Corporate Governance Progress in Asia: Past Decade Review

Shareholder Activism in Asia EU Asia Corporate Governance Dialogue July 6, 2012 Tokyo Hasung Jang

Corporate Governance Progress in Asia for last 10 years Financial crisis in 1997 opened new era in corporate governance development in Asia New rules and regulations are introduced Board Outside directors Audit committee Shareholder rights strengthened Derivative lawsuit Class action lawsuit Cumulative voting

Corporate Governance Progress in Asia for last 10 years Improvements are mostly in rules and regulations Practices has not improved as much as regulations did Disparity between regulations and practices Many laws and regulations exist in the law, but it is not practiced Weak enforcements of regulations

Corporate Governance Regulations in Asian Countries Liabilities on Shadow Directors Independent Director Audit Committee Derivative Lawsuit Class Action Lawsuit Cumulative Voting 1997 2011 1997 2011 v v v v v v v v v v v v v 2011 v v v v v v v v v v 2011 2011 v 2011 China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand v v v v v v v v v v v v v v v v v v v v v v v v v v v v v Data source: ACGA, OECD

Improvements in Corporate Governance in Asian Countries Two Surveys on Corporate Governance CG Watch 2010 by CLSA & ACGA CG Rules and Practices Enforcement Political & Regulatory IGAAP CG Cultures World Competitiveness by IMD Shareholders Rights Auditing & Accounting Practices

Corporate Governance Evaluation Asian Economies

Corporate Governance Evaluation Asian Economies

Shareholders' Rights IMD WORLD COMPETITIVENESS, 2010-2012 2010-2012 Average, 1 2 3 4 5 6 7 8 9 Finland Norway Denmark Sweden Australia South Africa Germany Netherlands Malaysia Chile Singapore Canada Switzerland Luxembourg Taiwan Belgium Austria Qatar Brazil Thailand 8.44 8.11 8.07 7.71 7.60 7.58 7.52 7.47 7.37 7.35 7.31 7.31 7.13 7.13 7.10 7.06 6.97 6.95 6.95 6.90 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Hong Kong India Ireland USA Lithuania Israel Colombia Estonia Peru UK Czech Rep France Spain New Zealand Portugal Indonesia Philippines Hungary Turkey Jordan 6.88 6.82 6.75 6.75 6.72 6.71 6.67 6.60 6.56 6.55 6.52 6.51 6.47 6.47 6.46 6.40 6.26 6.08 6.07 6.06 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 Mexico Japan Poland Romania Kazakhstan Iceland Greece Slovak Rep Argentina Korea Italy Croatia China Slovenia Bulgaria UAE Russia Venezuela Ukraine 6.06 5.98 5.95 5.94 5.88 5.74 5.65 5.49 5.24 5.18 5.14 5.13 4.75 4.27 4.20 3.87 3.83 3.69 3.53 10 11 12 13 14 15 16 17 18 19 20 8

Shareholders' Rights IMD WORLD COMPETITIVENESS, 2000-2002 2000-2002 Average 1 2 3 4 5 6 7 8 9 Finland USA Australia Sweden Canada Denmark Norway UK Singapore Ireland Netherlands Luxembourg Germany Israel Austria Chile Iceland South Africa Switzerland Hong Kong 8.78 8.51 8.45 8.39 8.35 8.30 7.92 7.85 7.85 7.84 7.79 7.65 7.61 7.57 7.52 7.47 7.42 7.36 7.35 7.30 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 New Zealand Portugal Belgium Hungary Spain Brazil France Taiwan Malaysia Greece Mexico Turkey Philippines Argentina India Colombia Poland Venezuela Italy Slovenia 7.16 6.83 6.72 6.64 6.58 6.57 6.54 6.53 6.37 6.31 6.22 6.17 6.06 5.90 5.89 5.87 5.87 5.74 5.71 5.51 41 42 43 44 45 46 47 48 49 China Thailand Estonia Indonesia Czech Rep. Korea Russia Japan Slovak Rep. 5.49 5.43 5.00 4.97 4.74 4.59 4.51 4.19 3.78 10 11 12 13 14 15 16 17 18 19 20 9

Shareholders' Rights: Changes from 2000-2002 to 2010-2012 2010-2012 Avg. 2000-2002 Avg. 2010-2012 Avg. 2000-2002 Avg. Changes Changes Japan Czech Rep Slovak Rep Estonia Thailand Indonesia Malaysia India Colombia Korea Taiwan Brazil Belgium South Africa Philippines Norway Poland France Germany Turkey Spain Chile Mexico Switzerland Denmark 1.79 * 1.78 * 1.70 * 1.60 * 1.47 * 1.43 * 1.00 * 0.93 * 0.79 * 0.59 * 0.58 * 0.38 0.34 0.22 * 0.20 0.19 0.07 -0.03 -0.09 -0.10 -0.11 -0.12 -0.16 -0.22 * -0.23 5.98 6.52 5.49 6.60 6.90 6.40 7.37 6.82 6.67 5.18 7.10 6.95 7.06 7.58 6.26 8.11 5.95 6.51 7.52 6.07 6.47 7.35 6.06 7.13 8.07 4.19 4.74 3.78 5.00 5.43 4.97 6.37 5.89 5.87 4.59 6.53 6.57 6.72 7.36 6.06 7.92 5.87 6.54 7.61 6.17 6.58 7.47 6.22 7.35 8.30 Netherlands Finland Portugal Hong Kong Luxembourg Singapore Austria Hungary Italy Greece Argentina Sweden Russia New Zealand China Australia Israel Canada Ireland Slovenia UK Iceland USA Venezuela -0.32 * -0.34 * -0.37 -0.42 -0.52 * -0.53 * -0.55 * -0.57 * -0.58 * -0.65 * -0.67 * -0.68 * -0.68 * -0.70 * -0.74 * -0.85 * -0.86 * -1.04 * -1.09 * -1.24 * -1.30 * -1.68 * -1.76 * -2.05 * 7.47 8.44 6.46 6.88 7.13 7.31 6.97 6.08 5.14 5.65 5.24 7.71 3.83 6.47 4.75 7.60 6.71 7.31 6.75 4.27 6.55 5.74 6.75 3.69 7.79 8.78 6.83 7.30 7.65 7.85 7.52 6.64 5.71 6.31 5.90 8.39 4.51 7.16 5.49 8.45 7.57 8.35 7.84 5.51 7.85 7.42 8.51 10 5.74

Auditing and Accounting Practices IMD WORLD COMPETITIVENESS, 2010-2012 Avg. 1 2 3 4 5 6 7 8 9 Finland Norway Denmark Singapore Sweden Canada Switzerland South Africa Australia Luxembourg Austria Germany Hong Kong New Zealand Malaysia Estonia Netherlands Qatar Taiwan Hungary 8.50 8.44 8.39 8.22 8.08 8.04 7.97 7.93 7.89 7.87 7.84 7.71 7.69 7.67 7.62 7.59 7.55 7.53 7.49 7.44 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Kazakhstan Belgium Israel Chile UK USA India Colombia Czech Rep Japan Brazil Thailand Lithuania France Spain Slovak Rep Venezuela Romania Philippines Poland 7.37 7.36 7.36 7.23 7.09 7.08 7.05 7.04 7.04 7.00 6.99 6.99 6.94 6.93 6.90 6.87 6.79 6.79 6.78 6.66 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 Jordan Mexico Argentina Iceland Ireland Indonesia Korea Turkey Portugal Peru Greece Ukraine Russia Italy China Croatia Bulgaria Slovenia UAE 6.60 6.53 6.46 6.46 6.44 6.43 6.39 6.29 6.20 6.19 6.12 6.08 6.03 5.70 5.70 5.54 5.11 5.10 4.61 10 11 12 13 14 15 16 17 18 19 20 11

CG in Asian Economies IMD WORLD COMPETITIVENESS, 2010-2012 Avg. Auditing and accounting practices Shareholders' rights Rank 4 13 15 19 27 30 32 39 46 47 55 2010-2012 Avg. Rank 9 11 15 20 21 22 36 37 42 50 53 2010-2012 Avg. Malaysia Singapore Taiwan Thailand Hong Kong India Indonesia Philippines Japan Korea China Singapore Hong Kong Malaysia Taiwan India Japan Thailand Philippines Indonesia Korea China 8.22 7.69 7.62 7.49 7.05 7.00 6.99 6.78 6.43 6.39 5.70 7.37 7.31 7.10 6.90 6.88 6.82 6.40 6.26 5.98 5.18 4.75 12

Why disparity between regulations and practices? Entrenched ownership structure Concentrated ownership Cross ownership Circuitous ownership Moral hazard of controlling shareholder Family values control right more than share value Expropriation of minority shareholders Unfair related party transactions Tunneling asset through related party transactions Stripping business opportunities to private company owned by the controlling shareholder

Why disparity between practices and regulation? Bank-financing is stronger than capital market financing Banks have its own poor governance problem Bank s capacity of CG risk management is weak Enforcements of rules and regulations are weak Supervisory agency s capacity is limited Prosecutors are not independent from business influence & political consideration Judges are not properly trained, and are not independent from interest conflicts & outside influence

Why Shareholders are inactive? High barriers in exercising rights Difficulties in fact discovery High legal cost Independent lawyers are scarce Establishments have strong influences on Politics Media Prosecutors and judges

Why Shareholders are inactive? Individual shareholders Speculative short term trading Investment horizon is too short Institutions shareholders Local institutions: Interest conflicts Foreign institutions: Lack of long-term commitment Pension funds: Political inflences

Shareholder Activism Empower Shareholders Lower barriers in exercising rights Procedures Cost Provide mechanisms to be active Electronic voting Cumulative voting Class action lawsuit Create activist institutional investors Public pension fund should be active investor 18

Shareholder activism in Asia Shareholder activism in Asia is weak Activist investors Hong Kong: David Webb Korea: Lazard Korea CG Fund Quasi-Government Agency Taiwan: Securities and Futures Investors Protection Center NGO Korea: Solidarity for Economic Reform Malaysia: Shareholder Watchdog Group Japan: Ombudsman(Osaka) 19

Actions Shareholder Can Take Attending shareholder meetings Proposing agenda at the shareholders meetings Public campaign through media Electing directors Proposing outside director candidate Proxy fights Taking legal actions Filing civil lawsuit Derivative actions Class-Actions Filing criminal investigation 20

Activist Investment: Case 1 Sovereign Asset Mgt. vs SK Corp Sovereign Asset Management Activist foreign investor SK corporation scandal in March 2003 Accounting fraud Embezzlements by controlling family Sovereign s investments in SK shares Investments of $150 million in March 2003 Capital gains of $800 million in July 2005 Sovereign s strategy Proxy fight for management control Proposed improvements in corporate governance

Activist Investment: Case 1 Sovereign Asset Mgt. vs SK 120.0 SK Scandal 100.0 80.0 60.0 40.0 20.0 0.0 2003-01-02 2003-01-16 2003-01-30 2003-02-13 2003-02-27 2003-03-13 2003-03-27 2003-04-10 2003-04-24 2003-05-08 2003-05-22 2003-06-05 2003-06-19 KOSPI SK SKT SKN

SK Share Price 2003 - 2006 600.0 500.0 400.0 Sovereign left 300.0 SK Scandal 200.0 100.0 0.0 2003-01-01 2003-04-01 2003-07-01 2003-10-01 2004-01-01 2004-04-01 2004-07-01 2004-10-01 2005-01-01 KOSPI 2005-04-01 2005-07-01 2005-10-01 SK 2006-01-01 2006-04-01 2006-07-01 2006-10-01

Increase in SK market capitalization from $1 billion to $6.3 billion Capital Gains shares capital gains 15% $800 million Sovereign: Rest of shareholders: 85% $4.5 billion Stock price KOSPI 556.33 1019.01 ROR SK 8,600W 55,100W KOSPI SK March 2003 July 2005 83.2% 540.7%

SK Share Price 2003 2007 1800 1600 1400 1200 Holding Co. established 1000 800 Sovereign Left 600 400 SK Scandal 200 0 2003/1/1 2003/5/29 2003/10/24 2004/3/22 2004/8/17 2005/1/12 2005/6/9 2005/11/4 KOSPI 2006/4/3 2006/8/29 2007/1/24 2007/6/21 SK 25

SK introduced major reforms in corporate governance in 2007 If Sovereign stayed until June 2007, they could have made capital gains of $2.4 billion out of $150 million investment Stock price KOSPI 556.33 1019.01 1733.10 ROR SK 8,600W 55,100W 134,500W KOSPI SK March 2003 July 2005 June 2007 83.2% 211.5% 540.7% 1463.9%

Alternative Approaches in Korea Shareholder Activism NGO shareholder activists since 1997 Group of two dozens volunteer professionals Landmark lawsuit cases brought changes Korea Corporate Governance Fund Established in April of 2006 Enhancing share value by improving CG Long-term commitments in value investment

Activist Investment: Case 2 Korea Corporate Governance Fund Disclosure of 5% shareholding of Daehan Synthetic Fiber Co. on August 23, 2006 Index = 100 as of August 22, 2006 350 300 250 200 150 100 50 Aug-06 Apr-06 Jun-06 Jul-06 Jan-06 May-06 Oct-06 Sep-06 Nov-06 Feb-06 Dec-06 Mar-06 Dae Han Synthetic Fiber Co., Ltd KOSPI

Activist Investment: Case 2 Korea Corporate Governance Fund Disclosure of Ownership: September 19, 2006 Index = 100 as of August 22, 2006 Apr-06 Dec-06 Jan-06 Mar-06 Nov-06 Feb-06 Jun-06 Jul-06 Aug-06 Oct-06 May-06 Sep-06 Tae Kwang Industrial Co., Ltd. KOSPI

Shareholder activism will create wealth with Justice & Cause for minority investors Thank you!