Corporate Governance of Family-Based Businesses in Asia: Which Road to Take?
AbstractThis paper addresses the problems of reforming corporate governance in Asia in the post-crisis period through a theoretical analysis of corporate governance and a case study of reforms in Hong Kong. Theoretically, the concept of a family-based corporate governance system (FBS) is contrasted with the bank-led system (BLS) and the equity market based system (EMS).Both BLS and EMS are closely associated with the dominant modes of corporate finance by banks and equity markets respectively. For FBS, the financing can come from three different sources. Initially, family business is financed largely by internal funds. As the enterprise grows over time, the role of banks and outside equity becomes important. However, under FBS, neither the banks nor the equity markets ultimately control the family business groups. This can give rise to serious agency problems necessitating reforms. Hong Kong has a predominance of family-based system (FBS) of corporate governance which has undergone a series of reforms. There, it seems to have been recognized that as the share of external finances rises with the growth of the firm, agency costs increase due to problems of asymmetric information between management and external financiers. FBS can be a workable form of governance under such conditions only with proper monitoring capabilities of the financial system, managerial expertise and market competition. Particularly important for reforming the FBS is the need for recruiting and training competent professionals so that the financial institutions can gather and analyze the relevant information about the firms they finance. Furthermore, there must be formal and informal means to influence the decisions of a borrowing firm when it appears to be not performing well. Several factors explain Hong Kong's success in continuing with gradual corporate governance reforms. First and foremost, is the relative strength of the financial sectors. Both the banks and the equity markets have proved to be much stronger than those in other regional economies during and after the crisis. Second, the presence of both competition and cooperation in the financial sector has made it possible to regulate effectively through the Banking Ordinances and Listing Rules and Takeover Codes. A third factor is that in Hong Kong the insolvency and bankruptcy procedures are relatively straightforward. This makes exit of insolvent firms economically less costly and after such exits the system regains its vigor. Fourthly, increasing the emphasis on accounting and auditing standards improvements will make monitoring, including some further self-monitoring by the family businesses themselves easier. Finally, although this may not be the most significant, the smallness of Hong Kong also makes it easier for informal agreements to be made and kept through reputational and other relational mechanisms. In economies where some of the above characteristics that make reforming FBS in Hong Kong possible are present, some degree of reform of FBS may be possible, so that this system remains effective as an interim type of governance for some time to come. However, the role of banks even in this interim period must be strengthened a great deal more than it is today. Without a strong, independent banking system the agency costs arising from the monitoring problems in most Asian economies will still remain high. In order to improve corporate governance in Asia, the monitoring capabilities of the financial sector - in particular the banking system - must be given top priority.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-229.
Length: 34 pages
Date of creation: Jul 2003
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