revenue: USD 64.555 million Index (Rank): Industry: Cement Industry: Consumer Products Corruption Index 29 (126) Assets: USD 62.876 million Assets: USD 48.713 million (Rank): Chairman Omar Faruque Chairman Abdul Majeed (End-2014): (End-2014): Innovation Index 24.0 (134) CEO (End-2014): Abrar Hasan (Rank): CEO (End-2014): Azam Faruque Type: DO/DA/FG Legal System: Mix Common/ Type: DO/FM/FG Muslin Law 5Yr CAR: 279.36% 5Yr CAR: 169.16% Hofstede’s 55/14/70/50 Company Name: Dewan Cement Company Name: Sapphire Textiles Limited Cultural Score Limited (PD/Ind/UA/LTO): Family (% Owned): Farooqui (33.83%) Family (% Owned): Abdullah (60.69%) Political Rights/ 4/5 (Partly Free) Founded: 1986 Founded: 1980 Civil Liberties: Revenue: USD 99.700 million Revenue: USD 254.279 million Industry: Cement Industry: Textiles Assets: USD 228.490 million Assets: USD 215.589 million Chairman Dewan Muhammad Chairman Mohammad Abdullah (End-2014): Yousuf Farooqui (End-2014): CEO (End-2014): Syed Muhammad CEO (End-2014): Nadeem Abdullah Anwar Type: CH/CC Type: DO/FM/FG 5Yr CAR: 96.78% 5Yr CAR: –75.05%

Case Study X: Philippines—Influencing Executive and Director Compensation Executive remuneration is a prominent and hotly debated issue during the past decade. For family firms where family members hold pivotal senior executive positions, minority owners may be particularly sensitive to the question of excessive remuneration seeking it as a means of wealth expropriation. The four Filipino publicly listed family firms analyzed have several family members serving in key senior executive positions (e.g., CEO, CFO, division president).

For FY2014 the highest absolute declared remuneration of top executives across the four firms was by Ayala Corporation (i.e., USD 7.78 million) with Lopez Holding Corporation having the lowest (i.e., USD 0.93 million). The ratio of top executive to all executive/director remunerations was greatest for Aboitiz Equity Ventures Incorporated (i.e., 54.05%) and the lowest for SM Investments Corporation (i.e., 26.47%). Meanwhile, the ratio of top executive remuneration to net income (or total assets and total revenue) was lowest for SM Investments Corporation (i.e., 0.185%) and highest for Ayala Corporation (i.e., 1.072%).

Determining whether executive remuneration is excessive and a potential wealth expropriation from minority shareholders is problematic on several levels. First, consistency in depth of remuneration disclosure may present concerns about reliability. Filipino firms can declare executive remuneration in various documents (e.g., Annual Report, Corporate Governance Report, SEC Form 17-A, 20-IS, or ACGR). For some entities (e.g., Ayala Corporation), remuneration amounts and policies are declared across a broader set of documents and in a more consistent manner (e.g., same table, declaration). However, others (e.g., Aboitiz Equity Ventures Incorporated) disclosed remuneration amounts and policies in only select documents (e.g., SEC Form 17-A but not the Annual Report).

There also appear to be inconsistencies in the information disclosed and requirements of respective forms. For example, SEC Form 17-A and 20-IS require a declaration of aggregate full-year remuneration to executive directors. For one entity analyzed, monthly rather than annual figures were supplied. Another section requires entities to declare full annual aggregate remuneration for top executives who are otherwise not board members. Two entities, nonetheless, declared in this section the remuneration of executive directors. Inconsistent overlapping makes it problematic to decipher precisely how much remuneration is paid to executives at different levels. Finally, information is presented in aggre- gates, making it difficult to determine remuneration to individual family executives and to compare across firms.

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Another factor that can influence whether remuneration amounts are excessive is the remuneration committee composition. If the family can influence the remuneration committee, this could allow greater ease of excessive payments to family executives. Interestingly, while Ayala Corporation had the highest executive remuneration to net income ratio, it was the only entity without a family member on the subcommittee. Furthermore, the Ayala Corporation remuneration subcommittee had a majority of independent directors. In the case of Lopez Holding Corporation and SM Investments Corporation, not only were senior family executive members of the remuneration committee directors, they were also the subcommittee chairs.

Finally, overall compensation paid to nonfamily independent directors presiding on the remuneration committee may cast a shadow over a subcommittee’s independence if payments substantially exceed counterparts. For three entities analyzed, the amount and remuneration policy (i.e., per month retainer plus a per diem for each meeting attended) are highly similar. For SM Investment Corporation, only a per diem for each meeting attended is paid, leading to a lower overall annual remuneration to the independent directors of the entity relative to the other three family firms examined. This could infer a better perception of independence.

Population: 100,100,000 50% 40% GDP (2014): USD 284.58 billion 30% GDP per Capita USD 6,596.00 20% (2014): 10% Avg. Gross GDP ∆ 11.17% (11.07%) 0% (2010–2014): –10% Gov’t Debt to GDP: 49.20% –20% Exchange: Philippines Stock –30% Exchange –40% –50% Main Index: PSEi—Philippine –60% SE IDX 2010 2011 2012 2013 2014 2015 Index End-2014: 7,186.32 SM Investments Corporation Aboitiz Equity Ventures Inc. Avg. Market ∆ 15.09% (14.36%) Lopez Holding Corporation PSE Composite Index (CAGR) 2010–2014: Ayala Corporation Market Cap USD 261.840 billion End-2014: Mkt Cap Avg. ∆ 14.78% (13.58%) Overview Select Family Firms (CAGR) 2010–2014: Company Name: Aboitiz Equity Company Name: Lopez Holding No. of Listed Firms 263 (253) Ventures Inc. Corporation End-2014 (2010): Family (% Owned): Aboitiz (49.5%) Family (% Owned): Lopez (52.5%) Mkt Concentration 45.37% (37.67%) Founded: 1989 Founded: 1928 End-2014 (2010): Revenue: USD 6,287.331 million Revenue: USD 7,578.989 Family Firm Mkt USD 217 billion million Industry: Industrials Cap End-2014 Industry: Utilities Assets: USD 2,471.299 million (Est.): Assets: USD 2,264.060 Competitiveness 4.39 (52) Chairman Jon Aboitiz million (End-2014): Index (Rank): Chairman Manuel M. Lopez CEO (End-2014): Erramon Aboitiz (End-2014): Corruption Index 38 (85) (Rank): Type: CH/CC CEO (End-2014): Manuel M. Lopez Innovation Index 29.9 (100) 5Yr CAR: –16.69% Type: CH/CC (Rank): Company Name: Ayala Corporation 5Yr CAR: –7.46% Legal System: Mix Common/Civil Family (% Owned): Ayala (51.2%) Company Name: SM Investments Corporation Law Founded: 1834 Family (% Owned): Sy (51.8%) Hofstede’s 94/32/44/27 Revenue: USD 16,245.41 million Founded: 1958 Cultural Score Industry: Real Estate (PD/Ind/UA/LTO): Revenue: USD 15,912.84 million Assets: USD 4,146.001 million Political Rights/ 3/3 (Partly Free) Industry: Real Estate Chairman Jaime de Ayala II Civil Liberties: (End-2014): Assets: USD 6,201.170 million CEO (End-2014): Jaime de Ayala II Chairman Henry Sy Sr. (End-2014): Type: CH/CC CEO (End-2014): Harley Sy 5Yr CAR: 42.00% Type: CH/CC 5Yr CAR: 17.60%

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Case Study XI: Singapore—Returns to Shareholders of Free Cash Flows The total return to investors will be derived from capital appreciation and income. Assuming a long-term time horizon, the focus of many investors will be on capital appreciation. Nonetheless, income return is undoubtedly of importance to investors. The entity’s dividend and repurchase policy can also influence the risk of cash flow diversions by majority owners, and the cost of equity.

Consistent low dividend yields may place investors at a disadvantage paying for an overvalued stock relative to the lower income return. Net income of City Developments Limited (closely held and controlled family firm) between 2012 and 2014 is comparable to direct property development competitors (e.g., CapitaLand, UOL, Hong Kong [SAR, China) Land] of similar market capitalization in the Singapore capital market. However, dividend yield (approximately 1% compared with greater than 2% of competitors) and dividend payout ratio (approximately 20% to higher than 30% for competitors) of City Developments Limited generally lingers. Interestingly, compared with direct competitors, City Developments Limited relied heavily on a special dividend (50% of gross dividend) to bolster overall dividend returns. Use of special dividends further underscores the pru- dent dividend policy of City Developments Limited but also indicates potential ease for income returns to minority investors can be reduced substantially in future.

While higher dividend yield/payout ratios may be preferred, the sustainability of dividends is also important. Net income of Eu Yan Sang Limited, for example, was relatively flat during the period 2012 to 2014. The dividend payout ratio in contrast rose from 53.9% to 65.1% during the same period. This increase can be viewed as advantageous to investors. However, free cash flows were increasingly negative (i.e., SGD 2.7 million in 2012 down to SGD 10.4 million in 2014). The negative and declining free cash flow raises concerns about the sustainability and justification for the higher payout ratio. Such action could be perceived as family management and board control being used to benefit the majority family ownership with higher income return that could disadvantage the long- term interest of minority owners.

Adjusting dividend policy to benefit minority shareholders in tune with shift in entity circumstances can provide a positive boost. During 2012, Far East Orchard Limited undertook a major restructuring that included the appointment of professional outside management, increased board independence, and reduction of family board control. The restructuring coincided with a significant increase in share value (see the following line graph) with a CAR exceeding 100%. Total dividends in 2010 and 2011 exceeded 2013

and 2014 levels, but only due to the issuing of a special dividend. Prior to 2012, the dividend payout ratio was relatively poor (below 10%). The dividend payout ratio exceeded 65% in 2013 and 2014. Importantly, free cash flow levels remained positive and stable (>SGD 12.5 million per year) justifying stability of the dividend. The restructuring exercise had benefited minority shareholders with not only capital appreciation but also a better sustainable dividend payout policy.

Aside from reducing the diversion of free cash flow via payment of dividends, an entity may opt to repurchase shares. Of the four Singapore publicly listed family firms analyzed, the only entity (i.e., OCBC Limited) to engage in share repurchases between 2012 and mid-2015 had a diluted ownership and family governance control structure. OCBC Limited repurchased 14,459,000 shares valued at SGD 150,219,000 in 2013 with another 16,387,000 shares valued at SGD 161,473,000 repurchased in 2014. Reluctance of more closely held and family-controlled entities to engage in share repurchases may herald from a motivation to preserve family-ownership levels at current levels. Nonetheless, the lack of desire to repurchase shares could provide minority shareholders reduced chance of free cash flow diversions leading to higher cost of equity.

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Population: 5,470,000 140% GDP (2014): USD 307.87 billion 120% GDP per Capita USD 38,088.00 100% (2014): 80% Avg. Gross GDP ∆ 10.15% (9.86%) 60% (2010–2014 40% Gov’t Debt to GDP: 99.30% 20% Exchange: Singapore Stock 0% Exchange –20% Main Index: FT Straits Times Index –40% 2010 2011 2012 2013 2014 2015 Index End-2014: 3,353.67 Avg. Market ∆ 2.18% (1.26%) OCBC Limited City Developments Limited (CAGR) 2010–2014: Far East Orchard Limited FTSE Straits Times Index Market Cap USD 752.831 billion Eu Yan Sang Limited End-2014: Mkt Cap Avg. ∆ 4.69% (3.85%) Overview Select Family Firms (CAGR) 2010–2014: Company Name: City Developments Company Name: Far East Orchard No. of Listed Firms 775 (778) Limited Limited End-2014 (2010): Family (% Owned): Kwek (48.4%) Family (% Owned): Ng (59.9%) Mkt Concentration 15.70% (26.90%) Founded: 1963 Founded: 1968 End-2014 (2010): Revenue: USD 2,953.27 million Revenue: USD 247.58 million Family Firm Mkt USD 406 billion Industry: Real Estate Industry: Real Estate Cap End-2014 Assets: USD 14,873.93 million Assets: USD 1,415.40 million (Est.): Chairman Kwek Leng Beng Chairman Koh Boon Hwee Competitiveness 5.64 (2) (End-2014): (Appointed: January (End-2014): (Appointed: 2013) Index (Rank): 1995) CEO (End-2014): Lui Chong Chee Corruption Index 84 (5) CEO (End-2014): Grant L. Kelley (Appointed: 2014) (Rank): (Appointed: January Type CH/DA 2014) Innovation Index 59.2 (7) 5Yr CAR: 105.07% Type: DO/DA/FG (Rank): Company Name: OCBC Limited 5Yr CAR: –20.33% Legal System: Mix Common/ Family (% Owned): Lee (19.6%) Muslin Law Company Name: Eu Yan Sang Limited Founded: 1932 Hofstede’s 74/20/8/72 Family (% Owned): Eu (36.53%) Revenue: USD 6,543.82 million Cultural Score Founded: 1993 (Original 1879) Industry: Financial Services (PD/Ind/UA/LTO): Revenue: USD 287.41 million Assets: USD 302,926 million Political Rights/ 4/4 (Partly Free) Industry: Biotech and Pharma Civil Liberties: Chairman Ooi Sang Kuang Assets: USD 264.08 million (End-2014): (Appointed: 2012) Chairman Robert James Eu Yee CEO (End-2014): Samuel N. Tsien (End-2014): Sang (Appointed: 2011) (Appointed: 2014) CEO (End-2014): Richard Eu Yee Ming Type: DO/DA/FG (Appointed: 1996) 5Yr CAR: 4.05% Type: DO/FM/FG 5Yr CAR: –31.50% © 2017 CFA INSTITUTE. ALL RIGHTS RESERVED. 83 Corporate Governance for Asian Publicly Listed Family-Controlled Firms

Case Study XII: South Korea—Impact of Family and Social Controversies It is suggested direct family conflicts and family associated controversies can potentially have negative consequences for family firms. This is because there is often a thin veil between the identity of the “family” and that of the family firm as a business.

During the past several decades, Samsung Electronics Limited (one of the world’s largest family conglomerates) has been beset by a variety of family-related conflicts. In early February 2012, for example, the entity’s immediate former Chairman Lee Kun-hee faced legal action brought against him by his elder siblings over claims in shares to the firm. More recently, the highly publicized Samsung C&T–Cheil merger battle has heightened concerns of succession nepotism and exploitation of minority owners. Despite such controversies, the 2011–2015 stock performance of Samsung Electronics Limited outperformed the KOSPI Index by more than 35%. In contrast, the Shin family—owners of the Lotte Group—faced extensive criticism and negative publicity in the construction of the 87,000 square meter Lotte World Complex. Built in part as a distinguishing legacy for the company founder, the project was the subject of enormous scrutiny, particularly following the death of a construction worker associated with the building (Chang 2015). During the 2011–2015 period, the stock of Lotte Shopping Limited underperformed by more than 60%.

Establishing a direct linkage and correlation between family-related conflicts and stock performance is highly problematic. Any definitive association may only be appar- ent if there is a direct economic link. For example, in the case of Kumho Petrochemical Company Limited, its parent entity Kumho Asiana Group (controlled by the Park family) faced substantial debt concerns in the late 2000s. Creditors consequently instigated a restructuring of Kumho Petrochemical Company Limited that required greater managerial independence of the entity from its parent. The successful restructuring completed in 2012 may account for the stock of Kumho Petrochemical Company Limited significantly outperforming the KOSPI in 2011 and 2012. The underperformance (relative to the KOSPI) since 2012 may be credited in part to the inability of Kumho Petrochemical Company Limited to fully separate its identity from its parent’s woes.

Investor and shareholder interaction by a family firm may highlight the entities’ concerns to criticism arising from family conflicts and controversies. To this end, the four South Korean publicly listed family firms examined appear proactive in providing comprehensive information to investors and shareholders on socially conscious issues. Aside from corporate social responsibility disclosures in regulatory documents (e.g., annual reports),

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the four entities examined provide lengthy discussion on key socially sensitive topics via web portals and sustainability reports. Hanjin Shipping Company Limited, for example, provides access to separate sustainability reports dating back to 2005 while having individual sections on such topics as business ethics, safety and quality, and the environment. While the entities examined are proactive in investor and shareholder engagement on socially conscious topics, it is noted that a review of information supplied suggests a defer- ence in discussing matters specifically related to any family conflicts and controversies.

Despite steps to promote investor interaction, some argue the current family-dominated corporate structure creates a “chaebol ceiling” that nullifies shareholder activism, embold- ens family firms, and eliminates the ability to effectively address spillover effects of family controversies and conflicts. While Korean publicly listed family firms may outperform the domestic market, the chaebol ceiling is reputed to effectively create a so-called Korea discount (Pesek 2015) that depresses valuations relative to international counterparts that is detrimental to minority owners. Furthermore, the existing system and its inability to deal with family conflict spillovers may damage the general economy by stifling innovation (Chang 2015).

Population: 50,220,000 100%

GDP (2014): USD 1,410.38 billion 50% GDP per Capita USD 33,629.00 (2014): 0%

Avg. Gross GDP ∆ 9.54% (9.35%) –50% (2010–2014): Gov’t Debt to GDP: 33.80% –100% Exchange: Korean Stock –150% Exchange 2010 2011 2012 2013 2014 2015

Main Index: KOSPI Index Samsung Electronics Limited Hanjin Shipping Company Limited Index End-2014: 1,948.16 Lotte Shopping Limited KOSPI Index Avg. Market ∆ –0.87% (–1.02%) Kumho Petrochemical Company Limited (CAGR) 2010–2014: Market Cap USD 1,212.759 Overview Select Family Firms End-2014: billion Company Name: Hanjin Shipping Company Name: Lotte Shopping Mkt Cap Avg. ∆ 3.13% (2.66%) Company Limited Limited (CAGR) 2010–2014: Family (% Owned): Cho Joong-hoon Family (% Owned): Shin (69.4%) (36.0%) No. Listed Firms 1,768 (1,864) Founded: 1967 Founded: 1977 End-2014 (2010): Revenue: USD 22,925.80 Mkt Concentration 77.29% (36.68%) Revenue: USD 7,443.21 million million End-2014 (2010): Industry: Shipping–Services Industry: Retail and Wholesale Family Firm Mkt USD 624 billion Assets: USD 7,323.20 million Assets: USD 34,493.30 million Cap End-2014 Chairman Young Choi Eun (Est.): (End-2014): Chairman Shin Dong-Bin (End-2014): Competitiveness 4.95 (26) CEO (End-2014): Young Choi Eun CEO (End-2014): Lee Won-Joon Index (Rank): Type: DO/DA/FG Type: CH/CC Corruption Index 55 (43) 5Yr CAR: –123.54% (Rank): 5Yr CAR: –64.03% Company Name: Kumho Innovation Index 55.3 (16) Petrochemical Company Name: Samsung Electronics (Rank): Company Limited Limited Legal System: Mix Civil/ Family (% Owned): Park (40.0%) Family (% Owned): Lee (≈ 5%–15%) Customary Law Founded: 1970 Founded: 1969 Hofstede’s 60/18/85/100 Revenue: USD 4,099.21 million Revenue: USD 177,399.10 million Cultural Score Industry: Chemicals Industry: Electronics (PD/Ind/UA/LTO): Assets: USD 3,816.52 million Political Rights/ 2/2 (Free) Assets: USD 198,232.85 Chairman Park Chan-Koo million Civil Liberties: (End-2014): Chairman Kwon Oh-Hyun (origi- CEO (End-2014): Park Chan-Koo and (End-2014): nally Lee Kun Hee) Kim Seong-Chae CEO (End-2014): Kwon Oh-Hyun Type: DO/FM/FG Type: DO/FM/FG 5Yr CAR: 7.40% 5Yr CAR: 35.58%

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Case Study XIII: Thailand—The Board and Internationalization With a substantial proportion of the majority family-owner’s wealth retained in the family firm, the lack of portfolio diversity is a substantial risk. This risk can be accentuated if the underlying asset base and revenue stream of the family firm are highly concentrated. Some recent surveys of Asian family firms (e.g., PwC 2012, 2014) indicate a recognition of the importance of greater internationalization, flexibility, and innovation to the future success of family firm entities. However, past research has found that there is often a reluctance among family firms (and particularly those nearing a succession change) to internationalize operations or adopt innovative changes. This reluctance is often borne by a conservative focus to preserve wealth for future generations and ensure the founding family member’s legacy.

BTS Group Holdings PLC is a diluted family-ownership entity with strong family involvement in management and governance. The family ownership of CP All PLC is also diluted with strong family governance but higher professional management delega- tions. Operations and assets of the two entities are virtually confined entirely to Thailand (i.e., 100% for BTS Group Holdings PLC and 99.89% of revenue and 98.35% of assets for CP All PLC). Operations of BTS Group Holdings PLC form three major business segments (i.e., media, property, services) and two for CP All PLC (i.e., convenience stores and cash and carry). The localized and concentrated operational bases of the two entities place them much at the fortunes of the Thai economy. A review of each firm’s respective documents and disclosures suggest the lack of any formal research and development program. BTS Group Holdings PLC does place an emphasis on the need for innovation, although CP All PLC is generally silent.

The average age of the board of directors of BTS Group Holdings PLC and CP All PLC is more than five years higher than for Indorama Ventures PLC and Thai Union Frozen Products PLC. The differential is almost double (i.e., 10 years) if only considering independent directors. The higher age of directors (particularly independent directors) on BTS Group Holdings PLC and CP All PLC may lead to a reluctance to instigate change or knowledge of new industry developments. In respect to BTS Group Holdings PLC, the higher proportion of executive director on the board than independent directors may provide a further obstacle to change. As for CP All PLC, the average tenure of the five independent directors on the board is 10 years (higher by more than 3 years relative to the other three entities). The long tenure raises concerns about the independence of these directors and increases potential for greater reluctance to encourage change.

For Indorama Ventures PLC, only 6.17% (41.28%) of revenue (assets) are derived (based) from (in) Thailand. Meanwhile, in the case of Thai Union Frozen Products PLC (diluted family ownership, strong family management and governance involvement), less than 7.5% of revenue and assets are from Thailand. Both Indorama Ventures PLC and Thai Union Frozen Products PLC have active in-house research and development initiatives aimed at developing innovations useable to the entity. Both the boards of Indorama Ventures PLC and Thai Union Frozen Products PLC have non-Thai members that can aid in supporting the understanding of the internationalized operations of these two firms. Independent directors compose 50% of the board of Indorama Ventures PLC and may be beneficial in increasing the ability to enable change and flexibility more rapidly than a board dominated by executive directors, such as with Thai Union Frozen Products PLC.

A general feature of the four Thai publicly listed family firms is the lack of recent corporate governance–related training undertaken. Information disclosed by each firm suggests many directors has not attended any board or governance associated training within the past 5 years (often more than 10). The lack of governance training could hamper internationalization concerns, although other board experience could be an offsetting factor.

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Population: 67,010,000 100% GDP (2014): USD 373.80 billion 50% GDP per Capita USD 3,451.00 (2014): 0% Avg. Gross GDP ∆ 7.51% (7.23%) (2010–2014): –50% Gov’t Debt to GDP: 45.70% –100% Exchange: Stock Exchange of Thailand –150% Main Index: SET Industrial 2010 2011 2012 2013 2014 2015 Index Index End-2014: 1,510.41 Thai Union Frozen Products BTS Group Holdings Public Company Limited Public Company Limited Avg. Market ∆ 11.16% (9.97%) Indorama Ventures Thailand SET Index Public Company Limited (CAGR) 2010–2014: CP All Public Company Limited Market Cap USD 430.426 End-2014: billion Overview Select Family Firms Mkt Cap Avg. ∆ 13.56% (11.58%) (CAGR) 2010–2014: Company Name: BTS Group Holdings Company Name: Indorama Ventures Public Co. Limited Public Co. Limited No. of Listed Firms 613 (541) Family (% Owned): Lohia (66.39%) End-2014 (2010): Family (% Owned): Kanjanaplas (41.3%) Founded: 1994 Mkt Concentration 64.13% (40.64%) Founded: 1967 End-2014 (2010): Revenue: USD 176.12 million Revenue: USD 7,020.61 million Family Firm Mkt USD 208 billion Industry: Transportation Industry: Consumer Staples Cap End-2014 Assets: USD 1,915.35 million Assets: USD 5,606.64 million (Est.): Chairman Keeree Kanjanapas Chairman Aloke Lohia Competitiveness 4.65 (31) (End-2014): (End-2014): Index (Rank): CEO (End-2014): Kavin Kanjanapas CEO (End-2014): Aloke Lohia Corruption Index 38 (85) Type: DO/FM/FG Type: CH/CC (Rank): 5Yr CAR: 39.70% 5Yr CAR: –90.59% Innovation Index 39.3 (48) Company Name: CP All Public Co. Company Name: Thai Union Frozen (Rank): Limited Products Public Co. Limited Legal System: Civil Law Family (% Owned): Chearavanont Family (% Owned): Chansiri (20.96%) Mono-system (42.9%) Founded: 1988 Hofstede’s 64/20/64/32 Founded: 1968 Cultural Score Revenue: USD 10,264.2 million Revenue: USD 3,507.45 million (PD/Ind/UA/LTO Industry: Consumer Staples Industry: Consumer Staples Political Rights/ 6/5 (Not Free) Assets: USD 9,361.42 million Assets: USD 3,309.88 million Civil Liberties: Chairman Dhanin Chairman Kraisorn Chansiri (End-2014): Chearavanont (End-2014): CEO (End-2014): Tanin Buranamanit CEO (End-2014): Thiraphong Chansiri Type: DO/FM/FG Type: DO/FM/FG 5Yr CAR: 65.17% 5Yr CAR: 18.01%

Case Study XIV: Vietnam—Influences in a Non- Traditional Capitalist Market Although state-owned enterprises still dominate the Vietnamese business environment, the contribution of non-SOEs to GDP and employment is increasing (Taussig, Nguyen, and Nguyen 2015). The economy’s embryonic corporate governance and capitalist landscape, nonetheless, has also led to the rise of a greater variety of governance structures not found in other Asian economies. Also, reliance on foreign investment has perpetuated a strong foreign influence. Current variations and foreign influence imply an interest period moving forward on how the governance structures of Vietnamese family firms may evolve.

FPT Corporation uses a two-type governance structure. The board of directors (seven members) is designated as the highest governance body; however, the board is overseen by a supervisory board (presently three members). A board of management (four members) is also in place with oversight by the board. An interesting feature of the board of FPT Corporation is the presence of three foreign directors that is representative of the share-ownership structure, with 49% foreign ownership including 140 institutional investors. Like FPT Corporation, Gemadept Corporation is 49% foreign owned with only 0.1% state ownership. A board of directors (comprising two members) is included in the governance structure, but its role is more likened to an audit committee, being charged with preparing financial statements and oversight of internal auditing responsibilities. For Gemadept Corporation, an 11-member board of management (overseen by a 5-member control board) is the other major governance body. Despite the high proportion of foreign ownership, only one board member was not from Vietnam.

Nearly 48% state-owned Kinh Bac City Development Holding Corporation also incor- porates a dual-board system (i.e., board of directors and supervisory board), supported by a board of management, as the foundation of the entity’s governance system. In contrast to FPT Corporation, where 57% of the board of directors are non-executives employed outside the entity, all members of the Kinh Bac City Development Holding Corporation board of directors are employed by the entity. In further contrast, one member of the board of management of Kinh Bac City Development Holding Corporation is independent, whereas no members of the board of management of FPT Corporation are independent (all employees).

Finally, the governance structure of Refrigeration Electrical Engineering Corporation is more closely aligned with that of a single-board structure seen in the majority of other Asian economies. Specifically, a board of directors (comprising five members of whom one member is a non-executive independent director and two non-executive non-independent)

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is designated as the main governance body. The actions of the board of directors are overseen by an inspection committee (in contrast to a supervisory board) comprising three members. Two members of the board of directors of Refrigeration Electrical Engineering Corporation are foreign, which has 49% foreign ownership, comprising 556 individuals and institutions (one being a major shareholder).

Key board committees (i.e., audit, remuneration, and nomination) are scarce. None of the four Vietnamese entities reviewed had an audit or nomination committee, although one (Refrigeration Electrical Engineering Corporation) had an internal audit committee. Only two (FPT Corporation and Refrigeration Electrical Engineering Corporation) entities had a remuneration committee. Aside from a higher foreign presence in the governance structure, the proportion of female representation appears to exceed other Asian economies. For example, for Gemadept Corporation, 18% and 60% of the board of management and control board are female. Similarly, for Refrigeration Electrical Engineering Corporation, the board chair and two of the three members of the inspection committee are female. As for Kinh Bac City Development Holding Corporation, the CEO (member of board of management and directors) and two members (including Board Head) of the Supervisory Board are female. Diversity in regards to gender and nationality of the four Vietnamese entities reviewed contrasts with that observed in other Asian capital markets.

Population: 90,730,000 80% GDP (2014): USD 186.20 billion 60% 40% GDP per Capita USD 1,078.00 20% (2014): 0% Avg. Gross GDP ∆ 11.97% (11.92%) –20% (2010–2014): –40% Gov’t Debt to GDP: 50.60% -60% Exchange: Ho Chi Minh Stock –80% Exchange –100% Main Index: VN Industrial Index 2010 2011 2012 2013 2014 2015 Index End-2014: 484.66 Avg. Market ∆ 4.49% (2.42%) Refrigeration Electrical Gemadept Corporation Engineering Corporation FPT Corporation (CAGR) 2010–2014: Kinh Bac City Development Market Cap USD 46.067 billion Holding Corporation HOSE - 30 End-2014: Mkt Cap Avg. ∆ 14.93% (11.21%) Overview Select Family Firms (CAGR) 2010–2014: Company Name: FPT Corporation Company Name: Kinh Bac City No. of Listed Firms 305 (275) Development Holding Ownership: Internal (24.5%)/ Corporation End-2014 (2010): Foreign (49.0%)/ Domestic (20.5%) Family (% Owned): Major (40.29%)/ Mkt Concentration N/A Founding (0.28%)/ End-2014 (2010): Founded: 1988 State (47.69%) Revenue: USD 1,548.92 million Family Firm Mkt N/A Founded: 2002 Industry: Technology Cap End-2014 Revenue: USD 50.73 million Assets: USD 1,067.63 million (Est.): Industry: Real Estate Chairman Truong Gia Binh Assets: USD 614.84 million Competitiveness 4.22 (68) (End-2014): Chairman Dang Thanh Tam Index (Rank): CEO (End-2014): Bui Quang Ngoc (End-2014): (12.95% ownership) Corruption Index 31.8 (119) Type: N/A CEO (End-2014): Nguyen Thi Thu (Rank): 5Yr CAR: –48.82% Huong (Mdm) Company Name: Gemadept Type: N/A Innovation Index 34.9 (71) Corporation 5Yr CAR: –44.79% (Rank): Family (% Owned): Other (50.9%)/Foreign Company Name: Refrigeration Legal System: Civil Law (49.0%)/State (0.1%) Electrical Engineering Mono-System Founded 1990 Corporation Revenue: USD 143.14 million Hofstede’s 70/20/30/57 Family (% Owned): Local Ind/Inst. Industry: Diversified (42/9%)/ Local Ind/ Cultural Score Inst. (1/48%) Assets: USD 385.37 million (PD/Ind/UA/LTO): Founded: 1977 Chairman Do Van Nhan Political Rights/ 7/5 (Not Free) (End-2014): Revenue: USD 124.83 million Civil Liberties: Gen. Dir. (End-2014): Do Van Nhan Industry: Electrical Type: N/A Assets: USD 395.95 million 5Yr CAR: 6.16% Chairman Nguyen Thi Mai (End-2014): Thanh (Mdm) (6.22% holding) Gen. Dir. (End-2014): Nguyen Thi Mai Thanh (Mdm) Type: N/A 5Yr CAR: 53.11%

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5.1. Part V Summary The 14 case studies provide a variety of intriguing insights. The case studies cover publicly listed family firms from a broad spectrum of economies (i.e., developed to emerging to frontier) and a broad range of socio-geographical features (e.g., large population to small, higher collective to lower collective society). The underlying capital market and institutional structures are also diverse. For example, the capital markets in Hong Kong (SAR, China), Singapore, and South Korea have a lengthy history. However, while the legal framework underpinning the capital market and institutions in Hong Kong (SAR, China) and Singapore are strongly influenced by common law, the principles of civil law prevail in South Korea.

The national and capital snapshot details also highlight interesting relative changes during the past several years. Since the end of 2010, the number of listed firms in the capital markets of some of the Asian economies examined rose [e.g., Hong Kong (SAR, China), Indonesia, Vietnam] while others have remained relatively stable (e.g., Mongolia, Singapore) or fallen (e.g., Pakistan, South Korea). Furthermore, the market returns and total market capitalization growth during the same period have been mixed. In the case of Pakistan, the average annual return and market capitalization growth from end-2010 to end-2014 were approximately 30% and 24%, respectively. For Singapore, the average five- year annual return was about 2%, while for South Korea, it was nearly –1%. Market capitalization growth for Singapore and South Korea was around 4%. Over 2010–2015, there appears to have been expansion in some economies but declines in others, with market capitalization growing faster in some economies but slower elsewhere in Asia. Relative to 2001–2010 as reported in the Credit Suisse (2011) report, capital market changes between 2011 and 2015 may not have provided fertile ground for growth in the number of family firm listings in Asian capital markets and expansion opportunities.16

The case studies also provide anecdotal evidence and factoids regarding corporate governance issues confronting Asian publicly listed family firms that can impinge on the interests of minority owners, and that may be worthy of more attention from policymakers

16The Credit Suisse (2011) report is the last comprehensive multi-economy study in the Asian region to have sought to formally determine the number of publicly listed family firms in each economy. It is somewhat speculative, therefore, to suggest with any true certainty that growth in the number of publicly listed family firms in Asia between 2011 and 2015 stagnated relative to the period 2001–2010, or that Asian family firms that are publicly listed did not grow (based on market capitalization) as during 2001–2010. Nonetheless, the stagnation in overall listing numbers and slower market capitalization growth do provide reasonable grounds for such a supposition. It is recommended in Part II that in the future it would be useful to collect a comprehensive overview of each economy’s capital market to determine with more precision the changes in publicly listed family firm numbers and market capitalization to provide an invaluable update.

within the region. For example, the Hong Kong (SAR, China) case study analysis suggests publicly listed family firms may have a tendency for the board and subcommittees to have a strong executive director and family presence. In several circumstances, a senior executive family member served as the chair of the nomination committee. Such presence may not only impair perceptions of independence in the eyes of investors but also reduce the chances of electing directors who support the interests of minority owners. In Indonesia and to a lesser extent the Philippines, senior executives and family members dominate the remuneration (and nomination) committees of the publicly listed family firms reviewed. Control of the remuneration committee by senior executives and family members may enhance the risk of excessive compensation.

Insufficient information is identified as another risk that could hamper the share value and performance of publicly listed family firms. In this context, it is not surprising to find a lack of information on financial accounting, nonfinancial, and corporate governance issues in a frontier capital market, such as Mongolia. However, there are difficulties in obtaining information in more developed Asian capital markets, such as Chinese Taipei (Taiwan) and China. With greater internationalization pressures, publicly listed family firms may have to extend their information reach beyond domestic boundaries to address concerns of international investors and other stakeholders (e.g., suppliers, customers). At present, the consistent availability of information supplied by Chinese Taipei (Taiwan) and Chinese publicly listed family firms that is accessible by a broader international audi- ence is limited relative to counterparts in other Asian capital markets, such as India and Thailand. The timeliness of financial and nonfinancial information supplied by Chinese Taipei (Taiwan) and Chinese publicly listed family firms also seemed to lag counterparts in capital markets in Asia with similar levels of economic development.

Another interesting observation relates to differences in the social dynamics of the board and subcommittees. There has been much criticism of the lack of diversity on the boards of Asian publicly listed firms. Various case studies suggest that Asian publicly listed family firms in some economies have been proactive in promoting diversity. In respect to gender, publicly listed family firms in such locations as Bangladesh, Hong Kong (SAR, China), India, Singapore, and Vietnam had female directors. For Chinese Taipei (Taiwan), Chinese, Pakistan, and Thai publicly listed family firms, female director presence was limited. In such economies as Bangladesh and Hong Kong, female directors tended to be family members, but in other locations (e.g., India), female directors were often independent. In Indonesia and Thailand, the publicly listed family firms included nondomestic citizens. This diversity was not present in other Asian jurisdictions. If diversity improves firm value and performance, then further analysis of the socio-dynamics of Asian publicly listed family firms is warranted to determine why some economies are more proactive than others in embracing diversity.

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The case studies illustrate several issues worthy of more investigation and consideration than noted in this brief section, which focuses on only a limited set of observations. The task moving forward is to determine the priority of issues requiring more immediate attention and to develop a research methodology to conduct a more rigorous analysis that can lead to the development of key corporate governance recommendations that can enhance both value creation for publicly listed family firms and minority-owner protection. The greater the depth and breadth of the analysis conducted, the more effective and holistic the recommendations can be.

Case Study Key ■ ■ Population: Latest census information sourced from the World Bank Group. ■ ■ GDP (2014): Latest census information sourced from the World Bank Group. ■ ■ GDP per Capita (2014): Latest census information sourced from the World Bank Group. ■ ■ Avg. Gross GDP ∆ (2010–2014): The average gross change (figure not shown in parentheses) is measured as the sum of annual change (i.e., ∑(GDPi – GDPi-1)/ GDPi-1)) in GDP from 2010 to 2014 divided by the number of years (i.e., ∑(GDPi – GDPi-1)/ GDPi-1))/N). The figure in parentheses is the compounded annual rate of change in N GDP from 2010 to 2014 (i.e., (GDP2014 – GDP2010) where N is the number of annual periods). GDP values sourced from the World Bank Group. ■ ■ Gov’t Debt to GDP: The percentage of government debt to total GDP. Latest annual value sourced from Trading Economics. ■ ■ Exchange: The name of the stock exchange in the nation of interest. ■ ■ Main Index: The main reported index (as commonly featured on major finance portals, such as Bloomberg, CNBC, or Reuters) for the stock exchange of interest. ■ ■ Index End-2014: The value of the main index of the nation and stock exchange of interest as sourced directly from the stock exchange and verified using major finance portals, such as Bloomberg, CNBC, and Reuters. ■ ■ Avg. Market ∆ (CAGR) 2010–2014: The average gross market change (figure not shown in parentheses) is measured as the sum of annual change in market index value (i.e., ∑(MIVi – MIVi-1)/ MIVi-1)) from 2010 to 2014 divided by the number of N years (i.e., ∑(MVIi – MVIi-1)/MVIi-1))/N). The figure in parentheses is the compounded annual rate of change in market index value from 2010 to 2014 (i.e., (MVI2014 – N MVI2010) where N is the number of annual periods). The value of the main index of the nation and stock exchange of interest at the end of each year is sourced directly from the stock exchange and verified using major finance portals, such as Bloomberg, CNBC, and Reuters. ■ ■ Market Cap End-2014: Total market capitalization reported in USD at the end of 2014. Data are sourced from each stock exchange and supplemented by data from the World Federation of Exchanges.

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■ ■ Mkt Cap Avg. ∆ (CAGR) 2010–2014: The average change in total market capitalization (TMC) (figure not shown in parentheses) is measured as the sum of annual change in total market capitalization (i.e., ∑(TMCi – TMCi-1)/TMCi-1)) from 2010 to 2014 divided by the number of N years (i.e., ∑(TMCi – TMCi-1)/TMCi-1))/N). The figure in parentheses is the compounded annual rate of change in market index N value from 2010 to 2014 (i.e., (TMC2014 – TMC2010) where N is the number of annual periods). Data on market capitalization at the end of each annual calendar year from 2010 to 2014 are sourced from each stock exchange and supplemented by data from the World Federation of Exchanges. ■ ■ No. of Listed Firms End-2014 (2010): The figure not in parentheses is the number of listed firms on the stock exchange at the end of 2014 while the figure inside the parentheses is the number of listed firms on the stock exchange at the end of 2010. Data on number of listed firms on the stock exchange are sourced directly and supplemented by data from the World Federation of Exchanges. ■ ■ Mkt Concentration End-2014 (2010): Data on market concentration are sourced from the World Federation of Exchanges for the period ended 31 December 2014. The value not reported in the parentheses is the proportion of the total capital market capitalization attributed to the top 5% of listed domestic firms based on market capitalization. The value in the parentheses is the portion of total market capitalization attributed to the top 5% of listed domestic firms based on share trading value. ■ ■ Family Firm Mkt Cap End-2014 (Est.): This is anestimated value. It is based on the assumption that the percentage of publicly listed family firms to total listings at the end of 2010 as reported by Credit Suisse (2011) remained constant from 2010 to 2014. Total market capitalization is based on end-2014 values as collected from each stock exchange while the percentage of family firms at end of 2010 is sourced from Credit Suisse (2011). ■ ■ Competitiveness Index (Rank): Score (international ranking) of the nation’s competitiveness as reported in the Global Competitiveness Report produced by the World Economic Forum. ■ ■ Corruption Index (Rank): Score (international ranking) of the nation’s corruption perception as reported by the Transparency International Corruption Index produced by Transparency International. ■ ■ Innovation Index (Rank): The nation’s innovation score (ranking) as reported in Global Innovation 2014: The Human Factor in Innovation index produced by Cornell University, INSEAD, and the World Intellectual Property Organization.

■ ■ Legal System: The nation’s legal system classification as reported by JuriGlobe–World Legal Systems (http://www.juriglobe.ca/eng/sys-juri/) at the University of Ottawa. ■ ■ Hofstede’s Cultural Score (PD/Ind/UA/LTO): National cultural scores for the dimensions of power distance, individualism, uncertainty avoidance, and long-term orientation as defined by Geert Hofstede and reported by the Hofstede Centre (http:// geert-hofstede.com/countries.html) ■ ■ Political Rights/Civil Liberties: The political rights and civil liberties scores as produced in the Freedom of the World 2015 Survey produced by Freedom House (https://freedomhouse.org/report-types/freedom-world#.VbiFqfmqpBc) with the qualitative score shown in parentheses.

Case Study Table Terms ■ ■ Family (% Owned): Family ownership percentage—The percentage of family ownership is based on an assessment of the latest end of year financial information documented (i.e., annual report) and supplied by the firm. Attempts to verify the information are drawn from alternative sources, such as details on the stock exchange to which the entity is listed, major financial media sources (e.g., Bloomberg, Reuters) or the Global Family Business Index. ■ ■ Founded: The year of founding is sourced directly from the firm directly or where not possible, secondary sources, such as Bloomberg, CNBC, or Reuters. ■ ■ Industry: As defined by the domestic stock exchange or secondary sources. ■ ■ Revenue and Assets: Values for total revenue/total assets are taken from the latest annual financial statements of the firm and converted to USD using average exchange rates for revenue and end of period values for total assets. All values are as at the end of December 2014, although some values are for earlier in 2014 depending on the close of books. In very limited cases (less than two and reported accordingly), values are earlier due to unavailability of data. ■ ■ Chairman (End-2014) and CEO or Gen. Dir. (End-2014): Names are based on review of latest annual report (i.e., 2014) disclosures supplemented where possible by corporate governance reports and/or sustainability reports. Information was sourced directly from the entity. ■ ■ Ty pe: The type of family firm is based on the mapping scheme shown in Table 3.2 based on a review of the entity’s ownership structure, family involvement in

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management and governance participation. Terms: CH—closely held; CC—closely controlled; DO—diluted family ownership; DA—delegated authority; FM—family management involvement; FG—family governance participation. ■ ■ 5Yr CAR: The five-year cumulative abnormal return (CAR) is the sum of annual abnormal returns of the entity from 1 July 2010 to 30 June 2015. The abnormal return is the amount of return the stock of the firm outperformed or underperformed the main index during the noted period. Data to compute abnormal returns, stock returns, and market returns are sourced directly from the stock exchange or reputable secondary sources where stock exchange data are missing (e.g., Bloomberg, Reuters). ■ ■ The diagram shown in support of each case study illustrates the annual percentage return of the main index from 1 July 2010 to 30 June 2015. For illustration purposes, the diagram is listed as from 2010 to 2015. The annual percentage return of the main index is shown as the front-most line in the diagram. The cumulative annual return is at the end of each time period (e.g., for 2012 the sum of annual abnormal returns for 2010, 2011, and 2012, while for 2014 the sum of annual abnormal returns for 2010, 2011, 2012, 2013, and 2014). If the annual return of any given firm outperformed (underperformed) the market return, then the annual change in CAR would be shown as an increase (decrease) or upward (downward) shift in the line graph cor- responding to the entity.

As highlighted in this review, publicly listed family firms in Asia—whether achieving success or confronting economic hardship—are facing complex challenges that influence the impact of the underlying corporate governance framework. The review indicates that publicly listed family firms are not a homogeneous group to which a singular corporate governance template can be attached to guarantee success. Rather, Asian publicly listed family firms are a heterogeneous group with different entities having unique characteristics and challenges.

Consequently, it is important to develop a holistic understanding of the corporate governance features supporting firm performance and value across the broader spectrum of publicly listed family firms in the region. Such insights can lead to more effective practices to better address the difficulties facing different types of publicly listed family firms within Asia and help companies thrive through enhanced performance and value into the future across generations. Also, development of policy recommendations that assist in enhancing the corporate governance practices of Asian publicly listed family firms will also increase protection to minority owners from wealth expropriation by majority, controlling family owners.

Before developing any specific policy recommendations, a pivotal step for any future analysis is to develop a clear definition of a publicly listed family firm that can be applied across OECD Asian Roundtable economies. This definition will allow for more effective catego- rization of listed firms and will provide a clearer basis for comparative analysis with other research.

A second major step is to provide a more up-to-date overview of the depth and types of publicly listed family firms across Asia. The Credit Suisse (2011) analysis provides an initial foundation, being the most comprehensive study examining publicly listed family firms across 10 of the 14 OECD Asian Roundtable economies. That analysis used a consistent framework and methodology that enhances the comparability of findings.

Studies of Asian family firms have been conducted since the Credit Suisse (2011) report. However, all too often these studies are country specific, concentrate on a limited set of economies in the region, and/or use differing definitions, which make it difficult to create

100 WWW.CFAINSTITUTE.ORG VI. Concluding Remarks and Recommendations

a consistent picture of the publicly listed family-firm landscape across Asia. The case studies conducted as part of this report suggest the capital market environment across various Asian economies is likely to be different from the concluding period of the Credit Suisse report. For example, the case studies suggest listing across various Asian economies between 2011 and 2014 was not as prominent as during the period of focus of the Credit Suisse report. Consequently, the number of publicly listed family firms in Asia may have declined. Until a more comprehensive framework using a consistent method is conducted, such notions are strictly speculative. An important step to enhance the relevance of future analysis is to develop a more in-depth and comprehensive picture of Asian publicly listed family firms.

While developing a more recent picture of the Asian publicly listed family firm landscape is an invaluable step, such analysis and resulting outcomes can be enhanced by examining these entities as a heterogeneous group. Prior empirical research has consistently encased publicly listed family firms within a homogeneous window despite recognition of the familiness construct. The case studies presented in Part V provide some evidence that many publicly listed family firms in Asia are either closely held and managed or have diluted family ownership but strong family involvement in management and governance. Family firms that have a diluted family ownership structure and delegated authority but with strong family control of governance are also observed to be strong in some economies but less prevalent in others. Structures where the family firm is closely held but with delegated management authority appear less prevalent.

The case studies—while presenting valuable insights—only provide a limited snapshot. Future analysis should consider determining more precisely the frequency of different types of publicly listed family firms. The framework used in the development of the case studies presented in this report can provide a template for further research. Alternatively, a more complex mapping structure (such as that shown in Figure 3.1) could be useful to enhance future recommendations for publicly listed family firms.

Finally, the case studies presented discussed a wide range of issues while the focus is limited. Future research needs to examine the issues across all 14 economies to develop a more robust set of findings that would enhance any policy recommendations subsequently developed. Pragmatically, it is not likely feasible to examine all issues highlighted in this report across all 14 economies. An important step for further analysis is to determine the key issues that can be gleaned from a review of the case studies that warrant greater attention. Findings from such rigorous empirical analysis across a comprehensive dataset would be invaluable in enhancing possible recommendations to major issues confronting Asian publicly listed family firms in respect to corporate governance.

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Tony Tan, DBA, CFA Head Global Society Advocacy Engagement CFA Institute

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