CORPORATE governance, which is about the way companies are directed and controlled, have different ways of practice in Asia and the West even if the underlying principles are the same throughout the world. True enough, both strive to protect the rights of shareholders, to create an environment of transparency and disclosure, and to define the roles and responsibilities of stakeholders in running a company. These principles, aptly classified into five by the Organisation for Economic Co-operation and Development (OECD), are important to ensure a stable and competitive business environment and to attract investment, especially in the case of publicly listed companies.
Basically, in the West, the focus is on rules, accounting standards and codes of practice often defined by legislation or by appropriate regulatory bodies with the objective of creating a level playing field for competitors. The corporate failures, led by the mother of them all—Enron—led to the tightening of governance codes and legislation to improve transparency and accountability. But, as we all know, there were continued global financial crises in many western institutions, leading to the thought that there might be something to be learned from Asian practices.
The Asian approach to business is often built on relationships, which sometimes take precedence over transparency, and had been decried as resulting in corruption and malfeasance. In Asian practice, regulations are not often enforced strictly and legal redress has been known to take years. In Asia business is more often based on trust and loyalty, even among businesses that have begun to formally adopt western practices in the competitive globalized world.
It had been noted that some western companies expanding into Asia found difficulty when their rules-based processes clashed with local cultures. On the other hand, some companies from Asia found that their personal networks were ineffective across the sea and in a different culture. But it could be said that the best from both styles of governance might be extracted, learning the advantages and disadvantages of each and then try to find a common ground between the two models.
Western cultures are based on rules, rights and transparency, whereas Asian cultures are relationship based. The former trust rule-based institutions, while the latter trust their friends and family and prefer to cultivate strong relationships.
However a 2003 OECD white paper said that the informal nature of Asian stakeholders and company interaction can produce lasting benefits that can equal or even exceed those offered through formalistic approaches based on rights.
In a lecture given by Robert Jelly of Chartered Institute of Management Accountants some time ago, he commented that western companies that do business with Asian counterparts, were often hindered by the “unfamiliar landscape.” Companies in Asia are often run by the founders and their families, such that supply contracts, for instance, tend to go to trusted friends and knowing the right person in the right place could mean a difference in the time of securing necessary licenses. By emphasizing individual relationships, Asian firms find it harder to implement procedures that are considered best practice in the West, especially those that require an increase in transparency. This notwithstanding that Asian regulators have adopted and require the principles widely adhered to in the West, viz., the OECD Principles.
In summary, the conclusions derived from Jelly’s lecture are:
- The corporate governance model familiar to Asian culture emphasizes trust and relationships, which can be beneficial to stakeholders as there typically is a longer-term view of an organization’s success, although it is vulnerable to corruption and cronyism.
- The Western governance model, with its emphasis on legislation, standards and transparency, suffered a bit in the aftermath of the financial crises, noting that there are limits to tightening checks and balances.
- Both models have their strengths, and it is important to understand the benefits and drawbacks of each.
- The key indicator of good governance in an organization is that it is sustainable over the long term. There should be confidence that the business model will deliver this, using appropriate risk mitigation, and that performance indicators and incentives will reinforce the desired culture and behavior.
Management information that is relevant, accurate and up to date is a crucial success factor for all organizations, Asian or Western.