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Corporate Governance and Poverty Reduction [2003] ADBLPRes 10 (31 December 2003)

Corporate Governance and Poverty Reduction

Seeking the “right” model for balanced growth poses a challenge to Asian countries

By Arthur M. Mitchell (amitchell@adb.org)
General Counsel

Corporate governance is at a crossroads. Many developing and emerging economies already recognize that good corporate governance is crucial for sustainable economic development. And many are searching for a new or “right” model to apply to their specific domestic environment.

Over the past decade, focus has been increasing from outside—whether from governments, foreign investors, or multilateral development institutions like the Asian Development Bank (ADB)—on issues related to increased accountability, transparency, and disclosure in corporate governance systems.

Coupled with appropriate management incentives to ensure the discipline required for compliance, a balanced corporate governance system can help distribute wealth to a broader segment of civil society.

While good corporate governance is critical, it is important to realize that it goes hand in hand with public governance reform. Only an integrated approach will ensure a balanced contribution to development. After all, it is not possible to create and run an island of good corporate governance in a sea of poor or underdeveloped public governance.

What influences Asia’s business structures? Social and cultural heritage, through religion and philosophy, stresses loyalty to family. But contemporary Asian legal systems also have roots in western civil and common law legal traditions.

Despite this diversity, however, there are similar challenges. If there is a common denominator, it is the shift away from state-owned enterprises and the monopolies of family-controlled conglomerates to wider ownership; more balanced control; more independent board members; and deeper, more liquid, domestic capital markets.

Reformers currently face much resistance, mostly in convincing traditional businesses that it is ultimately in their best interests to adopt reforms.

The reason for the resistance is simple. Both major developed nation models—the “bank-centric” system (like those in Germany and Japan) and the “market-centric” system (as in the United Kingdom and the United States)—have shown their weaknesses of late. Relationship capitalism in Japan led to a slew of nonperforming loans and a no-growth decade, while the Enron and Worldcom scandals called the US model into question.

egal culture has a huge impact on what is ultimately appropriate for a country. And in building the “right” model for corporate governance, perhaps it is better to study what not to learn from both bankcentric and marketcentric systems.

The key is to ensure that corporate governance reforms in emerging economies do not dampen entrepreneurship, but rather enhance economic development in a more transparent and accountable fashion.

So instead of replicating the financial systems that more prosperous countries developed over many years, Asian countries should focus on several issues.

* While strengthening legal frameworks and institutions, Asian governments must enforce laws equitably, resolving the rule of law deficit (or implementation gap) and build accountable public governance—the precursor to a properly functioning corporate governance regime.
* Bank-centric systems must be reformed to clean up bad debts and nonperforming loans and implement cutting-edge risk management techniques.
* Systemic risks (like the 1997 financial crisis) can be reduced if regulators and investors diversify risks by promoting robust local currency corporate bond markets, among other things, as an alternative to bank financing.

The need remains to convince governments, dominant corporate families, and the traditional “old-boy” domestic business networks that reform must be real and not merely legal lip service to outside pressure or expectations.

They need to be convinced that good corporate governance is truly in their best interests. Good corporate governance expands potential markets, broadens ownership, creates alternate financing options, and—most importantly—will help reduce poverty.