Corporate Governance

Osama Wagdi Wadi _____________Governance: Egyptian Exchange Case

Corporate Governance Egyptian Exchange Case Osama Wagdi Wadi Financial Institutions Department, Faculty of Management Modern University for Technology and Information (MTI), Email:[email protected]

Cairo, Egypt

2013

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Electronic copy available at: http://ssrn.com/abstract=2349738


Corporate Governance: Egyptian Exchange Case Osama Wagdi Wadi Financial Institutions Department, Faculty of Management, Modern University for Technology and Information (MTI), Cairo, Egypt. Corresponding author: [email protected] Abstract In this paper, we are answering the big question: what is Corporate Governance? , and what is models of Corporate Governance, this paper review the impact of Corporate Governance on stock market in Egypt, Finally, the study found a different impact of corporate governance on return and risk in Egyptian stock (EGX), the study found an impact of corporate governance in total risk of common stock, But don’t has this impact in the return of common stock. So, the researcher expected reason this impact due to the risk pricing is relative to Efficiency application of corporate governance

Keywords: Corporate Governance, shareholder, performance, stock market, Egyptian stock (EGX) Introduction:

A post-Enron consensus on corporate

It is clear that governance is gaining

governance has emerged among investor

considerable attention throughout the

groups,

world,

governance

private sector market overseers. The

model

corporate

implies

Work a

on

good

one-best-way

of

government

board

regulators,

should

and

function

effective governance; we have two types

principally as an oversight body for

of

from

shareholders. To ensure the board’s

Organization for Economic Co-operation

independence from management, the

and Development (OECD) or non-

board should have a substantial majority

OECD countries (Matt Andrews 2010).

of independent, outside directors, who

model

of

governance

neither have business relationships to the 2

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Electronic copy available at: http://ssrn.com/abstract=2349738


firm

nor

social

with

particular emphasis on the legal

management. Some proposals go further

mechanisms that prevent the

by only allowing one insider on the

expropriation

board,

shareholders

the

relationships

CEO

(Chief

Executive

Officer). But, all the proposals call for

of

minority

(Shleifer

and

Vishny, 1997)

the board’s audit, compensation and

Shareholders

nomination committees to be comprised

Governance:

exclusively of outsiders (Allen Kaufman,

Divergence

Ernie Englander & Craig H. Wood 2003)

shareholders and management is a basic

Definition of Corporate Governance:

of

We don’t have a one definition for

governance

corporate

internal and external mechanisms to

governance,

some

this

definition is: 





3

align

Corporate systems

agent

governance and

is

processes

a for

and

in

Corporate

interests

problem, have

in

proposed

between

corporate various

the shareholders' objectives with

those of the managers.(for more see : Dorata, N., & Petra, S. 2008)

ensuring proper accountability,

Shareholders purchase the stock of a

probity and openness in the

corporation because they expect to earn

conduct of an organization’s

an acceptable return on the money they

business

invest. Because we know shareholders

(Catherine

Turner,

2009).

(Investors) want to increase their wealth

Corporate governance as a set of

positions as much as possible, then it

mechanisms

follows that managers should behave in

through

which

outside investors can protect

a

themselves against expropriation

enhancing the firm’s value. For this

by insiders.(La Porta, R., Lopez-

reason, the management’s primary goal

de-Silanes,

is stockholder wealth maximization,

F.,

Shleifer,

A.,

manner

that

is

consistent

with

Vishny, R., 2000)

which, as we will see, translates into

corporate governance mean the

maximizing the value of the firm as

effectiveness of mechanisms that

measured by the price of its common

minimize

agency

conflicts

stock. Firms do, of course, have other

involving

managers,

with

objectives: In particular, managers who

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make the actual decisions are interested

The target from governance:

in their own personal satisfaction, in

The governance views to corporation it

their employees’ welfare, and in the

as an aggregate of various inputs acting

good of the community and of society at

together to produce goods or services

large. Still, stock price maximization is

Employees provide

the most important

provide

goal

of most

debt

labor. Creditors

capital.

Shareholders

corporations. ( Scott Besley and Eugene

initially provide equity capital and

F. Brigham 2008)

subsequently bear the risk of losses and

Overview of corporate governance:

monitor

Corporations are republics. The ultimate

management. Management monitors the

authority

voters

performance

elect

coordinates the activities of all the

rests

(shareholders).

with

These

voters

the

performance

of

employees

of

and

representatives directors who delegate

corporate inputs.

most

decisions to managers (Paul

Accordingly, the firm is not a thing, but

Gompers, Joy Ishii & Andrew Metrick

rather a nexus of explicit and implicit

2003) .

contracts

As in any republic, the actual power-

obligations among the various inputs

sharing relationship depends upon the

making up the firm (Stephen M.

specific rules of governance (Paul

Bainbridge 2008).

Gompers, Joy Ishii & Andrew Metrick

establishing

rights

and

Figure1:the corporate as the nexus of contracts

2003). So, that corporate governance provides a

framework and

serves to regulate

relationship_between shareholders and managers and the rest of Stakeholder

Source: Stephen M. Bainbridge 2008, p. 29

Today, corporate governance looks very different. The Imperial CEO is a declining breed, so corporate governance is increasingly active in monitoring top management and CEO. (Stephen M.

The

struggle

for

efficient

internal

management control is the center of the corporate governance (Klaus J. Hopt & Patrick C.Leyens2004)

Bainbridge 2008).

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Advantages of Corporate Governance:

directors on one-tier boards

The advantages of corporate governance

(see UK).

include :(For more see: Shleifer and

B. Two-tier structure

Vishny 1997 , Kevin C.W. Chen,

Another

systemic

break-

Zhihong Chen, K.C. John Wei 2009 )

through for the two-tier

governance

board model is the growing

lowers the cost of equity by

tendency to separate the

reducing the cost of external

positions of CEO and board

monitoring by outside investors.

chairman

A. Better

corporate

and

the

governance

strengthening of the strategic

reduces the relation between the

role of the supervisory board

degree

(see German).

B. Better

corporate

of

expropriation

and

C. Internal Controls and Auditing

market conditions. also

Another systemic the control

reduces the cost of equity by

duties by internal auditing

limiting

opportunistic

committee for an increase of

trading

and

C. Corporate

governance

thus

insider

approval

reducing

supervisory

information asymmetry. D. Better

corporate

of

the

board.

(See

Italia).

governance

minimize agency problem

rights

Egypt Code of Corporate Governance

Corporate governance models:-

This

Corporate governance has many models,

principles of corporate governance in

but all model targets strengthen the

Egypt, used to describe the rules,

presence of independent directors and

regulations, and procedures that achieve

coordinate the nexus of contracts in the

the best protection of and balance

corporate. (Klaus J. Hopt & Patrick

between

C.Leyens2004)

managers,

Find that strengthen the

5

of

of

the

guidelines

interests

shareholders,

of

relates

to

corporate and

other

stakeholders.

A. One-tier boards

presence

set

independent

This code has principles of corporate governance include: (Egyptian General

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Authority for Investment and Free

Figure 2: sector breakdown.

Zones, 2005) a) General Assembly b) Board of Directors (BOD) c) Internal Audit Department d) External Auditor e) Audit Committee f) Disclosure of Social Policies g) Avoiding Conflict of Interest

Source: Standard & Poor's, 2010

S&P/EGX ESG Index The Index is designed to raise the profile

Data

of EGX-listed companies that perform

Our basic sample is all corporate in

well

and

S&P/EGX ESG Index Constituents, This

corporate governance indicators when

index from 7-2007, so we will use the

compared to their peers, and is expected

market value for this corporate after and

to raise the level and quality of

before Index Since Inception

disclosure on ESG issues in Egypt for

year, where we have a historical data for

investors, the Environment, Social and

trading in 2004 and 2010, and don’t have

Governance (ESG) Index for Egypt has

change in the signal of return, so the

been created by the Egyptian Institute of

sample

include

(There

Directors (EIOD), Standard & Poor’s

is convergence in levels

of standard

and Crisil ,This index have many sector,

deviation for EGX 30 between 2004 &

we can see that from the fowling figure

2010)

on environmental,

social

by 3.5

(For more see: Standard & Poor's, 2010, www.egyptse.com)

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Test 2: the corporate governance and

Table 1: sample

stock total risk

Reuters Code

Company Name

POUL.CA

Cairo Poultry

HDBK.CA

Housing & Development Bank

Figure 3: Wilcoxon Signed Ranks Test for stock total risk Ranks Mean Rank

N

ESRS.CA

B_SD A_SD

Ezz Steel

EKHO.CA

Egyptian Kuwaiti Holding

HELI.CA

Heliopolis Housing

OCIC.CA

Orascom Construction Industries (OCI)

COMI.CA

Commercial International Bank (Egypt)

EGAL.CA

Egypt Aluminum

HRHO.CA

Egyptian Financial Group-Hermes Holding Company

MNHD.CA

Medinet Nasr Housing

OCDI.CA

Six of October Development & Investment (SODIC)

Negativ e Ranks Positiv e Ranks Ties Total

a

2

b

9

Sum of Ranks

2.50

5.00

6.78

61.00

0c 11

a. B_SD < A_SD b. B_SD > A_SD c. A_SD = B_SD

Test Statisticsb

Z Asy mp. Sig. (2-t ailed)

Test statistic:

B_SD A_SD -2.490a .013

a. Based on negativ e ranks. b. Wilcoxon Signed Ranks Test

Test 1: the corporate governance and

Table 2 show the different total risk of common stock is significance at 5%.

stock return

Conclusion:

Table 2: Wilcoxon Signed Ranks Test for stock return Ranks Mean Rank

N B_R - A_R

Negativ e Ranks Positiv e Ranks Ties Total

a

6

b

5

Sum of Ranks

7.50

45.00

4.20

21.00

0c 11

a. B_R < A_R b. B_R > A_R c. A_R = B_R

Test Statisticsb

Z Asy mp. Sig. (2-t ailed)

B_R - A_R -1.067a .286

a. Based on positiv e ranks.

Finally, the study found a different impact of corporate governance on return and risk in Egyptian stock (EGX), the study found an impact of corporate governance in total risk of common stock (significance at 5%.), But don’t has this impact in the return of common stock(not significance at 10%.). So, the researcher expected reason this impact due to the risk pricing is relative to Efficiency application of corporate governance

b. W ilcoxon Signed Ranks Test

Table 2 show the different return of common stock is not significance at 10%.

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References Allen Kaufman, Ernie Englander & Craig H. Wood (2003), “A Team Production Model of Corporate Governance Revisited”, Working Paper, George Washington University School of Business and Public Management ,September Catherine Turner (2009),” Corporate Governance : A practical guide for accountants “ , USA : Elsevier . Dorata, N., & Petra, S. (2008) ,” CEO duality and compensation in the market for corporate control”, Managerial Finance, Vol.34, No.5, P.P. 342-353. Egyptian General Authority for Investment and Free Zones (2005),”Egypt Code OF Corporate Governance: Guidelines and Standards “, October. Kevin C.W. Chen, Zhihong Chen, K.C. John Wei (2009),” Legal protection of investors, corporate governance, and the cost of equity capital”, Journal of Corporate Finance, Vol.15, p.p. 273–289 Klaus J. Hopt & Patrick C.Leyens(2004),” Board Models in Europe Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France, and Italy”, Working Paper, ECGI Working Paper Series in Law , January. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., (2000), “Investor protection and corporate governance”, Journal of Financial Economics , Vol.58, p.p.3–27. Matt Andrews (2010),” Good Government Means Different Things in Different Countries”, Governance, Vol. 23, No. 1, January ,pp. 7–35. Paul Gompers, Joy Ishii, Andrew Metrick (2003),” Corporate Governance and Equity Prices”, The Quarterly Journal of Economics, Vol. 118, No. 1, Feb., pp. 107155 Scott Besley and Eugene F. Brigham (2008),” Essentials of Managerial Finance”, Fourteenth Edition, USA: Thomson Higher Education Shleifer, A., Vishny, R. (1997),” A Survey of Corporate Governance”, The Journal of Finance, Vol. 52, No.2, June, pp. 737-783. Standard & Poor's, February (2010),” S&P/EGX ESG Index: Equity Indices “,S&P Thought Leadership and Research , February. Stephen M. Bainbridge (2008), “The New Corporate Governance in Theory and Practice “, New York: Oxford University Press, Inc.

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APPENDIXE A Corporate listing in S&P/EGX ESG Index Constituents ISIN

REUTERS CODE

COMPANY NAME

EGS02051C018

POUL.CA

Cairo Poultry

EGS60301C016

HDBK.CA

Housing & Development Bank

EGS655L1C012

PHDC.CA

Palm Hills Development Company

EGS691S1C011

TMGH.CA

T M G Holding

EGS3C161C014

LCSW.CA

Lecico Egypt

EGS3C251C013

ESRS.CA

Ezz Steel

EGS69082C013

EKHO.CA

Egyptian Kuwaiti Holding

EGS65591C017

HELI.CA

Heliopolis Housing

EGS65901C018

OCIC.CA

Orascom Construction Industries (OCI)

EGS3D061C015

IRON.CA

Egyptian Iron & Steel

EGS3G191C017

NASR.CA

El Nasr Transformers (El Maco)

EGS44012C010

MOIL.CA

Maridive & oil services

EGS48031C016

ETEL.CA

Telecom Egypt

EGS48011C018

EMOB.CA

Egyptian Company for Mobile Services (MobiNil)

EGS60121C018

COMI.CA

Commercial International Bank (Egypt)

EGS3E181C010

EGAL.CA

Egypt Aluminum

EGS07061C012

IFAP.CA

International Agricultural Products

EGS10001C013

ASCM.CA

Asek Company for Mining - Ascom

EGS652L1C015

NDRP.CA

Namaa for Development and Real

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Estate Investment Co. EGS380S1C017

SKPC.CA

Sidi Kerir Petrochemicals

EGS3G0Z1C014

SWDY.CA

ELSWEDY ELECTRIC

EGS69182C011

NAHO.CA

Naeem Holding

EGS673T1C012

AUTO.CA

GB AUTO

EGS691L1C018

PIOH.CA

Pioneers Holding

EGS30431C018

ESGI.CA

Egyptian Starch & Glucose

EGS3C351C011

SVCE.CA

South Valley Cement

EGS69101C011

HRHO.CA

Egyptian Financial Group-Hermes Holding Company

EGS65571C019

MNHD.CA

Medinet Nasr Housing

EGS65851C015

OCDI.CA

Six of October Development & Investment (SODIC)

EGS74081C018

ORTE.CA

Orascom Telecom Holding (OT)

Sources: Egyptian Exchange

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