ECONOMIC RESEARCH CENTERDISCUSSION PAPER

No.158

Trend of reforming corporate governance in East Asia;
A comparative viewby
KAWAI Shin’ichi

August 2006

ECONOMIC RESEARCH CENTERSCHOOL OF ECONOMICSNAGOYA UNIVERSITY

Trend of reforming corporate governance in East Asia;
A comparative view
KAWAI Shin’ichi
Aichi University

This paper considers the trend of reforming corporate governance in East Asia in comparative
perspective. Chapter 1 considers increasing concern of corporate governance in East
Asia .Chapter 2 describes the features of corporate governance in East Asia, chapter 3 analyses
the measures of reforming corporate governance in East Asia and chapter 4 makes
assessment of corporate governance reform there.
.

1

Increasing concern of corporate governance in East Asia
For the past decade, there has been a new trend to consider and reform corporate governancein East Asia. The concept of corporate governance was originated in Anglo-American world, butsince 1990s it has spread all over the world including East Asian developing countries. More
Scholars and business management in East Asia have started to reconsider their past corporate
governance system and to regulate their system in reformative ways.

This process has somehistorical backgrounds.
1)

BackgroundWe should look at three levels of background. The first is increasing crimes and scandals incompanies and efforts to defend and control them in each country．Many crimes and scandals
repeatedly revealed the lack of public disclosure, moral hazard of managers and ineffective
control, all of which were related with the problems of corporate governance. The second is
Asian Financial Crisis in 1997, which was partly resulted from the dysfunction of
governance in financial area (security and banking).

1

corporate

The countries suffering from severedamage, such as Thailand, Indonesia, Philippines and Korea had to do their best to reform theirfinancial and related systems including company system.

The third is international efforts to

spread and build the principle of corporate governance among developing world by internationalorganizations such as OECD, Word Bank etc.

OECD is originally a developed nationsorganization but has made much effort to spread the principle of corporate governance among
non-members developing countries as well as OECD members by organizing many
international meetings.

OECD adopted a corporate governance principle in 1999 which

regulate a general guideline for member countries to make and perform corporate governancecode in their own way. Main contents of the principle are as follows: 1）Stockholder right, andequal treatment , 2）Stakeholders Right, 3）Information Disclosure and Transparency,

4）

Responsibility and Duty of Board of Directors.
It should be noted that the OECD corporate governance principle offered a frame of reference
for making a corporate governance code in East Asian countries.

For example, Chinese

corporate governance code issued in January 2002 was partly based upon the OECD principle(Kawai ,2002).
OECD and the World Bank established Global Corporate Governance Forum (GCGF) in
1999. GCGF with back-up of OECD and World Bank organized a series of round tableconferences on corporate governance in Asia, Latin America, Russia, and Southeast Europe andEurasia, respectively.

The roundtable meetings on corporate governance addressed general

corporate governance issues as well as matters of specific concern to their respective regions.

2)Asian roundtable conference of corporate governance
13 nations and an area are members participating in the Asian Round Table.

The Asianround table conference has been held seven times until now. Themes and contents of eachround table conference were as follows.

2

The 1st round table conference, “comparative examination of Asian countries and area”

washeld on 3-5 March 1999 in Seoul. The OECD, under the auspices of the Centre for Co-operation
with Non-Members, organized a senior experts meeting on "Corporate Governance in Asia: A
Comparative Perspective". The meeting was co-hosted by the Korean Development Institute(KDI) and the Korean government and was co-sponsored by the Japanese government and theWorld Bank. A debate developed around a set of country papers on corporate governancearrangements in the above countries and a set of substantive presentations by experts andconsultants, including presentations by OECD, KDI and the World Bank experts. The
continuing relevance of corporate governance as one of the main factors in the 1997-98 crisis
and as an area of major policy reform was underlined by all participants. Deputy Secretary
General Joanna Shelton focused on the important role that the OECD Corporate GovernancePrinciples are expected to play in the design of reforms and the international policy dialoguethat would develop around them. Most of the countries declared their readiness to use theOECD Principles, as a main benchmark and a gauge of progress in the context of this dialogue.
2nd round table conference, "Role of the indication in strengthening of corporate governanceand accountability" was held in Hong Kong on 31 May - 2 June 2000. The meeting, co-hosted
by the Hong Kong Securities and Futures Commission, the Hong Kong Stock Exchange and theHong Kong Society of Accountants, focused on three broad aspects of disclosure: the role of theboard of directors in overseeing disclosure, accounting and audit standards and theirimplementation, and non-financial disclosure. As countries move from merit based regulation to
greater disclosure based regulation, financial transparency was identified as the remedy ofchoice for many problems associated with governance in the region.
3rd round table conference, “The role of Boards and Stakeholders in corporate governance”
in Singapore on 4-6 April 2001. This meeting was organized by the OECD, World Bank, and
ADB and co-hosted by the Monetary Authority of Singapore, Singapore Institute of Directors,

3and Singapore Exchange. The Singapore meeting covered a wide range of issues relating to thefunctions and responsibilities of boards as well as the development of good stakeholder
relationships. The meeting participants also discussed the first draft of the Asian Corporate
Governance White Paper, which contains region-specific guidance to assist policymakers,
regulators, stock exchanges, and other standards setting bodies in the Asian region in theirefforts to evaluate and improve the framework for corporate governance.
4th round table conference“Shareholders' rights and the equitable treatment of shareholders” in
Mumbai , India, 2002.11. The meeting considered three themes: the first theme was“Promoting

Shareholder Participation”. Under this theme, there were sessions considering those problems ofcreating shareholder value in Asia, the general meeting of shareholders and the state as shareholder.
The second theme was “Preventing Insider Abuse”, considering such problems as the case for "roughjustice", related-party transactions, and corporate-control structures and transactions. The third
theme was “Enforcing Shareholders Rights”, under which there were sessions considering
empowering shareholders and private-sector initiatives.

5th round table conference, “Manuscript completion of the white paper and execution” in Kuala
Lumpur, Malaysia in March 2003. The meeting comprised drafting sessions on the White Paper
on Corporate Governance in Asia, as well as a workshop on implementation and enforcement
issues.

The meeting was organized by the OECD, in partnership with the Global Corporate

Governance Forum and the Government of Japan. The Securities Commission, Malaysia, theKuala Lumpur Stock Exchange and the Malaysian Institute of Corporate Governance served as
joint hosts.
This meeting addressed the main features of the White Paper on Corporate Governance inAsia and its priority key recommendations. It also considered the future work of the AsianRoundtable, which is organized by the OECD in cooperation with the World Bank and in
partnership with the Global Corporate Governance Forum and the Government of

4

Japan. Furthermore, it featured a review of responses to a questionnaire addressing the
Implementation and Enforcement Issues in Asia.
6th round table conference, “Implementation and Enforcement in corporate governance”, inSeoul, Korea on 2 and 3 November 2004.

Sub themes discussed included 'Quality of theRegulatory Framework'; 'Supervision and Regulatory Enforcement: (i) Investigatory Powers
and Sanctions, and (ii) Ensuring Capacity, Integrity and Accountability of Regulators andSupervisors'; 'Judicial Enforcement: (i) Civil Enforcement, and (ii) Criminal Enforcement; and'Ensuring Judicial Infrastructure'.

During the closing session the future work of the Asia

Roundtable was discussed; it was decided to form dedicated Task Forces consisting of bothRoundtable participants and outside specialists to investigate two or three key topics, e.g. (i)Corporate governance of banks / financial institutions, and / or (ii) Related party transactions,and / or (iii) Convergence to IFRS.
7th round table conference was held in Bali, Indonesia, on 8 and 9 September 2005. The
principal agenda items for the meeting included (i) corporate governance of banks, (ii) a stock
take of progress in policy reforms since the publication of the Asian White Paper in 2003, (iii)the role of the board in implementing the OECD Principles of Corporate Governance, and (iv)
corporate governance of state-owned enterprises.

The Bank for International Settlements(BIS) on the topic of corporate governance of banks, the Task Force on Corporate Governanceof Banks presented a draft Policy Brief. Subsequently the draft report titled “2005 Stock Takingof Corporate Governance Related Developments in Asian Roundtable Economies” waspresented.

Furthermore the Advisory Group to the OECD that is drafting the “Boardroom

Guide to the OECD principles of Corporate Governance”, stressed in their presentation that theBoardroom Guide will focus on an aspect of corporate governance generic to all jurisdictions:what takes place in or should take place in the boardroom. Public consultation on the
Boardroom Guide is anticipated in the near future. In the session about corporate governance of5state owned enterprises both the OECD Guidelines on Corporate Governance of SOEs were
presented and the first findings of the Task Force on Corporate Governance of SOEs. Finally, inthe closing session the two key areas for the Roundtable’s agenda in the coming year wereidentified to be (i) corporate governance of SOEs, and (ii) enforcement of corporate governancelegislation / regulation

3)

Asian corporate governance white paper: a step toward Asian corporate governance norm
The white paper on Asian corporate governance was formally announced in Tokyo, in Nov.

2003. The white paper had been prepared by the 5th roundtable in Malaysia within theframework of the Asia program of the OECD Center for the co-operation with the non-membersof Asian nations.
The White Paper included the following contents: ①equal treatment of shareholder’s rights,②role of stakeholders, ③information disclosure and transparency, and ④responsibilities ofboard of directors. The framework of the White Paper was basically the same as the OECD
corporate governance principle(1999), although it had some modification based on Asian
conditions.
Among these four contents, the first stress was placed on the equal treatment of shareholder’srights as well as responsibilities of board of directors in terms of amount of page coverage（16pand 15p respectively）.The second stress was on information disclosure and transparency(12p.)
and the least on the role of stakeholders(5p.). The difference of stress reflected concern ofcorporate governance on the part of Asian roundtable participants.
The White Paper is an ambitious undertaking, because Asia is a very diverse region in areas
such as regal tradition, regulatory system and economic development.

To the Asianroundtable’s credit, it has harnessed this diversity to drive home the essential points thatdifferent jurisdictions may adopt different approaches to the same concern based on the their6

understanding of national/regional conditions. Therefore, the White Paper was not a particular
but a general guideline which gave each nation much room for its concrete way of fulfillment.
According to the White Paper, six priorities for reform are proposed for Asian countries andareas（executive summary）(1) Public- and private-sector institutions should continue to raise awareness among
companies, directors, shareholders and other interested parties of the value of good corporate
governance.
(2) All jurisdictions should strive for effective implementation and enforcement ofcorporate-governance laws and regulations.
(3) Asian roundtable countries should work towards full convergence with international
standards and practices for accountings, audit, and non-financial disclosure. Where, for the time
being, full convergence is not possible, divergences from international standards and practices
and reasons for these divergences should be disclosed by standards setters; company financial
statements should repeat or reference these disclosures where relevant to specific items.
(4) Board of directors must improve their participation in the strategic planning, monitoringof internal control systems and independent review of transactions involving managers,
controlling shareholders and other insiders.
(5) The legal and regulatory framework should ensure that non-controlling shareholders areprotected from exploitation by insiders and controlling shareholders(6) Government should make further efforts to improve corporate governance of banks andthe regulation towards banks
It is a fundamental task to raise social awareness of value of good corporate governance amongcorporate stakeholders because generally they are less or not aware of the value and even if theyaware they have different views of what good corporate governance is.

This proposal

regards international standards of corporate governance, reflected in the OECD corporate

7

governance principle as model for reference and insists that Asian countries should try toremold their reality converse with the international standards, although admitting somedivergence for the time being.

2

Overview of the nature of corporate governance in East Asia

The feature of corporate governance of public companies in East Asia has been discussed in aseries of Asian Roundtable meetings and was reviewed in the White Paper．The paper
mentioned three features;concentration of ownership, strong private character of relationshipamong interested person and a very diverse system of law and economy. These features are
mentioned by many scholars, some of whom participated in the Asian roundtable meetings.
1)

Concentration of ownership

One of the strong features in listed companies in East Asia is concentrated ownership offamily and government. Table 1 shows highly concentrated ownership of family as ultimate
owners in many East Asian countries except Japan. Overall the nine East Asian countries all
have high rate of family ownership approximately on the average of 50％(S.Claessens et
al .1998).
Table 2 shows that the concentrated situation basically remains unchanged in term ofownership weighted by stock market capitalization, although the average rate of ownership is alittle less than that of unweighted ownership as seen in table 1.
Then we can see a concentrated ownership of government such as Singapore, Malaysia,
Thailand and Korea in table 2.

But on the other hand there are much smaller ownership ofgovernment in Taiwan, Philippines, Hong Kong and Japan.
.

2)Strong informal feature of relationship among stakeholders

8

Concentration of ownership by family and government lead us to assume the second prominent
feature of corporate governance in Asia. That is the strength of informal or private relationships
among stakeholders. The informal feature can be found not only in the concentrated ownershipby family members or close friends even in the large enterprises but also in the informaltransactions among companies. The informal nature of stakeholder/company interaction can
produce real and lasting benefits for stakeholders, which equal or exceed those offered throughmore formal approaches based on the rights.

At the same time trend towards globalization andgreater minority shareholder activism are leading to changes in the business relationships, aswell as to debate about recasting informal interests as formal rights enjoying formal protection
mechanisms.
Rajan and Zingalas（1998）noted that East Asia had more relationship-based system oftransaction than arms-length market-based system as seen in Anglo-American countries. Tsuiand Shieh（2002）described four types of corporate governance regimes in the emerging
markets: 1）market based corporate governance regime, 2）family based corporate governanceregime, 3）bank lending corporate governance regime，４）government- affiliated corporate
government regime.

Among these four types of regime, ２）to ４）are more or less informal

relationship based.
Family based regime are generally seen in the emerging markets especially seen in Hong
Kong, Indonesia, Malaysia, Thailand, Singapore, Taiwan and Korea etc. It is noted thatcompany with high concentrated family ownership could have less agency problem that stemfrom the conflicts of interest between owners and managers because family company has lessseparation between shareholders and managers. But on the other hand, such concentrated
ownership could lead to the suppression of minority rights and could adversely affect theeconomic development of market characterized by weak enforceability of the legal andregulatory institutions. And also family based regime has less transparency on corporate

9

governance practices such as disclosure of financial information should be expected in market
regime.
Banks in emerging markets more or less are controlled and intervened extensively bygovernment in lending decisions. This has led to little interest in deriving good disclosure fromcompanies. In Korea, Indonesia, Malaysia, the government would act a de facto guarantor forloans extended to companies in targeted industries. With the lack of financial transparency inthese countries, lending decisions of banks were made primarily on the basis of relationshiprather than on an objective assessment of the prospects of the company. These banking lending
relationships generally show the lack of effective corporate governance mechanism and lack oftransparency.
Government affiliated corporate governance regime can be found in China, Singapore andMalaysia. In China government has very high rate of ownership approximately with 65％ of
total shares issued on stock markets. Singapore government directly or indirectly controls up to
80％ of listed companies in Singapore, although the rate of ownership has been reduced in
1990s through theprivatization program. This kind of regime also could result in less financial transparency
lending to possibility of earning manipulations by corporate managers who are also agents ofgovernment to expropriate wealth from the minority shareholders.
3) Asian business has a very diverse system of law and economy.
With respect to legal traditions, Hong Kong, India, Pakistan , Malaysia and Singapore
have common law framework. Thailand and the Philippines have framework based on French
civil law while China, Taiwan and South Korea draw upon German civil law traditions. Japan
also had German civil law tradition which has been modified with the influence of
Anglo-American law after World WarⅡ. Relatively speaking, nations with common law
framework are superior to civil law nations in equity participant protection, capital market

10

development, creditor protection, and respect of the rule of law（La Porta et al.,1997）．
Overlaying these different legal traditions in many countries are behavioral norms stemmingfrom various cultural and religious traditions. Economically Asian countries also constitutemuch diversity of economic development with broad spectrum of infrastructural resources.

3

The measures of reforming corporate governance in East Asia
In this decade, many East Asian countries have made efforts to improve corporate

governance through various legal measures including company law, securities exchange act,
rule of listing shares in the exchange market and some other administrative regulations,non-obligatory documents. Increasing countries drafted and issued their corporate governancecode which itself was not an obligatory rules

Fig.1 shows the diffusion of corporate

governance code in the world since 1978. This trend is true in East Asian countries after 1990s.
For example, corporate governance code or its preliminary document was issued in Hong Kong
（1989,1996,1999,2000），Singapore（2001,2003）Korea（1999,2003），Taiwan（2002）、Thailand（1999,2000,2002），Indonesia（2000,2001），Malaysia（2000），Philippines（2004）,
China（2002）and Viet Nam.
There are much similarity in the measure to reform corporate governance in East Asian
countries as seen in Table 3.

The table shows that each country has the same intent of reformin term of increasing shareholders value, adoption of independent director, independent board
committee, principle of best practice, increasing financial disclosures and importance ofinstitutional investors. This partly means that East Asian countries have the same orientation
towards market-based corporate governance system as a model..
But East Asian countries differ in some fields of corporate governance such as stress of
stakeholders, composition of board and the volume and scope of the code as seen in Table 4.
There are two types of board system, namely one-tier system and two-tier system. One-tier11system is that board of directors plays executive function as well as audit function. Two-tiersystem is that executive function and oversight function are separately performed by two
different boards. In popular cases board of directors perform executive functions and board ofauditors perform oversight functions. The volume and scope（conclusiveness）of the code shows
indirectly the degree of concern of corporate governance on the part of policy makers in eachcountry. Therefore we can see stronger concern or intent held by policy makers in Thailand,
India, Japan and China.
Now we are not able to cover all aspects of the reform, therefore only pay a particularattention to two important fields of reform: one is reform of board of directors and director
responsibility, the other is protection and equal treatment of minority shareholders.
1) reforming board of directors
The reform of board of directors is the key to strengthening outside control of management
and increasing directors’ accountability toward shareholders. In this regard many East Asian
countries adopted two reforming measures; ①introduction of independent directors (or outside
directors) and②setup of board special committees as seen in Table 5. Many Asian corporate

governance legal frameworks already provide for the appointment of independent directors.
Minimum numbers of independent directors should be two or three, minimum percentage ofdirectors should be 20％，33％ and 50％ in special case. However, because controllingshareholders often choose the entire board, the real objectivity and independence and the realvalue of nominally independent directors can be undermined.
Board special committees include audit committee, nominating committee, remunerationcommittee, strategy committee, risk management committee etc.

These special committees

should be chaired by an outside director or outside directors members should be more thaninsider members. Therefore these board committees are an institutional means through which tostrengthen outsider control.

12

The most popular and important committee is an audit committee which should be an
obligatory organ in almost all reforming countries. But nominating committee and remunerationcommittee are optional but recommended in many reforming countries.
Now look at concrete examples of the setup of independent directors and board committees insome countries.
① South Korea

According to a research of listed companies in April 2003, average numberof outside directors of a firm listed on the big board are 2.18 persons, making up 35.05％of total
directors. This figure shows that actual average percentage has cleared the percentage of 25％
regulated by rule. But it is not clear whether outside control can be effective by setting up theoutside director system.

Job distribution of outside directors are as follows ; 32.2% corporate

managers, 20.3% college professors and researchers, 14.8% financial business circles, 9.5%
lawyers, 9.3% former government officials, 7.2% official accountants and tax accountants.
Companies which already setup an audit board committee constitute only 16.5％ of listedcompanies (Imaizumi and Abe, p.60 )② Taiwan

According to a research in 2004, independent director system was adopted bymany listing companies in Taiwan. Companies with at least one independent director are 245 in
number, comprising 36％, companies with two independent directors and more are 175,
comprising 26％，companies with three independent directors and more are 32, comprising 5％.
These figures show that reform of setting up independent directors in Taiwan has not yet
reached, has still been a long away from the regulated target of at least two independent
directors in each listed company.
③ China

China’s effort to building corporate governance framework has been intimately

related with the reform of state-owned enterprises（SOEs）,because main field where corporate
governance should be set up was large scale SOEs and joint-stock companies which weremainly originated from SOEs. The China Securities Regulatory Commission (CSRC) issued a13

directive in setting up independent directors in listed company, saying that each company shouldhave at least two independent directors by June 30,2002 and then should have independent
directors who comprise at least one third of directors by June 30,2003. Under this policy push,
more and more listed companies introduced independent director system. The system wasintroduced in 348 listed companies at the end of 2001, comprising 30.7% of all listed companies,
with the average of 0.62 independent directors per company. 1124 listed companies comprising
94.7％ set up the system with the average of 2.1 persons per company by the end of June, 2002.
65％of listed companies set up independent directors comprising one third and more of
directors and 82％of listed companies have independent directors comprising one forth andmore by the end of June, 2003. These figures show that regulated target of the number and theaverage of independent directors has been basically achieved.

Independent directors comefrom several job backgrounds; university and research institutions are the largest comprising
58.4％, company managers 25.5％，independentintermediate organs 15.2％ and others

19.3％（Ma Qingquan, first, p.7）
Board committees were set up in 98 listed companies in 2001， including audit committee（25.2％）Remuneration committee（27.9％），strategy committee（19.4％），merit rating
committee（10.6％），nominating committee（9.3％）（Wang Zhongjie, 90）．Only less than 20％
of listed companies set up four board committees and about half of listed companies did not yet
set up any board committees in 2003.
④

Singapore (2003)

Singapore had more positive achievements of setting up independent

directors than any other East Asian countries. For example, 41％of listed companies have
independent directors who comprised more than half of directors in 2003.（22％in 2001）82％
of listed companies have independent directors comprising one third and more. Each listedcompany has an average of 3.1 independent directors and 43％average ratio of independent
directors．Board committees have been most positively set up in Singapore as seen in Table 6.

14Three main committees（audit, remuneration, nominating）were set up in the majority ofcompanies. In each board committee independent directors are more than executive directors interm of average numbers.
2) Protection and equal treatment of minority shareholders.
Unequal treatment among shareholders is one of the remarkable features in East Asian
corporate governance. This has been proved by many facts that dominant shareholder who
control the management through concentrated ownership virtually appropriate the value ofminority shareholders. Various measures have been made in order to protect and treat equallyminority shareholders rights. Some major measures are as follows.
a) intensified disclosure of information.
In the years prior to 1997 financial crisis, disclosure of information was too frequently
inadequate; financial statements not only failed to present the company’s true financial situation
but were often highly misleading. Most Asian countries such as China, Hong Kong, Malaysia,
Singapore, Taiwan and Thailand have introduced more rigorous disclosure rules in these years.
In addition some countries also display greater assertiveness in monitoring and enforcing
regulations. In recent years, some Asian countries have taken significant steps to improvefinancial disclosure, including the adoption of international accounting standards. One
particularly significant reform in some countries has been the introduction or enhancement ofconsolidated financial reporting for corporate groups.
Besides financial disclosure, non-financial disclosure has improved in many East Asian
countries. For example, some countries including China now require disclosure of corporate
governance structure and practices, the background and remuneration of directors and key
executives as well as related party transactions（between affiliated companies or between thecompany and the controlling shareholders or managers）. The stock exchange in some Asianmarkets, China, Hong Kong, Malaysia, Singapore and Taiwan require disclosure of deviations

15

from a code of conduct. Correspondingly investors in Asia increasingly voice a desire for better
non-financial disclosure. As for disclosure of self- dealing and related party transaction is strong
in some countries and weak in others. In Malaysia, Kuala Lumpur Stock Exchange has recently
broadened the definition of related party transactions to capture a wider range of self- dealing
activities.
b) deliberations of cumulative voting in a general meeting of shareholders
Cumulative voting has become a necessary means of protecting minority shareholders rights.
In countries such as Pakistan and Russia already mandate cumulative voting.

In somecountries including China, Korea, Taiwan, optional right of cumulative voting can be exercisedunder a certain conditions as seen in Table 7. For example, the corporate governance code in
China（2002）lays out a middle ground
By requiring cumulative voting for listed companies that are more than 30％ owned bycontrolling shareholders. China’s company law revised in 2005 formally prescribed thatshareholders could exercise cumulative voting in electing directors and auditors in the general
meeting of shareholders. Of course, where a family or group controls a high percentage of thevoting shares, even cumulative voting can not ensure a balance of interests at the board level.
Korea addressed this situation by partially restricting the voting rights of certain major
shareholders in large corporations. Where a Korean company has more than 2 trillion won in
assets, shareholders with more than three percent of all voting shares cannot exercise the voting
rights of those shares that exceed three percent when voting for non-executive directors whowill serve on the audit committee. But the practical effects of this rule which is not yet
mandated by the OECD Principles remains unclear in either China or Korea.
c)shareholders derivative action suit and class action suitOn the whole, Asian legal systems favor regulatory over judicial redress. Until recently, Asianlegal system generally lacked the legal infrastructure to permit class-action or derivative action

16

suits. In addition, where infrastructure for class-action or derivative-action suits does exist,
instigation of these suits can be hampered by high minimum share requirements, high court
filing fees and other mechanism that hinder litigation. But there has been an accelerating trend
favoring greater availability and use of class-action or derivative- action suits. General outlookof the rule of derivative suits and class action suits can be seen in Table 7. For instance, Taiwan
recently enacted norms permit shareholder class-action lawsuits and Korea has liberalized its
derivative-action rules and has seen a related increase in litigation. A court in China permitted
that country’s first common action by shareholder plaintiffs and the derivative action suits was
firstly promulgated in the company law revised in 2005. The Malaysian Securities Commission（MSC）made steps to implement recommendations by the High Level Finance Committee on
Corporate Governance of the Ministry of Finance to make derivative actions more “userfriendly” in terms of process and cost. MSC is also undertaking a study of class-action suits forthe purpose of possible inclusion among the tools available to shareholders to enforce theirrights.

4

Assessment of the reform among East Asian countries
How can we assess achievements of the reform of corporate governance in East Asian

countries. It seems too early for us to assess accurately the real achievements and the problems
facing the reform. But from the comparative overview above, we can say that there has been an
accelerating trend of enacting and enforcing new norms of corporate governance that are asignificant improvement in this decade. However, the enforcement of corporate governancerules in each Asian country has not be fully realized and core areas such as accountability,
responsibility, transparency and independence of directors are lagging far behind. There has
been a significant gap between actual performance and the advancement of the corporate
governance rules. As Jamie Allen, head of the Asian Corporate Governance Association put it,17

“there is a long way to go”. The effectiveness of the rules might be more or less restricted andundermined.
La Porta et al（1997）assessed many countries in the three area of shareholders’ rights,
creditors’ rights, and the rule of law. They found that ,in general, countries with civil law
systems（Indonesia, Japan, Korea, Taiwan, Thailand etc.）offered lower levels of investor andcreditors rights, as well as a lower rating of rule of law than countries with common law
systems（Hong Kong, Malaysia Singapore, Philippines etc.）.This distinction can be clearlyseen in Table 8, both shareholders’ and creditors’ rights are lower in the five countries with civil
law tradition. The average rule of law score was 7.5 for common law countries and 5.9 for civil
law countries. In addition to the lower score, a much wider range of values is seen among thecivil law countries. Indonesia and Philippines have the lowest rule of law scores in the group,
therefore it is likely that it is more difficult for shareholders and creditors to enforce their rights.
As for corruption and expropriation of shareholders’ interests, Philippines and Indonesia also
the highest corruption and expropriation scores, therefore further exacerbating the poor level ofshareholders’ protection.
It should be noted that the data in Table 8 showed the situation before 1995（La Porta et al,
1997）．Therefore the assessment of legal protection and enforcement as seen in Table 8 does notbasically show the result of corporate governance reform..

The data seen in Table 9 is thelatest assessment of the enforcement of corporate governance, so it is useful to see how
corporate governance rules have been enacted, enforced and regulated effectively. We can findthat in general Asian countries with common law system have higher score than civil law
countries. This trend is basically the same as seen in Table 8. Indonesia has the lowest score inalmost all areas including rules, enforcement, policy/ regulation and IGAAP.

China is also thelowest in area of rule and corporate governance culture and the second lowest inpolicy/regulation and IGAAP, although enforcement is scored higher than Indonesia,

18Philippines and Thailand.

Distinctions of the level of enforcement among East Asian countries

have not changed, though corporate governance has more improved than before in each county.

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19

Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer (1998)"Corporate Ownership around
the World" NBER Working Paper Series No.6625
Raghuram G.Rajan and Luigi Zinglales (1998)"Which Capitalism. Lessons from the East Asian
Crisis" Journal of Applied Corporate Finance 11(3)Stijin Claessens, Simeon Djankov, Larry Lang (1998)"Who Controls East Asian Corporations?"
Policy Research Paper no.2054, World Bank
Stijin Claessens, Simeon Djankov, Larry Lang (2000)"The Separation of Ownership and Control in
East Asian Corporations" Journal of Financial Economics no.58
Tomas Clarke ed.(2005) Corporate Governancce Critical Perspective on Business and Management
Vol.IV Asian Corporate Governance, Routledge
Yuen Teen Mak(2001) "A Comparative Review of Board Committees in Asia" a paper at The Third
Asian roundtable on the role of boards and stakeholders in corporate governance, OECD/World
Bank/ADBJapanese
Shinya Imaizumi and on Abe (2005) Corporate governance and corporate law system reform in East
Asia,

Institute of Developing Economies

Mamoru Nagano (2000) ”the present condition of the corporate governance in an Asian area,"view" Mitsubishi general research， news No.37
Japan Securities Research Institute (2004) Illustrated securities market in Asia， 2004 edition
Japan Securities Research InstituteShinichi Kawai (2002) “ Drafting of Chinese-style corporate governance code” Keiei Sogo Kagaku,
no.79. Aichi University
Shinichi Kawai((2003)
by Insiders

Companies listed on the Chinese Stock Exchange: Corporate GovernanceSodosha.

20

Table 1. Ownership / control structure of listed companies in East Asian countries/ area.
unweighted
ListedDistributed

FamilyState

Distributed

company

ownershipownershipownership

type Financial(%)
Distributed typeinstitution

Corporation

Hong Kong

330

0.6

7.0

64.5

66.7

3.7

1.4

7.1

5.2

24.1

19.8

Indonesia

178

0.6

5.1

67.1

71.5

10.2

8.2

3.8

2.0

18.3

13.2

Japan

1240

41.9

79.2

13.1

9.7

1.1

0.8

38.5

6.5

5.3

3.2

Malaysia

238

1.0

10.3

57.7 67.2

17.8

13.4

12.5

2.3

11.0

6.7

Philippines

120

1.7

19.2

41.3

44.6

3.6

2.1

16.8

7.5

36.7

26.7

Singapore

221

1.4

5.4

51.9

55.4

23.6

23.5

11.5

4.1

11.5

11.5

Korea

345

14.3 43.2

67.9

48.4

5.1

1.6

3.5

0.7

9.2

6.1

Taiwan

141

2.8

26.2

65.6

48.2

3.0

2.8

10.4

5.3

18.1 11.5

Thailand

167

2.2

6.6

50.8

61.6

7.5

8.0

17.9

8.6

21.7

Claessens et al(1998)

15.3

left figure：10% cut-off of voting rights，right figure：20% cut-off,ownership is referred to as ultimate ownership%

Table 2. Ownership Weighted by market capitalization
ListedDistributed

FamilyState

Distributed

Distributed

company

ownershipownershipownership

type

type

Financial

institution

Corporation

Hong Kong

330

7.0

71.5

4.8

5.9

10.8

Indonesia

178

6.6

67.3

15.2

2.5

8.4

Japan

1240

85.5

4.1

7.3

1.5

1.6

Malaysia

238

16.2

42.6

34.8

1.1

5.3

Philippines

120

28.5

46.4

3.2

8.4

13.7

Singapore

221

7.6

44.8

40.1

2.7

4.8

Korea

345

51.1

24.6

19.9

0.2

4.3

Taiwan

141

28.0

45.5

3.3

5.4

17.8

Thailand

167

8.2

51.9

24.1

6.3

9.5

Claessens et al (1998)

ownership is referred to as ultimate ownership

21

Table 3. Corporate governance reform ：Similarity
country

andarea

Strengthening

Independent

Financial

Independence

Best practiceinstitutional

shareholder

director

indication

board committee

principle

investor'svalue

importance

Advancement

China

Yes

Yes

Yes

Yes

Yes

Yes

Hong Kong

Yes

Yes

Yes

Yes

Yes

Yes

India

Yes

Yes

Yes

Yes

Yes

Yes

Indonesia

Yes

Yes

Yes

Yes

Yes

x

Japan

Yes

Yes(selection)

Yes

Yes (selection)

Yes

Yes

Korea

Yes

Yes

Yes

Yes

Yes

Yes

Malaysia

Yes

Yes

Yes

Yes

Yes

Yes

Philippines

Yes

Yes

Yes

Yes

x

Yes

Singapore

Yes

Yes

Yes

Yes

Yes

Yes

TaiwanYes

Yes(IPO)Yes

Recommendation

YesxThailand

Yes

Yes

Yes

Yes

Yes

Yes

Jamie Allen, 2000, and 2005. -- partly corrected by author

Table 4. Corporate governance reform ：Difference
Stake-

One-layer

Two-layer

holdersystemsystem

Board

Board

The quantity of a code

The range of a code

small

Limitedmedium

large

China

O

x

O

Hong Kong

x

O

x

India

x

O

x

Indonesia

O

x

O

Japan

O

x

O

Korea

O

O

x

O

O

Malaysia

Notes

O

x

O

O

Philippines

x

O

x

Singapore

Notes

O

x

x

O

O

x

TaiwanThailandO○95

Comprehensive

O

O
O

O

O

O

O
O

O

O
○65

22

Notes
O

O

Jamie Allen and 2000 -- partly corrected by author

O

OTable 5

Establishment of independent director and board-of-directors special committee

country and area

Independentoroutsidedirector

Establishment of a special committee

number and ratio
China

Three persons and 33%

Audit, nomination, remuneration, a strategy committee etc.
They are codified and virtually duty.

Hong Kong

Two

persons(threepersons

recommendation)
Indonesia

Audit committee is duty. Remuneration, nomination1 com.
are arbitrary

30%

Audit com. is duty, nomination and remuneration com. are
optional, however, should be encouraged.

Japan

Two-person outside director (selection

A duty is imposed in a committee established company.

system)
Korea

Audit and nomination (property of 2 trillion wong or more)

25%
Three persons, 50% (the property of 2

are duty, and a committee is arbitrary.

trillion wong or more)
Malaysia

Two persons, 33%

Audit com. is duty, nomination and remuneration com. are
optional, however, should be encouraged.

Philippines

Two persons, 20%

Audit, nomination, remuneration com. are arbitrary

Singapore

33%

Audit committee is duty. nomination and remuneration com
areoptional, however, should be recommended.

TaiwanTwo persons

The bill that installation is possible is submitted.

ThailandThree persons

Audit com. is duty,

nomination, remuneration and risk

management com. are optional, however be recommended
originated from ACGA, Julian Roche (2005), White Paper on Corporate Governance in Asia, and 2003 grades.

Table 6.

Establishment of board committees in Singapore（2003）

committee

No./ ％

Average no. of

Average no of

Average no. ofcompanies

committee staffs

Executive

Independent directors

directorsaudit

119（100）

3.1

0.3

2.4

remuneration

90（76）

3.1

0.5

2.1

Managing directors

38（32）

3.9

1.8

0.9

Stock option

40（34）

3.1

0.9

1.7

nominating

76（64）

3.1

0.5

2.1

strategy

5（4）

4.4

1.4

2.0

technology

1（1）

6.0

2.0

0.0

Risk management

3（3）

3.0

1.8

1.7

(Imaizumi and Abe, p.194 )23

Table 7. Regulated protection of minor stockholder's equal right
Shareholders'Shareholders’

Person paying

Stockholders

obligatory

derivate action

Class action

action costs

permission of affiliated persons

Cumulative voting systemdealings
China

No regulated

No regulated

Lost side

Regulated

(over

5%

of

Regulated→tangible net assets, or 30(30% or more of a controlling2005 regulated

million yuan)

stockholder'sratiosofshareholding)Hong Kong

regulated

No regulated

Lost side

Regulated (when exceeding theminimum line)

Indonesia

regulated(voting

regulated

Court determins

rights of over 10% )Japanregulated

Korea

Regulated

Malaysia

Regulated (stockholder who is
not a connected person)

regulated

Lost side
Un-answered.

Un-answed.

regulated (the stockholder of(stockholder with 1%

1% or more of holdings can beof the stock balance)

charged)regulated

regulated(those

with

Court

regulated (in the case of overdetermination

5% of tangible net assets)

Court

regulated

restrictions)
Philippines

regulated

regulated

determination
Singapore

Regulated

Regulated

regulated (in the case of overNo regulated

5% of tangible net assets)
Taiwanregulated

Regulated

Winners sideNo

regulated(stockholder who willbusinesshave 3% of stocks forduty-izing)

(only

main

transactions

regulated (exclusion by articles
of association is possible)

one year in a period)
Thailandregulated (an at least

No regulated

five-person(understockholder or 20%

examination)

Lost sidebill

regulated (3% super-また of

exclusion by company articles

tangible net assets is 10 millionisbahts)

abolished byof stocks)
Viet Nam

regulated

No regulated

Lost side

regulated (in the case of over
20% of net assets)

Originated from White Paper on Corporate Governance in Asia, 2003,

24

Imaizumi and Abe (2005), etc.

possible)

but

will

a new bill.

be26