Corporate Governance and the Asia Economic Crisis

The economic crisis that hit Asia in the late 1990’s came as a rude shock to the region and the world. As the leading source of economic growth after the Second World War, investors ad creditors had come to view Asia as the place to be and accordingly poured their funds into the region. The depth and breadth of the crisis, when it came shattered any notions that all was well with the region. The crisis has had a significant and sobering effect of investors alike. At the very least, they will now have much stricter requirements as far as good corporate governance is concerned.

As governments and multilateral agencies picked through the debris of the crisis, two things emerged. First, the crisis was not only the result of poor macro economic management, but also the result of very weak corporate governance. Secondly, while political and economic differences exist between Asian countries, the most serious problems affecting Asian companies are remarkably similar across the region. With the top corporate governance, the key issues identified were as follows:

1. Ownership: Corporate ownership in Asia is highly concentrated, with the top few shareholders typically accounting for a very large percentage of the share of companies. Pyramid structures are also employed, to give controlling shareholders the ability to control companies several layers down with the use of limited capital.

2. Fairness and the Board of Directors: For the most part, the boards of Asian companies are ineffective as oversight mechanisms, because they are generally dominated by representatives of the largest shareholder and therefore tend to represent the interests of the largest shareholders rather than of all of shareholders. As such, the rights of small shareholders are frequently ignored.

3. Independence: The boards distinguish themselves by their general lack of independence. Quite often, the Chairman is both a representative of the controlling shareholder and also CEO of the company. “Independent directors” are defined very weakly, to exclude only management and employees, but not those with close links to the dominant shareholders. As a consequence, minority shareholder participation in companies is very weak and passive.

4. Transparency； Transparency and disclosure are poor on account of the fact that management and the board are dominated by “insiders” of the major shareholder. These “insiders” have little tradition of disclosure and in sharing corporate control.

5. Accountability and Responsibility: Disclosure is further undermined by inadequate accounting standards, weak enforcement of these standards and poorly functioning legal systems. This, together with highly concentrated ownership and weak minority rights, often lead to a lack of accountability and responsibility on the part of senior management.

The preceding observations bring into sharp focus the parlous state of corporate governance in Asia. But given the change in investor and attitudes, it does have serious implications for the ability of Asian companies to raise financing in support of the continued growth and development of their businesses.(490)