Comparative perspective of corporate governance: Europe and East Asia

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Comparative perspective of corporate governance:Europe and East AsiaJean‐Pierre Lehmann a

a The European Institute of Japanese Studies , Stockholm School of Economics , P.O. Box6501, Stockholm, S‐113 83, SwedenPublished online: 07 Dec 2007.

To cite this article: Jean‐Pierre Lehmann (1997) Comparative perspective of corporate governance: Europe and East Asia,Global Economic Review: Perspectives on East Asian Economies and Industries, 26:3, 3-36, DOI: 10.1080/12265089708422871

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GLOBAL ECONOMIC REVIEW 3Vol. 26, No. 3 (Autumn, 1997)

Comparative Perspective of Corporate Governance:Europe and East Asia

Jean-Pierre LehmannStockholm School of Economics. Sweden

1. Preface1

Giobalisation is having a dramatic impact on the landscape of internationalbusiness. The recent huge increase in foreign direct investment and the appearanceof prominent new actors (e.g. Korean and other East Asian emerging multinationalcorporations) are particularly striking illustrations of this phenomenon. In turn, thecombined effects of globalisation and the increased volume and importance of FDIhelp explain why corporate governance has become much more important, anddebated, internationally.

The distinction, especially in the post Cold-war era, between internationalrelations (IR) and international business (IB) is becoming more and more blurred.Thus, while international trade negotiations have traditionally focused on issues "atthe borders" (tariffs, quotas), attention is shifting now much more to what ishappening "within borders" (competition policy, labour standards, industrialstructure, corporate governance). These economic and business forces have beenaccompanied by a certain amount of irresponsible polemic—"Asian values," "clashof civilisations," "competing capitalisms"—in America, Asia and Europe These riskexacerbating tensions.

The work undertaken here sets out both to destroy myths regarding allegedEuropean (of Western) forms of corporate governance versus Asian forms ofcorporate governance and to propose a more realistic comparative framework.

While recognising (of course) the enormous impact of the East Asianeconomics on the global business environment, there is no such thing ashomogeneity of Asian corporate governance. Just as the sources of economicgrowth in, say, Korea and Indonesia, differ, so do the structures, cultures,management, of their corporations. Furthermore, in spite of the much greater

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4 Jean-Pierre Lehmann

coherence of Europe, in comparison to East Asia, and the decades of a commonmarket and recent economic integration, pattens of corporate governance vary agreat deal in Europe as well. There is no "Asian" or "European" form of corporategovernance. Six distinct models are assessed in this paper: Anglo-American,Rheinal, Japanese keiret^u, Korean chaebol, Mediterranean and Chinese bamboonetworks.

In respect to the three "models"of corporate governance that are most oftencited, namely the Anglo-American, German and Japanese, though contrastsundoubtedly exist, depending on the perspective, it is the similarities which maybe more striking. In a number of critical respects, Anglo-American, German andJapanese forms of corporate governance—which remain to date the mostsuccessful models—esemble each other more than, say, Germany would resembleItaly, the United States would resemble Canada, or Japan would resembleThailand. The contrasts, therefore, must be put in the perspective of similarities thattranscend a global framework. Similarly, greater similarities may be foundbetween forms of corporate governance in Asia and Europe—e.g. Italian andChinese firms—than within the continents.

Different forms of corporate governance emerge from national culture, levelof development, industrial structure, nature of ownership, and sources of capitalformation. Critical also in determining corporate governance patterns aregovernment-industry relations. Four models are set out: government as refereegovernment as manager, government as coach and government as crony. Thepoint that repeatedly requires emphasising is that the phenomenon is dynamic, i.esubject to change. Thus, for example, whereas in the early decades of its industrialrevolution Dorea may have corresponded to the govemment-as-manager-model(and possibly in part to government-as-crony), since the late eighties/early ninetiesit has been shifting to the govemment-as-coach-model.

While most capitalist societies are facing crises of corporate governance, thecurrent conventional wisdom that there is an irreversible global trend toward theAnglo-Americanisation of corporate governance is questioned.

Certainly, however, as the world economy changes, especially as itglobalises, companies must adapt. It is the external environment that leads.Throughout the industrialised and industrialising world companies recognise theneed for transformation. The Korean chaebols are under pressure to bring aboutchange in their systems of corporate governance from owner-manager toprofessional managers. In Italy, the scions of the leading families who are assumingpositions of corporate power openly admit that change and internationalisation areimperatives (Sullivan 1996). Corporate governance, therefore, is currently one ofthe "hottest" issues facing those who deal with the international political economy,with relations between states and between regions, and in the field of international

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Comparative Perspetives of Corporate Governance 5

business studies.

2. Mythology of East Asian Corporate Homogeneity

The impact of the East Asian economies on the global economy has beenenormous and promises to remain so for the coming decades. Fcr Europe, EastAsian economic growth poses two interrelated challenges. The first is theintellectual challenge of understanding the sources, driving forces, key actors lyingbehind the economic growth of the East Asian societies. What are the propellersand where are they driving? The second is the commercial challenge of doingsuccessful business in the region and with East Asian corporations in globalmarkets.

There has been a tendency in both political and academic circles to ascribe aunity to East Asian approaches to corporate governance, whereas in fact diversityis prominent. The reasons for the mythology include (in no particular order ofpriority):

• Although the decade since 1985 has witnessed a far greater degree of EastAsian intra-regional economic integration, intellectual integration and cross-fertilisation remain limited. East Asians do not know each other's societies well.

• The myth of Asian corporate-governance unity has partly been driven byignorance, but also by two complementary factors. One is the very relatively shortperiod over which the phenomenon has been in the public eye: to the extent thatEast Asian economic integration exists, it is hardly more than a decade old.2

Moreover, because most of the economies of the region share very high growthrates, it has been (wrongly) assumed that they also share socio-economic structuresand cultures.

• In shaping the myth of East Asian homogeneity, the Japanese dimensionhas loomed large. Japan's economic success from the late Edo era (1860s) onwardshas been due in considerable measure to its assiduous study of and selectiveborrowing from the West. From that time onwards, Japan has been both learningfrom and closely allied to three successive Western partners: Britain, thenGermany, and since the end of World War II the United States. The trends ofgreater East Asian integration in the second half of the 1980s occurredsimultaneously with another trend: growing economic friction between Japan andthe United States. As a reaction against hitherto dominant American influence,some Japanese opinion leaders began to "re-discover" the country's Asian roots and"re-Asianisation" became the slogan.

In the period roughly from the mid/late 1970s to the mid/late 1980s when"Japanese management" became a subject of interest, Japanese opinion leaders and

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academics tended to draw primarily socio-cultural distinctions based on ananthropological approach between "Japanese" and "Western" management. Twoimportant pillars of this phenomenon were: (a) the "West" tended to be lumpedtogether and generally held to be synonymous with America; (b) Japanese culture,on the other hand, was self-perceived as unique. More recently, however, there is atendency to ascribe alleged Japanese business traits to a greater East Asian canvas.3

Thus, in the Japanese perspective, the "East Asian model" is very often presenteti asa Japanese model writ large.

• With the end of the cold war, economic frictions between the United Statesand East Asian countries, Japan and China in particular, have become more acute.Especially at the time when the Clinton administration came to power, there was aview in influential intellectual circles that the age of geopolitics was being replacedby that of geo-economics. In the cold war era the battle had been betweencapitalism and communism, and with the rivalry between two militarysuperpowers. The very demise of the Soviet Union, however, in itself proved thegrowing irrelevance of the conventional means of power. Henceforth, power, toparaphrase Mao Zedong, emerges no longer from the barrel of a gun, but fromfinancial and technological power. The battle is no longer between capitalism andcommunism: capitalism has conquered, even in supposedly communist countries,e.g. China and Vietnam. The 21st century battlefield, according to this school ofthought, is one that will pit different types of capitalism against each other.4

Although Japan has been the bête noire of the geo-economists, some of these writershave also tended to paint Japanese corporate governance stokes on to a broaderEast Asian canvas.

3. Limitations of European Integration

East Asians, as pointed out earlier, know each other relatively little and untilrecently, with the exception of Japan, were not engaged among themselves intrade, investments, etc. In contrast, the European nations have been engaged ineconomic activities—as well as war, peace, inter-marriage, migration, learning, etc.—with each other for centuries. Furthermore, while East Asian discussions aboutregional cooperation are of recent vintage, the construction of a European commonspace has been in preparation for half-a-century. However, although the singleEuropean market was inaugurated in 1993, its creation has not resulted in a singleEuropean business community. The distinctive approach of individual Europeannations to business—and the persistence of national barriers—has prevented thefusion on any large scale of different European businesses.

Cross-border European mergers, acquisitions or alliances tend to fall into

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one of several distinct categories:® Very, very large projects, that simply cannot exist without extensivecross-border cooperation, which arc deemed to be of strategic significanceand where the role of governments looms large. Thus, Europe would not beable to have a sizeable civil aircraft industry, let alone compete with Boeing,without a four-nation arrangement as in Airbus.5

© High-tech areas, also deemed of strategic significance, where the size ofthe project may not be so great, but resources in R&D need to pooled, e.g.the Italo-French joint venture between SGS and Thomson in thesemiconductor industry.® Acquisitions by very dominant European players of much smaller fry inreatively low-tech industries: e.g. the BMW—»Rover and Volkswagen—»Seatacquisitions in automobiles.® Cross-border companies that predate and therefore have little, if any,connection to European integration, e.g. Royal Dutch Shell and Unilever.There are exceptions to these rules, though, apart from ABB, none are of

glaring proportions. The creation of ABB resulted from the merger between Aseaof Sweden and Brown Boveri of Switzerland. It is hailed as the paragon ofEuropean integration—even if one of the two partners' national origins does notfigure among the members of the European Union, and the other is a recentmember—and as a company with extensive global reach, great competitive powerand strategic vision. In reality, however, ABB is not so much an "exemplar," as aunique creature.

What is striking about the European business community is how "national"national companies have remained.6

4. Corporate Governance in the Japanese,German and Anglo-American Models

Comparing corporate governance in different cultures can be done from anumber of different perspectives. Comparisons can overlap with contrasts. Theframework addressed here reviews the characteristics of Japanese, German, andthe Anglo-American "models". Models are derived from both reality andperception and portray "ideal-types". Inevitably there are variations anddistortions. In making the assessment of these three models, corresponding to fourcountries, several comments need to be made:

• The United States, Japan, Gemany and the United Kingdom, are four ofthe world's largest economies. Together they account for the bulk of the worlds ,foreign direct investment. The other members of the G-7, France, Italy and Canada,

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have a much lower rate of overseas investment, while Asian foreign investment,apart from Japan's, is a recent phenomenon. American, Japanese, German andBritish firms tend to be the most numerous and prominent global players.

• The four are also the world's most influential and best-known economiesand business systems. The United States, Japan and Germany rank respectivelyfirst, second and third in GNP7, and although the United Kingdom iscomparatively weaker, it remains influential for a number of reasons, e.g. the roleof the city of London in international finance.

• In these four countries, unlike Fiance and Italy, slate control of industry isminimal. Most large companies are public.

• Also, although in certain cases there may still be some family shares in thelarge companies—e.g. the Siemens family in Siemens corporation, the Kobayashifamily in Fuji Photo Film, the Ford family in Ford Motor Corporation, theSainsbury family in Sainsbury's, etc.—unlike France and Italy, most largeAmerican, Japanese, German and British companies are no longer owned ordominated by individual families.

• Although their industrial strengths vary, all three tend to be active playersacross a very broad spectrum of sectors and technologies. Their relative strengths—e.g. the United States in aerospace, Germany in chemicals, Japan in consumerelectronics and components—are derived more from historical experience thanfrom differing forms of corporate governance.

• Two general differences stand out in particular. The first is that in theUnited States and the United Kingdom take-overs, whether friendly or hostile, arepart of everyday industrial life, whereas they are rare in Germany and Japan.Second, whereas the United States and to a more limited extent the UnitedKingdom generate many start-up companies and have a strong and active venturecapital market, in Germany and Japan start-ups are rare and the venture capitalmarket is weak.

With the exception of this last point, what has to stressed is that there aremany similarities in the industrial fabric of these four countries. In comparisonwith 90 percent or more of the world's economies, including industrialisedcountries such as Italy, France, Spain and Korea, what is striking is how much theUnited States, the United Kingdom, Japan and Germany have in common. Onefurther feature they share, which is perhaps obvious but bears emphasising, is thatall four countries' business systems have been, and on balance remain, successful.

The contrasts between these three "models" can be illustrated from what onemay call the "inversion in the priority of the 3Ps"—people, products and profits—as outlined below.

JAPAN GERMANY U.S./U.K.People Products Profits

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Products People ProductsProfits Profits PeopleLarge Japanese companies practice so-called life-time employment. The fact

that there are exceptions to this rule—e.g. women, temporary workers,foreigners—is, from the viewpoint of corporate governance, irrelevant. It isdefinitely part of the rhetoric of Japanese capitalism that people in companies comefirst, that they are community-oriented forms of enterprises and that seniormanagement have a social responsibility (Dore 1962; Fruin 1992). In Japanese theword for corporation, kaisha, and the word for society, slwkai, are «-imposed fromthe same two characters (kanji), albeit in reverse order, some Japanese are fond ofsaying that in Japan there are lots of kaisha (corporations), but no sJuikai (society).The absence of slwkai is manifested, among other things, by the non-existence of thewelfare state. On the other hand, the expectation of employees in largecorporations is that they provide the welfare. One of the many reasons why thereare very few start-ups in Japan, is that life is so much better in established largecompanies. Security, social prestige, better pay and excellent fringe benefits,including good marriage prospects,8 are among the advantages to be gained.Traditionally, lay-offs in Japanese companies are unheard of. In exchange, theemployee is supposed to provide loyalty to the company.

German corporations do not have quite the same fixation with employees asthe Japanese. The union structure is also different. In Japan unions tend to bevertical corporate unions as opposed to horizontal trade unions, which is theprevalent form in Germany. On the other hand, while the company union in Japanis an integral part of the culture of the corporation and of its structure, Japanesecompanies do not have, as in Germany, legal requirements for unionrepresentation on the board, nor is it the custom. Since most Japanese companyunions are, de fado if not de jure, closed shops, at one time or another all employees,including senior managers, will be union members.

Traditionally, German companies reputations and claims to excellence lie intheir technology, specifically the engineering quality of their products.Consequently products take precedence over other considerations. Germanautomotive companies, for example, have been reluctant to adopt either Americanor Japanese (lean production) manufacturing techniques, on the grounds that thesemight jeopardise the quasi-craftsman nature of their vehicles.

While people are lower priority in German companies than in Japanesecompanies, they rank well ahead of traditional Anglo-American corporateconcerns. Considerable investment in Germany goes into training workers, forexample through the intensive and extended apprenticeship system. Job-hoppingbetween major German companies is rare and although lifetime employment doesnot exist as in Japan—layoffs do occur, even if rare compared to the United States

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and United Kingdom—the tendency is for employees to remain with theircompanies throughout their careers. Both in German and Japanese companiespromotion is primarily internal. Senior management come up the corporate rungsof the ladder.

When the corporate governance systems of Germany, Japan and the UnitedStates/United Kingdom are compared, in the former two, in contrast to the lattertwo, take-overs are very rare and hostile take-overs virtually non-existent. It isgenerally stressed that a key reason for this contrast lies in the different and veryclose bank-industry relations that prevail in the German and Japaneseenvironments.9 However, there are also important cultural reasons: in light of thehigh priority given in Japan to people, and their relatively high priority inGermany, take-overs are socially and ethically frowned upon.

Until recently, IBM could have been described as a German/Japanese-stylecompany, just as some other American (e.g. Boeing) and British (e.g. BritishPetroleum) companies might also correspond to the community - centred typeenterprise. As a general pattern, however, in the American corporate scheme ofthings, people are the last of the three priorities. Lay-offs are frequent and reflectthe business cycle—when times are good, hire, when times are bad, fire;appointments to senior positions more often than not result from externalhorizontal moves, rather than internal promotions; American and Britishcompanies spend a far lower proportion of their resources than their German orJapanese counterparts on training; job-hopping is virtually the American way ofprofessional life; take-overs are endemic.

The implications of these differences in priorities are several, quite profoundand can be described as follows:

T o , „ . .. r Emphasis on CEO is anJapan — PeoplePnonty — |_ ^ ^ — ..generalist..

t Emphasis on .

Tech& •engineer

Engineeringr Emphasis on CEO is an

US./U.K. • Profits Priority • Share-holder • MBA orL value an accountant

Since lifetime employment in large Japanese companies is virtuallyguaranteed (for males), a corollary has always been that this meant employment inthe company, not employment in a particular job or skill.10 Rotation within thecompany has also been a characteristic of the Japanese corporate culture. Withinthe corporation, qualities such as those required to foster team-spirit, to createconsensus, to motivate, etc., are the ones that will be particularly prized forpromotion. Typically, therefore, a Japanese CEO and his senior colleagues will be

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generalists, namely people who have worked in many different sections, hence willhave acquired a good bird's eye-view of the company. Furthermore, in the Anglo-American model an individual's worth will normally be based on his or herspecific skill. In the Japanese model, an individual's worth will more normally bebased on his loyalty to and longevity in his company. The value of a good Intel orGEC engineer in that he/she is a good engineer. The value of a good Toshiba manis that he is a good Toshiba man.

When seen from this perspective, the frequency of lay-offs in the UnitedStates/United Kingdom, as opposed to its genera! absence in Japan, assumes adifferent rationale. The Intel/GEC engineer has his/her skill to sell in the openlr.bour market. IF he/she is made redundant, transferring the skill to anothercompany is relatively straightforward. If a Toshiba person is made redundant, thefact that he knows a lot about Toshiba is not much use—except of course if heknows so much that he can spill the beans to the competition, in which casehowever he is unlikely to be made redundant! It is for that reason, therefore, thatwhen large Japanese companies do layoff or prematurely retire their employees,they normally place them among the company's suppliers, where knowing theparent company will still be a distinct advantage.

A good deal of comment—often negative—has been made about the factthat Japanese corporate boards, and, to a somewhat lesser but neverthelesscomparable extent, German boards, are ratlter incestuous affairs, with great powerconcentrated in the hands of the CEO. Although German and Japanese boardsdiffer in legal form, especially in that the former have a two-tier system consistingof separate supervisory and management boards, in fact this will more often becosmetic than effective in terms of balance of power." The main disadvantage ofthe German/Japanese models with their priorities on people and products, asopposed to seeking, as a priority, to maximise shareholder value, and the morelimited role of shareholders, is the relative absence of efficient monitoring of topmanagement. The megalomania that gripped Japanese and German companies inthe 1980s, culminating in huge losses incurred due to reckless diversifications, andthe scandals that beset Japanese companies in particular, would not havehappened had there been more careful, closer and more objective monitoring. Aremedy that is often proposed12 is the appointment of outside directors.

The emphasis in comparing and contrasting the corporate governancesystems in the Japanese, German and Anglo-American models here has been onthe internal dynamics of the corporation. Passing reference was made to the crucialdifference in the nature of bank-industry relations in Japan and Germany on theone hand, in the United States and the United Kingdom on the other. As this is abetter known feature of the corporate governance systems of the different models,it requires less attention here.

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What should be noted for the moment, however, is the following. To saythat in the Japanese and German models profits have a lower priority than theywill typically have in the United States or United Kingdom, does not mean thatprofits do not count and shareholders do not 'matter! Since in Germany and Japaninstitutional/network shareholders have a much higher profile, the emphasis willtend to be on stable returns. The profit priorty-shareholder-value emphasis clearlyhas important results. Dividends in the United Kingdom typically will be nearlytwice as high as German dividends and three times as high as Japanese.

While noting some of the distinctions between these major models ofcorporate governance, it has to said that the consensus is that convergence willoccur and that it will take the form of German, Japanese and similar systems'emulating, indeed joining, the American model. Whether this trend is noted withglee, as in the case of the Economist,1* or with regret and resignation, as in the case ofMichel Albert (1991), it is felt to be an inevitable consequence of globalisation.

As Aron Viner has remarked, "Japanese boards, not unlike those in Germany,have despotically maintained their own priorities. The interests of employees,customers, politicians, and established corporate and banking relationships havetraditionally come before those of institutional investors and individualshareholders. Today in Germany there is a growing recognition that managementmust be committed to maximising the long-term value of the company's shares forthe shareholders" (Viner 1993: 118). Yoshimori (1995) nctes that, "Japan andGermany are edging towards the Anglo-American model for increased opennessand transparency, emphasis on shareholder interest and short-termism. (•••)Increased reliance on the New York capital markets and the future location of theEU's central bank in Frankfurt will certainly accelerate the Anglo-Americanisationprocess. Disclosure by Daimler Benz of its hidden assets to conform to the SECregulations for listing on the New York Stock Exchange is symbolic".

Certainly there is a crisis in Japan. The economy has been in the doldrums forhalf-a-decade, unprecedented in Japanese post-war history and pretty lacklustrecompared even to the generally more sluggish European economies. One can agreewith the statement made by Robert Monks (1994) that Japan's economic crisis is, tosome extent, a corporate governance crisis.14 There are both internal and externalpressures for change, some of which were incorporated in amendments made to theJapanese Commercial Codes in 1994, e.g. in requiring the establishment of at leastone outside auditor (Viner 1993).

By way of tentative conclusions for this section, three points can be made.The first is that one must be careful to distinguish between learning lessons

and reaching hasty conclusions. In the 1980s it was fashionable to argue thatAmerican companies needed to learn from their Japanese and Germancounterparts, and that the latter societies enjoyed a higher and more effective form

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of capitalism.15 Though a number of American companies did absorb some lessonsfrom Japan, especially in production technology and human resourcemanagement, the culture and structure of American corporate governance did notundergo fundamental change. Today many American companies are doing ven'well: it is too early—and indeed rather silly—to say, however, that this derivesfrom a systemic superiority. The relative German and Japanese disadvantage may.be temporary.

The second is that seeking suddenly to change deep-rooted cultures is notonly difficult, but can have all sorts cf serious consequences. If Japaneso companieswere to heed the advice given to them that they should abandon the lifetimeemployment system, in order to focus on boosting profits and thus maximiseshareholder value, the economic and social consequences would be very differentfrom those that occur with lay-offs in the United States and the United Kingdom.Japanese employees of large companies do not really have individual identities, letalone individual skills, apart from their companies. Japanese companies can ofcourse change and begin emphasising the development of individual skills ratherthan the fostering of a collective spirit. The Japanese system of corporategovernance before the war was quite different from what it is now, priority wasnot given to people in the past, and the working class had to rely on theirindividual skills. Hence when one refers to the Japanese corporate culture, this ismainly a feature of the post-war era, as opposed to something totally and eternallyembedded in Japanese society. The culture has changed before, it can change again.In order, however, to bring about the kind of change that is being talked about, i.e.ending lifetime employment and leaving employees to make out in an open labourmarket, the passage of at least one generation will be required.

The third is that as the world economy becomes more multi-polar, it wouldbe premature, and somewhat arrogant, to assume that globalisation will inevitablytake the from of Américanisation.

5. Corporate Governance & Models ofGovernment-Industry Relations

In his book Capitalism versus Capitalism, Michel Albert (1991) draws themain contrast between the Anglo-American mode and the "Rheinal" mode. Thelatter includes: Germany, Austria, Switzerland, the Netherlands and theScandinavian countries. Japan he presents as basically an Asian extension, orvariation, of the Rheinal form of capitalism.16 In this paper the concept is extended toinclude in Europe the Mediterranean form, while in Asia, distinction is drawnbetween the Japanese keiretsu, the Korean chaebol and the Chinese Bamboo

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networks. Different forms of corporate governance, therefore, fall under six systems:• the Anglo-American . ,• the Rheinal• the Mediterranean• the Japanese keiretsu• the Koiean chaebol• the Chinese bamboo network

There is some overlap between the different systems. Furthermore, greatersimilarities can be identified between those advanced industrialised countrieswhich are dominated by large, publicly owned companies (the United States,Japan, Germany and the United Kingdom) than between the others. AmongAlbert's Rheinal countries, from this particular perspective—economic dominanceof large public companies—Switzerland and the Netherlands come closest to theGerman "model". Austrian large enterprises are dominated by the state, while inDenmark there are very few large corporations and indeed comparativelyindustry outside agriculture. Sweden is sui generis in that while it includes aconsiderable number of very large public companies across a broad spectrum ofindustrial sectors, there is a heavy concentration of ownership and control in familyhands, the Wallenberg family in particular. In so far as the other three models areconcerned—the Mediterranean, the Korean and the Chinese— only in the Koreanare there large public corporations, although here too, as in Sweden, familyownership and control looms large.

The gist of a good deal of the argument in Francis Fukuyama's book, Trust,is that in societies where trust outside or beyond the family is low large publiccorporations are unlikely to emerge, let alone flourish. In France, Italy and in thecountries or territories where Chinese enterprises operate, the quality of trust - inparticular trust in public institutions, e.g. courts, government departments, etc-tends to be conspicuous by its absence. In the Mediterranean and Chinese models,therefore, the prevalent pattern is that of small and medium, family owned andgenerally family-managed enterprises. Indeed in the Mediterranean countrieseven quite well-known companies, e. g. Benetton and Fiat in Italy, Remy Cointreauand Peugeot in France, etc, tend to be family fiefs, in which professional managersmay be retained in much the same way feudal lords employed mercenaries. Tocompensate for the absence of large public companies, the state has to interveneand create them. In France, Italy, Spain, Taiwan and some of the economies ofSouth-East Asia, large enterprises are usually owned and managed by the state.

In so far as government-industry relations are concerned, and their impacton corporate governance, four models apply.

• government as referee• government as manager

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• government as coach• government as crony

These models are "ideals," i.e. they correspond to how things should beaccording to prevailing ideology or principles, but not necessarily to reality inevery case. There are a'so exceptions according to sectors. The government-industry models broadly correspond to the corporate governance models.

In the first model, government as referee, as implied, government isexpected to remain totally impartial in respect to the market, it stands on thesidelines, and will intrude only if/when abuses need to be prevented (e.g.monopolies or cartels) or perpetrators of illegal acts (e.g. insider trading) punished.The emphasis on the government's role in this model is to be as unobtrusive aspossible, to promote fairness, grant recognition and respect to the market, and thusminimise regulations. As the government must exercise its role of vigilant referee,this system also places stress on transparency and visible observance of the law.Auditors and lawyers have an important role to play. Corruption tends to be low.

This is ideally the system that is supposed to prevail in the United States andin the United Kingdom, especially since the "Thatcher revolution". It is also thesystem that has existed for the last half<entury or so in Hong Kong. While somecountries have undergone "conversions" from one system to another, these havegenerally tended to be gradual and they have more often been from the second(manager) to the third (coach).

In summary, the government as referee model can be presented as follows:

governmentas

referee

United StatesUnited Kingdom

Hong KongAustralia

New Zealand

sidelines jimpartiality j

prevention & |punishment of j

abuses j

emphasis onfainess &

unregulatedmarket forces

opentransparentaccountable

forms ofcorporate

governance

I

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In the second model, government as manager, the role of the government isat the other extreme of the first. Not only does the government neither recognisenor respect the market, it does not trust the market. Although in democraticsocieties the application of the models may vary depending on parties in power(e.g. in the United States the Republicans, in principle, will be less intrusive thanthe Democrats) nevertheless, by-and-large. the models apply irrespective of whichparty is in power. In France, which is the epitome in Europe of the government asmanager model, continuity also tends to prevail between the left and the right. Thesocialists nationalise and the right wishes to privatise, but certain Gallic attitude?remain engrained. This point can be illustrated from an interview during the recentpresidential election, when then prime minister and presidential candidateEdouard Balladur referred, in a pejorative manner, to the "Jungle" of the market!

The French ideology of the govemment-as-manager model is known asdirigisme. In this model, the government knows best. Thus government is intrusive,regulations are numerous and often labyrinthine, trade policies are more inclinedto protectionism, and corruption tends more easily to be rampant. Although thegovernment-as-manager model normally includes a heavy proportion of state-owned and state-controlled industry—especially in so-called "strategic" sectors—the point about government as manager is that it intrudes quite forcibly even whenindustries are not owned by the state. French economic life is suffocated withregulations, the bureaucracy is powerful, lots and lots of papers are required foreverything and anything. Another major objective of the government as manager isto promote national industrial champions.

In France, which as mentioned, is the pillar of that particular model, therehas traditionally been an absence of professional managers in senior managementpositions. The French elite comes from the grandes écles—institutions of tertiaryeducation entry to which is througn a competitive exam—and the elite of the eliteare graduates of the Ecole Nationale d'Administration (ENA). The Enarques, asgraduates of the ENA are known, will typically spend their careers waltzingbetween bureaucracy and business as they climb (usually quite quickly) the rungsof these parallel ladders.

In the government as manager model, corporate governance is opaque,secretive and, consequently closed. In summary, the government as managermodel can be presented as follows:

The distinction between govemment-as-manager and government-as-coachwill be further elaborated upon below. What should be noted here are two things:the first is that it is between these two systems that one finds the most hybrids,especially in East Asia; the second, which a complement of the first, is that it is alsobetween these two models that, again in East Asia, there has been the mostmovement. Korea, for example, tended to be quite dearly a case coming under the

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Comparative Perspetives of Corporate Governance

governmentas

manager

France, Italy, SpainChina & Vietnam

Singapore

Indonesia, MalaysiaThailand

Korea (ca 1962-90)Taiwan (ca 1949-86)

économienationalism &

protectionism

governmentintervention &.

con."rol

promotion ofciroiratenational

champions

opaque,secretive,closed,

low publicaccountability

form ofcorporate

governance

government-as-manager model, though in recent years it has moved in thedirection of govemment-as-coach. This would tend to apply to many of the EastAsian countries, thus they will feature under both models, with the distinctionbetween one either of chronology or of circumstances. For example, in Malaysiaand Indonesia, the government tends to play the role of coach in respect to Chineseenterprises, but to have a much more hands-on management role in regard tobumiputra and pribumi enterprises respectively.

. In all models there are variations in degrees of intensity. Italy fits into thegovernment-as-manager model more than in French, for various reasons, animportant one of which is of course the fact that Italy often does not have agovernment! Spain does not have national champions to promote. On the otherhand, the Suarez, Gonzalez and current Aznar governments have not succeeded inbreaking totally with the Francoist state-corporatist and protectionistic legacy.Also, just as there are some efficient managers and some inefficient managers, thesame applies to governments as manager. The French government has beenreasonably successful. In light of the absence of large public companies especiallyin high tech in France, it is difficult to imagine how the country could havesucceeded in having, for example, such a successful nuclear power industry

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without the government. The Italian government has been less successful, thoughthe Italian economy—and especially the myriad small, family enterprises—hasbeen quite successful in spite of the Italian government. Singapore, on the otherhand, has one of the developed capitalist world's most intrusive governments, andit has been quite remarkably successful.

Korea and Taiwan have made the break from government as manager togovernment as coach. This is partly the result of their successful policies inprevious decades, as well as the result of economic growth, growing industrialcomplexity and the greater independence and aspiration to power of the corporatesector. It is also no doubt a consequence of démocratisation in both societies.

Indonesia, Malaysia and Thailand manifest both models, i.e. manager andcoach. Although all three countries have been successful economically incomparison to most countries of the so-called Third World, none of the three canaspire to Korean or Taiwanese levels of success which have been truly astonishing.Many reasons would need to be given for this state of affairs,17 although one is thatnone of the three countries' governments has had the management capability ofKorea, Taiwan, or Singapore.

The economic reforms launched in China and in Vietnam—and possiblyultimately in Laos and Burma—are aimed at giving industry more leeway andthus coming closer to the coach model. As things currently stand, however,government in both countries remains conspicuous by its presence. Thus, whileone can note the trend, (a) it is at this stage no more than a trend, and (b) it couldwell be reversed. Thus China and Vietnam for the time being remain in the secondmodel.18

In so far as the govemment-as-coach model is concerned, as in others, thereare variations in degrees of intensity. A coach can be actively shouting from thesidelines, or he can be more detached. In Europe, the Rheinal-capitalism countriesconform to the govemment-as-coach model This is, among other things, a naturaloutcome of the welfare state and the social contract that characterise theseeconomies. Furthermore, while all of the Rheinal countries have had both centre-right and socialist governments, in none of them have the socialists sought to bringabout widespread nationalisation of industry as they did under FrancoisMitterrand's socialist government in France: in the Rheinal countries, the Socialistsare content to remain coaches, rather than aspiring to become managers.

There has been a growing body of literature and a quite intense debateamong Western scholars and others as to whether the role of the Japanesegovernment has or has not been prominent and/or effective in the country'seconomic development. Advocates of the school which portrays the Japanesegovernment as having been weak and/or ineffective, among other things, pointout that Japanese business has tended to be strong precisely in those sectors (e.g.

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cars) where there has been least government interference and the most successfulcompanies (e.g. Sony and Honda) are those that had the most distant relationshipwith government. While all this is to some extent true, the consensus among socialscientist specialists of Japan is. that the Japanese government's role has been veryimportant," but perhaps also quite subtle.

When the Japanese bureaucrats sought to intrude beyond the limits ofcoaching, then they tended to fan. Thus, in contrast with the coachir.g provided to theelectronics, office equipment, machine tool, factory automation, telecommunicationsequipment and specialty chemicals sectors, in financial services, aerospace,Pharmaceuticals, petroleum refinery and agriculture, the Japanese government'sactions consisted of outright managerial interference and all five correspond to someof Japans weakest sectors.

France and Japan share an essentially meritocratic/elite-stream form ofsociety. Parallels can be drawn between France's grandes écoles and the half-dozenor so prestigious Japanese universities from which the top-flight Japanesemanagers and bureaucrats lend to be recruited. There are however criticaldifferences. In France, according to its government-as-manager model, graduatesof the grandes écoles waltz in-and-out of government and industry throughout theircareers. In Japan, the elite university graduate bureaucrats run government and theelite university graduate managers run corporations. They know each other well,they drink together,play golf together, and plot together. Much of the contact isinformal.

In Japan, there is no movement at all from corporation to government. Thosebureaucrats who do leave government in early or mid career will normally go intopolitics, in some cases into universities, and in a few cases they may join foreigncompanies. Government bureaucrats do not—except in cases of very temporarysecondment due to very special circumstances—go into private corporationsduring their careers. At the end of their careers as bureaucrats, there is thephenomenon known as amakudari (descent from heaven), whereby bureaucrats arerecruited to private companies, either as executives on the board or as "senioradvisers".

This difference in government and corporate career patterns quite vividlyillustrates the difference between France and Japan and, consequently, onedifference between the govemment-as-managei and govemment-as-coach models.

Most East Asian societies, including China, are seeking to emulate theJapanese government-as-coach model. Taiwan and Korea have been the mostsuccessful. Indonesia, Thailand and Malaysia are seeking to go in that direction.

While the fashion in the mid-1990s is to argue that all economies should tothe American way, in the 1980s there was considerable discussion in the UnitedStates that only by adopting an industrial policy could American industry hope to

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compete against Japan. There is some doubt as to whether in fact the role of coachassumed by Japan does constitute an industrial policy. Japan's approach has beenmore characterised and indeed described as that of "administrative guidance".Leaving that point aside, however, what must be stressed is that it would havebeen very difficult for Americans to "japanise," partly because the culture ofbureaucracy is, and has been since the Founding Faihers, very different. For similurreasons, it will be difficult for the Japanese (and others) to "américanise".

In both the coach and manager models, MBAs tend to be, in contrast to thereferee model, conspicuous by their absence. This is changing and in the Chinesebamboo networks more second generation managers are getting MBA training inAmerican business schools. In particular, in France and in Japan, however, thevirtual monopoly of the grandes écoles in the former and of the elite universities inthe latter, there is, by definition, not much room for the outsider. Both the Frenchand the Japanese meritocratic/education system are nationalistic. This in partaccounts for the fact that neither Japanese nor French enterprises have beenparticularly successful in the management of their foreign operations. French andJapanese graduates from their elite institutions lack international exposure.

The coach model can be presented as follows:The coach, like the referee, stands on the sidelines. The coach, however,

unlike the referee, is not impartial. He wants his team to win. The coach, unlike themanager, is not seeking to promote national champions. The coach recognises thatcompetition, including and indeed especially on the home turf, is a good thing. The

governmentas

coach

the Rheinaleconomies,

Japan,Korea & Taiwan

(Thailand, Malaysia& Indonesia)

sidelinespartiality

administrativeguidance

support systems,subsidies, etc.

organisedcompetition

semi-transparent /semi-opaque

corporategovernancewith lovvish

publicaccountability

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more you engage in competition, the better you are. In contrast, therefore, to theFrench who tried to promote one key computer maker (Bull), Japan has four majorcomputer makers (Fujitsu, NEC, Toshiba and Hitachi) who actively competeagainst each other, all the better to compete against IBM. The same principleapplies to many sectors of Japanese industry.

The coach model is closer to the manager model in that naturally it impliescosy relations between government and industry. Consequently, there isconsiderable scope for corruption, though it has to be noted that this scope appearsmore exploite«.! in the East Asian cases of the model than in the European. TheRheinal societies are among the world's least corrupt, though this may have moreto do with religion (the "Protestant ethic") than with forms of government-industryrelations or corporate governance.

There is no need to consider the fourth model. Unlike the others, which havetheir strengths and their weaknesses, crony capitalism is an entirely negativemodel. The term was coined to refer to the Philippines at the time of the Marcos réime. Although there have been some attempts at reform, and the economy is doingbetter under the presidency of Fidel Ramos, it is nevertheless still difficult tocategorise the Philippines in any of the other models. There is a bit of management,a bit of coaching, but cronyism remains—even though the cronies may not be thesame cronies. There is an element of crony capitalism in many economies. Thescandals that arc rocking France reveal the extent to which favouritism prevails inthat country and, consequently, a lot of insider information circulates. Cronycapitalism in various forms permeates most Southern European and East Asiansocieties.

6. Corporate Governance in East Asia: Trends and Implications

1) The Japanese Keiretsu

Not all Japanese companies are necessarily members of a keiretsu. Most,however, do belong in one form or another, more closely or at greater distance, toone, or, in many cases, several keiretsu. Keiretsu is a rather loose term which canmean several things.

Companies joined together in a horizontal group, e.g. the Mitsui or Dai-IchiKangyo groups, represent one form of keiretsu. The main governance features ofthese horizontal keiretsu is that they are all formed around a major bank, theyinclude companies from most, or certainly many, industries in the primary,secondary and tertiary sectors—i.e. from mining to insurance—they havesignificant cross share-holdings(Sheard 1994) and the presidents of the core keiretsu

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companies meet on a frequent and regular basis in what are known as the shacho-kai (presidents' societies). Keiretsu companies normally have privileged mutualtrading relationships. Among the six major horizontal keiretsu, Mitsui, Mitsubishi,Sumitomo, Dai-Ichi Kangyo, Sanwa and Fuji, only Mitsubishi extensively uses itsname among the companies of its keiretsu network: e.g. Mitsubishi Motors,Mitsubishi Heavy Industries, Mitsubishi Kasei, etc.

Even in the case of companies which are theoretically not members of akeiretsu, they will nevertheless be part of the "main bank" system. The main bank isthe bank which provides the most exposure to the company (i.e. debt) and/or hasthe greater (among banks) share in its equity. The main banks are normally themain city banks: those that are at the core of the six groups mentioned above, orlong-term credit banks, or some of the provincial banks, e.g. the Tokai bank inNagoya.

A second form oí keiretsu is that which links the chain between suppliers andmanufacturers. These are vertical groups. Whereas in the horizontal groups, inprinciple, equality reigns between the companies—though a handful will normallybe more equal than thee others—among the vertical companies the hierarchicalorder is clear and strict. Large manufacturers, e.g. Nissan, Kobe Steel, Matsushita,have first, second, third, etc., tier level suppliers, organised in pyramidal fashion.Virtually all small and medium-sized manufacturing companies in Japan belong inone form or another to a vertical keiretsu, although some of the vertical keiretsucompanies can be huge. Nippon Denso which is part of the Toyota keiretsu has aturnover of some $14 billion.

A third form of keiretsu, also vertical, is in the distribution chain.Manufacturers "have" their distribution chain, which normally involvesdistributors selling their products exclusively. For example. Shiseido, whichintroduced the vertical distribution system in Japan in 1924, has some 45,000 retailoutlets in Japan which sell exclusively Shiseido products. Market share is, notsurprisingly, often in direct proportion to the number of retail outlets in thedistribution keiretsu. Thus, Shiseido's major domestic competitor, Kancbo, hasroughly half the number of outlets as does Shiseido and about half Shiseido'smarket share in Japan.

As large Japanese companies have internationalised, through direct foreigninvestments, they have tended to take their keiretsu, especially of the first andsecond variety, with them. For example, Mitsubishi Shoji (the general tradingcompany) has invested with Mitsubishi Motors in the joint venture they have inthe Malaysian national car project (Proton Saga), partly on the grounds thatMitsubishi Shoji (like the other major Japanese trading companies, known as sogoshosha) has vast international experience and quite a few networks in Malaysia.Similarly, the arrival of Japanese automotive transplant companies in the United

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States brought in its wake hundreds of Japanese parts and components makerswho, as the suppliers in the individual companies' keiretsu chain, were instructed toset up operations in the new foreign environment.

The origins of Japan's keiretsu are complex and cannot detain us for too longhere. Suffice it for our purposes to note the following. Japan's industrial revolutionin the late nineteenth century was primarily driven from above, i.e. fromgovernment. Government quickly recognised however that it could not runindustry profitably. In the late 1880s, most government-owned assets were sold tothe private sector. However, they were not cold on an open-market, highest-bidbasis. They were sold on preferential terms to certain leading family groups (thezaibatsu). An over-riding concern of the officials of the modernising governmentwas that they were firmly committed to the principle and practice of order. Theyalso wished to ensure that private sector corporate interests and national interests(as determined by the government) should converge. Thus, while privateentrepreneurs might be entrusted to "manage," government should retain theobligation to "guide" (or "coach"). The sale of national assets to the zaibatsu—themain four of which at the time were Mitsui, Mitsubishi, Yasuda and Sumitomo—was carried out in orderly fashion. In essence, therefore, what the Meiji eraeconomic edifice came to represent was a government-guided oligopolisticindustrial system.

The American Occupation tried to break things up, including through theabolition of holding companies. In the immediate post-war period, however, theJapanese faced a situation whereby they had no, or very little, capital, markets,products and natural resources. Japan had lost the war, but the siege mentality wasretained in respect to economic affairs and, especially, to economic security. Hencemany of the business cultures of the pre-war era were revived, even if thestructures had been americanised. Furthermore, in the late 1950s and early 1960sthere was a real fear that the défi américain20 was reaching Japanese shores. Thereconstitution, albeit on a revised form, of the pre-war zaibatsu, and the creation ofnew groups centred around major bands, which led to the emergence of thehorizontal keiretsu, was triggered by a collective defence mechanism to preventJapanese industry from being taken over by American capital. In other words, bykeiretsu companies owning majority shares, collectively, among each other, theAmericans would not succeed in buying significant shares of Japanese companies.It worked.

The keiretsu correspond to something which is far more profound andextensive in Japanese capitalism: they represent the structural embodiment of theprinciples of interdependence. The most striking contrast between the Japaneseand Anglo-American models of capitalism is that between inter-dependence andindependence. In the Anglo-American model, economic entities operate

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independently in a free-for-all market force driven environment. In contrast, theone word that best epitomises the cultural and structural characteristic of everyaspect of Japanese economic life is inter-dependence. In the United States and theUnited Kingdom, banks are independent from industry, in Japan they are closelyassociated. In the United States and the United Kingdom, manufacturers selectsuppliers on the basis of costs and through short-term contracts. Both remainindependent—unless of course they are taken over. In Japan, the inter-dependenceis fostered by very long established relationships.

The intensiiy of Japan's interdependence and the form of go\ _mance it hasgiven rise to has come under some severe criticism outside Japan, in the UnitedStates in particular. Whereas, for a long time, Americans believed tint it wasJapanese government practices that were preventing American companies fromgetting into the Japanese market, it began to appear that perhaps it was more thestructure of industry, and the keiretsu system in particular, that was to blame(Encarnation 1992; Mason 1992). Keiretsu featured among the things the Americanswished to have discussed, with a view to being dismantled, in the so-called SH(Structural Impediments Initiative) talks during the Reagan and Bushadministrations. Included in the litanies of Japan's alleged "unlevel playing fields"was the fact that whereas Japanese companies were at liberty to acquire Americancompanies, foreign companies cannot acquire Japanese companies, not because oflaw, but because of the nature of the system of corporate governance.21

Given the nature of the inter-dependent, possibly nationalistic, form ofindustrial structure and culture in Japan, the system of corporate governance willintrinsically be different in orientation from what it is in the United States,whatever the law books may say. As Ulrike Schaede (1994: 321) has written: "It istrue that Japan is undergoing rapid change, and the role of the government maychange accordingly. However, it is likely that the Japanese system of corporategovernance will remain distinctive from that in the US., even if shareholders inJapan do obtain more rights and proceed to assert them".

The Japanese government, in principle, is committed to deregulation.Progress is slow, possibly because it remains the case that Japanese bureaucrats'predilection for order is steadfast. Also, while there can be no doubt that theJapanese system of interdependence has been quite outstandingly successful in theera of national-economy building, it is difficult to envisage how the structure andculture of inter-dependence will internationalise, as Japanese companies globalise.

2) Korean chaebol

Korea is the world's newest industrial country. Conventional wisdom onKorea's quite astonishingly rapid economic development tends to portray the

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government, especially that of General Park Chung-hee, as the main driver. Aspointed out by Jung Ku-Hyun, however, "although economic literature pays agreat deal of attention to the government role in economic development in Korea,one should not underestimate the role o'f entrepreneurs in the process. Forexample, we cannot imagine Hyundai group or Samsung group without suchentrepreneurs as Chung Ju Yung or Lee Byung Chul".22

Relations between the United States and Korea are close. Apart frommilitary and financial assistance, many Koreans have studied in Americanuniversities. The general friendly disposition iñs-ñ-iñs the United States, in contrastto the feelings of hostility towards Japan, have not, however, impeded the Koreaneconomy and business environment from looking more like Japan's than those ofthe United States. However, although the predominant form of large Koreanenterprises, the chaebol, is frequently compared to the Japanese kciretsu, someimportant differences between the Japanese and Korean enterprise systems andenvironment need to be noted.

One is that even though, in the symbiotic relationship between governmentand industry, Korea's model is passing from that of "manager" to that of "ccach," a<late as the early 1990s state-owned enterprises still accounted for 10 percent ofGNP. Korea Electric, Korea Telecommunications, Pohang Sieel Co (Poseo) belongin the top ten business groups if they are compared with private firms in terms ofsales.23 Thus government is significantly more prominent.

As in Japan, however, close relations between government and theoligopolistic companies were brought about through state backing, especiallythrough the provision of cheap loans and other forms of government subsidy. Infurther comparison between Korea post 1960s and Japan especially in the pre-warera—with some residual effects after the war—Korean enterprises were "invited" bygovernment to enter certain sectors.

Second, although diaebol like zaibatsu literally means financial clique, in factthe clwebol do not include banks. The financial sector in Korea is still dominated bythe state.

Third, the Korean chaebol do not include the vertical supplier and /ordistribution chains that were noted above in respect to Japan.

A fourth difference is that while the keiretsu normally include companies inmany different sectors, individual member companies tend to be specialised. Eventoday Japanese manufacturers will typically make 90 percent of their turnoverfrom core business. In the Korean chaebol structure, by contrast, individualcompanies are highly diversified. Critics compare the chaebol to department store«:first floor, heavy engineering and shipbuilding; second floor, construction; thirdfloor, footwear; fourth floor, textiles; fifth floor, chemicals; sixth floor, electroniccomponents; seventh floor, consumer electronics; eighth floor, cars; ninth floor.

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hotels, etc. The government from the mid/late eighties has sought to get the chaebolto specialise, but with hardly any success.

Fifth, the Korean chaebol are predominantly owned and controlled by theentrepreneurs and their families and/or descendants. In fact, domination by thefounder 2nd his family is one of the most striking distinguishing features of theKorean chaebol. As Whitley comments:

Despite state pressure to sell shares on the stock exchange and dilutefamily ownership, only 20-30 percent of chaebol firms were listed in 19S6.Nearly all the unlisted firms are owned and controlled by the foundingfamily, who often used the group holding company or trading companyto control all the firms in the chaebol. This pattern of family ownershipdespite high growth rates and large size has been maintained bywidespread reliance on debt financing, with debt/equity ratios of 3.6 forthe top ten chaebol in manufacturing in 1983 and 6.8 in construction. Incontrast to Japanese firms, even the pre-war family-owned zaibatsu,family ownership in Korea means strong family control. Nearly all the topmanagement posts in the chaebol are held by close relatives of thefounders, and it is a common saying in Korea that founders createsubsidiaries for each member of the family to manage (Whitely 1992:44-5).

Perhaps because of the dominant role of the family, a sixth difference thatcan be cited between the Japanese and Korean business environments is thatlifetime employment is not practised in Korea. Although the chaebol claim topractice paternalism and develop close ties of loyalty with the core labour force,this would seem to be mainly cosmetic: mobility between large firms, i.e. job-hopping, does occur. Labour unions in some instances have been extremelymilitant.

Jung24 argues that with démocratisation, the balance of power betweengovernment and the dwebol has tilted in the direction of the latter "the top fivebusiness groups have become so powerful that their influence reaches not only tothe marketplace but also such diverse areas as culture, welfare and the politicalarena". One of the not-surprising consequences, also in light of the heady newatmosphere of democracy in Korea, is that there is heavy public criticism for theexcessive concentration of economic power in the hands of a few chaebols. Thissituation is all the more aggravated in that there is still no separation of ownershipand management in the Korean chaebol.

The founder families often control the entire business with less than 10percent of the total outstanding capitaL This is made possible by the presence ofcross-shareholdings. There is, as Jung stresses, an anomaly, namely that private

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family power is concentrated in enterprises that are nevertheless public, in thesense that over 50 percent of the shares are owned by public investors, includingsmall shareholders and institutional investors. In addition, the large companies areheavily dependent on borrowings from public financial institutions. It is for thesereasons, among others, that it is quite alarming that the family form of corporategovernance in Korea should allow for virtually no monitoring.

It follows from what has been said that the composition of the board ofKorean companies is entirely at the discretion of the chairman. In Japan, it is alsothe CEO who appoints th? members of the board, though in Korea the chairman isboth owner and CEO. As Jung says, "it is apparent that the board does not functionas a decision making body but as a moeting where the chairman directs and givesorders to its members".

Jung argues that things will change. Korean chaebols, he says, are goingthrough a transitional period.

Large companies are currently about forty years old and thus there is atransition towards the second-generation of the founding families. Inheritancetaxes will also contribute to the dilution of capital. The Korean government, byvirtue of being democratic, is more accountable to the public and can engage in lessfavouritism. Laws have been introduced with a view to making financialtransactions more transparent. A main reason why families will have to rely moreon professional management, however, is that the companies have become muchbigger and the technologies have become far more complex.

Take the example of Samsung. As described recently in the Economist, "It isleading a Sino-Korean venture into aerospace, building new semiconductor plants,even eyeing up Hollywood. The group's planned investments this year alone cometo a staggering 7.8 trillion won ($102 billion), about a fifth more than is planned bythe 17 firms that make up the core of Japan's Mitsubishi empire. All this investmentis aimed at quadrupling Samsung's sales by 2001. That means over $200 billionworth of goods, more than the entire output of a country the size of Sweden".25

The Korean economy is doing well, growing this year at 7 percent. It iscertainly not facing the kind of crisis or recession which have occurred in Japan.Nevertheless, a lot of things in Korea are changing. Korea can be said to be facingsimultaneous discontinuities: domestic political change, international geopoliticalchange, technological change, social change. There are many challenges lyingahead. As Jung reflects, "how to develop a Korean-style governance systemcommensurate with the current and future ownership structure is the majorchallenge that Korean business groups are faced with in the next decade".

Changes are bound to occur. The tremendous national solidarity whichcharacterised the first decades of Korea's industrial revolution will have to giveway to greater internationalism and more international management skills..

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3) Chinese Bamboo Networks

Although there are a growing number of companies from the People'sRepublic of China, the Chinese bamboo network refers primarily to enterprisesoutside the PRC. The most obvious contrast between the Japanese and Koreanenterprises on the one hand and the Chinese on the other, is that whereas theformer are operating from secure, often captive, certainly highly protective,domestic bases, Chinese enterprises are operating in fundamentally insecureenvironments. Not only does t\¿s include the South-East Asian countries, but abothe Chinese outposts, Taiwan and Hong Kong, where there is a great deal ofinsecurity. Trust beyond the confines of famiiy and clan is a scarce commodity. Forthis reason, among others, the corporate governance philosophy of Chineseenterprises will not seriously include social responsibility, public accountability orany strong commitment to good corporate ciHzenship. Political circumstances may,however, dictate rhetorical reference to social responsibility. In South-East Asia,governments claim to be becoming concerned about the apparent growing gapsbetween rich and poor. The Chinese are among the rich, often the super-rich.2h

In the summer of 1995, the Indonesian government summoned about 100(primarily Chinese) businessmen to a conference in Bali aimed at fostering greateradherence to the state ideology Pancasila. In particular, they were urged to devisemeasures of contributing to alleviating problems of poverty and thereby to exercisea higher level of social responsibility. At the end of the conference the businessmenissued the "Bali Declaration," which, among other things, pledges to narrow thegap between rich and poor by fostering the growth of small businesses. Thebusinessmen also, however, took a swipe at government by calling for moretransparency in government policy and in thee bureaucracy.27

The first point to stress is that while it has been said that all of the major EastAsian systems of corporate governance are secretive, generally quite opaque, thisapplies in spades to the Chinese enterprises. Innovative accounting systems andthe normal practice of keeping several distinct account books areamong theirdistinguishing characteristics. The dominant characteristic of Chinese firms isfamily ownership and control, to the extent, as Whitley writes, that "enterprises areoften viewed as part of the family property-rather than as separate administrativeentities" (Whitely 1992: 54). As the Economist points out, although some Chinesefirms "display all the trappings of a modern corporation, such as professionalmanagers, stockmarket listings, or even a public relations department, — thechoicest assets are frequently ferreted away in a maze of private companies andtrusts".28

Although there are exceptions, another characteristic of the Chineseenterprise is that it is small. In the first respect, therefore, Chinese enterprises

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contrast with Japan, and in the second they contrast sharply with both Japan andKorea. Indeed, just as the Korea economy is dominated by large enterprises andthe small-and-medium-size sector is weak, the Taiwanese economy is dominatedby small and medium-sized enterprises and the large-enterprise sector is weak.The Korean government is seeking to restrain the large companies and encouragethe small and medium-sized companies, while the Taiwanese government is bothseeking to assist in the creation of large enterprises and, through places such asHsinchu science park, attempting to get small enterprises to cooperate in R&D.2"*The small size of Chinese companies is a handicap in respect to their being able tomeet the new challenges of moving into technology-intensive sectors.

The bamboo network is also far more informal than the Korean or Japaneseforms. In the Chinese scheme of things, firms are connected to a large number ofother firms through a "complex web of deals, obligations, personal ties and jointactivities" (Whitely 1992; 56). Trust is crucial, but relations are far more fluid than inthe Japanese keiretsu, and unlike them the Chinese networks may also change.Relations are between individuals, not between firms. Tin. general informalitywhich pervades Chinese enterprises is also reflected in finance: preference is givento informal sources, including family members, friends, credit associations, orunregulated "curb" markets, rather than formal institutions such as banks.

In respect of the internal functioning of the firm, personal autocraticleadership is complemented by preference for recruitment and promotion of kinfor top and key positions. The centralised decision-making does contribute to twooff the Chinese firms' strengths, namely their high degree of production flexibilityand strategic adaptability. Garments today, semiconductors tomorrow, noproblem. Owner-entrepreneurs are also obviously far more sensitive than outsidemanagers on matters of costs and finance. On the other hand, businesses aregenerally smali scale, with low capital-intensity, limited product diversification,and concentration on a few markets (Brown 1995; Redding 1990).

Until recently, ca 1985, Chinese enterprises tended to be players in their localenvironments. Since 1985, not only have Chinesee enterprises become regionalplayers: in China and in most South-East Asian markets, they are the most activeforeign players. Companies from Taiwan and Hong Kong needed to go abroad astheir currency (in Taiwan) appreciated, as labour and land became more expensiveand scarce, and as opportunities beckoned. The trade regimes of the countries alsoimproved significantly. Chinese companies in the ASEAN countries have engagedin considerable cross-border investments.

The régionalisation of Chinese companies has been one of the most markedbusiness developments that has occurred recently. The push abroad, therefore, ismostly driven by changes in external conditions, rather than internal corporatestrategies. The foreign operations of the Chinese companies are, however/ highly

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30 • Jean-Pierre Lehmann

enhanced by a number of key non-market forces, in particular ethnic resources andnetworks, kinship and personal links. These links include those fostered amongChinese studying in American universities. From their community networks,Chinese businessmen can obtain information, business partners, distributionchannels, etc. Although organisational structures and control systems of overseasChinese enterprises tend to change with the degree of internationalisation, thesechanges tend to be more apparent than fundamental.

Chinese companies can be described as hyper-active small fry. Thus,although these networks have achieved phenomenal success in driving the growthof the Chinese and South-East Asian economies, the fact that the individualcompanies are small in principle forces them to remain in the fairly low end oftechnology—i.e. they cannot afford huge R&D costs—and they are also unlikely tobecome major global foreign investors. The Chinese bamboo network exists in theUnited States, but is absent from Europe.

Although the Chinese and South-East Asian economies remain boomingand are expected to continue to be the fastest growing economies for theforeseeable future, and although the Chinese business enterprises are the drivingforce of the region's economies, serious challenges of transition also lie ahead.These include:

Control of the companies is now passing from the elderly founders to newgenerations. In some cases, the new generation consists of bright, American-educated, professionally inclined executives. In others, they consist of half-witswho obtain their position purely through nepotism.

International activities will require greater organisational skills and alsogreater organisational transparency. As Asian governments liberalise trade andderegulate their domestic economies, the key asset of the Chinese, guanxi(connections), may become less important.

If Chinese companies wish to remain competitive with their Western andJapanese counterparts, they will need to bring greater separation betweenownership and management as a key means to recruit well qualified and highlymotivated staff. If all promotions are made on nepotistic principles, clearly non-family members will prefer to find better career prospects elsewhere.

The point about having size in order to be able to afford expensive R&D alsopresents one of the key challenges. Examples of large, in fact very large, Chinesefirms exist. Generally, however, these are mainly in real estate or in commercialoperations. In industrial areas, especially in high tech, they also exist—e.g. Acer inTaiwan and Alphatech in Thailand—but they are few and far-between.

One of the most successful Chinese enterprises is the Thailand-basedCharoenn Pokphand (CP) Group. The company appears to be extremely ably runby two brothers, Sumet and Dhanin, grandsons of the founder. In their case, the

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often quoted Chinese proverb that in the third generation everything tends to go topot, would not seem to apply. CP is big throughout East Asia, including in Ovina,where it has made large investments which are providing good returns. The"Chinese-style" approach, which, according to Sumet, accounts for their success,can be illustrated from comments he recently made in an interview. CP'sperformance in China is guided by "flexibility," in contrast to the "inflexibility" ofnon-Asian companies: "American and European companies have adaptedthemselves to a very sophisticated legal-based society. In China there is no law.There is no system. It is a government by individuals, by people".30 While CP isclearly clued on to the Chinese way of doing things, it is also on internationalbusir.?sses' wavelengths; its partners include the American Nynex (in télécoms),the Japanese Honda (in motorbikes) and the European Makro (in retailing). Fromhaving been primarily an agribusiness company (a sector in which it remainsextremely strong), CP has moved into aquaculture, real estate, transport equipmentand telecommunications. Although CP has listings on a number of stockexchanges, including New York's, as a company it would nevertheless correspondto the general points made about rather opaque forms of corporate governance.The Jiaravanon family still reigns and rules.

The Bamboo Network has emerged as a highly dynamic force in the AsiaPacific Regional environment. It remains to be seen how the Bamboo network willadjust and respond to globalisation and indeed how the global economy will adjustand respond to the Bamboo Network.

7. Conclusion: Corporate Governance in Europe and Asia

The subject of corporate governance in Europe and East Asia constitutes avery rich field for research. There is a great deal of work to be done. This is all themore the case in that in some of the societies in East Asia, e.g. Korea, the subject isvery new.

One important conclusion to draw from this document is that the idea thatcorporate governance in the West differs fundamentally from that in the East iswrong, and potentially dangerous. The situation, as has been demonstrated, ismore complex and the notion of a fundamental cultural contrast needs to bedispelled. In some respects, chronology obviously has an influence. The businessenvironment in China today is perhaps not too dissimilar from what it was inNorth America a century ago. As economies mature, a degree of convergenceoccurs.

It is wrong, however, to assume that the convergence will invariably lead toa global assumption of the Anglo-American model. As indicated in the text, the fact

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that the economies of the Anglo-American model at present may be doing betterthan those of the Rheinal and Japanese keiretsu models does not necessarily proveanything. Drawing lessons must not be confused with reaching hash' conclusions.

As the shift of the global industrial'centre of gravity continues from theAtlantic to the Pacific, businesses will increasingly meet challenges, opportunitiesand perceived threats. Most of the focus has been on Europeans looking to Asia. Asthey globalise, however, East Asian companies will also have to look more closelyat Europe.

At> investments become a greater driving force in the world economy,increasingly companies will be meeting and competing in more and more markets,fhe scope for cooperation will be enhanced, but so will potential frictions becomemore numerous and intense. Understanding not only each other's nationaleconomic and political systems, but also systems of corporate governance is animportant means to increase the scope for cooperation and decrease confrontation.

Notes

1 The paper is extracted from a report originally commissioned by and submitted to a jointproject on investment in Asia undertaken by the Organization for Economic Cooperationand Development (OECD) and the Asian Development Bank (ADB) in June 1996. Thanksare especially due to Charles Oman, Director of the Development Centre, OECD.

2 In 1984 Deng Xiaoping's economic reforms which had been initiated in the countrysidewere instituted in the PRC's urban and industrial areas, thereby bringing the Chineseeconomy into the world and regional business environments. In 1985 the Plaza Accordresulted in the first massive phase of yen appreciation, thereby precipitating the outflow ofproductive Japanese investment in Asian countries. The appreciation of the Korean Wonand the New Chinese-Taipei Dollar had similar effects on their offshore manufacturinginvestments. Thus 1984/85 mark the genesis of East Asian regional economic integrationand a quantum change in its business environment. Prior to 1985, (a) China was prettyclosed off from the "capitalist world," (b) Japan's investments in East Asia were eitherdriven by the need to ensure access to sources of raw materials or to overcome importsubstitution policies which were widely practised especially in South-East Asia. Not onlywere outward investments from Chinese Taipei and Korean non-existent, they were in factprohibited.

3 The Japanese tend to oscillate between presenting their business culture as unique andemphasising its universality, or at least universality in respect to Asia. Fukuyama (1995)has made interesting remarks on the difficulty of the Japanese to make up their mindswhether to be unique or universal, though the prospects for the latter are complex: With

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the rise of Japan as an economic superpower, there has been talk among certain Japanese ofa "Japanese model" that should be followed by other nations of Asia, if not by other parts ofthe world more generally (...) In terms of industrial structure, however, there is a wide gapbetween Japan and other East Asian cultures, and some reason for thinking that it will bevery difficult for Sinitic societies to adopt Japanese practices' (p. 347).

4 See Thurrow (1992), Johnson (1995), Luttwak (1993), Tyson (1992), Prestowitz, Jr. (1988),Fallows (1994).

5 Which may in due course be extended to six, as the Swedish company SAAB and the ItalianAliena may be invited to join the consortium.

6 By national companies remaining "national" is meant that major shareholders and seniormanagement tend to be primarily, sometimes exclusively, citizens of the company'snational origins, they dominate their own national markets—e.g. Fiat in Italy—andgenerally convey a distinct national image—e.g. the German engineering image ofMercedes Benz, the Swedish solid safety image of Volvo, etc.

7 China's GNP may be catching up and, according to come calculations, has alreadysurpassed Germany and Japan. However, in the terms being discussed here, China'sbusiness system is not influential.

8 About 60 percent of marriages among employees of large corporations are so-called "shanai-kckkon," i.e. intra-firm marriages.

9 See Aoki and Patrick (1994), the chapter by Theodor Baums, The German banking system

and its impact on corporate finance and governance'.10As Whitley (1992), notes, 'high levels of mutual dependence between large employers, their

"core" workers and suppliers/customers in Japan is unlikely to generate effective businesssystems if they are combined with highly specialized tasks and formalized control systems'(p.23).

111 Elmar Gerum, 'Aufsichtsratstypen-Ein beitrag zur theorie der organisation derunternehemsntihrung,' Die Betriebswirtschaft 6, 1991, quoted in Yoshimori (1995).

12 See, for example, Monks (1994).13 See, for example, the article on Stakeholder capitalism' in Economist of 10-16 February 1996.14 Watanabe and Yamamoto (1993) also point out that " ... the current economic recession can

be called a governance recession" (p. 208).15 See, for example, Thurow (1992) and Garten (1992).16 Japanese industrial society and law in the pre-war era owed quite a lot to German

influences. The pre-war Japanese constitution of 1889 was inspired from a Bismarckianmodel, a German professor of jurisprudence, Hermann Roesler, drafted Japan'scommercial code, and the emphasis given in Japanese tertiary education to engineeringrather than science was also "copied" from Germany.

17 See, for example, Clad (1989).18 This paper will not attempt to include the recently emancipated economies of Central and

Eastern Europe or Russia. There have been those who have urged these countries to leap

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from communism (which might be described as the government-as-dictator model) to thegovernment-as-referee model, while others have cautioned in favour of a more gradualistChinese approach. The record is too recent however and the situation too volatile, in somecases turbulent, to draw any conclusions.

19 One of the more recent and truly excellent studies on this subject is Welliams (1994), and seealso the remarkable book of Tsuru (1993).

20 Défi américain literally means "American challenge". It was the title of a highly popularbook, published in 1967, translated into numerous languages, written by the French authorJean-Jacques Servan-Schreiber. In it, he forecasts, among other things, that superiorAmerican capital, management and technology would totally overtake Europe, includingthrough the purchase of European assets.

21 Strictly speaking it is not impossible for foreign companies to acquire Japanese companies.It is however extremely rare. There are only two cases of first stock-exchange listedJapanese companies acquired by foreigners. One was the acquisition of Banyu by Merck,Sharp and Dome, the other was the acquisition of Osaka Gas by the British OxygenCorporation (BOC). In both cases, however, acquisition followed very extensivediscussions and long-standing relationships. Hostile take-overs are still rather unthinkablefor foreign companies in Japan and are very rare between Japanese companies.

22 Jung Ku-Hyun, 'Ownership and Governance Structure of Korean Business Groups,'Unpublished, 1995. I am very grateful to Jung Ku-Hyun for having given me his paper.

23 Ibid: 324 The following few paragraphs are taken quite extensively from Jung's paper cited above.25 ' Sou th Korea Survey, ' Economist, 3 June 1995: 15.26 According to the Economist, T h e overseas Chinese inheri t ing the b a m b o o network, ' 23

December 1995-5 January 1996, nine out of every ten East Asian billionaires is Chinese.Redding (1990), comments that Overseas Chinese are brought u p to value three things:work, family and money , and to realise the connection between the three.

27 Manuela Saragosa, 'Leaders of Indonesia's big business return fire: bureaucracy and a lackof t ransparency irk the mostly ethnic Chinese tycoons,' Financial Times, 1 September 1995and T i m e to loosen the ties that bind, ' Financial Times, 17 October 1995.

28 ' T h e overseas Chinese inheri t ing the b a m b o o network, ' Economist, 23 December 1995 to 5January 1996.

29 'The Hsinchu companies, which employ 42,000 people, spend around 55 percent of theirturnover on research and development (against a national average of 1 percent),' 'A Surveyof Business in Asia,' Economist, 9 March 1996.

30 ' W h e n family empi re s s h a p e asian expansion, ' International Herald Tribune, 16 N o v e m b e r1995.

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Documents

Comparative perspective of corporate governance: Europe and East Asia