Privatesector P U B L I C P O L I C Y F O R T H E Note No. 195 September 1999 Who Controls East Asian Corporations-- and the Implications for Legal Reform Stijn Claessens, This Note reports an analysis of ultimate control While the analysis shows that ownership con- Simeon in nearly 3,000 publicly traded companies in Dec- centration in these countries is in keeping with Djankov, ember 1996--before the financial crisis--in nine levels in other developing and some industrial and Larry East Asian economies: Hong Kong, Indonesia, countries, its findings shed light on the viability H. P. Lang Japan, the Republic of Korea, Malaysia, the Philip- and vulnerability of corporate governance struc- pines, Singapore, Taiwan (China), and Thailand. tures in East Asia. The concentration of corpo- The analysis shows that the ten largest families in rate wealth and the tight links between Indonesia, the Philippines, and Thailand control corporations and government may have half the corporate sector (in terms of market cap- impeded legal and regulatory development, italization), while the ten largest in Hong Kong directly or indirectly. To create incentives for bet- and Korea control about a third (figure 1). More ter governance, East Asian governments may extreme, in Indonesia and the Philippines ulti- have to promote more competition, even by mate control of about 17 percent of market capi- breaking up conglomerates, and curtail related- talization can be traced to a single family. party lending by restricting ownership of banks. FIGURE 1 MARKET CAPITALIZATION CONTROLLED BY TOP TEN FAMILIES, 1996 Percentage of total market capitalization Japan Taiwan (China) Malaysia Singapore Korea, Rep. of Hong Kong Thailand Philippines Indonesia 0 20 40 60 80 100 Source: Claessens, Djankov, and Lang 1999. The World Bank Group Finance, Private Sector, and Infrastructure Network 2 Who Controls East Asian Corporations--and the Implications for Legal Reform mid structures and cross-holdings, and voting rights consequently exceed formal cash flow FIGURE 2 A PYRAMID OWNERSHIP rights (table 2). Pyramid schemes generally STRUCTURE involve using control of a publicly held firm to gain control of others (as in figure 2). Management is rarely separated from ownership Li family control, and in two-thirds of firms that are not widely held, the managers are related to the controlling shareholder. 35 Cheung Kong Patterns of controlling ownership stakes differ (fifth largest firm across countries, with ownership concentration in Hong Kong) generally diminishing with the level of economic and institutional development. This negative association suggests that companies gravitate 49 Hutchison Whampoa toward less concentrated control as their coun- (third largest firm tries become wealthier. in Hong Kong) Some of the differences in ownership patterns Note: Numbers refer to percentage ownership shares. arise from differences in company and securities Source: La Porta, Lopez-de-Silanes, and Shleifer 1999. laws across countries. Various rules determine the ownership stake needed to exercise effective control, such as the minimum percentage of Ultimate control shareholdings required to block major decisions or to call an extraordinary shareholders meeting. Control is defined as 20 percent of voting rights In Korea restrictions on the voting rights of insti- (as in the methodology developed in La Porta, tutional investors in listed companies and high Lopez-de-Silanes, and Shleifer 1999). Corpo- minimum percentages required to file class rations are divided into two categories: those action suits (30 percent of the vote) imply that widely held and those with ultimate owners. A relatively small ownership stakes can result in widely held corporation is one in which no own- effective control. ers have significant control rights. Ultimate own- ers are of four categories: families (including A possible factor in the degree to which corpora- individuals with large stakes), the state, widely tions are widely held is the evolution of capital held corporations, and widely held financial insti- markets. In Thailand a formal stock market was tutions such as banks and insurance companies. established only in 1975--and in Indonesia, in 1977--while the stock market in Japan has existed The results of the analysis show family control since 1878, and the Stock Exchange of Hong Kong in more than half the corporations in East Asia since 1891. Furthermore, in Japan following World (table 1). But significant cross-country differ- War II, the Occupational Forces pursued a delib- ences exist. In Japan corporations are generally erate policy of dispersing ownership (Aoki 1990). widely held, while in Indonesia and Thailand they are mostly family controlled. And state con- Family control trol is significant in Indonesia, Korea, Malaysia, Singapore, and Thailand. Perhaps a more meaningful focus of analysis, particularly if the concerns are market entry, The analysis shows that in many East Asian access to financing, and government policy, is economies control is enhanced through pyra- the pattern of control by family groups. To The World Bank Group 3 TABLE 1 CONTROL OF PUBLICLY TRADED COMPANIES IN EAST ASIA, 1996 Percent, except where otherwise specified Corporations with ultimate owner Number of Widely Widely held Widely corporations held financial held Economy in sample corporations Family State institution corporation Hong Kong 330 7.0 71.5 4.8 5.9 10.8 Indonesia 178 6.6 67.3 15.2 2.5 8.4 Japan 1,240 85.5 4.1 7.3 1.5 1.6 Korea, Rep. of 345 51.1 24.6 19.9 0.2 4.3 Malaysia 238 16.2 42.6 34.8 1.1 5.3 Philippines 120 28.5 46.4 3.2 8.4 13.7 Singapore 221 7.6 44.8 40.1 2.7 4.8 Taiwan (China) 141 28.0 45.5 3.3 5.4 17.8 Thailand 167 8.2 51.9 24.1 6.3 9.5 Note: Weighted by market capitalization. Source: Claessens, Djankov, and Lang 1999. TABLE 2 MEANS OF ENHANCING CONTROL IN EAST ASIAN CORPORATIONS, 1996 Percentage of sample Pyramids with Cross- Controlling Economy Cap = 20%V ultimate owners holdings owner alone Management Hong Kong 18.84 25.1 9.3 69.1 53.4 Indonesia 19.17 66.9 1.3 53.4 84.6 Japan 19.89 36.4 11.6 87.2 37.2 Korea, Rep. of 19.64 42.6 9.4 76.7 80.7 Malaysia 18.11 39.3 14.9 40.4 85.0 Philippines 18.71 40.2 7.1 35.8 42.3 Singapore 19.91 55.0 15.7 37.6 69.9 Taiwan (China) 19.61 49.0 8.6 43.3 79.8 Thailand 19.22 12.7 0.8 40.1 67.5 All 19.46 38.7 10.1 67.8 57.1 Note: Cap = 20%V refers to the average percentage of book value of common equity required to control 20 percent of the vote. Controlling owner alone means that there is no second owner holding at least 10 percent. Management means that the chief execu- tive officer, board chairman, or vice chairman is a member of the controlling family. Source: Claessens, Djankov, and Lang 1999. 4 Who Controls East Asian Corporations--and the Implications for Legal Reform TABLE 3 HOW CONCENTRATED IS FAMILY CONTROL? Percentage of total market capitalization controlled Average number of Top Top ten Economy firms per family family families Hong Kong 2.36 6.5 32.1 Indonesia 4.09 16.6 57.7 Japan 1.04 0.5 2.4 Korea, Rep. of 2.07 11.4 26.8 Malaysia 1.97 7.4 24.8 Philippines 2.68 17.1 52.5 Singapore 1.26 6.4 26.6 Taiwan (China) 1.17 4.0 18.4 Thailand 1.68 9.4 46.2 Note: Data refer to 1996. Source: Claessens, Djankov, and Lang 1999. capture this, the analysis looked first at the aver- economies is the Chung Ju-Yung family--which age number of firms in the sample controlled by owns Hyundai and its related companies--with a single family. That number is largest in holdings worth US$48 billion. Indonesia--more than four--and smallest in Japan--about one (table 3). Another measure of wealth concentration is the share of market capitalization held by the top These numbers already suggest that in most family or by the top ten. In Indonesia 16.6 per- East Asian economies ultimate control of the cent of market capitalization can be traced to the corporate sector rests with a small number of ultimate control of the Salims--and in the families. Further evidence is the number of Philippines, 17.1 percent to the Ayalas (figure 4). firms and the market value of assets controlled The top ten families in Indonesia and the by the largest family group in each country. The Philippines control more than half the corporate largest family group in a country does not nec- sector (57.7 percent and 52.5 percent). Control is essarily coincide with the largest business also concentrated in Thailand (46.2 percent) and group. In Japan the largest keiretsu--the Hong Kong (32.1 percent). In Korea, Malaysia, Mitsubishi Group--controls more than 400 and Singapore the top ten families control a affiliated firms, but does not have a single con- quarter of the corporate sector. In Japan family trolling family. In Indonesia the largest con- control is insignificant--the top ten own only 2.4 glomerate is the Salim Group, which is percent of market capitalization. controlled mainly by Soedono Salim but also in part by the Suharto family. The Suharto family Concentration, rule of law, and has many other holdings--members collec- corruption tively control assets worth US$24 billion in the sample firms--and is considered the largest There are many direct and indirect channels stockholder in Indonesia (figure 3). The largest through which business may influence govern- family holder in terms of assets across all nine ment, and government may play a role in busi- The World Bank Group 5 FIGURE 3 THE SUHARTO GROUP Bank Sempati Utama Air 17 firms (20% firm 262 control) control)s (20% Tirtamas 8 firmscontrol) Humpuss (20% 21 (20% firms Salim Group Usaha control) Group Mulia CibinongCemen Group firms control) Tripolyta 22 (20% Hanurata BimantaraGroup Group Suharto libom family sairT inaiK itkaS Andromeda asotneS puornauBreM G 02( boB nasaH puorG odnI orotm rG puo aisA a )lortnoc%smrif81 artiC aL lartneC uc adsreoP da G odnilebaK imruM rlloT knaB puoruadeK %021 ( gn hadnIuadeK artiC adraM )lortnocrif 1 gn IPT amaY sm knaB 02( irataG )lortnsmroc %if 41 Source: W.I. Carr 1997. ness. For example, senior government officials scores of small textile and pharmaceutical busi- may give preferential treatment to family mem- nesses to highly protected financial oligopolies bers. A case in point is the business empire of with exclusive rights over a wide array of invest- the Suharto family in Indonesia. Business groups ment transactions. Many companies operate in led by Suharto's children, relatives, and business defense-related industries and are thus exempt partners, many of whom also serve in the gov- from financial and ownership disclosure require- ernment, control 417 listed and unlisted compa- ments, making it difficult to estimate the true size nies. The most direct link, of course, is through of the party's corporate portfolio (Baum 1994). the large state-controlled companies prevalent in The main political parties in Malaysia--Umno Malaysia and Singapore. and the Malaysian Indian Congress--also have substantial business holdings. Government and business may also be linked through indirect control of companies by ruling Have the concentration of wealth and the impor- political parties. In Taiwan (China) the main tant links between government and business political party, Kuomintang, has a controlling helped shape the legal system in some East Asian stake in 155 companies, some of them overseas. economies? In the wake of the East Asian finan- Kuomintang's corporate holdings range from cial crisis, many analysts have argued that if a few 6 Who Controls East Asian Corporations--and the Implications for Legal Reform FIGURE 4 THE AYALA GROUP Meiji Life Insurance Ayala family 23 100 Mitsubishi Bank 20 Ayala Corp. 58 Mermac, Inc. 100 100 84 77 74 43 40 Ayala Foundation AYC Overseas Pure Foods 14 Ayala Land IMicro Electronics BPI GlobeTelecom 32 100 BPI Foundation 100 Ayalafil Hormel Corp. (US) 75 Ayala Hotel 90 Assemblies Inc. 100 AF Merchants ITT (US) 100 IM Inc. (US) 100 Ayala 51 Laguna 33 82 Mitech Corp. 100 BPI Agrobank Agriculture Tech Inc. 15 Honda Phil. Corp. Corp. 64 Ayala Systems 100 BPI Computer 15 Isuzu Phil. Corp. 80 Ayala 15 49 Share Realty 60 EDINet 100 BPI Credit Marine Industries 40 Program Realty 30 Automated 20 100 BPI Data Sys. Electronics International Kawasaki Steel 100 BPI Express Finance (Japan) Corporation International 100 BPI Family Finance 65 Sinar Intl. 60 Davao Hotel Corporation 100 BPI Finance 48 MPM Noodles 100 Ayala Property 100 BPI Leasing 100 Makati Corp. 100 BPI Securities 50 Alabang 100 Santiago Land 25 Cebu Venture 35 90 Ayala Insurance 22 Cebu Holding 27 22 51 Ayala Life Insurance Cebu Prov. Govt. Kuok Properties 39 Universal Corp. Soriano Corp. 70 FGU Insurance Corp. Note: The numbers refer to percentage ownership shares. BPI is the Bank of the Philippine Islands. Source: Koike 1993. The World Bank Group 7 TABLE 4 DOES CONCENTRATED FAMILY CONTROL SHAPE LEGAL SYSTEMS? Concentration of family controla Judicial Rule of Corruption Economy (percent) efficiency indexb law index index Hong Kong 34.4 10.00 8.22 8.52 Indonesia 61.7 2.50 3.98 2.15 Japan 2.8 10.00 8.98 8.52 Korea, Rep. of 38.4 6.00 5.35 5.30 Malaysia 28.3 9.00 6.78 7.38 Philippines 55.1 4.75 2.73 2.92 Singapore 29.9 10.00 8.57 8.22 Taiwan (China) 20.1 6.75 8.52 6.85 Thailand 53.5 3.25 6.25 5.18 Note: Data refer to 1996. a. Share of total market capitalization controlled by the top fifteen families. b. Assesses the efficiency and integrity of the legal environment as it affects business, particularly foreign firms. Source: Claessens, Djankov, and Lang 1999. families play a large role in the corporate sector the ownership structure of the corporate sector and the government is heavily involved in and and the level of institutional development. influenced by business, the legal system is less Moreover, La Porta and others (1998) show a likely to evolve in a way that protects minority relationship between the ownership structures shareholders and promotes transparent, market- of individual corporations and judicial and legal based activities. But little evidence has been col- development. lected to support this argument. Conclusion To test the argument, the analysis compared the concentration of corporate control by families In most East Asian economies wealth is with three indexes of judicial and legal devel- concentrated in the hands of a few families and opment: efficiency of the judicial system, rule links between government and business are of law, and degree of corruption (La Porta and extensive. These features may have directly or Lopez-de-Silanes 1998). The indexes run from indirectly impeded legal and regulatory devel- 1 to 10, with 10 indicating the most efficient opment. Thus relationships between patterns judicial system, strongest rule of law, and least of ownership and the characteristics of legal corruption. The correlations between the mar- systems are not necessary casual, as has been ket capitalization share of the fifteen largest suggested for some countries. These findings families and low scores for the three indexes imply that in some East Asian economies suc- are very strong (table 4). This result suggests cessful legal and regulatory reform may require that the concentration of corporate control changes in ownership structures and concen- plays a major part in the evolution of the legal tration of wealth. Findings also suggest that system--that there are relationships between insider control may have contributed to the 8 Who Controls East Asian Corporations--and the Implications for Legal Reform weak performance and risky investments of many East Asian corporations before the finan- cial crisis. References Aoki, Masahiko. 1990. "Toward an Economic Model of the Japanese Firm." Journal of Economic Literature 28:1­27. Baum, Julian. 1994. "The Money Machine: Taiwan's Kuomintang." Far Eastern Economic Review, August 11, pp. 62­66. Claessens, Stijn, Simeon Djankov, and Larry H.P. Lang. 1999. "Who Controls East Asian Corporations?" Policy Research Working Paper 2054. World Bank, Financial Sector Practice Department, Washington, D.C. Koike, Kenji. 1993. "The Ayala Group during the Aquino Period: Diversification along with a Changing Ownership and Management Structure." Developing Economies 31:442­63. La Porta, Rafael, and Florencio Lopez-de-Silanes. 1998. "Capital Markets and Legal Institutions." Paper presented at the Fourth Annual Conference on Development in Latin America and the Caribbean, June 28­30. La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer. 1999. "Corporate Ownership around the World." Journal of Finance 54:471­518. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1998. "Law and Finance." Journal of Political Viewpoint is an open Economy 106:1113­55. forum intended to W.I. Carr, Banque Indosuez Group. 1997. Indonesian Group encourage Connections. Jakarta. dissemination of and debate on ideas, innovations, and best Stijn Claessens (cclaessens@worldbank.org), practices for expanding Lead Economist, Financial Sector Strategy the private sector. The and Policy, Simeon Djankov (sdjankov@ views published in this series are those of the worldbank.org), Financial Economist, authors and should not Financial Sector Strategy and Policy, be attributed to the and Larry H. P. Lang (llang@baf.msmail. World Bank or any of its affiliated organizations. cuhk.edu.hk), Professor, Chinese University Nor do any of the con- of Hong Kong clusions represent official policy of the World Bank or of its Executive Directors or the countries they represent. To order additional copies please call 202 458 1111 or contact Suzanne Smith, editor, Room F11K-208, The World Bank, 1818 H Street, NW, Washington, D.C. 20433, or Internet address ssmith7@ worldbank.org. The series is also available on-line (www.worldbank. org/html/fpd/notes/). Printed on recycled paper.