Why Protecting Minority Shareholders Builds Stock Markets





From Wharton university:

Once upon a time, only countries like Britain and the United States had legal provisions in place to protect the rights of minority shareholders against the actions and decisions of large shareholders and management. As a result, money flowed into the stock market, and capitalization grew vigorously, dwarfing all other markets around the world. Beginning in the 1980s, however, countries in Continental Europe and Asia introduced reforms in their corporate legislation, affording minority shareholders a number of legal protections, including boosting the powers of the general shareholders’ meeting, prohibiting multiple voting rights and dual-class shares, mandating the presence of independent directors, and requiring the disclosure of major equity stakes, among others. What has driven these changes? Have they resulted in the growth of the stock market?

A new paper by Mauro F. Guillén of the Wharton School and Laurence Capron of INSEAD sheds light on these important issues.* They have assembled information on legal protections for minority shareholders in as many as 78 countries since 1970. They document that whereas four decades ago the Anglo Saxon countries afforded minority shareholders the greatest degree of protection, after the year 2000 countries in Western Europe, East Asia, and, especially, Eastern Europe and Central Asia had passed new legislation protecting minority shareholders.

The authors show that many countries around the world passed such new rules and regulations in response to a number of factors, including new economic ideas about free markets, imitation of other countries in the same region, emulation of the United States as the global financial leader, and pressures from the International Monetary Fund, which grew eager to induce countries in under financial stress to implement reforms.

By the 2010s, the countries in the world with the greatest degree of protection of minority shareholders were Kazakhstan, Russia, Uzbekistan, South Korea, Mauritius, and Poland. This phenomenon begs the question of whether legal reforms protecting minority shareholders are actually enforced or if they remain largely ceremonial. The research by Guillén and Capron, which carefully takes into account a number of economic and financial variables, conclusively shows that the adoption of legal protections has increased stock market capitalization, trading, and turnover. But they also found that the beneficial effects of such legal provisions are larger when the government has the capacity to enforce them.

Guillén and Capron argue that governments should continue to promote minority shareholder rights as an antidote against the abusive use of private information. Global competition for capital has intensified considerably, and having an appropriate legal framework that protects minority shareholders should be at the top of the policymaking agenda. Their research also has implications for companies and investors. Companies making investments in foreign countries need to carefully consider the extent to which minority shareholder rights are protected whenever they make decisions about floating part of their equity in a foreign subsidiary. Investors seeking global diversification of their portfolios also need to study the international map of shareholder protections before making decisions.



In Malaysia the legal protections are in place, and the government has the capacity to enforce them, but will they do that, without fear or favour? Or are the reforms in the name of good (corporate) governance mostly ceremonial?

63 Innovation agencies ...

From The Malaysian Reserve:


The government plans to address the existence of too many government agencies involved in innovation and technology in order to enhance efficiency and eliminate red tapes, said Datuk Seri Mohd Najib Razak.

The prime minister (PM) said presently there are a myriad of entities with so many roles which have created the risk of fragmentation in the innovation space.

“At the last count, entities in the government involved in technology innovation include:

• five units under PM’s Department
• three ministries with direct technology funding
• six ministries with technology associations
• three regulators
• four councils that I chair
• four other councils
• three development corporations with funding
• seven development agencies or corporations
• one foundation
• six research institutions
• five mutual funds
• five managed funds
• 11 funding agencies

 

If I add them all up, 63 in total. Simply amazing .....

XingQuan: does the company believe its own cash? (2)

Bursa has queried XingQuan about its rights issue, and the company has replied:


The Company wishes to clarify that the cash balance of RM886.55 million is mainly reserved for working capital, and as explained in the announcement dated 25 September 2015, Xinquan requires sufficient cash buffer and a high level of working capital to ensure minimal disruption to its operations in the event of a liquidity crisis or a sharp economic downturn. The purpose of the Proposed Rights Issue with Warrants is to raise funds for Xinquan’s capital expenditure requirements whilst maintaining a healthy level of cash balances at all times.

In addition, the available cash balance may also be used for future business expansion into related businesses, in particular, acquisition of foreign brand(s), if and when the opportunity arises.
The Group has placed its cash balances in savings accounts with licensed banks in China which carries an interest rate of approximately 0.35% per annum. The cash is placed in savings accounts as the cash is not idle and is required to fund Xinquan’s day-to-day operations.


I find the answers completely unsatisfactory given the size of its current operations. Just looking at balance sheet items like inventory, receivables, payables etc. gives an indication roughly how much cash the company needs in case the company grows, or in case there is a calamity. The company has abundant cash for all those purposes, much more than needed.

Regarding business expansion, first of all that sounds very vague, secondly those take time, the company could still raise money when the opportunity arises.

The company claims that it can not put money (not even a few hundred million RM) in a fixed deposit since it needs the money in day-to-day operations. That sounds highly questionable. The company should be forced to proof that, by showing the minimum amount of cash throughout the year in all saving accounts.

Chinese listed companies have a really bad reputation for its cash management. There have been fraud cases where the promised money was simply not there. Others have embarked on acquisitions (sometimes in related party transactions) that have destroyed value. They hardly pay out a decent dividend or embark on a share buyback program. In the contrary, they rather use private placements at share valuation below the amount of cash per share.

It doesn't make sense at all, and if that is the case, then in my experience most likely something else is going on, something more sinister.

There is still my suggestion in the previous posting.

More than four years ago I warned already about Chinese listed companies with cash levels that can not be trusted. Free advice for Bursa, it can't get much better than that, can it?

Tony's Top Ten Tips

I have often been critical about AirAsia (and even more so regarding AirAsia X) in this blog, especially regarding the aggressive accounting and the convoluted corporate structure.

But I did like the entrepreneurial spirit and "can do" attitude of Tony Fernandez and his staff.

Tony was invited to speak at an event organised by Digital News Asia and didn't disappoint with his speech "What’s Next: Tony’s Top 10 Tips for Entrepreneurs".

I think they are great tips, so I will copy them here from the above link:


1) You don’t need to know everything
 
I came from the music business. I knew nothing about planes. To all the entrepreneurs out there, you don’t need to know everything about what you want to do. It’s all about the idea, it’s about passion, it’s about implementing it.
 
2) Just do it!
 
Don’t let anyone tell you that you can’t do it. You’ve got one life, so you can’t press the rewind button and say ‘I wished I had done that.’

So I recommend to all of you out there, just do it. Live your life to the utmost, be positive. If you fail, at least you have tried.
 
I have failed miserably at Formula One, but I have no regrets because I got to stand with the greats from Ferrari, McLaren, and others.
 
3) Passion is a key problem-solver
 
Dreams do come true. Don’t worry about failure. You have one life, make the most out of it. Nine times out of 10, if you have the passion, you will find a way to work through it.
 
4) Invest in marketing
 
If you have the greatest idea in the world, please, please, please put some money on marketing. This is because if you don’t put money on marketing, nobody is going to hear about your great idea.
 
There are so many great ideas that never took off because of a lack of marketing.
 
Marketing is not about the dollars, it is also about public relations (PR). In AirAsia, we had no money. So I ran around with a red cap on and said controversial things so that the press would always take a picture of me. That was our marketing in AirAsia’s early days.
 
We have been through so many issues, and marketing played a key role in overcoming them.
 
Remember SARS (severe acute respiratory syndrome)? At that time, nobody wanted to fly; we all thought we are going to die.
 
Everyone cut their advertising, but I told my guys not to cut because this was the best time to build our brand. In fact, we tripled our advertising and everyone looked at me and said, “Are you on drugs?” I said, no, it is the best time because no one else is advertising.
 
When the first Bali bomb attack happened, everyone cancelled their flights. I said to the guys, we cannot let the Bali route die. We must continue to fly.
 
So we came up with ‘Love Bali’ campaign, giving away 10,000 free seats, and it worked. All 10,000 seats were snapped up in like under one minute. And all those who got those seats told all their friends about it on social media. Your best advertisement is your customers.
 
5) Leverage social media
 
When Malaysians get a good deal, they will tell the whole world about it. So the 10,000 people who went and had a good time in Bali, told 10,000 people that they had a good time. That was the early gestation of AirAsia’s social media.
 
We realised the power of social media very early on, so when Facebook and Twitter came up, we latched onto them. We were early adopters. We now have 32 million people on our various social media platforms, and 7% of our business comes directly from social media.
 
The Bali campaign taught us that our best advertisements are our customers.
 
6) Don’t be scared of complaints
 
Complaints are actually free market research. Someone took the effort to write to you to tell you where things went wrong and how they should be improved. These are things that companies pay a lot of money for consultants to tell them that same thing.
 
So we treat every email preciously.
 
7) Focus on one image when it comes to branding
 
During the early days, there was the word ‘AirAsia’ and a logo of a bird in our branding.
 
If you look at the top brands in the world, there’s only one image that comes to your mind. When I say “Shell,” you think of the Shell logo. When I say “Coca-Cola,” you think of the word ‘Coke’ in italics, and when I say “Nike,” you think of the swoosh.
 
So, back to our earlier AirAsia brand, we said drop the bird – we felt it was facing the wrong way anyway – and we used ‘AirAsia’ as our logo. Just one image. Why spend double the money to promote two images?
 
We also dropped the blue and the green colours. I tried very hard not to go with red, because everyone thinks that I want to be Richard Branson [the Virgin Group founder and Fernandes’ former boss] ... but it was the best colour, so we picked red.
 
So yes, the colour does make a big difference!
 
8) Go on the ground
 
What I used to do – although I don’t do this anymore – was that once a month, I would carry bags, I would be a cabin crew [member], and also at the check-in counter.
 
 I did this for two reasons: The first is that you can’t be an effective CEO (chief executive officer) unless you go on the ground to experience the real situation.
 
Here’s a true story. The baggage handling team told me that they needed belt loaders. I told them, “No, we can’t buy that as it’s too expensive.”

So one day when I was tasked to carry bags, they put me on one of the Indonesia flights. People who fly with us generally bring their house with them, but people who fly to Indonesia bring their neighbour’s house as well!
 
So there was a lot of bags. I broke my back in the process, and I told my team that they were right and I was wrong, and let’s buy the belt loaders.
 
If I didn’t do that [go on the ground] and just sat comfortably in the office, I would have made a wrong decision, damaged a lot of bags, and probably started a union.
 
The second reason [for going on the ground] is that I wanted to look for talent. I wasn’t looking for the talents from Oxford or Cambridge, I was looking for the Grade 3 SPM [O Levels equivalent] kind of guys who needed a second chance.
 
9) Never underestimate the potential of your staff
 
I broke all the rules in terms of hiring people. To me, as long as you have a dream, you can do anything.
 
There was an ex-cabin crew member – she came up to me one day and told me that her dream was to become a pilot. I told her to go for it.
 
Then she called me up one day and asked if she could take part in the Miss Thailand [beauty pageant], and I told her okay, as long as I get to use her photographs in our marketing materials.
 
She won the [Miss Universe Thailand] pageant and recently became a captain – so we are the only airline in the world with a Miss Thailand flying with us.
 
The moral of the story is that we have such a flat structure that she was able to tell me what her dreams were, and we were able to make a raw diamond into a diamond.
 
Another one of my boys, a baggage handler in Kuching, told me he wanted to become a pilot. I told him to go for it. He passed all the exams ... he had the top marks in the flying academy. Today, he is a captain.
 
We have many of such stories at AirAsia.
 
Your biggest assets, besides your ideas, are your people – because at the end of the day, it is the people who will deliver your ideas.
 
10) Data is king
 
We have a huge amount of data that we don’t know what to do with it, but everyone else wants our data ... so we figured it must be something very valuable and there must be an opportunity there.
 
We are investing in a few ventures. We plan to launch our own version of TripAdvisor, a travel dongle, a new YouTube-type of channel and more – data will be playing an essential role in these ventures. Data will be king.


Where is Ze Moola (the excellent, but inactive blog) often complained about the articles written about AirAsia. I guess Tony spilled the beans how those articles were conceived:

"Marketing is not about the dollars, it is also about public relations (PR). In AirAsia, we had no money. So I ran around with a red cap on and said controversial things so that the press would always take a picture of me. That was our marketing in AirAsia’s early days."

Journalists probably should have taken some distance there, but might have fallen too easily for the juicy story.