CORPORATE GOVERNANCE:
A GLOBAL PERSPECTIVE
(ACCT6170)

1. Overview

Joseph P.H. Fan (㤳ঊᆿ˅

Director, Institute of Economics & Finance
Professor, School of Accountancy and Department of Finance

Phone: 852-3943-7839; Email: pjfan@cuhk.edu.hk

http://ihome.cuhk.edu.hk/~b109671
Weibo˖http://weibo.com/u/2473797767



Course Map

• Lecture 1: Overview
• Part 1:
• Lecture 2-4: Family Business Basics
• Lecture 2: Family Assets
• Lecture 3: Roadblocks
• Lecture 4: The Family Business Map
• Part 2: “Once in a life time” governance decisions.
• Part 3: “Day to day” strategies.

Corporate Governance Overview 2 


 

Agenda

³Course features

³What is governance?

³Defining firms

³Why study family firms?

Corporate Governance Overview 3 

Course Features

• Purposes
• Understanding corporate organizations, their related parties and environments
• Understanding conflicts of interests among corporate stakeholders
• Choosing the best governance tools to mitigate conflicts, facilitate corporate
efficiency and long-term development
• Perspectives: local relevance, global comparative approach
• Analysis: economics based, but noticing the importance of psychology
• Focus: private and family businesses, examining not only the business
side but also the owner side of the business

Corporate Governance Overview 4 


 

Governance is the choice of alternative mechanisms that mitigate (but not

necessary eliminate) agency problems due to conflicts of interest in an
organization

Corporate Governance Overview 5 

An organization is a nexus of contracts among various

stakeholders
Who is missing? Minority Shareholders
Market for
Product Market
Corporate Control
(Consumers)

Auditors,
Input Market Managers Analysts,
(Suppliers) (Controlling Owners) Institutional Investors

Bank
Strategic Alliance
(Creditors)

Government

Corporate Governance Overview 6 


 

3 Circle Model of Family Business Governance

Ownership

Family Management

Corporate Governance Overview 7 

Discussion

• What are common conflicts of interest in your workplace?

• What are the consequences of the conflicts˛

• How do you or your firm prevent/mitigate the conflicts, before/after

they occur?

Corporate Governance Overview 8 


 

• A corporation can be viewed as a nexus of contracts connecting

various stakeholders, including shareholders, managers,
employees, suppliers, customers, government, etc.
• Contracts cannot be perfect, conflicts can occur after agreements
because of changes of circumstances
• Among the many corporate stakeholders, whose interest should
come first?
• The objective of a corporation is maximizing shareholders’ wealth
without hurting other stakeholders’ interests as agreed in their
contracts

Corporate Governance Overview 9 

What is fair?
(Does the court know?)
• Conflict between shareholders and debtholders at Marriotts Hotel

• Can you give an example?

Corporate Governance Overview 10 


 

There are many possible internal and external governance

mechanisms
• Laws, regulations, and their enforcement
• Monitoring
• Board of directors
• Large shareholders
• Market for corporate control
• Product market competition
• Others: boat pulling, ice cream machine
• Bonding
• Information intermediaries (auditors, financial analysts, rating agencies)
• Reputation
• Incentive:
• Compensation, promotion
• Organization design (e.g., decentralization)
• Others?

Corporate Governance Overview 11 

Why is the world not perfect?

Given so many governance methods, why conflicts still occur?

How can we make corporate governance stronger?

Should we?
• Why do we not necessarily want to eliminate all agency problems?
• Because doing so may be too costly (marginal benefit of eliminating agency
problem (marginal governance cost of monitoring and/or contracting)
• Remember: in the real world, agency problem (conflict of interest)
always exist. They will be mitigated to the extent that marginal benefit
equals marginal cost

Corporate Governance Overview 12 


 

Question

Which of the following are family firms?

Corporate Governance Overview 13 

Corporate Governance Overview 14 


 

Classification of Firms
Low Family management High

Low
Diffused ownership
Di
Diffusely held
Family firms
firms
concentration
Ownership

Non-family Family management

management

Family firms Family firms

High
Family ownership

Corporate Governance Overview 15 

LOCATING FIRMS
Low High
Family Management

Low Dispersed Ownership

Concentration
Ownership

Non-family Family
Management Management

High
Family Owner

Overview
Corporate Governance 16 


 

Questions
• Pick a firm (you work for or you know of). To what extent is it a family firm
according to the four definitions?

• Is there any difference between an entrepreneurial firm and a family firm?

• Do you expect the firm to be a family firm in 20 years?

Corporate Governance Overview 17 

Private (Entrepreneurial) Firm =

Family Firm?
• A family firm satisfies one or more of the below conditions
• Multiple family members participating business
• Concentrated ownership
• Family management
• Family succession

• Most entrepreneurial firms will not survive through the succession stage,
therefore they are not family firms strictly defined.

• But many entrepreneurial firms involved ownership and management by

multiple family members.

Corporate Governance Overview 18 


 

Why Study Family Firms?

• It is the most typical organizational structure in all countries around the

world!

• 70% of publicly traded firms in East Asia are family controlled

• In Hong Kong, 80% of firms are SMEs & 70-80% are family-owned / controlled,
hiring 50+% of workforce

• In China, emerging private firms are mostly family controlled

• Implications: tax revenue, employment, consumer spending, & competitiveness

of the economy

Corporate Governance Overview 19 

70% of publicly traded firms in East Asia are controlled by families

Source: Claessens, Djankov, Fan, Lang (Journal of Finance, 2002)

80
70 HK
Indonesia
60
S. Korea
50 Malaysia
40 Singapore
30 Taiwan
Thailand
20
East Asia
10 Japan
0 All
Percentage of firms controlled by families

Corporate Governance Overview 20




 

Why Study Family Firms?

• It is the most typical organizational structure in all countries around the

world!

• It has an amazing ability to survive for centuries!

Corporate Governance Overview 21 

Japan: Family Firms becomes more important over time!

Family Importance (Number)

100%

90%

80%

Family
70%

60%

50%

40%

Non-family
30%

20%

10%

0%
1951

1991

1994

1997
1949
1950

1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

1992
1993

1995
1996

1998
1999
2000

Corporate Governance Overview 22 


 

Year Company Country of origin Field

578 Kongō Gumi Japan Construction

705 Keiunkan Japan Hotel
717 Hōshi Japan Hotel
717 Koman Japan Hotel
771 Genda Shigyo Japan Paperbag
803 St. Peter Austria Resteurant
885 Tanaka-Iga Japan Religious goods
1000 Goulaine France Wine
1000 Marinelli Italy Foundry
1009 Sakan Japan Hotel
1024 Shumiya Japan Religious goods
1040 Weihenstephan Germany Brewery
1044 Wieliczka Poland Salt
1050 Corporate Weltenburger
Governance Overview
Germany Brewery 23 

Do you know?

• Do you know of any Hong Kong company that has more than 100 years
of history?

Corporate Governance Overview 24 


 

Why Study Family Firms?

• It is the most typical organizational structure in all countries around the

world!
• It has an amazing ability to survive for centuries!
• Family Firms are in the extreme of the performance distribution!
• Research found mixed results on family firm performance
• Sustainability is uncertain; succession is challenging

Corporate Governance Overview 25 

Corporate Governance Overview 27

Succession is a great challenge:

Most Asian families / companies don’t do well.

The Economist, Feb. 5, 2011.

Source: Joseph Fan, Ming Jian, and

Yinhua Yeh, 2009, “Succession: The
Roles of Specialized Assets and
Transfer Costs”




 

Wealth loss of family firm in succession

(monthly accumulated stock return, by regions)

0.4
Hongkong
0.2 Singarpore
Taiwan
0
-60 -48 -36 -24 -12 0 12 24 36
-0.2

-0.4

-0.6

-0.8

-1

-1.2

-1.4

Joseph Fan Succession 28 

Wealth loss of family business succession in China

(monthly accumulated stock return, 12 firms, 2000-2008)

Average
0
-36 -34 -32 -30 -28 -26 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

-0.05

-0.1

-0.15

-0.2

-0.25

-0.3

-0.35

-0.4

-0.45

Corporate Governance Overview 29 


 

Why Study Family Firms?

²It is the most typical organizational structure in all countries around

the world!
²It has an amazing ability to survive for centuries!
²Family firms are in the extreme of the performance distribution!
²Family business governance is important if:
• You want to work in a family firm (most firms are).
• If you want to go into private equity.
• If you plan to do investment banking.
• If you want to be in consulting, private banking, or insurance
• If many of your clients are family firms

Corporate Governance Overview 30 

“Family firms are frequently more riven with intrigue and visceral
hatreds than a medieval court – and for similar reasons. Substitute
the founder for medieval monarch and the professional managers for
courtiers, add in a pair of rivaling heirs with jealous wives and
scheming cousins, and you have the perfect recipe for a
Shakespearean drama.”

The Economist, Nov. 6th 2004

Corporate Governance Overview 31 


 

Summing Up

• Governance is a system of mechanisms that harmonize interests of

corporate stakeholders

• Family ownership and family management is the most common model of

businesses around the world

• Family firm governance include both family and corporate sides as well
as their interactions

• You need knowledge about family businesses because they are

everywhere
Corporate Governancealong your Overview
career path 32