Corporate Governance in Asia

¶ … Financial Regulatory Harmonization in East Asia

As globalization continues to evolve local economies, there has been increasing pressure put on East Asian nations to implement corporate governance reform. Many East Asian nations lack the restrictions and regulations seen in Western nations that provide for more responsible treatment of corporate activities that impact the health of businesses in that economy and attract foreign investment.. Moreover, the lack of corporate governance regulations have also been thought to have played a role in the 1997 Asian financial crisis, as there were not checks in place to curb corporate behavior that contributed to economic decline. In his 2010 article, "Financial Regulatory Harmonization in East Asia: Balancing Domestic and International Pressures for Corporate Governance Reforms," Richard W. Carney discusses how harmonization of international and domestic expectations of corporate governance in the region is possible.

The international community has long been putting pressure on East Asian economies to reform corporate governance and banking institution laws so that there is more stability within the business sector. Organizations like the International Monetary Fund (IMF), the World Bank, Bank for International Settlements, Organization for Economic Co-operation and Development (OECD), and others have begun increasingly advocating certain recommendations for corporate governance reform based on what is assumed to be a standard of "best practices." These recommendations ask the East Asian economies to adopt stricter corporate governance regulations based on Western ideologies. Such recommendations are meant to help further protect foreign investors thus attracting more into the economy, increase market liquidity that lowers financing terms for new and existing firms, "reducing exposure to the actions of market participants outside the region, and reducing double-mismatch tendencies" (Carney, 2010). Ultimately, the recommendations are meant to make these economies more cohesive with other global economic structures.

Yet, many local businesses do not see the need to increase such corporate governance and thus often only make minor superficial changes to make it look like they are taking such issues seriously. In fact, nations like Japan, South Korea, and China have been slow to adopt any of the recommendations provided by international organizations for various reasons. In certain areas, a wealthy elite dominate over political and business practices, wishing not to disrupt corporate activities that have so far been favorable to their role and influence. Many of these nations have thus been quite slow to implement any of the recommendations at all. Carney (2010) breaks down the issues resulting in slow implementation of such economic reforms by specific nation.

He begins with Japan, which is a country where political objectives have long played an influential role within the growing business sector. After World War II and into the 1970s, "Japanese firms began turning to capital markets with increasing frequency to meet their financing needs," (Carney, 2010). As a result, the economy was put under pressure to adopt corporate governance regulations that gave more favor to labor groups and shareholders in order to promote better business practices and protect the foreign investment that was streaming into the region. Yet, Japan has been resistant to truly accept corporate governance changes and instead have feigned compliance without the actual dedication to ensuring compliance on a practical level. During this same time, government policies were working against foreign actors, placing strict regulations that set up barriers for foreign takeovers and high restrictions on non-Japanese acquisitions in the region.

Next, Carney (2010) discusses the Republic of Korea and Singapore. He discusses how labor organizations won influence after democratization, although "they did not seek to change the prevailing concentrated ownership arrangement" of private businesses" (Carney, 2010). Ownership was highly concentrated in Chaebol pyramids, where managerial control was under the influence of highly political power families. It was not until the Asian crisis of the late 1990s that the country began to take corporate governance reform strategies more seriously, as its economy had suffered dramatically. Today, South Korea has some of the highest shareholder protections put into place in the region, but these still do not measure up to the level of the recommendations of international organizations. Singapore is another nation that has been dominated by concentrated ownership, just as South Korea. Carney (2010) describes the business environment "As a combination of family and state capitalism." Elite families with high political influence dominate over business ownership, making corporate governance reform the least of their worries. Managers simply do as they are told and have little decision making power if it conflicts with the dominate families.