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Concentration
of Wealth in Asia
Some Asian business groups controlled by a tiny elite
of ultimate owners have used extensive corporate pyramids to systematically
siphon wealth from minority shareholders, a study by researchers at the Chinese
University of Hong Kong has found.
Based on research sponsored by the World Bank, the
ground-breaking survey contains striking evidence of the concentration of
corporate power in the region, showing that eight groups control more than a
quarter of all the listed companies in Asia.
The findings have important policy implications, since
they provide quantitative evidence of the widely suspected link between
"crony capitalism" and the 1997-98 Asian financial crisis.
"The problems of East Asian corporate governance
are, if anything, more severe and intractable than suggested by commentators at
the height of the financial crisis," authors Professor Larry Lang and
Professor Leslie Young write, describing the concentration of control as
"extraordinary".
The study traces the ultimate ownership and control of
2,603 corporations in nine East Asian countries - all those for which credible
data could be obtained. The top eight ultimate owners were found to control 611
corporations, or 25.2 per cent of the total, while the top 22 controlled 838, or
32.19 per cent.
By examining the relationship between dividend
payments and the gap between ownership and control rights, the researchers found
evidence of "systematic expropriation" of outside shareholders at the
base of corporate pyramids.
By pyramiding, a group can maintain high control over
a corporation while having relatively low ownership. For example, a hypothetical
investor who owns 50 per cent of X, which owns 40 per cent of Y, which owns 30
per cent of Z, has 6 per cent of the ownership rights of Z but 30 per cent of
the control rights.
"Corporate wealth can then be expropriated by the
insiders who set unfair terms for intra-group sales of goods and services and
transfers of assets and control stakes," the researchers write.
They argue investors are generally alert to
expropriation if control is "tight", with one corporation holding more
than 20 per cent of the voting rights.
Critically, however, the public fails to notice that
even loose linkages of 10 to 20 per cent are sufficient for control in markets
where shareholder rights are weak.
The gap between ownership and control helps to explain
why controlling shareholders are willing to invest in uneconomic projects, since
they create opportunities for expropriation, the authors argue.
"This can pile up so much unrepayable debt as to
precipitate macroeconomic problems, as the Asian crisis has shown," they
say.
As a benchmark, the study also traced the ownership of
3,294 companies in five West European countries.
The results show that, contrary to popular belief,
family ownership is even more widespread in Europe.
However, Europe's stronger institutional framework
means there is less expropriation and less chance of macroeconomic problems.
The authors say that to address the problems in Asia
requires greater transparency, plus regulatory and legal reforms to strengthen
the rights of minority shareholders. But they say the concentration of corporate
control is such that the problem is one of political, not merely corporate,
governance.
"Dividends and Expropriation" by Professors
Lang, Young and Mara Faccio of the University of Milan, will be published early
next year in the American Economic Review.
The Asian ownership data was collected by Professor
Lang in collaboration with Stijn Claessens and Simeon Djankov of the World Bank.
Their paper, "The Separation of Ownership and
Control in East Asian Corporations", was published in the Journal of
Financial Economics. - By Matthew Brook South
China Morning Post
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