The Asian financial crisis has rekindled worldwide interest on the issue of corporategovernance. In recent years, pushing for higher governance standard has become a regular campaign, with the participation of an increasing number of parties: academics, media,regulatory authorities, corporations, institutional investors, international organizations,shareholder rights watchdogs, etc.
Numerous initiatives have also been proposed by Asiancountries to enhance their corporate governance practice, e.g., new listing/disclosure rules,mandatory training for board directors, enforced codes of governance, etc. Internationalorganizations are also very keen on governance issues. The International Monetary Fund hasdemanded that governance improvements should be included in its debt relief program. In1998, the Organization of Economic Cooperation and Development (OECD) issued itsinfluential
OECD Principles of Corporate Governance
, which is intended to assist member and nonmember countries in their efforts to evaluate and improve the legal, institutional, andregulatory framework for better corporate governance. In addition, private companies, suchas Standard & Poor, California Public Employees
Retirement Pension System (Calpers),CLSA, and McKinsey, are also calling for sweeping reforms of governance practice inemerging economies . Corporate governance has also gained unparalleled importance inChina. The Chinese government opened stock exchanges in the early 1990s to raise capitaland improve operating performance for state-owned enterprises (SOEs). In less than12 years, China
s stock markets have grown into the eighth largest in the world, with market capitalization of over US$500 billion. Chinese companies, especially SOEs, have benefitedtremendously from the rapid growth in issuance and the general public
s enthusiasm onequity market. Meanwhile, the regulations over stock markets have been evolving to addressthe tradeoff between growth and control: a liberal approach that will lead to fast growth vs acontrolled approach that will lead to slower growth. Although issuance approval, pricing, and placement systems have been significantly liberalized, they are still tightly controlledcompared with that of other Asian markets. As controlled as it is, poor governance practicesare still rampant among companies listed in China. For example, several listed companieshave been placed on the spotlight due to their poor governance practices. In 2001, the largest shareholder of Meierya, a one-time profitable listed company, colluded with other related parties and collectively embezzled US$44.6 million, 41% of the listed company
s totalequity. In the same year, Sanjiu Pharma
s largest shareholder extracted US$301.9 million,96% of the listed company
s total equity.
While Chinese companies, especially the SOEs, acquire a huge amount of capital from the public through either the banking system or the capital market, they remain extremelyinefficient. For example, recent official statistics suggest that about one third of all SOEs areloss makers, another third either break even or are plagued with implicit losses, while theremaining onethird are marginally profitable. Ineffectivegovernance system hasbeen widely
A recent research by McKinsey finds that articles featuring corporate governance in major internationaleconomics/finance newspapers or magazines, such as
Asian Wall Street Journal
Far-East Economic Review
, etc, have increased 10-fold from precrisis 1996
1997 to 2001
2001 (see ). In academics,the rebirth has spawned a voluminous body of research on governance-related issues, especially in emergingmarkets.
Liu and Lu  finds that majority of Chinese listed companies manage their earnings as a response to avariety of regulatory loopholes. However, the incentives are stronger for firms with poorer governance practice.84
Front. Econ. China (2006) 1: 83