Promoting a more efficient corporate governance model in emerging markets through corporate law.

• Published date: 22 September 2016
• Author: Zhao, Jingchen
• Date: 22 September 2016

ABSTRACT

If we group together corporate governance models in countries with emerging markets, it is worthwhile to consider if reform suggestions could be offered to these counties collectively to address their shared weak points from a legal perspective. This article attempts to find common characteristics in corporate governance models from countries with emerging markets, who suffer from similar problems and challenges. The article traces many dimensions through which corporate governance functions in emerging markets can be characterized, with an emphasis on the legal foundations and responses to problems especially within corporate law, in order to promote the soundness of corporate governance systems measured according to criteria such as accountability, transparency, responsibility, and fairness. Focusing on corporate governance problems arising from state ownership, state control, board independence, and poor stakeholder and minority shareholder protection, several proposals are made at different levels. Hybrid regulatory sources from government legislation and soft law are suggested as appropriate for emerging markets. A series of elements are suggested, although some may have already been enforced individually in certain jurisdictions, including independent directors, employee representatives, more clearly defined directors' duties, especially their duties toward stakeholders, mandatory information disclosure of corporate social responsibility ("CSR") issues, legitimacy of cross-listing, effective auditing, and the appointment of independent external auditors in order to promote corporate governance and respond to inefficiencies in emerging markets.

I. INTRODUCTION

Corporate governance has attracted a great deal of attention over the past two decades as a global topic, with special attention paid to developing countries and emerging markets. This exposure has been driven by financial turmoil and corporate scandals, namely the Asian financial crisis in the late 1990s, scandals across the United States and Europe (including Enron, WorldCom and Ahold), and the recent financial crisis of 2008. It is widely accepted that poor governance quality hinders economic growth, financial market development, and establishment of a sound economic system that fits a jurisdiction. Academic theories concerning typical and classic corporate governance can be divided into two schools of thought, (1) centered on the shareholder primacy norm and stakeholder theory. These theories are typified by the Anglo-American "market orientated" outsider model and the continental European and Japanese "network orientated" insider model. Each has characteristic sets of structural elements, ownership patterns, and strengths and weaknesses. (2) The former is usually characterized by financing though equity, dispersed ownership, active markets for corporate control, and flexible labor markets. (3) In contrast, the latter is usually described in terms of long-term debt finance, ownership by large blockholders, weak markets for corporate control, and rigid labor markets. (4)

Comparing the "communitarian" and "capitalist" systems, corporate governance in emerging markets refers to the systems adopted in countries which are rapidly entering the global market. With the globalization of the world economy, world trade, and multinational corporations, the importance of diversity across various corporate governance models is becoming increasingly important. (5) Corporate governance in emerging markets is playing, or is going to play, a particularly active role in such a diversified context. The jurisdictions which are classified as emerging markets go beyond China, Russia, India, and Brazil and are important global powers creating economic and political waves on a global scale. They include Asian countries such as Thailand, Indonesia, South Korea, the Philippines, and Malaysia, as well as European countries such as Romania, Turkey, Poland, Bulgaria, Russia, and Hungary, and Latin American countries such as Argentina, Mexico, and Chile. (6) It is worth pointing out that it is not accurate to equate countries with emerging markets to developing countries (7) because of the rapid economic growth which enables countries with emerging markets to provide a focus for personal and institutional investors and international corporations--it would be equally misleading to judge by relative income per capita. (8)

It is argued by David Held and Anthony McGrew that "globalization, simply put, denotes the expanding scale, growing magnitude, speeding up and deepening impact of transcontinental flows and patterns of social interaction." (9) As for corporate governance and legal transplant, (10) there is no consensus on how globalization will affect legal reform towards global standards. For example Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer, and Robert W. Vishny conclude that countries with a common law tradition tend to protect investors better than do countries with a civil law tradition. (11) Thomas Clarke and Marie dc la Rama argue that the European and Asian corporate governance systems will converge towards an Anglo-American system with a stronger securities market and higher level of disclosure. (12) Another group of scholars has recognized that a "one size fits all" approach will not work because of path dependence theory. (13) Based on such discussions, countries with emerging markets should avoid simply copying legislation and code implemented in mature markets. The most appropriate and effective regulatory framework will greatly depend on how evolved the market and the legal and governmental institutions are as well as the history and culture that exist in a specific economy, (14) including the shareholding ownership structure that is unique for each nation and brings unique agency problems. The author agrees with the argument of Ozden Deniz that "copying code from one country to another without analyzing the details of a corporate governance system or considering the applicability to a specific country's judicial system or ensuring effective enforcement, will not bring the expected benefit and reform to that country." (15) The corporate governance models in emerging market are still in the developing stage without a certain and clearly predictable end as changing and dynamic hybrid models with characters from both extreme models, which change in line with economic advancement and legal and cultural development.

The post-crisis research has not placed a great deal of focus on emerging markets and even less so on developing countries, and much work still refers to situations in developed countries, in particular the United States and Europe. Furthermore, research often focuses on the relationship between corporate governance and economic development and not on regulation or proposals for legal responses. The purpose of this article is to fill these gaps. Grouping corporate governance frameworks in countries with emerging markets together, it is worthwhile to consider if reform suggestions could be offered to these counties collectively to address their shared weak points from a legal perspective. This article attempts to find common characteristics of corporate governance models in countries with emerging markets. This special economic development stage means that corporate governance in these counties suffers from similar problems and challenges. This article traces many dimensions through which corporate governance functions in emerging markets. However, the emphasis of the article will be on legal foundations and responses to these problems, especially within corporate law, in order to promote the soundness of corporate governance systems measured according to criteria including accountability, transparency, responsibility, and fairness. Therefore, effective corporate governance will lead to greater investment, high growth and greater employment creation; lower costs of capital and associated higher firm valuations; better allocation of resources and better management; lower risk of financial crises; and better relationships with all stakeholders. (16) Current discussions on emerging markets tend to distinguish the business model and governance model in emerging markets and those in development markets, and there is a lack of research on legal responses that could be introduced or improved within emerging markets in order to promote the competitiveness of corporate governance schemes. This article is an original attempt by linking the weaknesses of corporate governance in emerging markets with possible regulatory responses from the domain of corporate law and governance through a combination of both hard law and soft law.

The article is structured as follows. It starts with an introduction to corporate governance in emerging markets, as that determines the scope of the issue in the current economic climate. The article goes on to explore the common characteristics of corporate governance in emerging markets, and argues for the possible weaknesses and problems of these corporate governance models. It does so by proving background on the countries' financial, economic, and institutional environments, including control of companies, political or governance interference, board structure and performance, ownership patterns and stakeholder protection. After analyzing the common problems of corporate governance models in emerging markets, some regulatory reform suggestions will be presented in order to enhance the corporate governance inefficiencies that exist in emerging markets. The author is aware of the limitations of the research, mainly stemming from difficulty in generalizing the findings from one specific country to the others, since optimal governance likely differs between developed and emerging markets as well as between different countries with emerging markets. (17) While selected highly representative examples have been given...