IDEAS home Printed from https://ideas.repec.org/p/tky/fseres/2003cf229.html
   My bibliography  Save this paper

Corporate Governance of Family-Based Businesses in Asia: Which Road to Take?

Author

Listed:
  • Haider A. Khan

    (GSIS, University of Denver)

Abstract

This 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.

Suggested Citation

  • Haider A. Khan, 2003. "Corporate Governance of Family-Based Businesses in Asia: Which Road to Take?," CIRJE F-Series CIRJE-F-229, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2003cf229
    as

    Download full text from publisher

    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2003/2003cf229.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khan, Haider, 2013. "Globalization and Democracy: A Short Introduction," MPRA Paper 49515, University Library of Munich, Germany.
    2. Ananchotikul, Sudarat & Eichengreen, Barry, 2009. "Corporate governance reform in emerging markets: How much, why, and with what effects?," Journal of the Japanese and International Economies, Elsevier, vol. 23(2), pages 149-176, June.
    3. Khan, Haider, 2011. "Constructing Global Governance of Global Finance: Towards a Hybrid Global Financial Architecture," MPRA Paper 40249, University Library of Munich, Germany, revised Jan 2012.
    4. Sapovadia, Vrajlal & Patel, Akash, 2013. "Levers of Corporate Governance in India: Critical Analysis through Prism of Legal Framework," MPRA Paper 55314, University Library of Munich, Germany, revised 19 Mar 2014.
    5. Haider A. Khan, 2006. "Soft Infrastructure, Trading Costs and Regional Co-operation ," CIRJE F-Series CIRJE-F-457, CIRJE, Faculty of Economics, University of Tokyo.
    6. Haider A. Khan, 2003. "Corporate Governance:The Limits of the Principal- Agent Approach in Light of the Family-Based Corporate Governance System in Asia," CIRJE F-Series CIRJE-F-230, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2003cf229. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office). General contact details of provider: http://edirc.repec.org/data/ritokjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.