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2016 | OriginalPaper | Chapter

26. Envisaging an East Asian Model of Corporate Governance: A Developmental State Perspective

Author : Yueh-Ping (Alex) Yang

Published in: Legal Thoughts between the East and the West in the Multilevel Legal Order

Publisher: Springer Singapore

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Abstract

East Asia’s well-known “developmental state model” has attracted wide attention in development economics, but its connection to corporate governance in East Asia remains understudied. In this paper, I attempt to establish this connection and envisage an East Asian model of corporate governance based on two primary observations. First, I examine how Corporate East Asia performs corporate governance’s two main functions, i.e., protection and coordination, and observe the state’s heightened protective and coordinated roles therein. Second, I propose a typology of state-firm relationship based on two aspects of state intervention, i.e., channels and purposes, which lays down a foundation for observing the relative position of different states and allows further exploration of the form of intervention taken by East Asian developmental states. Acknowledging that this proposed theory of East Asian corporate governance can be reflected in many corporate issues, I pick independent directors as a touchstone for testing the theory. Based on the above observations, I propose an East Asian version of corporate governance theory rooted in the developmental state model in this region, which should open a door for future East Asian studies in comparative corporate governance.

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See generally Hansmann and Kraakman (2001). See also Gilson (2004).

See generally La Porta et al. (1997); La Porta et al. (1998); La Porta et al. (1999); Djankov et al. (2008).

The opposite camp to the convergence proposition is the persistence theory. For related literatures, see, e.g., Bebchuk and Roe (2004), p. 69; Schmidt and Spindler (2004), p. 114; Gevurtz (2011).

For literatures advocating the institutional advantages of Japanese corporate governance, see, e.g., Sheard (1989); Aoki (1990); Hoshi et al. (1990); Hoshi et al. (1991); Kaplan and Minton (1994).

See, e.g., Mitchell and Wee (2004); Low (2004); Steier (2009).

This is especially the case for the emerging China. For literatures disentangling the myth of corporate China, see, e.g., Milhaupt and Zheng (2015); Lin (2013); Lin and Milhaupt (2013).

For earlier studies of economic developments in Japan, South Korea, and Taiwan, see, e.g., Johnson (1982); Amsden (1989); Wade (2004). For recent studies of China, see, e.g., Coase and Wang (2013); Lin (2012b); Huang (2008).

See, e.g., Rodrik (2007), pp. 13–54; Chang (2003).

Notable examples are a series of OECD studies on Asian corporate governance problems. See, e.g., OECD ( 2010 ); OECD ( 2011a, b ).

For studies on East Asian developmental states, see, e.g., Chang (2006); Woo-Cumings (1999).

For an introduction to these two economic models, see generally Hall and Soskice (2004).

For related debates, see, e.g., Pang (2000); Clark and Jung (2002); Caldentey (2008); de Medeiros (2011).

For an introduction to the Washington Consensus proposals, see generally Williamson (1990).

See Fn 7 & 8. Even the World Bank later admitted that the East Asian miracles were built on a more statist approach than it originally thought, though with some qualifications. See generally World Bank ( 1993 ).

For a discussion of whether China fits the developmental state model, see, e.g., Bardhan (2010); Bolesta (2007).

See generally Woo-Cumings (1999). See also Chang (2006), pp. 13–56.

Woo-Cumings (1999), pp. 1–2.

Id. at pp. 4–10.

Id. at pp. 15–19.

Id. at pp. 10–13.

Id. at pp. 13–15.

Chang ( 2006 ), pp. 34–40.

Id. at pp. 29–34.

Id. at, pp. 40–43.

For a more in-depth discussion of the rationale behind East Asian developmental states, see id. at pp. 109–133, 227–256.

Chang made a comprehensive study of how before the 1960s initial conditions in East Asia lagged behind those in Sub-Saharan Africa, which shows that East Asia’s economic success was not based on initial conditions. Id. at pp. 143–175.

See, e.g., Pang (2000), p. 12.

For a summary of these attacks, see Chang ( 2006 ), pp. 180–184. See also Clark and Jung (2002), pp. 21–25.

Chang ( 2006 ), pp. 187–189. See also Wade ( 2004 ), pp. xxiii–xxxvii.

See Chang ( 2006 ), pp. 207–223.

Chang, for instance, argued that neither the growing economic complexity nor democratization would necessarily demise the developmental state model. Id. at pp. 248–254.

For some praise of China’s progressive liberalization and privatization approach, see, e.g., Allen et al. (2014), p. 1.

See, e.g., Wade ( 2004 ), pp. xxxv–xli.

It is documented that by the end of August, 2012, Taiwanese state-operated banks had a 51.87 % market share in deposits and 55.62 % in lending. Kuo (2013), p. 283.

Wade ( 2004 ), pp. xxxix–xl.

See Fn 15. See also Lee (2014), pp. 29–31.

See, e.g., Schaede (2012).

Fields (2012), pp. 51–53.

The Global Revival of Industrial Policy: Picking Winners, Saving Losers, The Economist (5 August 2010), http://www.economist.com/node/16741043. Accessed 10 March 2016.

Kalinowski (2008).

Fields (2012), pp. 54–56.

OECD (2015b), p. 9.

For a discussion of how different modes of capitalism interact with different corporate governance models and the application of a variety of capitalism to the US post-crisis governance reform, see generally Templin (2010).

See generally La Porta et al. (1997); La Porta et al. (1998); La Porta et al. (1999); Djankov et al. (2008).

Armour et al. (2009), pp. 35–37. The agency theory of the firm was firstly proposed in Jensen & Meckling’s masterpiece. See generally Jensen and Meckling (1976).

For related discussion, see generally Jensen and Meckling (1976); Jensen (1986); Henderson and Clark (1990).

See generally Milhaupt and Pistor (2008).

Id. at pp. 173–195.

For some reflections on the USA’s decentralized and confrontational corporate system, see id. at pp. 47–67.

For some discussion of “economically benevolent dictators,” see generally Gilson and Milhaupt (2011).

The negative impact, however, is that under this structure, businesses are basically tamed by the state and become dependent on the state’s blessing. This compromises their motivation to innovate and may be harmful to the economy’s long-run productivity and efficiency.

Chang ( 2006 ), p. 29

The negative impact, however, is that it risks a rigid corporate governance environment departing from the contract theory of firms. Specifically, it may inhibit private ordering in corporate rule-making, resulting in, for instance, rigidity in the charter or bylaw provisions or limited financing instruments available to capital markets. For a discussion of the “flexible rigidities” in East Asia, see id. at pp. 109–133.

The negative impact, however, is that the banking system could be involved too deeply into businesses and become subject to the domino effect once businesses fail. This structure also creates multiple layers of agency relations and perhaps aggravates the agency problem, see Woo-Cumings (1999), pp. 12–13.

For instance, it is observed that in East Asian developmental states, landlords, and labor unions are typically suppressed.

For an introduction to the main bank system, see generally Sheard (1989); Aoki (1990); Hoshi et al. (1991). For arguments claiming that there never was this main bank system in Japan, contra Miwa and Ramseyer (2006).

For a summary of the discussion of Japan’s governmental direction practices and associated critiques, see Miwa and Ramseyer (2006), pp. 115–146.

For instance, it is argued that the main bank system is a valid alternative to hostile takeover in monitoring managerial performance.

See Chang (2006), pp. 262–265.

Note that the Taiwanese state’s dominance of finance does not only take place in the banking system but also in venture capital financing. For a comprehensive account, see generally Gulinello (2005).

For a comprehensive discussion of the governance of state-owned enterprises in China, see generally Lin and Milhaupt (2013); Lin (2013). For that of the governance of state-owned banks in China, see generally Howson (2009).

For a comprehensive discussion, see generally Milhaupt and Zheng (2015).

For instance, the OECD’s prescriptions for corporate governance reforms in Asia focus only on state-owned enterprises but fail to address a deeper state intervention issue beyond state-owned enterprises reform. See OECD ( 2011a, b ), pp. 45–46.

The administrative guidance in Japan mentioned above is one example.

For some general discussion of the stakeholder theory, see, e.g., Blair and Stout (1999), pp. 247–328; Elhauge (2005), pp. 733–869.

For a general discussion of constituency directors, see generally Veasey and Di Guglielmo (2008).

Japan’s main bank system is one example. See Fn 56.

The most notable instance is the German codetermination model. For some discussion, see, e.g., Pistor (1999). For a more general discussion of labor directors, see Jackson (2005).

In addition to Japan’s main banks, the German universal bank also adopts this practice. For some discussion, see generally Gorton and Schmid (2000).

See, e.g., Pargendler (2012); Kahan and Rock (2011); Templin (2010); Enrico Perotti (2004), State Ownership: A Residual Role? (World Bank Policy Research, Working Paper No. 3407).

OECD ( 2015a ); OECD ( 2015c ); OECD ( 2011a, b ).

One piece taking note of this issue is Aldo Musacchio and Sergio G. Lazzarini (2012), Leviathan in Business: Varieties of State Capitalism and Their Implications for Economic Performance (Harvard Business School Working Paper, No. 12–108).

Enrico Perotti (2004), State Ownership: A Residual Role?, p. 5 (World Bank Policy Research, Working Paper No. 3407). Perotti, however, rebuts that private ownership only reduces the government’s discretion rather than depriving it. With the power of legislation, the regulator can always change laws to regulate private sectors and manage their misbehaviors. Id. at pp. 11–12.

For instance, Taiwan adopts unique securities class actions with government-sanctioned NGOs as the lead claimant. See generally Shao (2014).

See generally David E.M. Sappington and Joseph E. Stiglitz (1987), Privatization, Information and Incentives 1986–1998 (National Bureau of Economic Research, Working Paper No. 2196); Hart et al. (1997).

For related introduction, see generally Kole and Mulherin (1997).

For a related account and a discussion of the USA’s bailout history during the Global Financial Crisis, see, e.g., Shahabian (2011); Barnes (2010).

See, e.g., Shleifer (1998), pp. 133–150; Stiglitz et al. (1994).

Dinc, based on data on banks in 36 countries (19 emerging countries and 17 developed countries), found that state-owned banks significantly increase their lending in election years, which suggests that political motivations influenced their actions. Dinc (2005), pp. 475–476. Micco et al. (2007), based on financial information from 179 countries, also found that state-owned banks in developing countries tend to have lower profitability and higher costs than their private counterparts, and such performance difference increased during election years.

For a comprehensive introduction to the changes to Japan’s corporate governance, see generally Jackson and Miyajima (2008).

See generally Hansmann and Kraakman (2012).

See Fn 34.

For an introduction to the Chinese Communist Party’s power in economic sectors, see generally McGregor (2010 ).

Andrianova et al. (2011), pp. 686–699

For criticism, see generally Verret (2010). See also Templin (2010); Kahan and Rock (2011).

A more aggressive observation even proposes an observed rise of state capitalism, see, e.g., Bremmer (2010).

Block (2008). See also Hart (2008).

This is the case of the Bank of North Dakota (“BND”). BND is a wholly state-owned and state-operated bank formed in 1919, “the only one of its kind in the USA currently,” which is organized to foster local economic development, small business growth, and localism and relational banking via community banks and credit unions. For a comprehensive introduction of the BND practice, especially how it performs its development mission, see generally Schneiberg (2013).

For recent comparative studies of independent directors, see, e.g., Enriques et al. (2009), p. 55; Gutierrez and Saez (2013); Mire and Gilliga (2013); Ferrarini and Filippelli (2014); Karmel (2014).

For a summary of critics of independent directors, see generally Stephen M. Bainbridge (2002), A Critique of the NYSE’s Director Independence Listing Standards (UCLA School of Law, Research Paper No. 02–15). See also Rodrigues (2008), pp. 458–463; Sharpe (2012), pp. 285–291; Fairfax (2010), pp. 145–174.

The most frequently cited study was made by Bhagat and Black in 2002, which found no correlation between board independence and firms’ long-term performance. See Bhagat and Black (2002), pp. 233. See also Klein (1998), p. 283; Fisch (2004), p. 41; Bhagat et al. (2008). Contra Dahya et al. (2008); Dahya and McConnell (2007); Uzun et al. (2004).

See, e.g., Kirkpatrick (2009), pp. 21–23; Klaus J. Hopt, (2013), Better Governance of Financial Institutions pp. 1–65 (European Corporate Governance Institute – Law, Working Paper No. 207); Adams and Mehran (2012) (finding empirical evidence that board independence is unrelated to banks’ performance).

Commercial Act Arts. 542-8(1), 415-2(2), and 542-8(4) (S. Kor.)

Securities Exchange Act Arts. 14-4(1) & 14-4 (Taiwan). See also Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies (Taiwan). For some discussion of Taiwan’s implementation of independent directors, see generally Lin (2011); Chou (2013).

Company Law Art. 123 (Ch.); Guidelines for Introducing Independent Directors to the Board of Directors of Listed Companies Art. 1(3) (Ch.); Listing Companies Corporate Governance Code Art. 52 (Ch.). For some introduction, see generally Shen and Jia (2005); Clarke (2006); Lin (2012a).

Companies Act Arts. 335(3), 331(6), 327–2 (Japan). For literature discussing independent directors in Japan, see generally Goto (2013); Lin (2010).

It should be noted that the East Asian two-tier board system differs from that in Germany. In Germany, the shareholders elect both the board of directors and the supervisory board, whereas in the East Asian system, shareholders elect the supervisory board, which in turn elects the board of directors. Therefore, in East Asia’s case, since the board of directors is not subject to the supervisory board’s appointment and removal, it is less accountable to the supervisory board, which renders the supervisory board’s monitoring function less effective.

Aronson (2013), pp. 245–246 (Commentators from both Taiwan and South Korea report the failure of supervisory boards in their countries, while Japan reports failure in terms of performance monitoring but relative success in compliance monitoring).

For instance, it is documented that the looting taking place during Russian privatization discredited Russian reformers’ privatization initiative and in the end destroyed it. Black et al. (2000), pp. 1788–1789.

100

For instance, it is reported that the Taiwanese government’s promotion of good corporate governance is more about preventing long-term failure than promoting corporate performance. Aronson (2013), pp. 239–240. It is also reported that in Japan the monitoring is more effective in compliance monitoring than performance monitoring. Id. at pp. 244, 246.

101

Hansmann and Kraakman (2001), pp. 450–451.

102

See, e.g., Langevoort (2001), p. 799; Elson (2004), p. 502.

103

See, e.g., Tung (2011), pp. 1178–1185. It is found, for instance, that the existence of common backgrounds between CEOs and their nominally independent directors may affect directors’ monitoring. See generally Hwang and Kim (2009). It is also found that a powerful independent board which is more socially network based correlates with higher shareholder valuations, indicating that a more socially independent board might be better able to serve the independent directors’ monitoring role. See generally Fogel et al. (2013).

104

Davies and Hopt (2013), p. 322; Molitor (2010), pp. 104–108.

105

For a general discussion, see generally OECD (2013).

106

See Lee and Rhyu (2014), pp. 261–282.

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Title: Envisaging an East Asian Model of Corporate Governance: A Developmental State Perspective
Author: Yueh-Ping (Alex) Yang
Publisher: Springer Singapore
Book: Legal Thoughts between the East and the West in the Multilevel Legal Order
Print ISBN: 978-981-10-1994-4

Electronic ISBN: 978-981-10-1995-1

Copyright Year: 2016
DOI: https://doi.org/10.1007/978-981-10-1995-1_26