Corporate governance, the big business groups and the G-7 reform agenda: a critical analysis

Corporate governance, the big business groups and the G-7 reform agenda: a critical analysis

Published Jan 2002

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A. Singh

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Anglo-Saxon-style corporate governance may not be best for Korea

The issue of corporate governance in emerging markets became the subject of international concern following the Asian crisis which began in 1997. In the case of Korea, there was concern that big business groups (known as "chaebols") were too close to government and the banks and invested recklessly in unprofitable projects on borrowed money. Consequently, in the wake of the Korean financial crisis of 1997-98, the IMF demanded reform of the chaebols as a condition for further lending.

This paper analyses the international financial institutions’ reform programme for corporate governance and big business groups in developing countries, focussing on the Korean case. Drawing on recent secondary research, it outlines differences in patterns of corporate governance between developed and developing countries; examines the relationship between corporate finance, the stock market and corporate governance; and assesses the efficiency and viability of large conglomerate organisations in developing countries.

It argues that:

  • there are a diversity of corporate governance systems that have proved effective in different national contexts
  • the reliance of the Anglo-Saxon model of corporate governance on the stock market creates perverse incentives that can undermine long-term growth by accentuating the influence of short-term considerations, and may be unsuitable for emerging economies
  • business groups may play a key role in late industrialisation by compensating for structural gaps in developing country capital, product and labour markets
  • the chaebols indeed had high ratios of debt to equity: for instance, the average ratio for the top five chaebols was 458 per cent in 1997
  • however, these arrangements were functional within the traditional Korean system, and were particularly useful during Korea’s industrialisation drive, as the corporations were induced by the government to enter into new technological areas involving huge risks; these risks were effectively "socialised" through the government’s involvement in the banking system
  • this system became dysfunctional when the government introduced financial liberalisation and abolished economic planning in the early 1990s in preparation for OECD membership
  • by permitting Korean companies and banks to raise money abroad without the traditional supervision and control, the authorities were unable to control or monitor the rapid accumulation of short-term, foreign-denominated debt.

The paper concludes that it should be left to developing countries to decide which system of corporate governance is optimal for their particular circumstances, and that what is required is an analysis of corporate governance structures underpinned by a solid factual understanding of their role in economic development.

To read this document, click on the link below, open the ZIP file, and extract the file named 15-2-1.PDF.

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