The Fourth Asian Roundtable on Corporate Governance Moving Towards Transparency of Ownership and Control : A Case Study Presentation by Pulak Prasad, Managing Director, Warburg Pincus Global Corporate Governance Forum, Singapore Mumbai (India), November 2002

2 Agenda for today’s discussion  Does transparency of ownership and control prevent insider abuse?  2 cases : A study of contrasts  Key takeaways

3 No Does transparency of ownership and control prevent insider abuse?  Tells me who runs the company, not what their intent is  Insider abuse can be perpetrated by those who are neither owners nor in control  If it did, we would not have had disasters like Andersen, Enron, Worldcom, Adelphia ……….  Companies that are not transparent about ownership and control do not necessarily “abuse” (e.g. AIG, Hutchison)

4 But Transparency of - markets - management teams So what prevents insider abuse? It is not only transparency of ownership and control

5 BoardsNon-executive majority Insider DisclosureHigh Limited Minority protectionHigh Low Takeover marketActive Limited Fund sourcesSophisticated institutions Family, banks New issue marketActive Underdeveloped Meaning of transparency of “markets” ….. Aspect US / UK Asian Lower transparency

6... and management teams Key tests Does it share information Does it have high integrity Can it be fired Does it have adequate controls

7 Case 1: Ayala Corporation – Transparency Matters Publicly listed (18.5%) 100% Ayala International Private 70% Ayala Land 35% Bank of the Philippine Islands 32% Globe Telecom Division Ayala Corporation Shoemart (4.4%) Mitsubishi (19.1%) Ayala family (58%) AC Capital

8 Partner with Companies With exacting standards Better accounting practices Make companies public Why are Ayalas a role model?  Holding company is public  So are all the 3 major subsidiaries  Held to higher governance standards  Migrating to higher levels of disclosure  Ahead of Philippines SEC requirement  Working with Mitsubishi for 28 years  Working with Singtel or 10 years

9 Why are Ayalas a role model? (continued)  Only 3 family members involved (all at the top)  All CEOs are professionals rewarded on merit Professional management No parallel networks  Single family holding structure  Direct ownership in Ayala Corp (no layering or opacity)  All family members receive dividend income  Family does not invest in ventures that compete with Ayala Corp

10 Ayalas have created much more wealth than competitors Market Capitalization ($ million) Revenues, 2001 ($ million) $1,446 $1,144 $1,283 $1,002 $923 $711 $169 $965 Bank of the Philippine Islands Globe Telecom Ayala Corporation Ayala Land Metropolitan Bank & Trust Philippines Long Distance Telephone JG Summit Holdings SM Prime Holdings $795 $695 $895 $1,436 $527 $777 $205 $133

11 Ayalas have outperformed other conglomerates Performance relative to Local Index 1/1/95-24/10/ % 6.9% % 44.5% % % %-80.0%-60.0%-40.0%-20.0%0.0%20.0%40.0%60.0%80.0%100.0% Ayala Jardine Keppel Hutchison First Pacific SK Corp

12 BusinessA B C D E F G H Case 2: Asian IT Company – Transparency still matters! Company 1 Mr A Company 2 Company 3 Company 4 Company 5 <30% >50% >40% overlaps

13 Market reaction has been vicious Mr A’s company Transparent Company

14 Markets reward high transparency across countries Source : The McKinsey Quarterly Premium for good governance (%)

15 Key takeaways  Market and management transparency is key to preventing insider abuse/ creating value  Transparent companies get rewarded by the market  Transparency is very relevant to Asia and arguments of “unique Asian model” are without basis