Institutional Harmonization and Diversity: Corporate Governance
Citing the globalization of capital markets and lessons from the Asian financial crisis, Asia specialists underlined the importance of enhancing corporate governance to bolster the overall competitiveness of East Asia. But they also acknowledged that the region has a long way to go.
Experience of South Korea and Europe
In a session on "Institutional Harmonization and Diversity: Corporate Governance," Hasung Jang, professor of Finance and director of the Asian Institute of Corporate Governance at Korea University, said improving corporate governance is imperative to achieve sustainable growth and eventually increase social welfare.
"If the country needs funds to finance growth, we definitely have to go to the market... If that is the case, we have to improve corporate governance to increase the value and to reduce the cost," he said.
Greater transparency and accountability protect not only shareholders but also other stakeholders including workers, thereby leading to the sustainable growth, he said. And such transparency in business will bring greater transparency and justice to a society, preventing corruptions and increasing social welfare, he added.
Introducing South Korea's post-financial-crisis efforts to implement corporate governance system based on an Anglo-American model, Jang noted that not only South Korea but also Japan and other Asian countries must strive to improve corporate governance.
Gregory Jackson, a RIETI fellow who spent past five years in Germany, said that the globalization of capital markets urges changes to the rules for corporate governance, though not necessarily the harmonization of the rules.
The European Union, where corporate governance is diverse among member states but all in all differs from an Anglo-Saxon model, tried but failed to harmonize and develop a uniform rule for corporate governance.
Nevertheless, he said, the respective countries actually carried out substantial changes to shift more to a U.S.-type market-based model with their companies coming under massive pressures of capital markets.
At the same time, however, Jackson said, Asia should not necessarily stick to the U.S. model, which appears to best fit for the era of the IT revolution but may lose its advantage as technology develops.
"Countries need to continue to foster comparative institutional advantages and not chase a moving target of imitating the U.S. success of 10 years ago," he said.
Difficulty unique to each country
Justin Yifu Lin, professor and founding director of China Centre for Economic Research, Peking University, however, suggested that China and many other Asian countries have lots of work to be done before tackling on the issue of corporate governance.
In case of China, he said, the core problem lies in the presence of state-owned enterprises, which are "not viable" － as they survive on government subsidies and protection － but nevertheless important to China, providing some 60 percent of urban population.
"The reform of corporate governance of a firm is relevant only if the firm is viable. In the case that the firm is not viable, any kind of change in corporate governance cannot improve the situation of the firm," he said. "In many cases in a transitional economy, the firm is not viable."
Edward S. Steinfeld, associate professor at the Massachusetts Institute of Technology, said China, despite its phenomenal positive changes, still has a mount of problems and Chinese firms appear to be moving in an opposite direction from what is considered to be a best practice.
"If best practice is high specialization, high level of proprietary assets, high ability to integrate with supply chains, what we find in China is that firms tended to be very small, firms tended to be highly vertically integrated... very diversified horizontally, very localized both in terms of their upstream suppliers and their customers downstream tend to be very local, confined usually within the municipality or perhaps the province within China," he said. "They are producing a great deal for international supply chains but they are having a hard time meeting complex codes, complex production standards, and end up in lower value added production."
Problems, he said, stem from "local protectionism," which allows for arbitrary interventions by local governments, creating a "great deal of uncertainty in the regulatory environment" and prompting managers to pursue "incredibly complex corporate structure" to ensure cash inflow in case of dramatic changes in regulatory environment.
Jang said South Korea, despite substantial success in its reform, has yet to achieve the global minimum standard in corporate governance.
"Malpractice of corporate governance has been a part of the system for over 30 years. You cannot change everything overnight," he said. But then, he added, "On the other hand, you cannot wait for another millennium to have a gradual change."
Referring to the Korean reform, Kotaro Tsuru, senior fellow at RIETI, meanwhile, said that Japan, having established a very complete, contingent governance system, might have greater difficulty.
South Korea appears to be stepping into a new stage of development very quickly, ironically, because its corporate governance system was incomplete, thus, easy to break down, he said.
Japan, in contrast, constructed a very complete system, a combination of internal discipline by internal promotion and the main bank system as external pressure, which is hard to break down, he said.
Yukiko Fukagawa, faculty fellow at RIETI and Aoyama Gakuin University associate professor, acknowledged the point and said that the ongoing globalization may be rendering a unique opportunity for developing countries in Asia, enabling them to "access some kind of converged prototype for corporate governance."
"It can be a kind of leapfrogging beyond Japan or Germany's struggle to reform their corporate governance structures. And in some sense, emerging countries building from nothing can be somewhat easier ... than reforming an established one," she said.
Having said that, however, she also noted that emerging economies are given only limited time for the trial-and-error process.
"No matter how you try to go toward a certain direction, the direction of the foreign investors look is a different matter," she said. "If everything goes well, the direction is quite harmonized and everything is ok. But if something happens to the expectations and the foreign investors (and their) money can go elsewhere."
Diversity or uniformity?
The question as to whether and how East Asia can or should converge rules for corporate governance, meanwhile, remained unanswered as participants in the debate differed in their views.
Masahiko Aoki, RIETI president and Stanford University professor, called for competitions among companies to create an efficient model through numerous trial-and-error practices.
"I am very much in favor rather a diversity of corporate governance structures," he said. "Lots of new experiments have to be made, and which structure is most effective and so forth is probably being weeded out through competition rather than by designing a common rule of corporate governance for East Asia."
Lin also said, "Every corporate governance form has some advantages and disadvantages... We need to allow market competition to allow them to decide which one is more suitable for them."
But Yunjong Wang, senior research fellow at Korea Institute for International Economic Policy, called for caution in allowing diversities, saying that East Asia is not comparable to Europe where most countries have already cleared the minimum global standards in corporate governance.
"In East Asia, I think we are still very behind the global minimum standard," he said. "We need some degree of convergence, at least on the minimum standard."
Chia Siow Yue, director of Institute of Southeast Asian Studies, also suggested that East Asia should at least have a minimum standard for corporate governance.
"One of the standards that institutional investors, both in the region and externally, want to look for is how you assess the financial statements of corporations and how you assess the governance of corporations," she said. "And I think it is very difficult (in Asia) so... you take the line of least resistance. You will invest in the U.S. and you will invest in Europe, where obviously there is greater transparency."
Jang, meanwhile, said that the bottom line is to ensure the two basic principles of transparency and accountability, that is to say "Don't lie" and "Be responsible for your actions" respectively.
"Whatever the system or the diversity you have, the fundamental of corporate governance is quite simple," he said. "I don't think we should focus too much on which system is more fitting for each country, because, including Japan, I do not see the basic, minimum, fundamental systems that ensure these two principles in many Asian countries."
-The RIETI editorial department is responsible for this article