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What determines the quality of corporate governance is not simply the
enactment of laws and regulations. Culture influences not only the shape that
institutions take, but is also likely to affect the behavior of those participating
in corporate governance mechanisms. In addition, market forces working
toward the convergence of corporate governance practices, as well as other
institutional factors, make fundamental changes difficult. Finally, changing
technologies and types of corporate activities call for new models of corporate
Role of Culture
As the corporate culture differs from firm to firm in different cultures, so may
the way that corporate governance works (see, for example, Iu and Batten
† The authors appreciate Takao Kato’s contribution to this section: he assisted the authors
with the design of survey questions particularly on the roles of employees and joint labor-
management committees (JLMCs) as well as the interpretation and analyses of the relevant
128 / Corporate Governance in Asia
The most dominant value system in Asia is probably Confucianism,
and its essential teachings include harmony in human relations and education
as a way of training people. The emphasis on harmonious human relationships
based on filial piety, respect for superiors, and care for subordinates might
have been fertile soil for collectivism as opposed to individualism. As is most
evident in Japan, teaching people to avoid social embarrassment and shame by
meeting the expectations of others contributed to collective cooperation,
minimal social deviance, and conformity in a group or organization. As a
consequence, Japanese firms tend to be less concerned about supervisory chores,
rely less on litigation to deal with failed expectations than the social sanction
of a “shame culture,” and prefer informal binding through human relationships.54
Given a preoccupation with harmonious human relationships, minority
shareholders in Asia may not be very assertive in protecting their rights and
independent directors may be far less independent in their behavior than those
in Western countries. Management is generally characterized by an attitude of
benevolent paternalism, which often makes board discussions about sensitive
issues perfunctory. Given the views about relationships, management tends not
to be very careful about related-party transactions. Iu and Batten (2001) observe
that Asian culture significantly impedes the implementation of the Anglo-
American model of corporate governance and view the model of family-based
ownership concentration and the role of relationship-based business as
representative of a cultural tendency toward familism and group affiliation.
Also pronounced in Asia is an egalitarian corporate culture, whereby
decisionmaking is collective or consensus based on the basis of shared
information and employee participation and the disparity of financial
compensation between upper management and workers is relatively small.
Certainly Asian cultural values are more in favor of a stakeholder model than
the Anglo-American model based on shareholder supremacy. The implication
is that strenuous efforts are required to strengthen relevant institutions and
promote a culture that helps the model to function efficiently. Asian countries
53. For a discussion of social and corporate cultures with reference to People’s Republic of
China, Japan, and Korea, see Freeman (1998); Kim (2002); and Picken (2003).
54. According to Hitchcock (1994), East Asians value an orderly society, societal harmony,
accountability of public officials, openness to new ideas, freedom of expression, and respect
for authority most highly. By contrast, the most important American values include freedom of
expression, personal freedom, individual rights, open debate, thinking for oneself, and
accountability of public officials.
6. Potential Role of Stakeholders / 129
may attempt to develop their own model that is more compatible with their
culture. A challenge to any such effort is how to avoid intrinsic weaknesses that
are likely to result from the cultural preferences for families and relationships.
Convergence Versus Path Dependence
Many people predict a global convergence of different corporate governance
systems to one that is likely to be the Anglo-American model. Increasing
numbers of European and Asian firms are listed on US stock exchanges, thereby
subjecting themselves to the US listing regulations and securities laws. Also
many US institutional investors investing heavily in Europe and Asia are
increasingly demanding adherence to certain corporate governance principles
and specific standards.55
With further globalization of international capital
markets and growth of multinational corporations, the need for international
harmonization of securities regulations and disclosure standards will become
stronger. (For a more comprehensive list of reasons for such convergence, see
Coffee 1999, 2002; Gilson 2000; Hansmann and Kraakman 2000).
The efficacy of corporate ownership and governance systems may change
depending on the adequacy of the contractual infrastructure for protecting
investors (La Porta and others 1997; Rajan and Zingales 1998). In the absence
of adequate protection, investors tend to be preoccupied with management
control, which often leads to concentrated ownership or a relationship-based
system of corporate governance, particularly where capital is scarce relative
to available investment opportunities to make price signals for guiding
investment less important. This indicates that as an economy matures with
capital accumulation and better investor protection, a market-based Anglo-
American model will work better than a relationship-based model.
Despite these powerful forces, key differences in corporate governance features
are likely to persist because of the path-dependent nature of corporate ownership
and governance (Bebchuk and Roe 1999). Switching costs result from sunk
costs, resistance by vested interest groups, and network externalities even in
cases where relevant parties are aware of a more efficient system. If the entities
55. Institutional investors hold US$24 trillion in financial assets in the world’s top five
markets, 76% of which are held by UK and US investors. For the 25 largest US pension funds,
which account for two-thirds of all foreign equity investment by US investors, the percentage
of foreign equity held in their individual portfolios rose from an average of 8% in 1993 to 18%
in 2000 (Conference Board 2000).
130 / Corporate Governance in Asia
are myopic, the evolutionary process in response to environmental changes is
likely to lead to a local optimum, which will also cause path dependence. Still
another important cause of path dependence is complementarity among
institutions that characterize a corporate governance system in relation to
structure of ownership and decision rights, financial systems, employment and
human resource management systems, degree of disclosure and transparency,
and internal or external mechanisms of corporate governance.
An implication is that mixing the elements of different governance systems
together may not make much sense, because it will result in a loss of
institutional complementarity. Unless institutions are changed simultaneously
en masse in such a way as to ensure complementarity, an efficient shift to
another system would be difficult. In this connection, Schmidt and Spindler
(2000) envisage that as markets continue to be globalized, the insider control
system is likely to experience a greater degree of destabilization than the
Anglo-American system, because it relies more on mutually consistent and
stable expectations among diverse groups of stakeholders.
The 1997 Asian financial crisis served as a powerful break from path
dependence as many family-based business groups went bankrupt or
underwent substantial restructuring or ownership dilution. The resulting
extensive legislative and regulatory reform of corporate governance itself
represents a major break from the past. The crisis has likely provided a rare
opportunity to move to a new system that may be the Anglo-American model.
Nevertheless, core elements of the past system remain largely intact, namely,
the concentrated ownership structure and the nonseparation of ownership and
management. Thus a fundamental change from the insider control model with
domination by a controlling owner will be difficult.
Changing Technologies and Types of Corporate Activity
Depending on the types of technologies employed and activities undertaken,
firms’ organizational structure and corporate governance can differ widely.
For firms whose core competence depends on workers’ skills, a governance
structure that ignores workers’ role is likely to lead to trouble, and a failure to
involve them in corporate decisionmaking would make it difficult to retain
and motivate them. Also the development of technology implies that workers
need more skills and requires more workers with multiple skills. This will
increasingly induce corporations to involve employees in shop-floor
6. Potential Role of Stakeholders / 131
decisionmaking, in other practices leading to higher corporate performance,
or even in formal corporate governance.
Aoki (2003) argues that the desired governance structure may differ depending
on the type of organizational characteristics, especially information
connectedness among all those involved. For example, employee participation
in corporate governance or contingent relational governance by creditor banks
in serious financial distress may complement corporatist wage setting and an
information-sharing organizational architecture (where workers’ inputs and
cooperation are critical to corporate success). Similarly, Mayer (2000) argues
that different types of corporate activities may need different ownership and
control structures. For example, traditional manufacturing activities with a
long gestation period may need committed large investors with control for an
extended period, while many “new enterprises” may do better with dispersed
owners that are less committed but more flexible.
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