Globalization and Corporate Governance in East Asia - Essay Example

This paper examines the recent change or governmental reformation of Japan, China, and Singapore in terms of corporate ownership structure and governance. The analysis of this paper shows that globalization plays an important role in dissolving the existing corporate ownership and strengthening the corporate governance in these three countries. However, this analysis also shows that because of its strong inherence and utility derived from specific features of these three countries, the characteristics of ownership and corporate governance and their effects remain in these countries. Finally, this paper also touches on the potential of other elements that affect corporate governance from different perspectives. Corporate ownership has been one of the biggest concerns of corporate governance for many years.

Much previous research argues the prevalence of widely held corporations in the United States in which corporate ownership is dispersed among small shareholders1. Under such structures, the main concern of corporate governance is how to reduce the potential conflict between the interests of managers and stockholders, or so-called agency problems.2 However, as we look outside the United States, especially in countries with poor minority shareholder protections, even the largest firms often have controlling shareholders3.

In those countries, the central agency problem is how to restrict the expropriation of minority shareholders by controlling shareholders through the improvement of minority protections4. Corporate ownership in Asia is also largely different from the U.S. Asian characteristics, as containing a high concentration of ownership comes from family, state, and group ownership and low liquidity of shares5. Claessens investigated the separation of ownership and control in 2980 publicly traded companies in nine East Asian countries6 (Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand).

This study finds that in all countries, especially in Indonesia, Japan, and Singapore, voting rights consequently exceed cash-flow rights through pyramid structures and cross-holding. It also finds that more than two-thirds of firms in these countries are controlled by a single shareholder7. It is not hard to anticipate that under this corporate structure, the conflict of interests between majority and minority shareholders causes an adverse effect on corporate governance. Several studies show that concentrated ownership causes the low market valuation of firms and expropriation of minority shareholders in Asia8.

This expropriation is more detrimental in a country with weaker legal systems9. Although differences between countries are significant, White Paper on Corporate Governance in Asia emphasized that the protection of minority shareholders' rights was particularly critical in Asia10. There are three types of corporate ownership in Asia, which are family, state, and group ownership. More than half of Asian corporations are family-owned. Hong Kong, China, Malaysia, Indonesia, and Thailand show high degrees of family ownership.

State control is significant in China and Singapore. In Japan and Korea, group companies are characterized by interlocking cross-holdings of equity. These characteristics of corporate structure, however, have gradually changed in the 21st century because of Asian economic growth and capitalist globalization. Corporate governance in Asia has been subjected to reformation due to criticism for its weakness after the Asian financial crisis.