Reform of Corporate Governance of Asias Banking System Following the Asian Financial Crisis A Critical Analysis
In the final analysis, it was primarily the loss in confidence on the part of investors that gave way to declining investments in Malaysia, Indonesia, South Korea and Thailand that contributed to the Asian financial crisis. Investors lost confidence over concerns about satisfactory laws and the legal regimes in each of these Asian countries. In other words, corporate governance within the banking system was the primary target in the aftermath of the Asian financial crisis. Governments of Asia set about implementing reforms aimed at reforming corporate governance within the banking system. This research paper therefore sets out to investigate and explain the significance of corporate governance within the banking system and the corporate governance and reforms of the Republic of Korea, Malaysia, Indonesia and Thailand in the wake of the Asian financial crisis of the 1990s.
The 1997 financial crisis in Asia, particularly in Indonesia, the Republic of Korea, Thailand and Malaysia drew attention to the significance of corporate governance within the financial sector. These four Asian countries suffered the greatest losses during the 1997 financial crisis and contributed to the crisis. It was generally believed that the governance within the banking system was the primary contributing factor to the crisis. The research will therefore set out to critically evaluate the significance of corporate governance within the banking system by reference to the Asian banking system particularly with respect to reformatory responses to the 1997 financial crisis in the region. Particular emphasis is placed on the governance within the banking systems of Indonesia, the Republic of Korea, Thailand and Malaysia.
The first part of this research examines the significance and characteristics of corporate governance within the banking system. This will offer a lead in to the next section which hones in on corporate governance within the banking system of Asia in general. A more specific approach follows by a detailed examination of corporate governance of banks in Indonesia, the Republic of Korea, Thailand and Malaysia. The emphasis is on the weaknesses of the corporate governance of these four Asian jurisdictions in the pre-Asian crisis era and the reforms that followed. Only then will it be possible to offer a critical analysis of the corporate governance reforms of the banking systems in Asia. The four countries are selected because they suffered the greatest losses and share the greatest responsibilities for the Asian financial crisis of the 1990s.
Corporate Governance in the Banking System Its Nature and Significance
The OECD defines corporate governance as involving a number of relations between a companys management and its stakeholders. The standard of governance required of banking institutions is quite high because financial institutions economic diversification and consolidation is entirely important for economic growth. Banks are particularly important because of their role in the operation of the financial system. In the interim banks are confronted with a variety of risks including credit, liquidity, interest rates and markets. Corporate governance of banking systems typically involve supervision and regulation which focuses on risk management. This brings together all of the banks stakeholders which invariably include shareholders, regulators, supervises, managers, internal and external auditors as well as the public who have either a direct or indirect involvement in the financial risk management system.
The significance of corporate governance within the banking system is exemplified by the fact that the moment things go wrong within the banking system, attention immediately turns to corporate governance. In general corporate governance is a system of controls which identifies how rights and duties are distributed among the various actors within a corporation and it delineates the regulatory process and standards by which decisions are made relative to corporate matters. For banks, corporate governance means implementing a regime for the administration of the banks day to day business affairs by virtue of setting objectives and not only monitoring those objectives, but also achieving them.
However, the role of banks in the overall economy makes corporate governance for banks particularly important. Banks make provision for financing for business entities and provide general financing for a wide portion of any given population as well as facilitating systems for payments. Moreover, banks can also make credit available when market conditions are problematic.
Risk management is seen as the key to effective corporate governance in the banking system. Risk management helps to set up processes for identifying, analyzing and mitigating risk that have the potential to help the bank accomplish aims and objectives. Risk management is particularly important in banking system because of the unique manner of banks capital structures. To start with, banks when compared to other financial firms, have entirely restrictive equity. For banks, approximately 90 percent of their funding comes from debt. Secondly, the liabilities of banks are typically deposits which are available to creditors when called for and meanwhile a banks assets are typically in the form of loans with long-term maturity dates. Therefore, by possessing liquidity and issuing liquidity in the form of debts, banks are in a unique position to liquidate the economy.
Risk management is particularly important because the operation of liquid production can result in problems where creditors are concerned. This is because banks only hold limited amounts of deposits in reserve. Several depositors are therefore not able to have their deposits issued at the same time because banks will not have all of the deposits available. Problems will therefore arise in circumstances where a large number of depositors seek to withdraw all of their funds in times where there are fears that the banks reserves are in danger of being depleted.
The significance of corporate governance in banking systems is obvious. Banking operations engage concerns about the banks private interest in respect to owners and public interests in terms of its stability. The banks role within the financial network imposes upon the bank the role of principle-agent. Banks confront the juxtaposition between shareholders and its management. In this regard, shareholders are motivated to increase risk under the auspices of enhancing leverage via increased stakes in equity. Management, on the other hand, is predisposed to manage risks in order to safeguard their own human capital.
It therefore follows that corporate governance in the banking system is entirely important or a number of obvious reasons. First, when a bank fails, failure gives rise to external negatives. Secondly, agency difficulties are exemplified when bank monitoring on the part of depositors and other stakeholders is insufficient. Thirdly, banks function in non-transparent climates giving rise to complicated flows of information. Fourthly, banks are subjected to heavy regulatory processes in that its stakeholders are the regulators. Finally, diverse activities within banks enhance the difficulties associated with agency between insiders and smaller shareholders. As a result, conflicting interests are common place and corporate governance is necessary for striking a fair balance in the frequently occurring circumstances where conflict of interest arise. Corporate governance, responds to the shortfall in contractual obligations and the obligations attributed to stakeholders and for the improvement of information transparency relative to bank information.
Theoretically at least, corporate governance within banking systems generates increased awareness of the objectives and measures of effectiveness in achieving those objectives. Corporate governance is also meant to minimize threats to the banks success and it business operations continuity. Overall, corporate governance in banking systems is designed to ensure effective and efficient returns on investments and market premiums and helps to minimize pressures emanating from investors and critics alike.
Corporate Governance in the Banking System in Asia
The Asian financial crisis in 1997 drew attention to the significance of corporate governance in banking institutions generally. There are a number of reasons why corporate governance in the banking system in Asia as a region comprised mainly of developing economies is important. In developing economies, banks occupy a dominant position in the financial systems of these countries economic growth. Secondly, the financial markets in these economies are typically underdeveloped and banks provide the most significant sources of finance for most of the business organizations. These banks are typically the main receptors for savings and fourthly, a number of banks in developing countries are restructuring to embrace the concept of privatization.
Despite the significance of banks in developing countries, the corporate governance of banks relative to developing countries has received very little attention by researchers. In fact, it was only fairly recently that researchers have turned attention to the corporate governance of banks in developed countries. Whether in the developed or developing nation, banks require a system of regulation that takes into account the interests of the depositor as well as that of the general financial sector.
Asia represents a mix of both developing and developed economies. There are some Asian countries that either equal or exceed the economies of some of North America and Europes more successful economies. Similarly, there are a number of countries in Asia that are characterized as poor. Even so, there is common ground in Asia. For instance there is an intense conglomeration of corporate ownership and there are decidedly weak legal frameworks in Asia.
The concentration of corporate ownership is tied to weak legal frameworks. Claessens and Fan argue that in countries such as those in Asia where property protection laws are weak, it is natural for families to control cooperate ownership. In the absence of reliance on the state, owners gain authority via maximum voting powers and incentives via high cash entitlement rights to enforce contractual arrangements with the diverse stakeholders. However, while diverse ownership creates conflicts of interest between internal stakeholders and external stakeholders, in concentrated ownership conflicts of interest arise between the large shareholder and smaller shareholders which has consequences for agency problems. This has an entrenchment effect where the controlling owner typically decides how to run the company and to distribute profits among the shareholders.
Although minority shareholders may monitory firms in Asia if they have long term large equities, it is not certain if they can effectively challenge controlling owners. Similarly, internal governance has it problems as directors are usually controlled by insiders and rarely if ever have outside influence. For instance corporations in Taiwan are usually regulated by insiders while controlling owners are apt to appoint family members to sit on boards when their respective voting powers are in excess of the firms cash flow rights. However, when the cash flow rights of controlling owners increase, it is likely that family members on boards will decline implying that insider predominance on boards contributes to agency complications as a result of the separation of control and cash flow rights.
China, where state control ownership characterizes much of the corporate structure, corporate governance presents a different governance problem. In one research conducted of 632 Chinese companies that are publically owned, approximately half of the board of directors are appointed by state owners and 30 percent are aligned to other government agencies. Likewise, the presence of minority shareholders and professionals are scarce. The result is a board dominated by politicians with little or no financial or legal knowledge. Moreover, politicians take advantage of their political powers to influence markets and firms within their respective jurisdictions. In this regard, rent-seeking transactions are prevalent and professionalism is not in demand as it might disclose information that could expose the rent seeking transactions.
In a study conducted by the Asian Development Bank of four economies in Asia, namely Indonesia, the Republic of Korea, Malaysia and Thailand, it was found that corporate governance in these banks corresponds with the problems identified above. Specifically it was found that ownership is concentrated in approximately 70 percent of the banks and controlled by either families, foreign firms or governments. It was also found that politicians are heavily involved in the banks governance constructs. A number of banks are not governed by professionals and bank governance typically corresponds with ownership controls. Moreover, banks have a tendency to take on governance constructs that pander to controlling ownership.
In trying to identify the underlying factors that led to the financial crisis in Asia in 1997, a number of theories have emerged. One theory coming out of the US is that the crises was due to unsatisfactory economic policies complicated by incompetent or inappropriate governance of the original depreciation. Another theory attributes the crisis to the International Monetary Funds demands that interest rates be increased and that some banks be closed. Yet another theory suggests that the financial crisis was brought about as a result of improbable government guarantees. Each of these theories have one thing in common. They each suggest that whatever happened to contribute to the Asian financial crisis, one thing is certain, they each reflect a loss of confidence on the part of domestic and non-domestic investors. This loss of confidence emanated from weak legal frameworks relative to corporate governance.
In this regard, corporate governance in Asia was such that it was ineffective for preventing expropriation of minority shareholders. In essence, when managements expropriation goes up as the anticipated investment returns drops, negative shocks to investor confidence will automatically give way to more frequent expropriation and declines in capital inflows as well as increases in attempts at capital outflows. The result is a decline in stock prices and exchange rate depreciation.
The cases of expropriation on the part of managers in Asia during the financial crisis of 1997 are well documented. For instance the Bangkok Bank of Commerce in Thailand saw funds being moved to offshore locations in a manner that corresponded with losses. Hong Kong creditors with businesses in mainland China were not able to recover loan payments. Korean minority shareholders challenged the transfer of assets from large firms. The fact is, each of these cases demonstrate that management had the capacity to transfer funds and assets simply because they were also controlling owners. This is indicative of weak protection of minority shareholders and creditors and this goes to the heart of corporate governance.
Following the Asian financial crisis banking reform has honed in on regulating poorly performing loans, consolidation of banking institutions and recapitalization together with emphasizing legal and regulatory reformation and restructuring. After the Asian financial crisis of 1997, the Asian Development Bank Institute (ADBI) conducted a robust study on corporate governance in the four countries which suffered the greatest losses. As previously noted, the fours Asian countries are Republic of Korea, Malaysia, Indonesia and Thailand. The corporate governance and reforms of each of these jurisdictions are discussed below.
Corporate Governance of Banks in Malaysia
Malaysia had always been regarded as regulating a safe banking and financial system having followed the Basle Core Principles of Effective Banking. The Basle Core Principles of Effective Banking was a result of the G-10 summit in Basel in 1988. There are essentially 25 core principles and they relate primarily to supervision such as adequate capital, reserves for loan losses, concentration of assets, risk management, internal controls and liquidity. The emphasis was on the degree of responsibility banks must assume for risk management. However, the Asian financial crisis of 1997 exposed the gulf between concepts of governance and its adoption and practices.
According to the International Monetary Fund, the Asian crisis was catapulted as a result of weaknesses in domestic policy. Large deficits in current accounts demonstrated this with the focus on bank loans in realty as well as the financing of purchases of shares. Evidence of weaknesses in domestic policy was also evidenced in the financial system via weak governance and weak risk management. Additionally, there was far too much borrowing by the corporate sector from international sources.
The World Bank was of the opinion that the Asian financial crisis was brought about by a vulnerable banking system that was characterized by weak risk management and excessive lending. Weak risk management was a result of poor corporate governance and constraints on risk management technology investment. Excessive lending was a result of concentrated ownership of banks and corporations, poor bank regulations enforcements and state lending demands. Ultimately these factors would come together to cause a significant amount of stagnant loans and insolvency among financial organizations.
A common thread runs throughout both the World Bank and the International Monetary Funds assessment of the Asian financial crisis. The common thread is poor corporate governance. It is therefore not surprising that Malaysia, like the rest of the jurisdictions in East Asia would turn its attention toward strengthening corporate governance in the aftermath of the Asian financial crisis.
Corporate governance reform in Malaysia was promulgated via the Malaysian Code on Corporate Governance by Finance Committee on Corporate Governance, Capital Market Master Plan (CMP) by Securities Commission and Financial Sector Master Plan (FSMP) by Bank Negara Malaysia within the financial sector. The Malaysian Code on Corporate Governance 1998 established a Finance Committee on Corporate Governance which is comprised of industry and government alike. The Committee released a report in 2000 which contained four significant principles. These principles are board of directors, remuneration for directors, shareholders and accountability together with auditing. Malaysian companies are required to apply these principles in the management and operation of their businesses.
The CMP was launched in 2001and its primary objective is to mobilize and allocate funds with a certain level of confidence for market participants. This objective is to be achieved through good corporate governance. The CMP contains a compulsory provision for disclosing compliance with the Malaysian Code on Corporate Governance on the part of listed companies. The FSMP was launched a month after the CMP by the Bank Negara Malaysia and focuses on promoting resiliency, competition and dynamic financial systems that promote economic and technological development. Corporate governance is covered by the FSMPs recommendation that shareholder and consumers are active in the regulatory process and financing in the priority sector. Other corporate governance reforms are noted in the FSMPs recommendations requiring the implementation of committees, transparency and unambiguous warning systems as well as the promotion of mergers among banking organizations and the establishment of an insurance fund for deposits.
Institutional development in the aftermath of the Asian financial crisis is also another method for improving corporate governance in Malaysia. Institutional developments came by virtue of the implementation of the Malaysian Institute of Corporate Governance (MICG) and the Minority Shareholders Watchdog Group (MSWG). The MICG was launched in March 1998 and is a non-profit public company founded by the Federation of Public Listed Companies, the Malaysian Institute of Accountants, the Malaysian Association of Certified Public Accountants, the Malaysian Institute of Chartered Secretaries and Administrators and the Malaysian Institute of Directors. The MICG is committed to effecting the development of corporations and businesses in Malaysia via enhanced best practices in corporate governance.
From 1998 to 2003, Malaysias Central Bank has taken significant steps toward revising and improving guidelines for the regulating of the financial market via improved disclosure and transparency with respect to information within the banking sector. However, history dictates that regulatory initiatives are insufficient for mitigating the incidents of moral hazard and excessive risk taking. Even so, Malaysias Central Bank has made significant progress in the aftermath of the Asian financial crisis in revising its guidelines for ensuring that policies are consistent with the changes that occur within the financial and banking industries. Likewise, domestic banks have evolved to such an extent that they are making corporate governance a priority in terms of decision making and conducting the business affairs of banks. Measures have been taken by banks to improve and validate boards in their constructs and compositions.
The MSWG was set up to ensure that companies adhere to corporate governance principles and to heighten minority shareholders awareness of their rights and how to go about enforcing those rights. Committee members emanate from government fund organizations including the Employees Provident Funds, Armed Forces Fund Authority, Pilgrims Fund Board, Social Security Organization and Permodalan Nasional Berhad.
Although, corporate governance in the Malaysian reform initiatives acknowledge the rights and authority of shareholders, these rights and authority remain subordinate to government laws. What this means is that the rights and authority vested in principal and agent within a company depends on the extent to which the government intervenes. In this regard, the government is actually the controller of the company relative to laws or policies promulgated under the corporate governance rules and regulations. Moreover, financial institutions play a significant role in the corporate governance enforcement process. Therefore a stable financial institution will give way to a stable company. Even so, difficulties may arise in circumstances where the financial institution is owned by the government. In these kinds of circumstances the government is in a position to control the company by virtue of both economic policies and corporate laws and regulations.
Concentrated ownership, as noted previously contributed to weak corporate governance constructs in Asia in general. The issue of concentrated ownership was addressed by FSMP which emphasizes the significance of institutional and foreign ownership and placing restraints on individual as well as family ownership of banking institutions and like businesses. The CMP goes further to mandate the ownership of equity for future brokerage businesses be reformed so as to permit ownership by a foreign majority. It was also announced later on that foreign actors would be permitted to own up to 100 percent of a brokerage firms equity. Moreover, corporations may only own 20 percent of the equity in a banking institution while individuals may only own 10 percent of the equity.
Additional corporate governance reforms in Malaysia include the introduction of a new mandate for the board of directors. In this regard, the board is charged with the responsibility for ensuring that management conduct themselves in a manner that provides the best returns for shareholders. Moreover, the Bursa Malaysias 2002 listing criteria restrict the individuals number of directorship. A director is only permitted to have 10 directorships in a listed company and 15 directorships in companies that are not listed. The idea it to ensure that the director is not inundated with commitments and that his or her time can be put to more productive use.
The Malaysian Code on Corporate Governance 2000, also requires that there be a balance of authority between the Chairman and the Chief Executive Officer. The idea is to prevent an individual having autonomous authority in the decision making process. It is therefore important that no one individual maintains both positions. Other improvements in corporate governance include the admission of outsiders to the board and the admission of professions to the board. Both moves are intended to ensure the board of directors fosters some semblance of independence and neutrality.
It is obvious that Malaysia has turned its attention to strengthening corporate governance within the banking system. It has targeted a number of the weak areas that gave rise to the loss of investor confidence, the catalyst of the 1997 Asian financial crisis. Whether or not these reforms will effectively transfer into practice will only be known in time. This is because these reforms are relatively new and are essentially a work in progress.
Corporate Governance of Banks in the Republic of Korea
Prior to the 1997 crisis corporate governance of the banks in the Republic of Korea was characterized as inefficient. Reforms within corporate governance which focused on transparency and meeting global standards of banking compliance is believed to be primarily responsible for the Republic of Koreas financial recovery. In short, the government of Korea has emphasized improving corporate governance. In the interim there have been enhancements both institutionally and legally accompanied by debate and civic groups pressure and examples by model corporations relative to improving corporate governance. Still, there is room for improvement.
In the thirty years leading up to the Asian financial crisis in 1997, Korea evolved as Asias second largest financial market. At the core of this economic growth was a banking system controlled by the government which essentially channeled consumer savings into a capital base for a minority of business firms referred to as chaebols. Chaebols are ownership structures where Korean corporations are owned by virtue of conglomerates (chaebols). Chaebols were the beneficiaries of preferential treatment which included business license access, foreign investor and import protection and cheap credit from state controlled banks. Moreover, the government managed interest rates but at the same time placed constraints on the sectors and corporations that banks could finance and encouraged savings by consumers.
During this period, Korean banks were responsible for more than 50 percent of the countrys financial assets or at least US863 billion by 1997. Even so, management within the banking sector was described as weak during the period leading up to 1997. Weak management was primarily a result of dependence on chaebols and government as well as poor bank supervision. Many of the consequences of weak bank management were manifested in the poor orientation of profit, weak supervision and regulatory processed, fragmentation of industry, insufficient risk assessment and management and very little innovation relative to production and service provision.
Caught by strict government control under a government committed to supply oriented economic policies, a majority of Koreas banks were not tailored to pander to the needs of retail consumers or profit returns for shareholders. Instead, banks were primarily tailored to transform savings from households to cost friendly financing for specific industries and corporations. In this regard, the Korean government commanded that banks issue lower interest policy loans and purchase bonds at a significantly reduced rate. Additionally, banks were rewarded for loan surpluses rather than profit margins. With a damper on bank autonomy and little focus on profits, financial and management weakness was a natural consequence.
In the aftermath of the 1997Asian financial crisis, Korea market actors moved for reforms and improved their own efficiency. These initiatives have contributed to Koreas economic recovery at a more rapid pace than anywhere else in Asia. The Korean government also implemented policy changes within the finance system that liberalized interest rates, relaxed finance industry development and expanded financial institutions business areas. Even so, the changes in company ownership constructs have not been fast enough nor have government control been relaxed enough.
The most important corporate governance laws in Korea are the Commercial Code, the Securities and Exchange Act (SEA), Act on External Audit of Stock Companies and Listing Rules. Both the Commercial Code and the SEA have been amended a number of times following the Asian financial crisis of 1997. These amendments are reflective of significant reconstruction which are compiled in the Memorandum of Understanding which are co-signed with the International Monetary Fund and the International Bank for Reconstruction and Development. The Commercial Code together with the SEA have stressed the promotion of corporate management efficiency, transparency and emphasizing the rights of minority shareholding.
Directorship has changed so that directors are appointed at the general meeting of shareholders and are required to be at least three in number unless the companys total share capital is below W500,000,000. Directors liabilities and obligations have also been implemented so that they are required to be faithful and to adhere to confidentiality considerations. In the event a directors conduct causes damages to the company, shareholders with a total of 1 percent outstanding shareholding may initiate proceedings against that director.
The Commercial Code regulates audit committees and requires that no less than three directors sit on the audit committee. Moreover, directors affiliated with the companys business shall not occupy more than one-third of the committee. In order to facilitate independence, the audit committees chairperson is required to be a non-executive director.
The amended laws also turned attention to heightening awareness of and strengthening shareholders rights and obligations. In this regard, shareholders are entitled to notice of all general meetings. They also have the right to use proxies with respect to their voting authorities. Similarly, minority shareholders rights and duties have also been enhanced. As previously noted, minority shareholders can initiate action against a director for damages to the company. In addition, minority shareholders with a shareholding of at least 0.5 percent of the shares for at least 6 months may request directors, auditors or liquidators dismissal. A 0.5 percent minority shareholding may also obtain injunctive relief with respect to the illegal act of a director or directors. Minority shareholders with no less than 0.1 percent of shares for over 6 months have the right to inspect company books and other documents. Minority shareholding of at least 3 percent may also convene general meetings of the shareholder or demand appointment of auditors. Minority shareholders with 1 percent of shares may also make proposals. These rights apply to listed companies and are slightly altered in terms of percentage of shares for larger companies and general companies.
In order to enhance post-crisis regulatory systems, the government set up two primary regulatory organizations namely the Ministry of Finance and Economy (MOFE) and the Financial Supervisory Commission (FSC). The Korean Securities and Futures Commission as well as the Financial Supervisory Services fall under the supervision of the FSC. The MOFE is responsible for setting principles and directions for the countrys economic policy. The FSCs primary responsibility is regulating the Financial Supervisory Services. The primary role of the Securities and Futures Commission is to follow up on recommendations by the FSC. Invariably these recommendations include investigating suspicions of unfair securities and futures markets dealing, companies accounting and audits standards and managing and supervising securities.
Self-regulatory organizations were also set up in the aftermath of the Asian financial crisis. Among the self-regulatory organizations are the Korea Stock Exchange (KSE), the Korea Securities Dealers Association and the Korea Listed Companies Association. The Korea Securities Dealers Association set up the KOSDAQ Market for the purpose of performing functions relative to the operations of the market such as disclosing listed companies, executing transactions and actions like suspending trading. The KSE was set up to regulate fair pricing and for the protection of investors. In this regard, the KSE makes information relative to corporations available, monitors alleged unfair dealings and monitors trading in general. KSE reports its findings to the FSC who in turn may take action accordingly.
The Korea Listed Companies Association was established by the Securities and Exchange Law to deal with securities issues. Its primary responsibilities are to recommend modifications that improve the corporate and securities systems including training processes. The Korea Listed Companies Association also provides a list of within the banking system and makes recommendations for non-executive directors. The Korea Corporate Governance Service was also set up by the KSE for the purpose of making provision for analysis so that corporate governance is a prominent focus for Koreas listed companies.
Although the FSS performs investigations, those powers are constrained and the investigative powers relative to financial institutions are conducted by the Securities and Futures Commission under the auspices of the FSC. The FSS may take action upon completing an investigation and action can include the termination of a business license or registration, suspension of a business either partially or entirely, business closure andor issue warnings. Persons may also be indicted and therefore face criminal prosecution. However, between 2000 and 2001 only two investigations resulted in partial suspension of businesses, four in cautions, and nine in punitive action by the FSS. All indications are therefore that only a small degree of enforcement exist in Korea.
Other post-Asian financial reforms in Korea relate to transparency via disclosure and information sharing. For instance the FSC has the last word on the implementation, modification and construction of the Korean Accounting Standards (KAS) as well as the Korean Standards on Auditing. In 1998, immediately following the Asian financial crisis the FSC made a number of substantial amendments to the Korean Financial Accounting Standards and the Korean Standards on Auditing so that auditing and accounting standards in the country were consistent with international standards.
Ownership of banks in Korea changed substantially following the Asian financial crisis. Although prior to the crisis a significant amount of privatization had taken place, during the crisis, the government injected significant funds in Koreas failing banks and this situation had to be rectified quickly. Ultimately the Korean government acquired total control of at least seven Korean banks. A system of acquisitions and mergers were utilized for privatization. The Ministry of Finance and Economy encouraged five banks to acquire the holdings and liabilities of these failed banks and the mergers and acquisitions were completed by mid 1998. This process was compulsory, but by 1999 voluntary mergers and acquisitions took place.
Prior to the financial crisis, the Korean government had placed significant restrictions on foreign ownership of shares in Korean corporations. However, by virtue of the Foreign Investment Promotion Act 1998, significant steps were taken to reduce those obstacles. For instance the 4 percent limitation on foreign holdings in Korean financial institutions was removed. This led to an increase of foreign ownership in domestic banks which increased the stakes and the degree of foreign management of Koreas banks.
Specific management laws were implemented to ensure that Koreas banks improved its corporate governance. The Banking Act was amended in 2000 mandating that all banks appoint external directors and auditors during the annual meetings of the shareholders. Moreover, banks were required to set up internal standards for control and management as well as staff and for the appointment of a compliance officers charged with responsibility for examining and monitoring compliance. In line with this change, the FSS provides a meticulous set of principles for the promotion of effective and efficient operations by directors, auditors and compliance officials. For example, banks must appoint at least three directors, half of which must be external directors. Banks are also required to have at least two compliance officers whose primary job is to detect and prevent illegal conduct so as to help the board and management.
Two surveys were distributed for the purpose of obtaining information relative to corporate governance within the banking system. One survey was distributed in 2000 by the Korea Institute of Finance together with the FSS and McKinsey. The participants were comprised of 72 external directors and 56 executive directors from at least 15 banks. The survey illustrated that corporate governance among Koreas banks had improved significantly. The second survey took place in 2004 and was conducted by the ADBI and involved a survey of 14 banks in Korea. 41 external directors and 12 executive directors took part in the survey. This survey also reflected satisfaction with corporate governance improvements among Koreas banks.
Although there is room for improvement, corporate governance of Koreas banks has been improved with relatively satisfactory results. There have been significant increases in Koreas banks profitability since 2001. However, insolvent corporate loans continue to be a problem as well as consumer loans. Banks have responded by putting aside provisions for bad debts. Even so, the improvement in Koreas banks profitability at the very least indicate that improving corporate governance of banks is the right approach to take. At worst, Koreas situation indicates that corporate governance improvements within Koreas banking system has more work to be done. In the meantime corporate governance reforms is at least on the right track.
Corporate Governance of Banks in Thailand
Thailands banking industry is among the countrys most important industries with the result that the banking sector is far bigger than the countrys stock market. Thailands corporate governance of its banks was disadvantaged by incidents of corruption and poor risk management systems. Government intervention was also a contributing factor. In the wake of the 1997 Asian Crisis, Thailand was able to recover as a result of massive restructuring.
With the onset of the Asian financial crisis in Thailand, it was immediately assumed that Thailands issues were a result of currency crisis. On an entirely superficial level, this is indeed what contributed to the Asian financial crisis of 1997, however, when one goes below the surface, a number of underlying problems are discovered and Thailand is no exception. In Thailand, the general consensus is that within its financial system, transparency shortfalls permitted financial businesses to function with little respect for legal technicalities. Rather the relationship-capitalism, a business environment which depended on long-term relations between family elite ownership and government was the primary trait of the corporate constructs.
This relationship-capitalism was quite common across Asia and typically played out via government granting licenses at the exclusion of others to elite family businesses therefore distorting the principles of fair competition. Another problem was created by the indiscriminate provision of loans to the elite without first determining the ability to satisfy those loans. Moreover, business was conducted in the absence of neutral or independent supervision outside of the supervision of conventional regulatory bodies with the result that corporate governance of banks and businesses in Asia in general were inherently flawed.
It is argued however, that the financial crisis in Thailand was primarily brought about as a result of unsound macroeconomic policies and imbalances and the overutilization of short-term foreign currency-denominated loans as opposed to poor corporate governance constructs. Be that as it may, the financial crisis did expose fundamental problems in Thailands corporate governance system in terms of practices that were not heeded in the past. Some argue that the flaws in the corporate governance practices in Thailand emanate from a lack of disclosure and transparency models. Researchers in the field are largely agreed that there were two primary contributing factors to Thailands financial crisis. First there was the concentration of ownership among large corporations. Secondly, the corporate governance system was entirely opaque or lacking in transparency.
Thailands responses to the financial crisis involved major reconstruction by the government and Thailands banks. Nationally, the government introduced a number of measures calculated to enhance the capacity of the central bank to monitor and supervise the financial sector and to improve corporate governance. The banks themselves conducted restructuring which included the termination of bad loans and the introduction of improved corporate governance and risk management processes.
The first step taken by the Thai government was the implementation of a blanket guarantee in August 1997 as a means of regaining confidence in its banking sector. The Bank of Thailand also amended the rules relating to the establishment of fund adequacy and for defining non-performing loans provision. In order to make the financial sector effective once again and to improve transparency and competitiveness, the Thai government introduced improvements in the prudential constructs and a supervisory framework. In 1997 and 1998, a number of amendments were made to the Bank of Thailand, banking generally and finance systems laws so that authorities were in a position to act quickly in respect of failing financial systems.
By October 1997, Thailands government introduced a robust reconstruction framework for the banking and related sectors. This plan for reconstruction included the establishing of the Financial Sector Restructuring Authority (FRA) and asset management companies (AMCs) for the purpose of providing a regime for regulating the disposition of assets of failing financial systems and for restoring the financial sector. Plans were also announced for the introduction of international standards for regulating the classification and provision of loans as well as for accrual of interests. Plans were also announced for establishing an insurance system for deposits.
These plans for reconstruction of the banking and financial sector went into effect in August 1998 under the 14 August 1998 Program which resolved six banks via government intervention. The Thai Asset Management Company (TAMC) was set up in June 2001 for the purpose of cleaning up Thais banks balances by the taking over of national banks. The TAMC was implemented to resolve the issue of poor bank assets that had been transferred to AMCs from state-owned financial sectors. Additionally, the TAMC also covered poor loans within the private banking sector. In covering bad loans, enforcement by virtue of collection powers were conferred upon the TAMC.
The banks ownership regime was also targeted by the Thai government. By virtue of the Commercial Bank Act 1962 an individual was authorized to hold a maximum of 5 percent shares in commercial banks. Yet there were no limitations on the share percentage for the Crown Property Bureau or other relevant government units. Similarly, foreigners could only hold up to 25 percent of the commercial banks shares. Following the 1997 financial crisis the restrictions on foreign ownership changed to permit foreigner to own up to 100 percent of commercial banks shares for up to 10 years.
In the immediate aftermath of the 1997 crisis a majority of Thais banks shares were owned by families. However, with the restructuring of the banking system in Thailand in response to the 1997 financial crisis, this ownership by families decreased significantly. Even so, the concentrated ownership of banks became more pronounced in the wake of the 1997 financial crisis as the government nationalized a number of banks. Likewise, banks acquired by foreigners also reflected a large degree of concentration in that regard.
Corporate governance was targeted in a far more direct way however. In February 2002, the National Corporate Governance Committee (NCGC) was created for the introduction of policies aimed at enhancing corporate governance. Six sub-committees were therefore established by the NCGC. One such sub-committee was the Sub-Committee on the Enhancement of Corporate Governance in Commercial Banks, Finance Companies and Insurance Companies. Additionally, the Thai government introduced a number of guidelines and regulatory processes for improving banks corporate governance.
In March 2002 guidelines appeared in the Bank of Thailands Financial Institution Directors Handbook. The fiduciary duties of the directors were enunciated together with policies and monitoring guidelines for supervising management taking account of stakeholders expectations. The handbook also clarified a regulatory regime for the duty of care, breach of which could result in criminal liability for directors. In December of the same year, the Bank of Thailand published guidelines and regulations for the qualifications, duties and the compositin of the board of directors as well as the sub-committees attached to banks. Under these guidelines a bank is required to have a minimum of 9 d board members and one third is required to be non-executives. Independent directors must comprise at least three board members or one fourth, whichever is highest.
External and neutral directors are required to be individuals who are not employed by the bank do not have relatives occupying top executive positions or are major bank shareholders, do not own 0.5 percent or more of the banks shareholding and do not have an interest in the bank or in the interests of major shareholders of the bank. Moreover, directors may not be appointed politically. Nor may they be members of the financial supervision bodies nor may they be individuals who have been dismissed from public offices as a result of mismanagement or fraudulent conduct. Directors are also prohibited from serving on more than one bank board at the same time. Directors are also not allowed to serve as executives of more than three business entities while sitting on a banks board. The guidelines also require that directors participate in at least half of the banks yearly board meetings.
The Bank of Thailand also mandated that banks establish risk management and audit committees. The audit committee is required to have a minimum of three members and two must be independent. The committees chair must not serve on any other committee. The risk management committee must contain a minimum of five members who can be members of the banks board or from among the banks top managers. The chairman is required to be the banks chief executive officer.
The Bank of Thailand also targeted the qualifications of the senior bank management. Previously, under the Commercial Banking Act 1979, the banks top management could not serve if heshe had been removed from public office as result of fraud or bankruptcy. In 1997, the Bank of Thailand added that in addition to these disqualifications, top management is required to have at least five years experience in senior management at a financial institution of good standing. Additionally, banks top management must be in possession of a sound ethical business history with a good record and no previous custodial sentences.
In May 2001, the Bank of Thailand also targeted transparency and disclosure requirements as a means of improving the banking systems corporate governance. In this regard, banks are required to make a number of monthly detailed disclosures. These disclosures include transactions relative to senior bank managements and companies where they possess a minimum of 10 percent of the relevant shareholding. Banks are also required to disclose both financial and non-financial remuneration given to directors as well as senior management non-performing loans loans to connected personsparties and breaches of the Bank of Thailands regulations and any corresponding fines.
The Bank of Thailand issued guidelines for improving the effectiveness of internal auditing processes in October of 2001. These guidelines included reporting criteria, the auditing process and internal auditors duties. The guidelines are also applicable to group-wide internal auditor or an out-sourcee of such duty of a bank. Additionally internal auditors are requested to use other guidelines applicable to internal controls that are provided by other bodies like the Institute of Internal Auditors, the Committee of Sponsoring Organizations of the Treadway Commission, the Stock Exchange of Thailand and the Institute of Certified Accountants and Auditors of Thailand.
The Accounting Act 2000 was implemented with a view to improving accounting standards and closely mirrors that International Accounting Standard. All companies functioning in Thailand are required to adhere to the new statutory accounting standards. Failure to do so will result in penalties. The Bank of Thailand also provides that all financial statements are required to be certified by external auditors who have been previously approved by the Bank of Thailand. Additionally, the Bank of Thailand requires that a bank may not use the same auditor for a period exceeding five years. In addition, external auditors must make annual reports on a banks internal control system, the competency of the banks internal auditors and any suspicious lending history.
The restructuring of Thailands banking system is aimed at reconstructing ownership, management and supervision of the banking systems primary participants. It also aims at taking into account the wider interest of all stakeholders including the public by making internal and external controls more transparent and accountable. Some of these changes have only occurred in the early part of the 21st century. Therefore reforms aimed at improving corporate governance in Thailands banking system remains a work in progress. It is anticipated that more changes are afoot as Thailand copes with and adjusts to changing financial environments. This is particularly so since ownership restructuring has rather than removed concentration of ownership, has transferred it from family ownership to foreign and government ownership. As explained throughout this paper thus far, concentration of ownership was one of the primary contributing factors to the weakening of corporate governance and in large part facilitated the financial crisis of 1997.
Corporate Governance of Banks in Indonesia
Prior to the 1997 Asian financial crisis Indonesias Company Law Act 1995 provided the primary legislative regime for corporate governance. Previously the Commercial Code of 1847 regulated corporate governance. Banks were specifically regulated by the Banking Law 1992. In short, policy reforms in Indonesia between 1983 and 1992 effected the dismantling of interest rates controls, controls on lending and branch expansion as well as the removal of obstacles to entry. The decimation of loan subsidy processes which were funded by the central bank corresponded with these reforms. Private banks were able to take over the market share from the less efficient and less customer-oriented public banks. Despite these reforms, Indonesia was hit hard by the Asian financial crisis and further reforms were necessitated.
It is generally agreed that it was these bank deregulation reforms prior to the 1997 financial crisis that caused Indonesias financial crisis. Regardless, by 1998 confidence in Indonesias banking sector had fallen dramatically, so much so that the banks liquidity was adversely impacted. In response, Indonesias officials established the Indonesian Bank Restructuring Agency (IBRA) for the purpose of restructuring failing banks and for the management of these banks assets. By August of the same year at least 54 of Indonesias 222 banks were under the supervision of IBRA. By year end the IBRA had control of approximately 70 percent of all of Indonesias banks. In other words, private banks diminished significantly as a result of the financial crisis of 1997.
Serious structural weaknesses within Indonesias banking sector were revealed as a result of the 1997 Asian financial crisis. Previously banks were regulated by the Banking Law 1992 which had reformed Indonesias banking system. This Act was amended in 1998 in response to the crisis so that banking in Indonesia is under the supervision of Bank Indonesia, the countrys central bank. As noted above, failing banks were transferred to the supervision of the IBRA.
Under the new Banking Law 1998, only two types of banks are permitted in Indonesia. These banks are general banks and peoples credit banks. General banks are able to operate as limited liability companies and fall under the Company Law 1995. General banks can be state, private or other types of commercial banks such as foreign or joint-venture banking systems.
Under the Banking Law 1992, the legal lending limit also known as 3L rule which was a lending limit imposed by the central bank on occasion. The Banking Law 1998 introduced a prohibition against banks going over the relevant 3L rule. In the event a shareholder has a part in getting a bank to go over the 3L rule, that shareholder faces a custodial sentence of between 7 and 15 years as well as a substantial fine. Additionally, amendments made by virtue of the Banking Law 1998 levied more onerous duties on banks to monitor both the capacity and intention of those applying for loans with respect to their ability to repay those loans with a view to safeguarding against bad and multiple debts. The Banking Law 1998 also introduced a deposit insurance scheme requiring Indonesias banks to make provision for insurance schemes to protect those who deposit funds in the bank.
Another important change under the Banking Law 1998 was the central banks supervisory role. Licenses which had been issued to bankers by the Minister of Finance in consultation with the central bank are now issued solely by the central bank. In addition to having the capacity to order interim audits and bank inspections, the central bank may now appoint external public accountants to audit banks on behalf of the central bank. Ultimately, what this means is that government intervention has been reduced. Instead of relegating control of banks to the Minister of Finance and the Department of Finance, much of their responsibilities have been transferred to the central bank. The Bank Indonesia Law 1999 made provision for the creation of a new independent financial services supervisory organization by December 31, 2002 so that the central bank may transfer its supervision to that entity.
As for corporate governance generally, corporate ownership in Indonesia is dominated by conglomerates. Conglomerates are big business entities with a number of businesses and subsidiaries which provide a variety of products. Some of their businesses include banking. Indonesian conglomerates typically function via corporations and as a whole control a significant part of the economics in Indonesia. However, conglomerates have grown to have poor reputations in Indonesia with perceptions of unfairly obtained wealth. These conglomerates are typically monopolistic or oligopolistic.
Cronyism is another derogatory term associated with Indonesian corporate climate during the 1990s. Cronyism became a popular term in Asia during the 1980s when Marcos ruled in the Philippines. Ten years later it was the term used to characterized the corruption which is alleged to have caused or at the very least worsened the financial crisis. Even so, according to Christianto Wibison, the head of the Indonesian Business Data Centre maintains that there are essentially three types of conglomerates in Indonesia. They are authentic conglomerates who operate in a clime of fair competition crony conglomerates which survive on cronyism and bureaucratic conglomerates which are under state control or are affiliated with the state.
Complicating matters, family corporate ownership, particularly within conglomerates is also a problem in Indonesia. The problem with this kind of dominance in family ownership is that it makes it difficult to strike a fair balance between control and ownership which is one of the key legal characteristics of the corporation. Realistically, this will have unhealthy consequences for the effectiveness and authenticity of corporate governance. In order to deal with the problem of conglomerate and family ownership the IBRA and Indonesias government privatized a number of banks that had been rescued and state banks by selling shares to the public and private investors.
Understandably, corporate governance was a key feature of reform following the Asian financial crisis of 1977 by the Indonesian government. Corporate governance was in fact a new concept for Indonesia to the extent that it did not have a specific term during 1999 to 2000. In August 1999, the National Committee on Corporate Governance (KNCG) was created. The KNCGs aim is to make recommendations for a domestic regime for introducing good corporate governance throughout Indonesia. This included preparation of a Code for Good Corporate Governance and making suggestions for reforms capable of complimenting the Code.
The Code was issued in March 2001 and is comprised of 13 chapters. Provisions are made for the duties and rights of shareholders, the board of commissioners, the board of directors, auditing systems, shareholders and corporate secretaries and provisions defining disclosure, confidentiality, insider dealing, business ethics and corruption. By 2003 the KNCG prepared an Indonesian Banking Sector code as supplementary to the KNCG. In the Indonesian Banking Sector Code, banking corporate governance is characterized by five factors.
The first factor is fairness. In perpetuating fairness, Indonesian banks are required to take into account the interest of all of its stakeholders in a manner that corresponds with concepts of equality. Banks are also directed to ensure that all of its stake holders have the opportunity to have an input and to make comments as well as access to information based on the principle of transparency. The second salient feature is transparency under which banks are required to make information readily available promptly and for the information to be clear and adequate. The information revealed should include everything connected to vision, mission, business aims, strategies, finances, management, compensation, shareholding, officers, risk management and good corporate governance policies as well as any other matter that effects the management of the bank.
The third factor targets accountability. In this regard banks are urged to establish unambiguous duties for each of their division and that those duties correspond with the vision, mission, objective and strategies of the bank. Banks are also urged to ascertain that each of their divisions are possessed of the competence necessary for carrying out their designated duties and are aware of the significance of those duties in comporting with good corporate governance systems. Banks are also urged to establish a system of checks and balances among the banks management and to measure the effectiveness of performances in the ambit of the banks values, objectives and strategies under a reward and penalization process.
The fourth factor is responsibility and accordingly banks are urged to implement prudential banking systems and make sure that the level of adherence comports with current rules and regulations. Banks are also required to conduct themselves as good corporate citizens who take account of the environment and social responsibilities. The fifth factor is independence under which banks are required to prevent improper domination by stakeholders and to avoid conflicts of interest.
The Banking Code also lays out a Governance Structure and Mechanisms which cover shareholders. Although bank shareholders have the same duties and rights as those of corporate shareholders, there are a number of differences. For instance, those holding controlling shares must be fit and proper on terms and conditions set by Bank Indonesia. Similarly, members of the both the board of commissioners and the board of directors are all required to satisfy Bank Indonesias fit and proper requirements. Perspective members of both boards are nominated by a nomination committee and are subsequently approved by the shareholders in a general meeting.
Under the Banking Codes Governance Structure and Mechanisms the internal auditor is appointed by the board of directors and approved by the board of commissioners and once appointed must be reported to Bank Indonesia. While the internal auditor reports to the board of directors it also works in coordination with the board of commissioners and the audit committee. The audit committee works with both the internal and external auditors with respect to financial reporting, particularly when preparing financial statements. This coordination is obviated by the fact that the audit committee must ascertain the efficiency of internal management and control relative to prudential banking policies and practices as well as adherence to the standards for auditing and the satisfactory follow-up on the results of an audit.
The Banking Codes Governance Structure and Mechanisms also provide for the placing of compliance officers within Indonesias banks. These compliance officers are charged with the responsibility for ensuring that the bank conducts its business in a manner consistent with laws, regulations, Bank Indonesias commitment and the banks specific internal standard operation processes. Bank Indonesia requires that all banks secure the services a compliance director.
Bank Indonesia regulations requires that the board of commissioners which is a supervisory board of a bank must have no less than two members and the board of directors must have no less than three members. The Jakarta Stock Exchange requires that the board of commissioner of listed companies have external commissioner that make up at least 30 percent of the membership of the commissioners. All commissioners are required to have some experience andor knowledge in banking and directors must have no less than five years prior experience in banking at the level of an executive. Banks owned by foreigners may have foreign commissioners and directors but they must have at least one Indonesian on each board.
Corporate governance reforms within the banking sector in Indonesia were entirely important for restoration of both the publics and investors confidence in banks. This explains why Indonesia targeted transparency and accuracy in the area of disclosure. It also explains why ownership, risk management, supervision and measures of effectiveness have been employed. Competition has become fairer among Indonesias banks. Although the concept of corporate governance is rather new to Indonesia, it has adopted an acceptable and workable method of corporate governance and has a long way to go, Indonesia has come a long way from the cronyism and concentrated ownership that previously characterized the system.
Analysis
Corporate governance of banks is a particularly difficult process to adopt. This is because it necessarily engages supervision and regulation. The nature of banking, its role in overall economy, the unpredictable nature of finance, widespread competition and diversity subjects banks to a number of risks and complications. The necessity for good corporate governance is exemplified by the four Asian countries in this study. The four countries studied also demonstrate that regardless of corporate government constructs, putting it into practice may be difficult when bank ownership and supervision are inseparable. As Thailand, Indonesia, the Republic of Korea and Malaysia teaches us, structural soundness must precede good corporate governance. In other words, unless supervision and ownership are separated good corporate governance within any banking system is no more than a misnomer.
Thailand, Indonesia, the Republic of Korea and Malaysia have taught us that when banks are owned and controlled by conglomerates, governments or families, conflict of interests and corruption are more likely to undermine the operation of good corporate governance. Moreover, where the legal framework for corporate governance is weak to start with, when banks are owned and supervised by the same entity, good corporate governance is even more compromised. Corporate governance is entirely important. In a study conducted on Korean banks following the financial crisis of 1997 and the ten years that followed after restructuring ownership and improving corporate governance, proves that corporate governance reduced risk and increased returns.
In the pre-financial era, many Asian countries as evidenced by the four countries studied, were vulnerable to financial risks. These risks were borne out of the fact that owners were primarily in control and supervised their corporations. Moreover, ownership was entirely concentrated. These factors together with intrinsically weak regulatory constructs compromised the supervision and internal management of banks. A vast majority of the loans advanced by the banks were of short term value and were also unhedged. This resulted in excessive debts, many of which were delinquent.
The most salient features of the structure of ownership and control among Asias banks in the pre-financial crisis was the resulting lack of transparency, disclosure and accountability. These were the natural consequences of the concentrated ownership and controls of banks in Asia. Moreover, the introduction of corporate governance mechanisms in Asian banks, as evidenced by the four countries studied in this research also offer direct evidence of the kinds of weaknesses permeating these banks which were subject to concentrated ownership and the wide range of control owners had over banks.
Governments almost immediately responded by restructuring the ownership culture and setting forth principles and bodies for setting standards for good governance and enforcement of good governance. Transparency, disclosure and accountability were heavily targeted by the four countries. These factors were targeted by requiring all stakeholders interest be balanced against the banks missions and visions. More directly, banks were required to ensure that directors include independent, competent and reputable board members. Similar steps were taking with respect to auditors and accountants and standards for conducting audits and accounting.
The reforms made in Asia were consistent with the Organization for Economic Development and Cooperation Principles of Corporate Governance. Impliedly these countries have adopted international standards of corporate governance which are reflected in a number of laws, codes and regulations which provide improved minority shareholder protection, improved transparency and greater transparency and accountability. Even so, putting these initiatives into practice has proven difficult since corporate practices and enforcement by regulatory bodies have not been consistent, nor have they been harmonious. These practices are reflective of the problems that gave way to the financial crisis and necessitated reforms.
Unfortunately, what this means is that corporate governance reforms and strengthening in Asia is for the most part good in theory and on paper. Having international standards of corporate governance is one thing. Putting it into practice and enforcing it is another thing altogether. Unless and until all banks adopt good corporate governance as promulgated by their respective regimes and unless there enforcement of good corporate governance standards are aggressively pursued, good corporate governance will continue to be compromised.
Many of the pre-financial crisis corporate governance weaknesses in Asia have been repeated globally in the current financial crisis. A report by the Organization for Economic Development and Cooperation bears this out. It was found that there were a number of infractions relative to remuneration, risk management, board practices and shareholders exercise of their rights.
It would seem that not too many lessons were learned in or from Asia. The current financial crisis is indicative of the fact that countries cannot afford to pay mere lip service to the significance of corporate governance within the banking system. An aggressive approach to practice and enforcement is entirely necessary. Certainly, the Asian countries studied have implemented measures for encouraging good corporate governance standards and practices and for enforcement. Enforcement is found in the penalties for failing to comply with the various corporate governance codes, legislation, regulations and guidelines. Enforcement is also found in the allocation of rights to minority shareholders who may take action against offending directors. However, if these new reforms are not enforced, practice will continue to be a problem. This is evidenced by the current financial crisis.
Undoubtedly, Asian countries as well as the rest of the world will seek to improve their corporate governance structures yet again. Hopefully, the emphasis will now be on enforcement and practices. In this regard, it is likely that greater emphasis will be placed on laws providing for the punitive action against corporations and banks that fail to comply with corporate governance standards and guidelines. Too much of the blame is placed on directors, as seen in the corporate governance reforms in the four countries studied. These laws call for criminal convictions of directors. While these laws are entirely necessary, banks and corporate entities should be jointly and equally responsible. This places more pressure on banks to ensure that directors are not only competent but also diligent.
Prior to the Asian financial crisis, the Asian countries were characterized by a system of bank ownership and supervision laws and regulation that was entirely weak and ineffective. In the aftermath of the Asian financial crisis a number of reforms were made to the banking system to improve corporate governance standards and enforcement of those standards. Since it was not possible to research the reforms of all Asian jurisdictions, this paper chose the four jurisdictions hit the hardest. A study of these four jurisdictions, namely the Republic of Korea, Indonesia, Malaysia and Thailand confirms the prevalence of weak corporate governance.
Changes were made to improve and enforce corporate governance. The current financial crisis, like the Asian financial crisis indicates that poor corporate governance was the catalyst for both crises. The current crisis just like the 1997 crisis also indicates that having good corporate governance regulations in place is of no consequence if they are not practiced by banks and they are not aggressively enforced. So while Asia made significant reforms in terms of corporate governance, practice and enforcement remains a concern.
This research was easily facilitated by the fact that there has been extensive research as reported in the literature on the question of corporate governance and its link to successful bank management and practices. The literature is also rich with respect to the Asian financial crisis and the factors given way to the crisis and the responses taken in that regard. However, there is a paucity of research on reforms taken in response to the current literature. Those reforms would help to identify the measures taken and how they improve on the measures taken in response to the Asian financial crisis of 1997. However, the current financial crisis is relatively new. So while there is a large body of literature on the superficial causes of the crisis, there is not enough research on what caused the crisis and the responses taken to them. It would be interesting to know how Asian countries, particularly the four case studies in this research, responded to the current crisis. It would be interesting to know whether these countries have been able to identify how to go about ensuring that good corporate governance is practiced and enforced.
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