Different Countries, Different Models
Corporate Governance Standards Often Prove to Be Culture-Unique
By Kim Yoo-chul
Staff Reporter
Corporate governance often develops along the lines of unique culture of doing business in a given country.
This often defies attempts to generalize corporate governance standards that fit developed and developing countries, although transparency and shareholders rights are two things that are often regarded as common denominators.
If a conglomerate has a good set of governance rules, it can benefit from preferential access to capital, information and other necessities for management.
``As different nations have developed languages, foods and customs, they also have adapted their own forms of corporate governance and board structures,'' said a local analyst.
``Now, as business continues to globalize, new pressure from international capital pools and government regulators may diminish the local and national flavor of corporate boards,'' according to Wharton Business School Prof. Michael Useem in an article posted on its Web site.
Companies that globalize operations or ownership know that adoption of internationally accepted governance standards would help them compete against other foreign rivals, he argues.
Industry watchers say firms are moving to create boards that are more independent from management, populated by non-executive members and organized around committees overseeing management, compensation and auditing.
Inducement of Foreign Capital
``All these factors point to good governance and thus the company becomes more attractive to investors and legitimate in the eyes of suppliers and customers,'' says Prof. Useem.
``An investment manager anywhere in the world looking to put cash in some of the potential markets will come at the company with an eye to whether it is following good practices.''
``I think there's been recognition ― maybe even more in the emerging markets ― that if management is given incentives to create shareholder value, the market will actually reward that, resulting in the stock trading at a premium. So, good corporate governance gets you a premium stock price,'' Kim Jin-hyun, who manages a $20 million private fund targeting for Asian emerging markets told The Korea Times by telephone.
The International Finance Corporation (IFC) has also backed up the importance of enhanced corporate governance by having a company-level code of ethics is a meaningful step in setting the stage for reforms.
It added that policymakers and regulators should encourage, or even mandate, directors and senior managers to undergo training on corporate governance, which also calls for listed companies to disclose non-financial information particularly on ethical practices.
The report also includes the need to create board-level committees to develop remuneration policies that attract, motivate and retain talent ― the adoption of internationally recognized financial reporting standards and the need for family-owned enterprises and banks to form councils or assemblies to separate the family interests from those of the company.
``There are large pension funds in the world and they have a common interest in creating boards that are independent of management and that act as an appropriate monitor of investor interaction. No matter where you happen to be, that model produces the best potential returns,'' Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware said on its Web site.
Japan, Korea ― Mixed View
In the past, Japanese management was generally left to make its own decisions, and local shareholders were traditionally passive.
Under a system of cross-shareholding, many big shareholders had a business tie-up with the company ― for example, a bank with a stake in a client or a manufacturer owning part of a supplier.
As Japan's economy declined from the early 1990s, these shareholders sold much of their stock. As share prices plunged, foreign investors bought, gradually increasing their holdings to some 30 percent of Japanese stocks as of the end of March this year.
Many of the activists hope to persuade management to increase dividends and sell off unprofitable divisions. Their proposals at shareholder meetings were defeated this year and last year. Just six companies were targeted with dividend proposals this year, compared with 16 in 2007.
``Foreign investors often cite management's reluctance to distribute profits to shareholders as a reason they are reluctant to invest more in Japan,'' said Park Min-sang, who manages $10 million fund in Japan.
``No one expects a drastic change in Japanese corporate governance anytime soon. But what I want to say is that there are tentative signs companies are showing more attention to investors' demand by pitching up efforts to enhance corporate governance,'' Park added.
In Korea, applying a stricter standards of corporate governance is becoming more important after the nation's biggest conglomerate Samsung Group has recently promised to restructure by abolishing a centralized planning office and gradually to simplify cross-shareholdings.
Insiders say unwinding cross-shareholdings and simplifying the group's complex internal ownership structures may take a considerable length of time ― which is likely to prompt critics to believe that it will be business as usual for Samsung for the time being.
``Similar ambivalence is likely to underpin reform of Korean chaebol specifically and of the economy more generally, given tensions between the drive to protect nationally important businesses and the need to bolster corporate supervision,'' a Samsung employee who works its factory in China said. He asked only to be identified his family name Ahn.
One Global Model?
Despite new regulatory codes and intensifying efforts aim to initiate ``good'' governance practices, it seems highly unlikely a global convergence on one model is possible.
``There was some movement towards U.S. models in the 1990s, however, following the scandals at companies like Enron and WorldCom, other nations became concerned that the U.S. model is flawed,'' Mauro Gullen, a Wharton management professor said on the school's Web site.
``Nations and companies will continue to exhibit local characteristics because different countries have followed varying patterns of economic development,'' he said.
In Asia, corporate structures based on diversified business groups, with cross-shareholding by banks, have propelled national economies out of rice cultivation into sophisticated manufacturing in just a few generations.
Analysts say they are somewhat reluctant to alter a system that has worked so well.
``Investors thrive on differences that are reflected in the balance between risk and return. Some want low-risk secure investments while others may be drawn to higher-risk companies with a greater potential to pay off big.''
