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Corporate Governance in East Asia Essay

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Updated: Sep 2nd, 2019

Introduction

Corporate governance is a topic that is multi-faceted with many aspects affecting the administration of corporations. Corporate governance essentially means the way corporations are directed through policies, laws, procedures and sets of customs that have been put in place. It is therefore a field of economics that is meant to ensure that corporations are effectively managed so as to improve on the financial performance of the enterprises (Azarmi, 2008, p.1).

Corporate governance can therefore be said to administer the manner through which the financiers of the corporations get their return on the investments made. The financiers as well as the stakeholders such as shareholders, suppliers, creditors, banks and the management are all concerned about the governance of corporations therefore calling for effective management of the corporations. The issue of corporate governance has been of concern in the modern world as a result of the rapid globalization rate.

Corporate governance has at the same time been of interest due to the collapse of many global high-profile companies. The 1997 Asian crisis is an example of the common tragedies that came as a result of poor corporate governance. This paper is therefore an analysis of the main features of the corporate governance systems in East Asia as well as a detailed look of the implications of the western firms trying to do business in East Asia.

The main features of Corporate Governance in East Asia

Most nations in East Asia suffered economic fluctuations as a result of the financial crisis faced by countries such as Thailand. These disruptions included poor investments, bankruptcy, high rate of foreign debts, over capacity among others. All these were as a result of poor governance of the corporations. The Asian crisis affected five countries of East Asia namely, Thailand, Malaysia, Philippines, Korea and Indonesia. This made East Asia have a new face of its corporate governance which has the following key features.

  • Participation and protection of shareholders

Due to the fact that most of the companies in East Asia are family owned it is evident that most of the shareholders will be family members. This has therefore called for the intervention of the board of directors to control the shareholders while safeguarding their interests (OCDE, 2000, p.5). Studies conducted in the countries of East Asia indicated that shareholders (especially the minority shareholders) were not allowed to effectively participate in the matters of the companies.

This was largely contributed by the lack of transparency and insufficient disclosure of information and requirements. The lack of transparency can be largely attributed to the idea of having less disclosure among family members and since the shareholders are mostly members of same families there arises lack of disclosure. Shareholders of the East Asian companies are not well protected since they do not get any incentives nor have their interests paid adequately.

  • Ownership

Research done on the countries of East Asia has shown that all have been concerned with corporate ownership. This means that they have dedicated the larger part of companies shareholders to family ownership or nominees of the company (OCDE, 2000, p.5). Despite this, the shareholding by foreign investors on most companies is diversified across the five countries.

Cross-shareholding is widely practiced in the region whereby companies are allowed to buy and own shares of other companies so as to achieve strategic controls, economies of scale as well as facilitating contracts of supply. Despite the fact that corporate ownership is a key feature of the East Asia corporate governance, the corporations still lack transparency and disclosure of the requirements.

  • Monitoring and Protection of Creditors

Among a company’s stakeholders are the creditors who although they may not have a hand in decision making play an important role in corporate governance (OCDE, 2000, p.5). Their role in corporate governance is limited because of the mare reason that they are themselves poorly governed (Azarmi, 2008, p.1).

Research done on the East Asian countries showed that most of the money lending institutions were owned by the same families owning the companies. This therefore created a weak legal protection for the creditors of the companies. Protection of consumers was not up to date as per the studies since the government guaranteed most of the loans taken by the companies.

  • Corporate market control and competition of product markets

The Asian countries have had inactive corporate market control majorly because of the policies that the governments have put in place. The governments are seen to be so concentrated on the ownership of the companies making competition difficult hence poor corporate governance.

  • Poorly developed Capital markets

The East Asian countries have poorly developed capital markets that have been largely dominated by external financiers. Only about 30 per cent of the total finance is from the internal while the rest is dominated by bank loans. The overreliance on bank loans can be largely attributed to the underdeveloped capital markets making the companies have fewer alternatives of sources of finances.

The implications for Western firms trying to do business in East Asia

East Asia has been the market place for many countries of the world because of the many resources the region is endowed with. However, for the western firms to be effective in East Asia, their mangers ought to be intuitive in making decisions as well as fast learners (Bruton, 2003, p.1). Other than that, the business entrepreneurs from the West are required to be well conversant with the cultural practices and languages of East Asia for effective running of the enterprises.

The venturing of Western firms in East Asia has both positive and negative implications on the region (Whitely, 1994, p.218). For one, the operations of the western firms in East Asia have greatly contributed to the economic growth and significant development of the region.

This is majorly because of the foreign exchange earned which in turn raises the price share in the global market. In addition, the venture of industries in the region has been depicted to shape the industries found in the region making them meet the international standards hence upgrading them.

This can be evidenced in the subject of corporate governance whereby the East Asian countries have imitated the way firms from the west are being effectively managed. Other than that, the venturing of western firms in the East Asia region breaks the monotony of having family owned companies hence creating healthy market competition. Competition improves the market by making sure high quality products are produced as well as limiting consumer exploitation.

Nevertheless, the bureaucracy of most East Asian nations and especially Indonesia has had negative implications of the western investment firms (Whitely, 1994, p.218). Their administrative policies and regulations have proved to be grate obstacle s for the western investors.

In some instances, the policies have been exploiting the businessmen by raising the costs incurred to undertake business in the region. The venturing of western firms to do business in East Asian countries will have great impact on the distortion of the cultural settings and norms of the region (Bruton, 2003, p.1). This is because through business interactions cultural practices will be exchanged hence affecting the original culture of the region.

All in all, when the western firms invest in the East region it is good indication that the region has developed and has upgraded its corporate governance to allow foreign investors. This therefore implies a positive move in terms of economic and financial growth.

Conclusion

From the above discussion, it is clearly seen that good corporate governance is necessary for the economic growth of a region. The corporate governance in the East Asian countries can be said to be varied with some nations doing well while others having poor systems of corporate governance (Prowse, 2009, p1).

Among the countries, Malaysia seems to have good performance in corporate governance. However, reforms have been put in place especially after the Asian crisis so as to ensure that good corporate governance prevails in the region. It is because of the ongoing reforms that the western firms are trying to do business with countries of East Asia.

These reforms on corporate governance have concentrated on developing the capital markets, encouraging competition in the markets, ensuring participation of shareholders as well as promoting corporate control. All these have however, been partly facilitated by the venturing of the western firms into the East Asian market.

Reference List

Azarmi, T., (2008). East Asian corporate governance and financial crises. Web.

Bruton, G., (2003). Understanding venture capital in East Asia: the impact of institutions On the industry today and tomorrow. Web.

OCDE., (2000). . Web.

Prowse, S., (2009). Corporate Governance and Corporate Finance in East Asia: What Can We Learn from the Industrialized Countries? Web.

Whitely, R. Business systems in East Asia: firms, markets and societies. 1994. SAGE.

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IvyPanda. 2019. "Corporate Governance in East Asia." September 2, 2019. https://ivypanda.com/essays/corporate-governance-in-east-asia/.

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