RIETI Policy Symposium

Corporate Governance from an International Perspective: Diversity or Convergence

Presentation Summary #4

Curtis MILHAUPT Columbia University

I would like to focus on corporate law enforcement. Why are nonprofit organizations playing the lead role as corporate law enforcement agents in Korea, Taiwan, and Japan? This form of direct shareholder activism is not found anywhere else in the world.

Why is strengthening the protection of investors difficult? It is a public good subject to common market failures, because the costs of enforcement are high and the benefits are shared. This is particularly acute in East Asia. First of all, the economic risks of exercising shareholders' rights are high. Second, share ownership is concentrated within closely held networks and domestic institutional investors are rather passive. Third, institutional infrastructure for private law enforcement is weak. Finally, there are constraints on law enforcement.

In each of the three systems, there has been a spontaneous emergence of an investor protection NPO to supply corporate law enforcement-related public goods. In Korea, the PSPD has filed suit on behalf of numerous plaintiffs in two historic court decisions on managerial responsibility. Japan's Shareholders Ombudsman has obtained large monetary settlements in a number of cases. And the Taiwanese Securities and Futures Institute has organized de-facto class action suits on behalf of thousands of small investors in securities and fraud cases.

Conclusions from my research include the following. Novel enforcement mechanisms are possible, even where corporate law is weak. NPOs may be a partial solution to the under-enforcement problem in transition economies (especially China). NPOs may be a better solution than the US-style attorney incentives, due to a built-in constraint against frivolous litigation. And NPOs improve the local enforcement regime; they seek to improve corporate law to enforce it.