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Transcript of FINS3616
Renee FINS3616 Question 1. What are the primary mechanisms of corporate governance in Japan?
Are they required by legal mandate or adopted at the discretion of the company? Internal Mechanisms - Board of Directors
- Threat of Dismissal & Remuneration
External Mechanisms - Takeover Threats
- Auditing Question 2. What are the primary mechanisms of corporate governance in Azerbaijan?
Are they required by legal mandate or adopted at the discretion of the company? Investor Protection - Shareholders have the right to attend the GMS, trade shares, receive basic information, elect board members and approve major transactions.
- There are no takeover laws or regulation for investor to take control of a company
- Insiders cannot trade on inside information or disclose it to third parties.
- Under Azerbaijan’s Law, foreign investors may participate in the domestic market through Joint ventures or establishing subsidiaries.
- There are 3 important areas of corporate governance in Azerbaijan including investor protection, disclosure and company oversight and board. Question 3. How would you compare the effectiveness of these mechanisms?
Would it be possible to use some of the mechanisms of Japan in Azerbaijan? Effectiveness of mechanisms Measurements of corporate governance systems
1)Level of private benefits of control
2)Willingness of entrepreneurs to make initial public offerings
3)Functioning of internal and external markets for corporate control Results Doing Business Investor protection rank (June 2012)
• Japan – Rank 19
• Azerbaijan – Rank 25
• 93 – 33 in 2008
Question 4. Given the exchange rate systems of both countries, what type of exchange risk would this investment face? How would you recommend hedging this risk? Future cash flows from investment
- Currency risk
- Non-conversion risk
- Forward contract, money market hedge
- Reinvestment Japan -> Floating exchange rate
Azerbaijan -> Crawling band
-currency revaluation risk
-forward contract, money market hedge
-insurance Question 5. How would you compare the financial development of both countries?
What issues may these differences cause? Depth of Financial Institutions and Markets Size of the financial markets - Japan’s stock market is the third largest in the world by aggregate market capitalisation
- Azerbaijan’s stock market is very small. In 1998, it’s market capitalisation was merely US 3 million dollars. Main Mechanisms •Corporate Governance mechanisms more extensive and effective for Japan
•Azerbaijan making progress
–Introduction of legal and political framework
–Issue of lack of implementation and enforcement
1) Legal liability •Japan – Olympus scandal
•$1.7 billion fraud
•Seven individuals arrested
•Former chairman Tsuyoshi Kikukawa facing 10 years imprisonment
•Azerbaijan - State commission for Securities (SCS) cannot initiate criminal proceeding
•Suggested to increase power 2) Board of directors Japan – Operates with board of directors
•Consists of insiders with large number of members
•2001 amendment to Commercial Code increased number of outsider directors
Azerbaijan – Operates with supervisory board and management board
•Should change role of supervisory board to provide them with exclusive powers
•Similar to role of effective board of directors Corporate Governance - System of policies & laws
- Aligns management to company objectives
- Not uniform Disclosure - All companies are required to produce audited financial statements consisting of a balance sheet and income statement
- Majority of companies did not produce the financial statements or make them accessible to shareholders
- Joint Stock Companies are also required to use an external auditor. Company Oversight and Board - Companies operate by a two-tier board structure
- Consists of a management board, which carries out the day-to-day operations of the company, and a supervisory board that oversees the activities of the management board.
- The management board can be selected either through a GMS or by the supervisory board.
- An important reform that was introduced in the Civil Code in 2007 was fiduciary duties for the supervisory board
Access to Financial Services Access refers to the ability of individuals and business to obtain financial services such as loans, currency exchange etc.
Issues of Financial Underdevelopment in Aberzaijan - Company in Aberzaijan may find obtaining capital difficult
- Low economic growth for Aberzaijan can be forecast from Aberzaijan’s financial underdevelopment.
Depth of Stock Market
- Common ratio to measure stock market depth is stock market capitalisation to GDP. Japan’s ratio was 60.3% compared to Azerbaijan’s 0.07.