RIETI Report December 2002

Corporate Governance Revisited <RIETI Featured Fellow> Curtis J. MILHAUPT

This month's featured article

Corporate Governance Revisited <RIETI Featured Fellow> Curtis J. MILHAUPT

Curtis J. MILHAUPTVisiting Fellow, RIETI

Greetings from RIETI

In Japan, we call December "shiwasu (teachers run)" as it is so busy in December that even teachers run about. Here at RIETI, we are also "running" back and forth with many projects. We launched the on-line forum "Corporate Governance Japan."
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We also invite you to our policy symposium on "Corporate Governance from an International Perspective: Diversity or Convergence" to be held on January 10, 2003.
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Taking this occasion, RIETI Report interviewed visiting fellow Curtis J. Milhaupt, one of the speakers at the symposium, asking his views on corporate law enforcement trend in East Asia.


Dr. Milhaupt has been a visiting fellow at RIETI since 2002. He is also Fuyo Professor of Law at Columbia Law School. After receiving his J.D. from Columbia Law School in 1989, he worked as a research fellow at University of Tokyo (1992-93). He also worked as a research fellow (1994-99), and professor at Olin Center for Business, Law and Economics at Washington University (1994-99). He became Fuyo Professor of Law, Columbia Law School since 1999. He is also Director at Center for Japanese Legal Studies, Columbia Law School, and a member of East Asian Institute, Columbia University since 1999. Since 2000, he is a core member at Center on Japanese Economy and Business, Columbia Business School. His expertise is comparative corporate governance, comparative financial regulation, Japanese law, law and economics, and new institutional economics.

His selected publications include:
"Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals (forthcoming, Columbia University Press), "Japanese Law in Context: Readings in Society, the Economy and Politics," (Harvard University Asia Center, Harvard University Press, 2001 with J. Mark Ramseyer and Michael K. Young).

For his column on "Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals," click here


RIETI Report: Would you explain the current situation of corporate law enforcement in East Asia?

Milhaupt: Something very interesting and unusual is happening in Japan, Korea and Taiwan, the three largest market economies in the East Asia. In all three countries, non-profit organizations (NPOs) are playing the major role in enforcing corporate law. Aside from the government, they are the principal shareholder activists in these three countries. That is very puzzling because NPOs by definition cannot distribute their profits to their members, so there is no financial incentive for them to be playing this role. Another puzzling thing is that East Asia generally does not have a long history of non-profit activity, yet this is the only region in the world where we see NPOs playing this role.

So at the conference, I will try to explain why this is happening. There are many theories on why NPOs exist around the world. While there is no single theory that everyone views as dominant, one very persuasive theory is known as the "government failure, market failure theory." This theory predicts that NPOs will emerge where public goods have not been supplied either by government or by the market. Corporate law enforcement (investor protection) is a public good because the benefits are enjoyed by many people in the form of deterrence and predictability of law, but the costs fall entirely on the people who are actually engaged in the enforcement effort.

A second theory focuses on the supply side: This theory recognizes that NPOs will emerge only if there is supply of "social entrepreneurs" to found and operate such organizations. For example, in Korea and Taiwan, both recent democracies, there is a large supply of social entrepreneurs. This is particularly true in Korea, where there was history of protests against the government.

In the paper I wrote for the symposium, I applying these theories to explain why NPOs are playing the role of corporate law enforcers in these three countries. I first analyze the corporate law enforcement environment in all three countries, and show why this public good has not been supplied adequately either by the government or by the market. According to the theory discussed above, this is a classic situation where NPOs should emerge to fill the gap in the supply of an important public good. I analyze the different organizational structures of the NPOs in the three countries, their successes, failures and their limitations. I try to explain why in each country the specific NPO looks the way it does, drawing on both the "supply side" theory and the distinctive legal and political environments of the three countries.

I end the paper by looking at the some of the implication of these unusual developments in East Asia. The conference is called "Corporate Governance from an International Perspective: Diversity or Convergence." NPO shareholder activism is a very unusual illustration of both phenomena. It illustrates convergence in the sense that the three countries have spontaneously converged toward this very distinctive mechanism of enforcement. But it also is a diversity story in the sense that even though NPOs emerged in these three countries, the way each NPO is organized and functions reflects the different local environments in which they emerged. It is also an important story for another aspect of corporate governance literature. Today, there is a lot of discussion about how law matters to corporate governance around the world. It is widely accepted that the quality of law enforcement is at least as important to investor protection as the quality of law on the books - statutory law. This is a very interesting illustration of how you might overcome problems in enforcement by using a novel organizational form that is neither state nor market.

Finally, I think there are very practical implications to be drawn from this example. For example, China might use the Taiwanese model, and in fact they are studying it. It may have application for other transitional economies as well where there are law enforcement problems.

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