Corporate Governance: a New Theory and Reform of the Family-Based Corporate Governance System in Asia

Abstract

In this chapter I want to probe the question of corporate governance not only in the context of post-crisis Asia, but also as a general problem that exists in any complex capitalist economy. The scandals that erupted in the United States, beginning with the notorious Enron affair in 2002 are reminders, if such reminders are necessary, that complex problems of governance are more ubiquitous than both big business and most eco-nomic theorists have acknowledged hitherto. At the same time I want to emphasize that both the proximate and the underlying causes of the Asian and other recent financial crises were macroeconomic in nature. They had more to do with premature capital account liberalization than so-called 'crony capitalism'. This is not to suggest, however, that governance issues are entirely irrelevant. Far from being irrelevant, they are crucial for efficient growth and distribution. Thus, in contrast with most conservative and radical analyses of financial crises and their aftermath, this book attempts to adopt a rather more holistic approach without blaming bad govern-ance per se for financial crises that were largely macroeconomic phe-nomena. While understanding the economics and the political economy at both the macro and micro levels are crucial they should not be confused, and a wrong causal analysis can have drastic conse-quences for growth and welfare. My claim is that good corporate governance must be the foundation of a sound economy in the 98 H. A. Khan, Global Markets and Financial Crises in Asia © Haider Khan 2004 future. Hence just as the conservatives were wrong in their thesis that 'crony capitalism' was the main cause of the Asian crisis, it will be a mistake to ignore the real and serious problems of corporate govern-ance in Asia and elsewhere. By itself good corporate governance will not always prevent large-scale macroeconomic shocks in an open economy, but the transparency and accountability of corporations can make the job of macroeconomic policy makers much easier – in addition to the benefits it will have for shareholders, workers and consumers. Corporate governance in a narrow sense addresses the fundamental microeconomic issue of how the managers of the firm are induced by banks, equity markets, or other mechanisms to act in the best interests of its shareholders and hence to maximize the discounted present value of the firm. In a wider sense, corporate governance can or should address a whole host of issues for multiple stakeholders – ranging from effi-ciency and equity to the promotion of economic and political freedom. Recently, Iwai (1999) has created a framework that distinguishes between the realist and nominalist approaches and can address many of the meta-questions about corporate governance. The present chapter tries to present a preliminary conceptual frame-work consistent with the realist approach within which to frame the salient issues regarding Asian corporate governance. An attempt is also made to address some significant issues for reforming corporate govern-ance in East Asia. 1 Finally, the limits of the most popular theoretical approach based on agency costs are also explored. It is argued that a complete explanation for the successes and the failures of the family-based system of governance requires a somewhat different model than that starting from the assumption of atomistic, utility-maximizing agents. This alternative approach should also be able to explain the persistence of different corporate governance structures – often within the same country. It appears that the standard approaches that consider the firm to be simply a nexus of contracts cannot completely account for the par-ticularities of the relationship types of corporate governance found in East Asia. Therefore, this chapter extends Berglöf's (1997) twofold classification of corporate governance structure to a threefold one by analysing family-based corporate governance structures. 2 Since large