Assignment Three Research Report (Individual) On Theory, Policy and Implementation of Corporate Governance and/or Sustainability to a Business Sector
Lingyun017
AsiaPacificCorporateGovernance.pptxSESSION SIX
ASIA PACIFIC
CORPORATE GOVERNANCE
Introduction
This chapter explores the diverse approaches to corporate governance practised in the Asia Pacific countries.
The special qualities of the relationship based approach to corporate governance are considered, and the pervasiveness of family owned businesses, embedded in business networks.
The traditionally informal and often weak corporate governance mechanisms of this region are examined, where boards lack authority, and financial institutions fail to monitor.
Despite the evident weaknesses in corporate governance this region has maintained the fastest economic growth, until the East Asian systemic financial crisis hit in 1997, and the lessons of the crisis for corporate governance reform are studied.
The distinctive corporate governance systems of the giant economies of Japan, China and India are examined, and the extensive transformations that are taking place in each of those countries.
The impact of the global financial crisis upon the Asia Pacific is considered, and the continuing reverberations of financial instability which exist in China.
Asia Rising
Asia Pacific Corporations
Asia Pacific Relationship-Based Approaches
The countries of the Asia Pacific, as with Europe, also have a rich cultural diversity with different political and legal structures, and social traditions.
Not only does this make for significant national differences in corporate governance policy and practice, but many countries in Asia are still engaged in a process of institutional development.
Most countries of the region have corporate governance systems that are essentially based around close relationships, usually involving family control, and ongoing close relationships with creditors, suppliers, and major customers. In some systems this is reinforced by close relations with regulators and state officials.
This relationship-based form of conducting business contrasts with the rules-based systems that predominate in Western industrial countries where there is a combination of internal and external controls exerted on companies.
Asia Pacific Relationship-Based Approaches
In Korea, Malaysia and Thailand for example, in the past the market and regulatory structures were undeveloped and therefore unable to ensure effective market discipline.
In a less developed legal and institutional environment, the information asymmetries – between those on the inside who know what is happening and others left in ignorance – are more severe.
Since it is difficult to enforce contracts, contract costs are higher. It is difficult to enforce contracts because courts are weaker, regulators less active and influential, and the economy is undergoing more rapid change than in advanced industrial countries.
In addition, developing countries tend not to have the administrative agencies capable of enforcing accounting standards, financial disclosure, and stock market listing rules (Prowse 1998).
Asia Pacific Relationship-Based Approaches
A related problem is that Asian economies have a considerable concentration of ownership of companies. Most companies in Asia either have a majority shareholder, or a tightly knit group of minority shareholders who act in concert to control the company. Often the company is part of an extensive corporate network, which in turn has majority shareholders.
As Young et al (2008) highlight such dominant ownership structures present an entirely different dynamic to corporate governance in Asian and other emerging economies compared to Anglo-American economies:
“Instead of traditional principal–agent conflicts espoused in most research dealing with developed economies, principal–principal conflicts have been identified as a major concern of corporate governance in emerging economies.
Principal–principal conflicts between controlling shareholders and minority shareholders result from concentrated ownership, extensive family ownership and control, business group structures, and weak legal protection of minority shareholders.
Such principal–principal conflicts alter the dynamics of the corporate governance process and, in turn, require remedies different from those that deal with principal–agent conflicts” (2008:196).
Asia Pacific Relationship-Based Approaches
The most common company form in East Asia is the diversified conglomerate, which is controlled and managed by a single extended family.
Companies with widely dispersed ownership are rare in Asia. In this context it is difficult to protect the rights of minority shareholders.
Though there are usually laws and penalties against insider trading and related party transactions, as well as on the conduct of substantial transactions and takeovers, it is open to question how often and how rigorously these are enforced (Prowse 1998).
Family Controlled Companies and Business Networks
A widespread business concern is that the most rapid economic growth in the world is occurring in Asia on relatively weak institutional foundations. “The most prominent features of the Asian business landscape include the predominance of family-run firms, the informal nature of stakeholder relations and the legal and economic diversity of the region” (OECD 2003:10).
The OECD reports that approximately two-thirds of listed companies in Asia are family run, and almost all private companies. These firms have demonstrated a flexibility and dynamism that has resulted in strong economic growth and substantial increases in living standards for several decades.
“A particular feature of the Asian corporate landscape, however, is a tendency for such individuals (and their families) to establish large interlocking networks of subsidiaries and sister companies that include partially-owned, publicly-listed companies.
On the one hand, the use of such subsidiaries and sister companies permits 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 specialise and which investors believe hold the greatest potential for profits.
On the other hand, such pyramidal structures can lead to severely inequitable treatment of shareholders. (OECD 2003:10)
Concentration of Family Control of Corporate Assets in Asia
Family Controlled Companies and Business Networks
The second prominent feature of Asian business is the strength of informal stakeholder relationships, as even in the largest enterprises other principal investors will often be family members or friends:
“The informal nature of Asian stakeholder company interaction can produce real and lasting benefits for stakeholders that equal or exceed those offered through more formalistic approaches based on “rights”.
At the same time, trends towards more globalised markets and greater minority shareholder activism are leading to evolutionary changes in business relationships, as well as to debate about recasting informal interests as formal rights enjoying formal mechanisms for redress” (OECD 2003:11).
Culturally the Asian family business is patriarchal (and occasionally matriarchal), and traditionally tends to have close relations also with long-standing employees, suppliers, distributors and others.
Weak Governance Mechanisms and Institutions
For some decades countries of the Asia Pacific have established all of the necessary mechanisms and institutions of corporate governance, however they were frequently nominal, almost ceremonial, with little active operation or meaning. Neither internal mechanisms nor external monitoring institutions made much difference in a culture of business as usual.
Claessens and Fan (2002) in a review of corporate governance issues in Asia emphasise the lack of protection of minority rights insisting that most studies do not suggest that firms in Asia are badly run, but,
“The returns went disproportionately to insiders, accompanied with extensive expansion into unrelated businesses, high leverage and risky financial structures. The usage of group structures created internal markets for scarce resources. However, the internal markets were prone to misallocate capital due to the agency problem. Conventional governance mechanisms were weak to mitigate the agency problem, as insiders typically dominated boards of directors and hostile takeovers were extremely rare. Neither did external financial markets provide much discipline, partly as there were conflicts of interest, but mostly as there existed rents through financial and political connections, which combined with the moral hazard of a large public safety net for the financial system.”
Boards of Directors in the Asia Pacific
The boards of directors of companies in Asia often serve a nominal and sometimes a perfunctory role. There is often no clear role for non-executive directors, and little knowledge of the formal obligations and functions of company officers. Boards are effectively dominated by majority shareholders.
A result is that disclosure and transparency are often minimal, making it more difficult for regulatory authorities to take action, even if they wished to. Furthermore, institutional investors and fund managers are under-developed, which reduces the extent of external monitoring by powerful institutions.
The OECD claims that boards in developing countries are frequently dysfunctional: “boards in developing and emerging market economies all too often fall into one of two categories. One is the rubber stamp board that plays little role in governance. In this case the company is run by a controlling shareholder who deals directly with management. Board meeting and decisions are formalities. The other is the family board. Here, the controlling shareholder, important executives – often relatives of the controlling shareholders – and long trusted advisors do make strategic business decisions.” (2003:164–165)
Finance
Banks and other financial institutions have a role in making sure that companies follow corporate governance principles and exercise prudent financial controls in advanced industrial countries.
Government intervention in banks in East Asia, including rescuing depositors when banks have failed, provides an incentive to relax risk controls on the part of companies.
Commercial operations appear to carry less risk when governments are ready to intervene in this way. In this context businesses can be inclined towards over-investment, inducing investment cycles of boom and bust in the markets, which led to the Asian financial crisis, and appears a potential cause of further crises in Asia.
Rapid Economic Growth
“From 1965 to 1990 the twenty-three economies of East Asia grew faster than all other regions of the world. Most of this achievement is attributable to seemingly miraculous growth in just eight economies” (World Bank 1993:1).
The World Bank research report, The East Asian Miracle, characterised the high performing Asian economies (HPAEs) led by Japan, into the four tiger economies of Hong Kong, Republic of Korea, Singapore and Taiwan, joined later by the newly industrialising economies (NIEs) of Indonesia, Malaysia and Thailand.
What caused East Asia’s success? The World Bank (1993:5) offered the following explanation:
“In large measure the HPAEs achieved high growth by getting the basics right. Private domestic investment and rapidly growing human capital were the principal engines of growth. High levels of domestic financial savings sustained the HPAE’s high investment levels. Agriculture, while declining in relative importance, experienced a rapid growth and productivity improvements.
Population growth rates declined more rapidly in the HPAEs than in other parts of the developing world. And some of these economies also got a head start because they had a better educated labour force and a more effective system of public administration. In this case there is little that is ‘miraculous’ about the HPAEs’ superior record of growth; it is largely due to superior accumulation of physical and human capital.”
Rapid Economic Growth
Whatever weaknesses remain unresolved in corporate governance, the Asia Pacific has become the epicentre of world economic growth, and once again has become the favoured region of the IMF and World Bank:
“For several decades, growth has been very strong in the region as a whole – even spectacular in the newly industrialized economies (NIEs) and, more recently, China. Between 1981 and 2001, the number of people living in extreme poverty declined dramatically in East Asia (by over 400 million in China alone).
At the same time, given the presence of both early and late developers, Asia continues to display wide disparities in per capita income, ranging from over $33,000 in Singapore to $2,000 in Bangladesh.
Looking ahead, further improvements in policies and institutional quality would help to sustain high sectoral productivity growth rates and facilitate the continued shift of resources from agriculture to industry and services, hence supporting sustained rapid growth, convergence toward advanced-economy income levels, and the elimination of poverty across the region.” (IMF 2006:1)
East Asian Financial Crisis
The unique combination of high investment and sustained high growth rates of the Tiger economies of East Asia was portrayed as an inspiration to the other developing economies, when abruptly the Asian financial crisis broke. Erupting in June 1997 in Thailand, it quickly swept through the Philippines, Indonesia, Malaysia, Singapore and South Korea, impacting upon Taiwan and Hong Kong.
Meanwhile, Japan was experiencing a deepening crisis in its financial institutions. The financial systems of East Asia began to collapse at the moment the Thai government announced a ‘managed float’ of the baht. This confirmed the warning signals of the bankruptcy of Hanbo Steel in Korea at the start of the year, and the failure of Finance One, the largest finance company in Thailand in May 1997.
The strenuous efforts of governments and repeated interventions of the International Monetary Fund did not prevent the spread of currency depreciation, collapsing stock markets, crashing asset prices, and contagious corporate failures and financial insolvencies. This process of enveloping panic intensified as domestic credit dried up and foreign investors disappeared.
Dimensions of the East Asian Crisis 1997-1998*
| Currencies | Stock Index | Market Fall | |
| Indonesia | -83.2% | -35.0% | -$96bn (-88%) |
| Thailand | -40.2% | -48.0% | -$40bn (-66%) |
| Malaysia | -39.4% | -56.0% | -$217bn (76%) |
| Philippines | -36.1% | -33.8% | -$43bn (-58%) |
| South Korea | -34.1% | -58.7% | -$111bn (-71%) |
| Singapore | -16.5% | -43.5% | -$91bn (-53%) |
| Hong Kong | Nil | -43.2% | -$223bn (-42%) |
*(Fall in currency exchange rate for US$ between 30 June 1997 and 3 July 1998. Percentage decline
in stock market index between 30 June 1997 and 3 July 1998.
Fall in stock market capitalization in US$ billions, between 30 June 1997 and 3 July 1998)
Sources: Bank of International Settlements; IMF; World Bank; Asia Week 17 July 1998; Jones Lang Wootton; Dataquest.
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Change in Share Indexes of East Asia Region 1997-8
Source: Adapted from Bloomberg IHT
19
Market Capitalization of Stock Exchanges in Asia Pacific, 1998
Source: Stock Exchanges Respective Annual Reports 1998.
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Asia Pacific Stock Markets 1990-2003
Market Capitalization. Total market capitalization is presented on an annual basis from 1990-2003,
By Asia Pacific exchange in USD, The Australian Stock Exchange (ASX), Bursa Malaysia (BMA), Hong
Kong Exchanges and Clearing (HKEx), Jakarta Stock Exchange (JSX), Korea Exchange (KRX), Stock
Exchange of Thailand (SET), Singapore Exchange (SGX),Shanghai Stock Exchange (SSE), and the Taiwan
Stock Exchange (TSEC) are represented on the left hand vertical axis. The Tokyo Stock Exchange (TSE) is
represented on the right hand vertical axis due to its large size compared to the other markets.
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East Asian Financial Crisis
How could all this have happened in economies that were formerly celebrated for their robustness and efficiency? Surveying the institutional structures of Korea, Malaysia and Thailand, Prowse (1998) concludes:
“Market and regulatory institutions that play an important role in ensuring market disciplines are relatively undeveloped in the East Asian economies.
In a less evolved regulatory, legal and institutional environment, information asymmetries are more severe, contracting costs are higher because standard practices have not developed, enforcement of contracts is more severe, contracting costs are higher because standard practices have not developed, enforcement of contracts is more problematic because of weak courts, market participants and regulators are less experienced, and the economy itself is likely to be undergoing more rapid change than in developed countries.
In addition to having a weak judicial system, developing countries are unlikely to have administrative agencies that can handle issues that benefit from detailed rule making and non-legal administrative enforcement such as accounting standards, financial disclosures and stock market listing rules.”
The Beginning of Reform
Following the crisis, an export-led recovery took several years to manage, but led to a longer and more pronounced period of growth for the Asia Pacific which has continued to the present day, barely damaged by the global financial crisis of 2007/2008.
However the question remains whether this continued economic growth is on firmer institutional foundations and is more sustainable than the rapid growth that led to the Asian crisis?
It is likely that only a fundamental program of the reform of financial markets, government and legal institutions, and corporate governance institutions and practices in East Asia is likely to produce results.
All of the countries concerned are committed to reform of corporate governance, but as the countries focus incessantly on economic growth and business development, the worry is that corporate governance may once again be considered of marginal importance.
A range of external agencies have an interest in sustaining the reform process including the IMF, World Bank, and Asian Development Bank
The Beginning of Reform
The reform process is taking different paths in different countries, but the main principles and objectives can be outlined as:
■ ensuring clear and effective financial control structures within firms;
■ developing external monitoring and control with improvements in the legal framework, regulatory agencies, and the disclosure environment;
■ advancing training and development programmes to encourage understanding of corporate governance procedures and issues.
It is likely that significant reform of the Companies Acts in the countries of East Asia will be required to clarify internal control structures. The commitment to adopting codes of best practice in corporate governance is necessary. A more prescriptive regulatory approach is required given the widespread failure of systems of voluntary standards in East Asia, with more powerful securities commissions ensuring compliance
The Beginning of Reform
Included as important elements of corporate governance codes would be provision for:
■ decision-making structures and roles within firms to ensure effective governance and financial controls, including representation by non-executive directors;
■ clearer definition of duties and responsibilities, with clear procedures for exercising these duties;
■ more rigorous monitoring and reporting requirements to ensure the transparency of management’s actions and the company’s performance.
What this entails is the development of a disclosure-based corporate governance and regulatory regime. Firms should be required to disclose all material information at the time of first listing, and update this on a periodic basis. In developed capital markets, firms depend on market prices and the exercise of due diligence to ensure disclosure of all material information.
Japan: The Miracle Economy
Japan is still recovering from a prolonged period of business and economic disorientation. After being the miracle economy of the 1970s and 1980s with the highest growth rate, it was hard to come to terms with decades of repeated economic recessions following the end of the bubble economy in 1990.
Major Japanese corporations continued to do exceptionally well in export markets, particularly Toyota and others automotive manufacturers and the consumer electronic companies, but the financial institutions remained weak and largely unreformed (corporate governance reform in Japan was once described as at best glacial).
Also Japan has experienced a number of what are referred to as the recent unfortunate incidents including the New York Daiwa Bank, Sumitomo Corporations copper losses, Nomura Securities, Mitsubishi Oil, and the collapse of Yamaichi Securities under a mountain of off-balance sheet liabilities (it transpired that one of the main architects of this operation was one of the company’s auditors!).
GDP Growth Japan and US (1890-2001)
Japan Listed Companies
The formal legal features of the Japanese corporate governance system resemble those in most other advanced industrial countries. Corporate law in Japan was modelled on the German system, with the establishment of limited liability companies since 1899.
As in most OECD countries, the majority of enterprises are organised as public-limited companies, though in Japan a significant number of medium-sized firms are private-limited corporations.
In 1995 there were 2,263 public-limited companies listed on the Japanese stock exchange (which requires a share equity of 1 billion yen or more).
In terms of the number of listed companies and the size of market capitalisation, Japan lies in the middle of the US/UK heavily equity based markets, and European countries with smaller equity markets (OECD 1996:147
Japan Unique Characteristics
Johnstone (1995) suggests there are four underlying institutional factors critical to understanding the Japanese corporate system:
■ a financial system based on bank rather than equity financing, with keiretsu of industrial groups and banks;
■ government policies which consistently protected industries deemed vital to economic development, and encouraged the development of oligopoly;
■ barriers to the entry of foreign companies by legal obstacles and traditional business norms;
■ the peculiarities of the Japanese labour market with a distinctive brand of labour/management cooperation in the form of lifetime employment and investment in human capital.
Japan Long Term Orientation
Together these unique factors allowed Japanese management to pursue long-term strategies based on winning market share rather than short term profit maximising, with an emphasis on product quality and manufacturing techniques.
Long-term growth strategies were possible according to Johnstone because Japanese managers were freed by the institutional structures in which their corporations operated from threats from shareholders, trade unions, domestic speculators, competitors and foreign capital.
The functioning of all of the major institutions and mechanisms of corporate governance including shareholders, banks and boards of directors, is rather different in Japan.
Beginning with the board of directors, in the west the board is largely appointed from outside the company and serves to monitor management. In Japan the board plays a more strategic and decision-making role and is drawn from the ranks of executive management who are employed by the company.
Japan Boards
Putting it simply: in the west the board members are outsiders representing the shareholders, in Japan the board members are insiders leading management (Yasui 1999:4).
This reflected the lifetime employment pattern traditionally offered by large Japanese corporations, as managers looked forward to board membership as a reward for loyalty to the company.
This structure is inherently hierarchical, and makes it difficult for the board to supervise the president or officers of the company. This hierarchy is extended into the board with vertical reporting lines between the president, and senior and junior members of the board.
Another problem of this approach is that over time there is a tendency for the size of boards to grow as more managers need to be rewarded. In 1998 the average board size was around 20, with some boards reaching as many as 40 members. As a result, most companies formed a board committee of the president and some senior board members who made all of the essential management decisions which are ratified later by the main board as a formality.
Figure 6.4 Independent Auditors and Audit and Supervisory Boards in Japan
Shareholders Meeting
Independent Auditor
Kansayaku-kai
(Audit and Supervisory Board)
Board of Directors
(Torishimariyaku-kai)
Japan Boards
In reality, however in Japan the respective roles of directors and managers have not necessarily been clearly defined.
Further, the distinction between the governance role of the board of directors on the one hand and the management role of managers on the other, is further complicated by the existence of a separate board of auditors whose role is to audit the activities of the management.
This body has meant that in practice the Japanese board of directors has not necessarily been equipped with sufficient governance authority or capability, while the board of auditors in the past has been little more than a cosmetic shell.
To provide some counterbalance, the Japanese Commercial Code requires statutory auditors to be appointed by the shareholders, who are responsible for the supervision of the directors (Figure 6.4). Statutory auditors have the authority to demand management reports, examine operational and financial information, attend board meetings, and demand the suspension of a director if they believe the director is contravening the law.
Japan Ownership Structure
The ownership structure of Japanese companies is also different than in western countries.
The banks and other business corporations have traditionally been larger shareholders than in the Anglo-American markets, though both have recently slightly reduced their share ownership (Table 6.2).
This is part of the cross-shareholding pattern of Japanese corporations originating in the early 1950s aimed at raising capital while preventing hostile takeovers.
When stock prices in Japan soared in the 1970s and early 1980s the shareholdings created hidden profits for companies, strengthening their financial base, though this was undone when the Japanese financial bubble burst in the early 1990s.
The significant change that has occurred in recent yearsis the considerable growth in the holdings of foreign investors in Japanese companies, up from 4.7 per cent in 1990 to 31.7 per cent in 2014. This has implications for the future governance of Japanese corporations and the orientations of Japanese managers.
The Transformation of Japanese Shareholding 1985-2007
Source: Adapted from Tokyo Stock Exchange 2007
Table 6.2 The Distribution of Share Ownership in Japan, by Type of Shareholder (1950-2014)
| Shareholder distribution (%) | 1950 | 1970 | 1990 | 2010 | 2014 |
| Government, Local Government | 3.1 | 0.6 | 0.3 | 0.3 | 0.2 |
| Banks, Trust Companies | 12.6 | 15.8 | 25.5 | 22.3 | 21.7 |
| Pension Trusts | Na | 0.0 | 0.9 | 3.2 | 1.8 |
| Investment Trusts | Na | 2.1 | 3.7 | 4.4 | 4.8 |
| Life and Casualty Insurance | Na | 13.7 | 15.8 | 6.4 | 5.0 |
| Other Financial Institutions | Na | 2.1 | 1.6 | 1.0 | 0.7 |
| Securities Companies | 11.9 | 1.3 | 1.7 | 1.8 | 2.2 |
| Other Business Corporations | 11.0 | 23.9 | 30.1 | 21.2 | 21.3 |
| Foreign Shareholders | 0.0 | 4.9 | 4.7 | 26.7 | 31.7 |
| Individual Shareholders | 61.3 | 37.7 | 20.4 | 20.3 | 17.3 |
| Total | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 |
Japan Ownership Structure
The concentrated pattern of shareholding in Japan in the past has has created considerable stability. The top ten shareholders of companies listed on the Tokyo Stock Exchange have held on average 44 per cent of the outstanding stock of a company (Yasui 1999:8).
The concentrated ownership structure gives key shareholders considerable influence over management, but these shareholders are usually affiliated companies in the same corporate group or keiretsu. Traditionally, they have put more emphasis on expanding their business with the company rather than seeking short-term returns.
The position of the main banks is central to the Japanese corporate governance structure and functioning. As the major creditor and a major shareholder the main bank was positioned to carry out effective monitoring in three forms:
■ Ex ante: Monitoring of the investment decisions of the company, examining loan applications.
■ Interim: Monitoring performance of the ongoing business and projects carried out by the company, examining cash flows at the company’s accounts.
■ Ex post: Evaluating the financial performance of the company, and when a company experiences difficulty, intervening to take corrective measures (Aoki and Okuno 1996).
Japan Banks
The main banks are well positioned to restructure companies when necessary, and in return they received long term benefits through fees, deposits, and interest rates on loans from companies and they had very economical costs of information gathering.
The Japanese government encouraged this main bank system in its policies, and in turn was the regulator of the main banks. However, a drawback of this main bank system is that it allows increasing borrowing by companies without sufficient risk assessment.
As banks competed to lend volumes of money with regulated interest rates, companies began making investments in projects with lower expected returns which contributed to the Japanese economic bubble.
Deregulation of the Japanese banks occurred in the 1980s, which strengthened the bargaining power of firms and weakened the main banks. With the bursting of the bubble economy in the early 1990s, the banks had accumulated problem assets, which eroded their capital base.
The Japanese Model of Transformation
Source: Adapted from Japanese External Trade Organization JETRO (2005).
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Transitions of Japanese Governance 1960-2000
Source: Toriihara (2004)
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Internationalisation of Equity Ownership Japan (1950-2009)
Japan’s Future
The arrival of aggressive Western hedge funds in Japan interested in releasing to shareholders the large capital reserves of Japanese corporations set the scene for a major contest with Japanese managers more committed to corporate value creation than shareholder value distribution.
As the drive for change in Japanese corporate governance accelerates, fundamental questions are asked in Japan similar to those posed by Berle and Means: “Whose interests should a company serve? Is it the property of shareholders, for them to do whatever they want with it, or does it have a wider social purpose?” This amounted to a contest of principles between U.S. hedge funds and Japanese corporations:
“Managers of the targeted companies, for their part, had little interest in shareholder value; they barely understood what the words meant. What mattered to them, and what constituted ‘corporate value’ in their view, was not the share price or any other financial measure, but the ability of the company to prosper and to grow over the long term” (Owen 2012).
A philosophical divide of significant dimensions separated the Japanese executives determinedly committed to the long-term development of their companies from overseas investors committed to securing what they perceived as their right to increase shareholder value (Seki and Clarke 2014:728)
Olympus
The evolution of corporate governance in Japan towards international standards continues, though at a gradual pace that often concerns outsiders. Several large Japanese companies have taken the bold step of appointing foreigners as CEOs (Sony, Nissan and Olympus).
The short period Michael Woodford survived as CEO at Olympus after he discovered a $5 billion fraud at the company, indicates the major cultural differences in governance still to be overcome (Figure 6.7 ; see Case 11).
The substance of Japanese corporate governance is often questioned due to a lack of understanding of the unique elements of the Japanese institutional system. Japanese companies have come under a sustained assault from overseas investors to introduce a greater number of independent directors on boards, to improve accountability, and enhance transparency. The majority of Japanese companies have taken what they regard as significant steps in this direction of accountability.
However in Japan there is a different conception of the role of the board, the function of corporate governance, and the purpose of the corporation. Executives demonstrate considerable commitment to the company with more modest rewards than in the West (Figure 6.8). Significant change in these enduring Japanese corporate values and practices could only be accomplished if a more convincing theory and model of the corporation was on offer.
Figure 6.7 The Crisis at Olympus 2011-2013
Figure 6.8 Executive Reward in Japan, US and Europe Source: Tokyo Stock Exchange (2010)
USD ( Millions)
Lost in Translation?
China
China is rapidly developing into the largest industrial economy in the world. The country has sustained the strongest and most consistent economic performance of the region since the 1980s with an annual average economic growth rate in excess of 8 per cent.
While the economies of East Asia went into reverse during the 1997–1998 financial crisis, suffered a further reversal in the tech-wreck of 2000–2001, and were damaged by the collapse in demand in Western markets during the global financial crisis of 2007/2008, China’s economy continued to grow strongly and helped to stabilise the region.
China’s exports reached $325 billion in 2002, more than double the 1996 level of $150 billion. This export performance now rivals that of Japan and the ASEAN 5 countries (Indonesia, Malaysia, Philippines, Singapore, and Thailand). Entry of China into the World Trade Organisation is likely to increase the export momentum of China.
Finally China since the 1990s has received large amounts of foreign direct investment (FDI) and in 2015 received US$249 billion in direct investment from other countries, rivaling the United States, as the world’s largest recipient of FDI (OECD 2016). China has reached the stage of internationalizing its economy on a huge scale, and in 2015 invested US$187 billion in overseas assets including major resources investments in oil, gas and other minerals, manufacturing and substantial agricultural businesses.
China
This momentous economic progress in the most populous country on earth has been achieved in spite of pervasively weak corporate governance foundations.
Though there has been a commitment to economic reform stretching back to the early 1980s, at times the progress of reform has stumbled. China has avoided the harmful social and economic dislocation experienced throughout Eastern Europe in the sudden lurch towards market systems.
However, there is a widespread recognition in China that it is unlikely sustained economic growth can continue without the development of more robust institutions of corporate governance.
There are five types of enterprise predominating in China:
■ state-owned enterprises (SOEs);
■ town and village enterprises (TVEs);
■ joint-ventures (JVs);
■ foreign owned enterprises;
■ Chinese listed public companies (Clarke and Duh 1998).
China
The state owned enterprise model dominated from the 1950s through to the 1980s in a negotiated system of central planning.
An SOE law of 1988 called on the SOEs to separate themselves from government, and exercise their responsibilities as businesses.
From 1992 Deng Xioaping supported the call for the introduction of a market economy, and China began the slow and uncertain process of corporatisation of SOEs by which they could eventually transform into state owned corporations or public listed corporations.
In contrast the town and village enterprise (TVE) sector of the economy has often represented a bubbling entrepreneurship in tens of thousands of small and medium sized companies, a few of which have grown to the size of large conglomerates, despite the fact they are supposed to be community based enterprises, and have uncertain ownership and governance structures.
In all of these enterprise forms the relationship that binds people together is guanxi – the sense of durable reciprocity.
China
In all of these enterprise forms the relationship that binds people together is guanxi – the sense of durable reciprocity. Boisot and Child (1996:624) suggest the western preoccupation with the relevance of property rights to economic performance has failed to recognise that property rights,
“can be a complex mixture that does not constitute a simple binary set of possibilities – ‘state’ vs ‘private’. In China a bundle of property rights is exercised by different bodies and de facto property rights tend to emerge from continuing processes of negotiation between central, regional, community and private interests … The Chinese system of network capitalism works through the implicit and fluid dynamic of relationships. On the one hand this is a process that consumes much time and energy. On the other hand, it is suited to handling complexity and uncertainty.”
China Joint Ventures
Joint-ventures with Chinese partner companies were the traditional means by which overseas companies entered China.
Though they brought the benefit of foreign technical expertise combined with local market knowledge, again the governance structures of joint-ventures often exhibited a degree of tension and uncertainty, as both parties discovered opportunities or disadvantages in the arrangement.
More recently the Chinese government has considerably eased its insistence of the formation of joint-ventures if overseas companies wish to enter China.
Negotiations with wholly foreign-owned enterprises could lead to similar benefits flowing to the Chinese economy as in joint-ventures, including technology transfer, skill development, and retained earnings.
China’s reforms
In the SOE sector poor performance remains widespread due to weak incentives for managers to maximise value. Furthermore, government agencies engaging in protectionist practices shield firms from market competition.
When government is considering state owned companies to become listed companies, it is often those with strong local government links that are selected, often leaving controlling shareholders able to exploit companies through related party transactions. Banks lack the capacity and incentives to monitor companies’ behaviour, and bankruptcy of SOEs is largely an administrative process, with state owned banks suffering the same weaknesses as the SOE enterprises.
Corporatisation and ownership diversification has introduced new institutional forms of control, without dismantling the old informal representation structures, and for example the role of chair of the board of directors and party secretary will often be combined.
Key decisions are often made informally, with boards assuming decorative functions. Power effectively is exercised by controlling shareholders and government agencies. The quality of audits is often compromised in this context, as accounts often bear little relation to the commercial transactions that have actually taken place.
China’s reforms
The burgeoning Chines share market is attracting global interest
China A-shares, comprising 51% of the entire China equity market, are securities listed on the Shanghai or Shenzhen Stock Exchanges and traded in Renminbi. Presently, China A-shares are only accessible to foreign investors through specific investment funds (MSCI 2014: FTSE Russell 2015).
H-shares (24% of the market) are China securities incorporated in the People’s Republic of China (PRC), listed on the Hong Kong Stock Exchange and traded in Hong Kong (HK) dollars.
Red Chips (11.7 % of the market) refer to China securities that are not incorporated in the PRC, but that are listed on the Hong Kong Stock Exchange and (directly or indirectly) controlled by organizations or enterprises that are owned by the state, provinces, or municipalities of the PRC.
P Chips (8.8 % of the market) are China securities owned by PRC individuals, incorporated outside PRC and listed on the Hong Kong Stock Exchange. These companies typically derive a majority of their revenues from the PRC and/or have the majority of their assets located in the PRC.
B-shares (0.4%) are China securities incorporated in China and listed on the Shanghai Stock Exchange (in US dollars) or Shenzhen Stock Exchange (in HK dollars).
China’s reforms
In 2015 there were 2,827 listed companies in the Shanghai and Shenzhen stock exchanges of China that have diversified their ownership through public listing with a combined market capitalization of over 9 trillion dollars, making this the second largest market in the world.
Accompanying this process a legal framework of company law, contract law, accounting and securities laws has also been established. The financial system has become more independent of political influence, and regulators’ capacity strengthened.
A corporate governance code has been introduced for listed and non-listed companies by the China Securities Regulatory Commission and the State Economic Trade Commission.
Notwithstanding this commitment towards reform, there remains considerable scope for advancing the rigour of corporate governance policy and practice in China (Tenev, Zhang and Brefort 2002).
China’s reforms
State shares are held by central and local governments, represented by state asset management or investment companies. State shares can also be held by the parent of the listed company, typically a state owned enterprise.
These state shares are not tradable, yet they normally form the largest shareholding in the enterprise. The state therefore remains the controlling shareholder in listed enterprises, revealing the limitations of China’s effort to diversify ownership, and the lingering power of the party and state as the country moves gradually towards a market based system.
A survey of corporate governance by the World Bank in China recommended the following policies for reform (Tenev, Zhang and Brefort 2002):
■ alleviating the negative impact of dominant state ownership on market discipline and on the regulatory capacity of the state;
■ building an institutional investor base to facilitate shareholder activism;
■ strengthening the role of banks, enhancing creditor’s rights in the case of default, with options for banks to engage in reorganisation and restructuring of client companies.
China’s reforms
The present salient features of China’s corporate governance are summarized by Yoshikawa (2015) as:
Concentrated state ownership and strong influence of the state over industry development, finance and control;
Limited power of the board of directors and directors are often appointed with political considerations especially in SOEs;
Limited influence of institutional investors on boards and companies;
The legal infrastructure of corporate governance is still in development, though there is now more effort at implementation of policy;
Weak legal enforcement remains the norm;
There is a lack of managerial incentives to improve a firm’s stock performance:
Some top managers are motivated by political career:
Managers are rewarded based largely on short-term gains (commissions):
There is a shortage of qualified independent directors and lack of incentives of directors (who are often government officials, university professors, nominees representing large financial institutions) to monitor management.
Air Pollution in China
A Sustainable Future for China ?
There is however a mightier challenge facing China, and that is the question of the sustainability of its heroic dash for growth? Green and Stern (2014) argue:
“In the past 30 years, China’s gross domestic product (GDP) grew at around 10% per year on average, hundreds of millions of people were lifted out of poverty, and China’s urban population grew by around 250%.
This growth has been an extraordinary achievement; but it has been unequal, and has come at great cost to China’s environment and the natural resources on which its population depends.
Current patterns of urbanisation, structures of governance, and fiscal arrangements are locking in unsustainable physical infrastructure and social relations that will be difficult and costly to alter.
In the next decade, it is likely that economic growth will lead to a doubling of China’s GDP (associated with a 7% p.a. growth rate), and another 350 million residents will be added to China’s cities. It is thus a critical decade; a decade that will effectively determine whether and how the sustainable economic transformation to which China aspires will occur.
A Sustainable Future for China ?
President Xi of China has conceded that China’s current model of economic development is “unbalanced, uncoordinated and unsustainable” and China’s leadership has signalled its determination to “accelerate the transformation of the growth model, … make China an innovative country” and “promote more efficient, equal and sustainable economic development” (CCCPC 2013).
“Achieving this structural transformation will be essential for China’s long-term economic prospects in a world that is increasingly natural resource-constrained, efficiency-focused, globalised and concerned with inequality” (Green and Stern 2014:9)
As Green and Stern suggest China has great ambitions for a more sustainable form of growth, with livable cities where the development of a service economy and high tech industries are the means for further growth and prosperity. To attain this there will need to be significant gains in efficiency particularly in energy, and creating an expanding share of services in China’s GDP.
Growth Trajectories: Japan, Korea, China?
India
India is the second giant Asian country to join the ranks of the miracle economies (even if the economic miracle in India is heavily concentrated in a few states and a handful of internationally successful companies).
If China has become the manufacturing centre of the world, India has embarked on becoming the business and information technology service centre of the world, and is enjoying some significant success in this quest.
If the economic growth rate of India does not quite match that of China, it is substantial and sustained enough to offer many business opportunities for the thriving entrepreneurs of the country.
However, it was not always thus: India until two decades ago was a centralised, heavily regulated economy which was virtually stagnant, and riddled with corrupt corporate governance practices. As Chakrabarti recalls the state financial institutions smothered enterprise at birth:
“In the absence of a developed stock market, the three all-India development finance institutions (DFIs) – the Industrial Finance Corporation of India, the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India – together with the state financial corporations became the main providers of long-term credit to companies.
India
Unfortunately, the financial institutions were themselves evaluated on the quantity rather than quality of their lending and thus had little incentive for either proper credit appraisal or effective follow-up and monitoring. Their nominee directors routinely served as rubber-stamps of the management of the day.
With their support, promoters of businesses in India could actually enjoy managerial control with very little equity investment of their own. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business. Frequently they bled the company with impunity, siphoning off funds with the DFI nominee directors mute spectators in their boards.” (Chakrabarti 2005:25)
The saga sadly did not end there as even after bankruptcy companies remained under protection almost indefinitely. India has traditionally had a notoriously poor system of corporate insolvency: according to Goswami (2001) 32 per cent of company liquidations took more than 20 years and 59 per cent took more than 10 years.
India’s Reform Process
A prolonged process of economic and governance reform is under way in India and has yielded some results. The interest in corporate governance coincided with the realisation that to raise capital at competitive rates there was a need to demonstrate greater disclosure, transparency and shareholder returns.
The Confederation of Indian Industry released a voluntary code in 1998 titled Desirable Corporate Governance: A Code. The document set out detailed disclosure guides that were subsequently adopted by many of the largest listed companies.
A further development occurred with the publication of an additional and mandatory code in 2000 by the principal regulator, the Securities and Exchange Board of India (SEBI) (Kimber et al. 2005:185).
The heavily amended Indian Corporations Act 1956 was reviewed. The Confederation of Indian Industry called for the new legislation to achieve “a balanced approach that recognized an international trend, i.e. flexibility and greater self-regulation by companies, subject to better disclosure, more efficient enforcement of law, and prompt and deterrent punishment to those who violate the law” (CII 2004).
India’s Growth Rate 1961-2007
India’s Reform Process
The Securities and Exchange Board of India commenced another round of corporate governance reform in 2013 given the evident limitations of the existing regulation:
“The current governance norms in India have been borrowed from Western jurisdictions where the corporate structure consists of diffused shareholders with no concentration of shareholding. However, the corporate structure that is predominant in India consists of controlling shareholders (promoters) who exercise significant influence over public listed companies. Given the mismatch of corporate structures…. the current governance norms do little to protect the interests of the minority shareholders ” (Varottil 2013:1).
How corporategovernance can go badly wrong in India was amply illustrated by the crisis at Satyam one of India’s high tech wonder companies, that was subsequently revealed to be a web of deceit and fraudulent accounting (Figure 6.9; see Case 10). The international pressure for reform of the Indian corporate governance system will continue, as will national efforts at transforming the deeply traditional cultural approach.
Figure 6.9 The Crisis at Satyam 2003-2010
India’s Reform Process
However the culture of India is deep and complex, and is unlikely to be moved readily or quickly. As Kar identifies, “In India, the evolution of corporate governance is a complex narrative about how a uniquely diverse society, home to many distinct cultures, comes to terms with global standards as part of its economic transformation.” Kar continues on the impact of international governance standards on Indian corporate governance:
“From a corporate governance standpoint, the West’s influence has advantages and disadvantages. For example, in an era of globalization when India’s businesses seek to expand worldwide, their ability to pursue acquisitions overseas and attract foreign capital depends on their adoption of the West’s approach. The move toward global harmonization of regulatory standards and accounting principles has intensified the perceived need by India’s business leaders to adopt Western best practice. Pragmatism and the pace of economic change are also helping expedite this process.
India’s Reform Process
The disadvantages of Western influence arise from the fact that the founding principles of business are rooted in a country’s dharma, or “life-path,” and corporate governance includes moral values, ethics, and concepts that are largely defined by the cultural and personal contexts in which they exist.
Concepts of equity, fairness, and stewardship have deep moorings.Within the West itself, such concepts explain in part the dichotomy between a “rules” and a “principles” approach to corporate governance. In Confucian society, there is a high value to achieving harmony and consensus, but this tradition may severely restrict board deliberations and result in directors’ mechanical deference, if not obeisance, to their board chairmen” (Kar 2013: 8-9).
It seems likely that the pattern of concentrated ownership of major Indian corporations, which has survived for more than a century, will take some time to dislodge (Table 6. 4).
Table 6. 4 Concentrated Ownership in India 1900-2000
Source: Adapted from Khanna and Palepu (2004)
India’s Future
However the reform process has accompanied a major growth in market capitalisation of Indian companies. The market capitalisation of the Bombay Stock Exchange (Mumbai), the oldest stock exchange in Asia, has risen dramatically to $1,516 billion in 2015, and is now one of the five largest stock exchanges in the world in terms of transaction volume.
In 2015 a total of $US 44 billion was attracted to India confirming it as one of the leading destinations for foreign direct investment in the world.
Meanwhile India invested nearly US$ 7 billion overseas, with a total of US$ 55.8 billion overseas investment between 2010-2015 securing resources and manufacturing assets overseas including much of the European steel industry as Mittel steel acquired Arcelor, and Tata acquired Corus in 2006, and significant elements of the the UK car industry through Tata acquiring Jaguar and Land Rover in 2008.
Korea
The Republic of Korea is a leading economy of the Asia Pacific which has successfully industrialised and achieved remarkable progress in a number of advanced technology industries to the extent that it has long been regarded as a significant industrial competitor to Japan in consumer electronics with Samsung and other leading manufacturers, and in automotive with Hyundai and other major car international car manufacturers. Yet the history of corporate governance reform in Korea is at best chequered:
“Many of the corporate governance problems arose from a high concentration of ownership control particularly among the large chaebol, the predominance of business groups in Korea, and the various interlinks among corporations. These features meant poor transparency and weak corporate governance, which in turn often facilitated an inefficient allocation of resources and much risk taking.
The weak governance structure was further aggravated by two factors. One was the generally passive nature of the Korean banking system, with its limited risk management and credit analysis skills and the still very large role of the government, both directly as an owner and indirectly as an overseer of banks. The second factor was the existence of many links between the corporate and fi nancial sectors, most notably the control by the chaebol over many merchant banks and other nonbank financial institutions (Claessens (2008:46).
Korean Chaebol
The domination of the Korean economy by the chaebol continues and increases. Although there are 49 chaebol in Korea, it is the top four chaebol that really count - Samsung, Hyundai, SK and LG that accounted for 90% of the total net profit earned by the top 30 conglomerates in 2013, according to the Korea Fair Trade Commission.
The Commission defines a conglomerate, or chaebol, as a group of at least two companies effectively controlled by the same individual or corporate entity. Conglomerates with total assets of at least 5 trillion won ($4.74 billion) are designated as large corporate groups, which are prohibited from mutual investment and debt guarantee practices within group companies (Nikkei Asian Review 10 April 2014).
Samsung, Hyundai Motor, SK and LG generated 42.842 trillion won out of 47.527 trillion won in net profits earned by the top 30 conglomerates, excluding their financial businesses.
Samsung and Hyundai Motor alone accounted for 76% of all profits made by the top 30 conglomerates. The share of the four chaebol in the total net profit has stood at around 50% to 70% in the four years 2009 to 2012.
Korean Chaebol
The evident strengths of the chaebols include their charismatic leadership (while it lasts), the political influence they wield, their entrepreneurial aggression in introducing new products and markets, the management systems applied which in some chaebols are horizontal and in others more vertical, the tendency towards risk aversion, the capacity for agile decisions partly due to the concentration of strategic leadership, the long term perspectives of management and the internal capital and labour markets generated for affiliated companies.
The weaknesses of the chaebols are often the corollary of the strengths, and are equally evident in that ready access to bank finance often leads to over-investment and dangerous investments, chengus often make investment diversification decisions not in line with any rational analysis, for political or marketing reasons, or to increase their personal influence in the company, tunnelling or internal trading among chaebel affiliates is common, for example buying goods off affiliates rather than competitors better priced products, and finally the most critical weakness is the appointment to senior positions is not base on merit but relationships.
Korean Chaebol
However the wisdom of having such dominating corporate conglomerates may be questioned. The word chaebol translates into "money faction" or "wealth clan," but a chaebol is more than a company.
In South Korean culture, chaebols are patriarchal dynasties, and the chaebols not only dominate the major part of the South Korean economy, but also the society, and at times the state also.
The chaebols have professional managers responsible for individual firms, but in practice are controlled by a single chongsu, an unappointed general manager who makes the final decisions for the entire conglomerate.
This position comes from being the leading blockholder and representative of the owner family.
However it does not require a majority shareholding to become chongus, for example the chongsu of Samsung is Mr Lee who holds 0.57% of the overall group shares, and his family own only 1.07% of the group’s shares. Nor does Lee hold any formal position, and is not formally CEO or chairman of the company, but still exerts control at the head of Samsungs’ vast cross shareholdings (Murillo and Sung 2013:.
Korean Chaebol
Key executive posts within a chaebol are almost always given to the relatives of the chairman, who is treated as the patriarch of the company. This has often given rise to sibling disputes at the top of leading chaebols, for example between two sons in the Lotte chaebol which is a major corporation in hotels, shopping malls and fast food in Korea locked in a “war of princes.”
“There is hardly any major chaebol group that has not been rocked by a “war of princes’; its such a volatile issue that it’s a great blessing for Samsung and Hyundai that their current chairmen only had one son” said Lee Ji-soo, the director of the Law and Business Research Centre in Seoul, which monitors chaebol. “When investors demand better corporate governance at chaebol they include transparency of succession planning” (Australian Financial Review 24 September 2015).
Overseas investors are concerned the combination of complex corporate structures, opaque finance cross-holdings, and chains of succession that depend only upon which of the founders’ children is in favour, leaves multi-billion dollar companies in danger of repeated upheaval. Though in the past the dominant position of the chaebol has been politically challenged, they are now ascendant once again in Korea due to their industrial strength.
Table 6. 5 The Largest Ten Chaebols in Korea
1. Samsung 2. Kepco 3. LH 4. Hyundai Motor Group 5. SK 6. LG 7. Lotte 8. Posco 9. Hyundai Heavy Industry 10. GS
Korean Chaebol
The industrial profile of the chaebol is greater due to the tradition that they span a number of industries as conglomerates.
For example though Samsung Group, South Korea's largest chaebol, is known for its flagship subsidiary, Samsung Electronics which manufacturs TVs and the Galaxy smartphone, it also owns subsidiaries that run a luxury hotel, build crude oil tankers and sell life insurance.
This typical conglomerate structure give the chaebol influence over every sector of industry and aspect of society including education and leisure.
Another important factor in explaining the tradtional influence and stability of the chaebol is the complicated cross-shareholding of the component companies within the chaebol.
“At its peak in 1999 and prior to increased government regulation, the cross-ownership of subsidiaries within chaebols was at 43 per cent according to the Fair Trade Commission. Loans between unrelated companies within a chaebol were also guaranteed, done to protect ownership and maintain control by the ruling family” (CNET 7 April 2015).
The Development of Asia Pacific Corporate Governance Codes
The countries of the Asia Pacific have been as enthusiastic about developing codes of corporate governance as have regulators in Europe and the Anglo-American world (Figure 6.10).
However, there is even more doubt about the substance and quality of enforcement. Promulgating a code of corporate governance is an important step, but effective implementation of higher standards of governance beyond a few leading companies is far harder.
Participants in the OECD Roundtable discussions in Asia have identified areas where directors are fundamentally failing in their task, reducing the board to a series of nominal and often rudimentary tasks. Among the problems that require attention in the Asian context are:
■ poor director attendance;
■ little preparation and participation;
■ a lack of healthy scepticism on the part of directors.
Another issue in Asia is that board appointees frequently include people who lack the experience of capacity to inform themselves fully and take a responsible role in the board deliberations. In some cases relatively junior employees or inexperienced relatives of controlling shareholders find their way onto boards of directors as straw men meant to cover for shadow directors
Figure 6.10 Asia Pacific Reform of CG Regulation
Source: Clarke T. (2006), UTS CCG.
79
Corporate Governance Mechanisms in Developing Transition Countries
Source: Berglof, E. and Claessens S. (2004)
| Corporate Governance Mechanism | Relative importance in developing and transition countries | Scope of policy intervention |
| Large blockholders | Likely to be the most important governance mechanism | Strengthen rules protecting minority investors without removing incentives to hold controlling blocks |
| Market for corporate control | Unlikely to be important when ownership is strongly concentrated, can still take place through debts contracts but requires bankruptcy system | Remove some managerial defences, disclosure of ownership and control, develop banking system |
| Proxy fights | Unlikely to be effective when ownership is strongly concentrated | Technology improvements for communicating with and among shareholders, disclosure of ownership and control |
| Board activity | Unlikely to be influential when controlling owner can hire and fire and has private benefits | Introduce elements of independence of directors, training of directors, disclosure of voting, cumulative voting possibly |
| Executive compensation | Less important when controlling owner can hire and fire and has private benefits | Disclosure of compensation schemes, conflicts of interest rules |
| Bank monitoring | Important but depends on health of banking system and the regulatory environment | Strengthening banking regulation and institutions, encourage accumulation of information on credit histories; develop supporting credit bureau and other information intermediaries |
80
Corporate Governance Mechanisms in Developing Transition Countries
Source: Berglof, E. and Claessens S. (2004)
| Corporate Governance Mechanism | Relative importance in developing and transition countries | Scope of policy intervention |
| Shareholder activism | Potentially important, particularly in large firms with dispersed shareholders | Encourage interaction among shareholders, strengthen minority protection. Enhance governance of institutional Investors |
| Employee monitoring | Potentially very important, in particular in smaller companies with high skilled human capital where threat of leaving is high | Disclosure of information to employees, possibly require board representation; assure flexible labour markets |
| Litigation | Depends critically on quality of general enforcement environment but can sometimes work | Facilitate communication among shareholders; encourage class action suits with safeguards against excessive litigation |
| Media and social control | Potentially important, but depends on competition among and independence of media | Encourage competition in and diverse control media; active public campaigns can empower public. |
| Reputation and self enforcement | Important when general enforcement is weak, but stronger when environment is stronger | Depend on growth opportunities and scope for rent seeking. Encourage competition in factor markets |
| Bilateral private enforcement mechanisms | Important, as they can be more specific, but do not benefit outsiders and have downsides | Requiring functioning civil commercial courts |
| Arbitration, auditors, other multilateral mechanisms | Potentially important, often the origin of public law; but the enforcement problem often remains, audits sometimes abused, watch conflicts of interest | Facilitate the information of private third party mechanisms (sometimes avoid forming public alternatives) deal with conflict of interest, ensure competition |
81
Ownership Concentration and Institutional Reform
Research by Claessens (2004) et al. reveals countries in Asia with a higher concentration of ownership of companies among a few families or blockholders show the least progress in adopting institutional reforms, judicial efficiency, rule of law, and absence of corruption (Figure 6.11).
Hence, insider controlled companies are frequently associated with a neglect of minority shareholder rights, as legal and judicial systems are not developed or active, and widespread corruption is often tolerated.
Berglof and Claessens consider further the potential mechanisms for enforcement of corporate governance in Asia. Systemic weaknesses are more apparent still in Asian modes of governance, where the separation of ownership and control has not taken hold.
The Asian Corporate Governance Association (ACGA) has suggesred that Asia’s regulatory performance is not impressive: ‘The authorities are reasonable enough at tackling smaller problems such as mis-selling of financial products’, but he said ‘big deals and insider trading issues are not well dealt with. Regulators are better at writing the rules than enforcing them’ (Ethical Corporation May 2006). See ACGA /CLSA Asia Pacific Markets index of the relative performance in corporate governance of 10 Asian countries (Table 6.8)
Countries with Higher Concentration of Wealth Show Less Progress on Institutional Reforms
83
Table 6.7 Corporate governance in Selected Countries of Asia Pacific 2007–2014. Source: Adapted from CLSA Asia Pacific Markets and ACGA (2015).
Domestic Market Capitalisation (May 2013) (World Federation of Stock Exchanges)
Growth in Emerging Markets 2002-2012
| Exchanges Asia Pacific | ||
| 2005 | 2015 | |
| $ millions | $ millions | |
| Australian SE | 804,014 | 1,187,083 |
| Bombay SE | 553,073 | 1,516,217 |
| Bursa Malaysia | 180,517 | 382,976 |
| Hong Kong Exchanges | 1,054,999 | 3,184,874 |
| Indonesia SE | 81,428 | 353,271 |
| Japan Exchange Group Korea Exchange | 6,859,948 718,010 | 4,894,919 1,123.199 |
| National Stock Exchange India | 515,972 | 1,485,088 |
| New Zealand Exchange | 40,592.5 | 74,350 |
| Philippine SE | 39,817 | 238,819 |
| Shanghai SE | 286,190 | 4,549,288 |
| Shenzhen SE | 115,661 | 4,549,288 |
| Singapore Exchange | 257,340 | 639,995 |
| Taiwan SE Corp. | 476,018 | 744,997 |
| Thailand SE | 123,885 | 348,790 |
| Tokyo SE | 4,572,901 | 3,557,674.4 |
| Total region1 | 9,310,171 | 23,141,192 |
Conclusions
The Asia Pacific countries are presently among the most dynamic in the world, and economic growth appears certain to accelerate further.
But the near-collapse of the economic systems of East Asia in 1997 was a salutary lesson of the importance of building solid institutional and governance foundations to support increasing economic activity if it is to be reliable and sustainable.
All of the Asian countries embarked on reform of corporate governance, though the considerable divide between policy and practice could undermine the integrity of the reform.
Adopting the rhetoric of corporate governance reform while retaining the substance of traditional ways of running businesses in Asia is not an adequate solution.
One of the great weaknesses of the reform movement is the often unthinking application of Anglo-American policies and interests to the corporate governance problems of the Asia Pacific, as the price for accessing western capital markets.
Eliminating corruption and extending principles of accountability and transparency may be necessary, but this does not mean assuming that shareholder value is the only purpose of business, and must be adopted to gain acceptance in world markets.
The Asia Pacific region will build stronger institutions if it reflects wider and more deeply rooted social values than this.
0
10
20
30
40
50
60
70
80
90
100
Hong KongIndonesiaJapanKoreaMalaysiaThe
Philippines
SingaporeTaiwanThailand
0
10
20
30
40
50
60
70
80
90
100
Top 1 familyTop 5 families
Top 10 familiesTop 15 families
% of GDP
% of GDP (1996)
% of total value of
listed corporate assets
that families control
1.681.171.262.681.972.071.044.092.36 1.681.171.262.681.972.071.044.092.36
Average
number of
firms per
family
-80
-60
-40
-20
0
20
40
60
+60%
*Emerging markets indexes
Asia*
Latin America*
W. Europe
Percentage change in
Morgan Stanley Capital
International
share indexes in U.S. dollars
July 4, 1997 = 100
1997
1998
JSAJMAMFJDNOSAJ JSAJMAMFJDNOSAJ
N. America
54.28
13
21
3145
68
81
115
220
276
278
314
1195
2210
2260
10465
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Karachi
Jakarta
Bangkok
Manila
Seoul
Kuala Lumpur
Singapore
Bombay
China
Sydney
Taipei
Hong Kong
Frankfurt
London
Tokyo
New York
Shareholder Main BankShareholder Main Bank
Management Management
Used to create stable relationships with
shareholders by cross-shareholding,
and so have management under
main Bank’s surveillance. Therefore it
was possible for management to
innovate.
JAPANESE COMPANIES in 80s
Now stockholders provide surveillance,
and so companies improve manage-
menton their own in order to enhance
long-term corporate and shareholder
value
JAPANESE COMPANIES TODAY
High ratio held by foreign investors in selected Japanese
Firms
Hoya Corp 56% Canon Inc 52%
Fuji Photo Film 49% ROHM Co.LTD. 49%
Kao Corp 47% Takeda 41%
SURVEILLANCE
0
5
10
15
20
25
30
35
40
45
50
199219931994199519961997199819992000200120022003
Holding ratio (%)
46%
Stable holding ratio
Japan Investment Council (1996)
•Expects to promote M&A through
reversion of cross-shareholding
24%
21%
Ratio held by Foreigners
6%
CROSSHOLDING
Executive
officers
Mutual dependence among
companies
Crossholding of shares,
main financing bank system,
company groups, etc.
Japanese-style employment
practice
Lifetime employment,
seniority system,
company union, etc.
Industrial policy
Administrative control,
public-private cooperation framework,
coordination in a industry group, etc.
Ambiguous corporate accounting
practice
Limited disclosure of corporate
information
Era of Japanese
-
style corporate governance
Governance by management, bank and
economic agencies of state
Japanese-style management
1960s
1980s
High-growth period
2000
Change of capital market
Indirect financing→Direct financing
Shift to borderless economy
Global economization
Trade and capital liberalization
Big ban, IT revolution
Corporate scandal
(Limitation of Japanese-style governance)
New corporate governance
Reform of the board
of directors
Introduction of
US-style
Enhancement
of auditor's
authority
Independent
board members
System selectivity
1990s
Lost decadeEconomic bubbles
Shareholder
value
3
Percentage of Value of Japanese Shares
Held by Individual and Foreign Investors, 1950-2009
0
10
20
30
40
50
60
70
1950197019751980198619881990199219941996199820002002200420062009
%
Foreign Investors
Individual Investors
Source: Tokyo Stock Exchange, 2010
0
100
200
300
400
500
600
700
800
900
1000
1/ 1/ 20 03
1/ 1/ 20 04
1/ 1/ 20 05
1/ 1/ 20 06
1/ 1/ 20 07
1/ 1/ 20 08
1/ 1/ 20 09
1/ 1/ 20 10
1/ 1/ 20 11
1/ 1/ 20 12
1/ 1/ 20 13
Jan 7: Satyam's chairman resigns writing a letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders, admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion—or 94% of the cash—on the books was fictitious.
Dec 17: Satyam share buyback in a move to regain investors’ confidence after its stock plunged. Citigroup, JP Morgan and Merrill Lynch downgrade Satyam and slash their share price estimates by up to half. Satyam shares end the day down 30.2 per cent in Mumbai. Dec 23: The World Bank bars Satyam from doing business with it for eight years in one of the most severe penalties by a client against a large Indian outsourcing company. On the day the stock drops a further 13.6 per cent, its lowest in more than four-and-a-half years.
2006: Satyam’s revenues cross $1 billion. B. Ramalinga Raju becomes the chairman of industry body, The National Association of Software and Services Companies.
2007: Raju is named Ernst & Young Entrepreneur of the Year. The company bags contract to be the official IT services provider of the FIFA World Cups in 2010 and 2014.
Dec 16, 2008: Satyam announces it is buying a 100% stake in two companies owned by chairman sons. The proposed $1.6 billion deal is aborted 7 hours later due to a revolt by investors who oppose the takeover. Satyam shares plunge 55% in trading on the NYSE
Sept 23, 2008: Satyam awarded with Golden Peacock Award for Corporate Governance and Compliance.
0
100
200
300
400
500
600
700
800
900
1000
1
/
1
/
2
0
0
3
1
/
1
/
2
0
0
4
1
/
1
/
2
0
0
5
1
/
1
/
2
0
0
6
1
/
1
/
2
0
0
7
1
/
1
/
2
0
0
8
1
/
1
/
2
0
0
9
1
/
1
/
2
0
1
0
1
/
1
/
2
0
1
1
1
/
1
/
2
0
1
2
1
/
1
/
2
0
1
3
Jan 7: Satyam's chairman resigns writing a letter to the Securities and
Exchange Board of India (SEBI) and his company’s shareholders,
admitting that he had manipulated the company’s earnings, and fooled
investors. Nearly $1 billion—or 94% of the cash—on the books was
fictitious.
Dec 17: Satyam share buyback in a move to regain investors’ confidence
after its stock plunged. Citigroup, JP Morgan and Merrill Lynch downgrade
Satyam and slash their share price estimates by up to half. Satyam shares
end the day down 30.2 per cent in Mumbai.
Dec 23: The World Bank bars Satyam from doing business with it for
eight years in one of the most severe penalties by a client against a
large Indian outsourcing company. On the day the stock drops a further
13.6 per cent, its lowest in more than four-and-a-half years.
2006: Satyam’s revenues cross $1 billion. B. Ramalinga Raju becomes the chairman of industry body,
The National Association of Software and Services Companies.
2007: Raju is named Ernst & Young Entrepreneur of the Year. The company bags contract to be the official
IT services provider of the FIFA World Cups in 2010 and 2014.
Dec 16, 2008: Satyam announces it is buying a 100% stake in two companies
owned by chairman sons. The proposed $1.6 billion deal is aborted 7 hours later
due to a revolt by investors who oppose the takeover. Satyam shares plunge 55%
in trading on the NYSE
Sept 23,
2008: Satyam
awarded with Golden
Peacock Award for
Corporate
Governance and
Compliance.
Code of Best Practice for
Directors
Guidelines on Behaviour
for Board Members
1999
THAILAND
Malaysian Code of
Corporate Governance
Self regulation over
statutory regulation
2000
MALAYSIA
Indonesia Code of
Corporate Governance
Code to raise the
standards of corporate
governance
2001
INDONESIA
Chinese Code of Corporate
Governance
An enforceable framework
for all listed companies
2002
CHINA
Kumar MangalamBirla
Committee Report
Recommendations that
distinguishes responsibilities
and obligations of the board
2002
INDIA
SEC Corporate
Governance
Reforms to raise investor
confidence
2002
PHILIPPINES
Hong Kong Code of
Corporate Governance
2004
HONG KONG
Japanese Corporate
Governance
Principles of Corporate
Governance
2004
JAPAN
Singaporean Code of
Corporate Governance
Requirements under the
Singaporean Exchange
Listing Rules
2005
SINGAPORE
1020304050607080
0
2
4
6
8
10
Judicial efficiencyJudicial efficiency
Rule of lawRule of law
Absence of corruptionAbsence of corruption
1020304050607080
Ownership by top 15 families (%)
(10 is the best, 0 is the worst)
Ranking
Japan
Taiwan
Malaysia
SingaporeHong Kong
Korea
Thailand
Philippines
Indonesia
Source: Claessens, Djankov, and Lang (1999).
2007 2010 2012 2014
Hong Kong 67 65 66 64
Singapore 65 67 69 64
Japan 52 57 55 60
Thailand 47 55 58 58
Taiwan 54 55 53 58
India 56 48 51 54
Korea 49 45 49 49
China 45 45 45 45
Philippines 41 37 41 40
Indonesia 37 40 37 39
