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March
1999
(Issue No. 109)
Synopsis
Corporate Governance and
Corporate Finance in East Asia: What Can We Learn from the Industrlised
Countries?
by Dr Stephen Prowse
What is the best system (or systems) for corporate governance in
East Asia? In industrialised countries, strong systems governance have some
common features ¨C well-functioning, competitive markets (especially corporate
finance markets), with minimal state interference, solid legal protection for
outside investors (creditors or shareholders, or both) and some way in which
outside shareholders can come together and influence the behaviours of
directors and mangers.
In East Asia, the major corporate governance issue is not how
outside financiers can control the actions of management (as it is in
industrialised countries) but how outside financiers can exert control over big
insiders shareholders. The extensive use of debt financing by East Asian firms
did nothing to loosen the grip of these tightly-held controlling shareholdings
(debts do not dilute equity). And a government¡¯s implicit too-big-to-fail
policy kept inept or corrupt executives and mangers in office and owners in
control, all at the expense of outside investors¡¯ best interest. Now, adding
to that weak market and statutory regulation, legal protection of outside
shareholders that, while extensive on paper, has no enforcement muscle, high
(insider) concentration ownership and a poorly competitive financial systems.
All this not only imposes high and severe costs on the economy but contains the
seeds of future crises.
This paper provides a framework for discussion on corporate
governance issues in East Asia. It is developed from the extensive research on
corporate governance, and from analysis of governance systems in industrialised
countries. The paper also analyses current governance in selected East Asian
countries and makes broad recommendations on how these countries can address
problems and to develop better governance systems.
Top
A Review of Corporate
Governance in Malaysia - With Special Reference to Rights of Shareholders and
Creditors
by Dr . Thillainathan
Where a firm relies only on internal finance, there is no
separation between management and financing or between ownership and control.
Corporate governance is not an issue as control and cashflow rights are
perfectly matched.
Designing an appropriate corporate governance system becomes a
problem where the firm places reliance on external finance. This will make for
a separation between management and financing, thus giving rise to an agency
problem. This will also lead to a mismatch between control and cashflow rights
with the mismatch being greater the more dispersed the shareholding or the more
marked the separation between ownership and control. The manager or controlling
shareholder, dubbed the insider in literatures, may end up having an enormous
discretion about what is done with the funds, often to the point of being able
to expropriate much of it.
In this paper, the writer examines the strengths and weaknesses
of corporate governance in Malaysia. Issues pertaining to corporate governance
are discussed, with reference to rights of control and cashflow.
Top
Corporate Governance in
Singapore: Towards the 21st Century
by Dr Phillip H. Phan and Dr Mak Yuen Teen
Singapore¡¯s small size and lack of natural resources have
necessitated an open trade policy. The country has virtually no exchange
controls on inflows and outflows of foreign currency funds by residents and
foreigners, whether in amount or destination. Singapore also has a very liberal
policy towards foreign direct investments, with no limitation on the extent of
foreign ownership, except in the onshore banking and news media sectors. In
addition, the equities and derivatives markets are the most developed in the
region.
According to the classical agency theory, the openness of the
equities market should give rise to free competition for capital, which will
lead to a selection mechanism favouring managers who are inclined to maximise
stockholders¡¯ wealth. In addition, a free and open capital market would lead
to an active market for corporate assets in the form of takeovers and
acquisitions ¨C an effective deterrent to managerial on-the-job consumption.
However, when compared to those of the US and UK, corporate
governance in practice and philosophy appears to be still relatively
underdeveloped in Singapore. In addition, the high concentration of ownership
combined with a weak takeover market appears to work in favour of
owner-managers who can consume at the expense of minority shareholders.
Further, without the strong bank-centred monitoring mechanisms common in Japan
and Germany, there appears to be a lack of either market or structural
governance echanisms to discipline errant managers.
This paper discusses the institutional environment as it relates
to corporate governance in Singapore. It argues that the government influences
corporate governance practices in Singapore not through the use of legislation,
but through government-linked corporations (GLCs) and moral suasion. This is
very much in line with the government¡¯s policy to develop Singapore as a major
centre for the accumulation and disbursement of corporate capital, so that
excessive legislation and onerous reporting requirements are seen as
counter-productive to the development of this still nascent market. The
dominance of GLCs in the private sector means that corporate governance in
Singapore is primarily based on a government corporatist model, which involves
the appointment of senior officials on the boards of GLCs. Their activities and
ties to the government provides the policy backdrop and communication channels
to encourage the adoption of practices deemed appropriate for supporting the
development of the capital market. Further development of the capital market
must necessarily be preceded by standards of corporate governance consonant
with those of the more developed markets, such as in the US and UK. This paper
also reports the results of exploratory tests of relationship between corporate
governance features and firm performance.
Top
Two
Models of Corporate Governance
by Professor Wesley Cragg
Corporate governance is increasingly being scrutinised by
shareholders, governments, international financial institutions and the media.
The collapse of the Asian tiger economies has led many to question both the
values and the competence of business leaders, investment managers and the many
financial institutions which failed to foresee the weakness inherent in the
economies in which they were investing so heavily. In the industrialised world,
budget deficits and neo-liberal economic policies have led to reduced
government expenditures on social services, serious unemployment and
underemployment in many countries and a widen of the gap between rich and poor.
Meanwhile, incentive schemes designed to reward senior executives who have
increased shareholders' value have resulted in bonuses which have attracted
wide spread criticism particularly when contrasted to the fate of those who
have paid for those gains with lost jobs and static or declining earnings from
their employment. The result has been increasingly vigorious public debate
about the social responsibilities of corporations.
Discussions have polarised around two seemingly imcompatible
"abstract visions" or models of the modern corporation. On the first account, a
corporation's sole obligation is wealth maximisation for the benefit of its
owners or shareholders whose property it is. The alternative model, which is
like the first has many of the characteristics of a "vision", argues that the
social and ethical responsibilities of the modern corporation extends well
beyond its shareholders to encompass all those, both individuals and groups,
who can be said to have a legitimate stake in a corporation's operations and
activities. This paper looks objectively at these two models of corporate
governance.
Top
Responsibilities
of Corporate Governance and Control of Corporate Powers
by Philip T.N. Koh
The issue of proper governance of our institutions has been very
much in the forefront of global debate in the wake of the convulsions suffered
by East Asian economies. The corporation is one of the ubiquitous aspects of
our social and political landscape. The fissures that have emerged have lead to
a clarion call to restructure and to hold accountable the corporation that has
lead in part to the debacle facing our commercial life.
It is, therefore, crucial to examine in depth the issues and
choices that confront us in the wake of the chorus of voices for change.
Discernment and understanding is paramount so that in addressing the changes
and challenges in the corporate governance debate, we sift beneath the rhetoric
and grasp the substance of the matter.
Top
Ethics and Corporate Governance: Some Guidelines for Directors
by Dr Simon Longstaff
There is no such thing as a value-free organisation. The values
and principles adopted by an organisation can be for good or for ill. That is,
they can contribute to the organisation's ability to achieve its objectives or
they can act as a hindrance. Given that values and principles shape an
organisation¡¯s ¡®climate¡¯ or ¡®culture¡¯, it is important that they be
identified and managed in the best interests of the organisation and the people
that it is there to serve. One of the key roles for directors is to help create
the conditions and competencies through which an organisation¡¯s values and
principles can be harmonised in a way that best serves the organisation¡¯s
mission.
If an organisation is to flourish, especially in times of change,
then it must manage its values and principles in a way that provides a stable
foundation for growth and development. Directors have an important role to play
in this process. While any list of guidelines is bound to be incomplete, the
author offers some suggestions as points of reference for directors.
In this paper, the writer examines the strengths and weaknesses
of corporate governance in Malaysia. Issues pertaining to corporate governance
are discussed, with reference to rights of control and cashflow.
Top
Revisiting Malaysian Banks'
Profitibility and Credit Growth: 1988 - 1997
by Wong Chee Seng & Dr Raja Lope bin Raja Shahrome
The core function of any financial intermediary is to accept
deposits and extend loans to household and/or businesses, guided by the
principle of ¡®maturity-matching¡¯. It emphasises the need to match liquidity
sources to liquidity needs in managing a healthy balance sheet while at the
same time maximising the value of the owners¡¯ investment in the bank. This
principle has served Malaysia pretty well before during most of the 1970s and
early 1980s.
In the early 1990s, driven by greater financial liberalisation,
continuous foreign capital inflows, strong macroeconomic fundamentals, growing
financial innovation and intermediation, the risk preferences of Malaysian
banks appeared to undergo a dramatic change. Bank credit in Malaysia grew at an
unprecedented and accelerated pace, far in excess of the growth of the real
sector of the economy.
This paper seeks to explain the key determinants of this episode
of strong and uninterrupted loans growth in relation to the profit maximising
behaviour of the Malaysian banking system between 1988-1997. The paper proposes
the formal use of the loan-deposit ratio as the principal instrument to control
excessive credit expansion.
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