Corporate Governance in Asia
Several Asian countries have been coming under fire from regulatory bodies and practitioners all over the world regarding their corporate governance. One of the key aspects in improving corporate governance is improved investor protection and more transparency in information which will enhance the development of local capital markets and promote foreign investment to provide funds for long-term economic development. Focus on improving national standards of regulation and corporate practice should first be achieved.
The definition of corporate governance is the system through which the behavior of a company is monitored and controlled. The significance of corporate governance is that in modern economies large corporations are typically associated with a division of labor between the parties who provide the capital (i.e., shareholders) and the parties who manage the resources (i.e., management). Conflict of interest among the two groups might lead to insufficient monitoring of the executive, suboptimal levels of investment in the firm, or some shareholders being expropriated. In these scenarios shareholders might be hurt if there are not sufficient means to ensure that the company is properly monitored. (Chan, Bob Y. and Cheung, Stephen Y.L. Corporate Governance in Asia. December 2004. Asia-Pacific Development Journal. https://docs.google.com/viewer?url=http%3A%2F%2Fwww.unescap.org%2Fpdd%2Fpublications%2Fadpj_11_2%2F2_cheung_chan.pdf, retrieved 22 April, 2011.)”
The Asian business landscape includes the predominance of family-run firms, the informal nature of stakeholder relations and the legal and economic diversity of the region. Two-thirds of listed companies and substantially all private companies are family-run. Over the last decades, the collective talents and efforts of these family-business owners have resulted in strong economic growth and substantial increases in living standards. (Organization for Economic Co-operation and Development (OECD). Corporate Governance Asia- White Paper. http://www.oecd.org/document/6/0,3746,en_2649_37439_47495110_1_1_1_37439,00.html, retrieved 22 April, 2011. 11.) A tendency for such individuals (and their families) is to establish large interlocking networks of subsidiaries and sister companies that include partially-owned, publicly listed companies. The use of subsidiaries and sister companies allows investors not only to place their money with the management team of their choice, but to direct this money to the markets and industries in which particular subsidiaries specialize and which investors believe hold the greatest potential for profits. The flipside is that these pyramidal structures can lead to severely biased treatment of shareholders. By conducting operations through a complex network of subsidiaries, controlling shareholders acquire control of operations and/or cash flows disproportionate to their equity stake in individual companies. The extent of this inconsistent control is often opaque to outsiders and undisclosed by the insiders. A challenge for corporate-governance reform in Asia is to encourage dynamism and growth of family businesses while channeling their energies and operations into structures that are more transparent and hence more clearly equitable for non-family investors. ((Organization for Economic Co-operation and Development (OECD). Corporate Governance Asia- White Paper. http://www.oecd.org/document/6/0,3746,en_2649_37439_47495110_1_1_1_37439,00.html, retrieved 22 April, 2011. 11.)
The second prominent feature of the Asian business scene is the strength of informal stakeholder relationships. Often, the principal investors in even the largest enterprises are more often than not family members or close friends. This informal nature of Asian stakeholder/company interaction can produce real and lasting benefits for stakeholders that equal or exceed those offered through more formal approaches based on “rights”. (Organization for Economic Co-operation and Development (OECD). Corporate Governance Asia- White Paper. http://www.oecd.org/document/6/0,3746,en_2649_37439_47495110_1_1_1_37439,00.html, retrieved 22 April, 2011. 12.) However, the trend to move towards more globalize markets and greater minority-shareholder activism are leading to evolutionary changes in the business relationships and debates regarding recasting informal interests as formal rights enjoying formal protection mechanisms.
There is extensive legal and economic diversity in Asia. With respect to legal traditions, Hong Kong (China), India, Pakistan and Malaysia have common law frameworks. Thailand and the Philippines have frameworks based on French civil law. China, Chinese Taipei and South Korea follow the German civil law traditions. State ownership of enterprises remains strong, especially in China and India, where aspects of stakeholder relations may draw upon or reflect elements of the socialist law. Apart from these legal traditions in many of the countries exist behavioral norms which arise from various cultural and religious traditions. (Organization for Economic Co-operation and Development (OECD). Corporate Governance Asia- White Paper. http://www.oecd.org/document/6/0,3746,en_2649_37439_47495110_1_1_1_37439,00.html, retrieved 22 April, 2011. 12.)
“The promotion of good corporate governance serves two important purposes in the development of local and regional capital markets. Firstly, local equity markets play a central role when there is a lack of foreign capital. Good corporate governance promotes the development of local equity markets and reduces the reliance on foreign debts. Secondly, the institutional investors usually make up the majority of foreign investors. Improved corporate governance provides a higher level of investor confidence from international investors and thus increases the stability of local equity and other capital markets. The significant benefits from good governance to the Asian corporate setting are numerous. The most significant is the reassurance of investor confidence, most especially the foreign institutional investor. (Chan, Bob Y. and Cheung, StephenY.L. Corporate Governance in Asia. December 2004. Asia-Pacific Development Journal. https://docs.google.com/viewer?url=http%3A%2F%2Fwww.unescap.org%2Fpdd%2Fpublications%2Fadpj_11_2%2F2_cheung_chan.pdf, retrieved 22 April, 2011.)”
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