Corporatization of Family Companies & International Corporate Governance Principles Syrian Commission on Financial Markets & Securities 3 rd Conference on Investment and Capital Markets William P. Mako The World Bank 3 December 2007

Many well-known public companies have emerged from family businesses. CompanyCountryEstablishedOriginal business BoeingU.S.A.1903wood products FordU.S.A1902automobiles Corning GlassU.S.A.1851glass SiemensGermany1847electrical equipment AyalaPhilippines1834plantations CitibankU.S.A.1812finance DuPontU.S.A.1802chemicals DoosanKorea1396retail

Institutional investors can play an important role in protecting minority shareholders (stock ownership) U.S.U.KSouth Korea Banks7%10%12% Insurance, pension, investment funds39%58%14% Non-financial companies0%1%21% Individuals49%21%34% Other5%10%19%

Family businesses go public for various reasons. Good reasons  Capital for generally-known business purposes  Family succession, exit  More professional management  Capital market discipline  possible by-product Bad reasons  Prestige  Capital for hidden business purposes

What can go wrong? E.g., South Korea, 1990s Cross-shareholding and pyramiding Family ownership minor, in some cases Lack of holding company structure Lack of accountability; poor governance Public subsidiaries & private subs. juxtaposed RPT expropriation of public S/Hs  “growth” Cross guarantees on debt; unsustainable debt Bad decisions; bad investments; bankruptcy

OECD Principles: II. Shareholder rights & ownership functions A. Basic rights B. Extraordinary transactions C. Participation in general shareholder meetings D. Disclosure of anomalous control arrangements E. Free market for corporate control F. Free exercise of ownership rights

OECD Principles: III. The equitable treatment of shareholders A. Including protections for minority shareholders B. Prohibitions  Insider trading  Abusive self-dealing C. Disclosures by management and board  Material interest in any transaction or matter  Directly, indirectly, or on behalf of 3 rd parties

OECD Principles: V. Disclosure & transparency A. Material information, e.g.  Financial and operating results  Company objectives  Major share ownership & voting rights  Remuneration; info on board members  Related party transactions B. Accounting standards C. Annual independent audit Etc.

OECD Principles: VI. Responsibilities of the Board A. Fully informed, in good faith, diligent B. All shareholders treated fairly C. Ethical standards D. Key functions: e.g.,  Guidance  Monitoring  Hiring/firing CEO E. Independent judgment F. Timely access to relevant information

Good corporate governance helps firm performance, even for family-owned firms. Gompers, Ishii, Metrick (2001)  Studied 1500 firms per year during 1990s  Purchase (sale) of firms with strong (weak) S/H rights: +8.5%  Correlation between governance index and valuation LaPorta, et al (2002)  Disconnect between cash flow & control rights  RPT tunneling  Low S/H protection  lower valuation

Corporate governance activism & results: South Korea, post-crisis Activist shareholders (e.g., People’s Solidarity)  Sued bank for lending to a bankrupt steel maker  $18 mn. from Samsung for related party shares sale Activist funds  $400 mn. Lazard Korea Corporate Governance Fund  $211 bn. California Public Employees Retirement Results  Daehan: register; HoldCo; investor relations; up 127%  LG Corp: reorganized as HoldCo; 10x price rise  SK Corp: reorganized as Hold Co; up 31% since 7/07