Corporate governance and restructuring in East Asia: An overview

Seoul Journal of Economics, Fall 2000 by Haley, Usha C V

After the 1997-8 Asian financial crisis, Asia's turnaround in 2000 appears spectacular. To aid corporate restructuring, East Asian economies have passed new laws and regulations for more efficient bankruptcy procedures and improved bank-supervisory standards. Foreign Direct Investment (FDI) has also poured into East Asia in 1999 and 2000. This paper provides an historical overview of corporate restructuring in Indonesia, Korea, Malaysia, the Philippines and Thailand since the outbreak of the financial crisis. It also explores the implications of growth and economic dependency, needs for transparency and increased FDI on corporate restructuring in East Asia.

Keywords: Asian crisis, Financial reform, Structural reform, FDI

JEL Classification: F23, G34

I. Introduction

After the 1997-8 Asian financial crisis, Asia's turnaround in 2000 appears spectacular. The region's reveged economies grew three times faster than analysts' forecasts of a year ago (The Economist 2000a; and World Bank 2000). South Korea's GDP rose by almost 11 percent in 1999 and now exceeds pre-crisis levels. Malaysia experienced 6 percent of GDP growth in 1999 and by the end of 2000, along with Thailand, will have clawed back to pre-crisis output levels. Indonesia has lagged, yet its GDP still grew at an annual rate of 6 percent in the fourth quarter of 1999 (Asian Development Bank 2000). Much of the growth in GDP has come from exports of electronics, particularly to the USA (Government of Japan 2000). Table I sketches percent of GDP changes in East Asia.

To aid corporate restructuring, East Asian economies have passed new laws and regulations for efficient bankruptcy procedures and improved bank-supervisory standards. Governments have closed many insolvent institutions, recapitalized weak banks and created public-asset-management companies to sell non-performing loans. As needs for transparency and corporate governance have grown, international auditors have acquired more power and influence (Crispin 1999).

Foreign Direct Investment (FDI) has also cascaded into East Asia in 1999 and 2000. FDI has always provided an important source of external financing in developing Asia. Historically and presently, FDI has also resulted in new. expectations from foreign partners and demands for changes in labor and managerial practices (Haley 2000a).

This paper provides an historical overview of the corporate restructuring efforts in Indonesia, Korea, Malaysia, the Philippines and Thailand since the financial crisis. It also explores the implications of growth and economic dependency, needs for transparency and increased FDI on corporate restructuring in East Asia. Section II indicates stakeholders' goals behind corporate restructuring. Section III highlights national differences in corporate-- restructuring strategies. Section IV explores the offshoots of some post-crisis strategies of restructuring and resurgence on corporations and managerial environments in Asia.

II. Goals for Corporate Restructuring

Analysts, researchers and policy makers widely attributed poor governance for the weaknesses in East Asia's financial and corporate sectors and urged restructuring for their effective functioning (see Backman 1999; and Haley 2000a). Symptoms of rot included intricate formal and informal relationships between governments, financial institutions, and corporations; inadequate disclosure requirements; and widespread corruption and favoritism. Reform and restructuring efforts aimed to improve market discipline and corporate governance through introducing anticorruption and competition policies. Broader goals included transforming corporate cultures. With the assistance of multilateral financial institutions, notably the Asian Development Bank (ADB), the International Monetary Fund (IMF), and the World Bank, the crisis countries endeavored to increase the transparency of economic and financial data, to strengthen corporate disclosure requirements, to enhance accountability to shareholders, to bolster competition laws, to privatize state-owned enterprises, to dismantle state-supported monopolies and cartels, and to restructure opaque corporate relations.

At least three broad strategic approaches exist for corporate-- sector restructuring: centralized, decentralized, and London. Governments play prime roles in centralized approaches; these strategies prove more effective with small debts, simple corporate structures and high-levels of stakeholders' confidence in governments (e.g. Sweden in the early 1990s and Hungary in the mid-1990s). At the other end of the spectrum, relevant stakeholders reach voluntary restructuring agreements with decentralized approaches; these strategies prove more effective with large debts and complex corporate structures (eg. the United States in the 1990s).

An intermediate strategic approach, the London approach, evolved in the United Kingdom in the early 1990s when creditor financial institutions and about 160 British indebted firms worked closely with a government institution, the Bank of England, outside formal judicial processes. The London approach includes: a) full information sharing between all parties; b) collective decision-making among creditor banks on corporate financial lifelines; c) standardized agreements between debtors and creditors; d) clear timetables for resolution; e) binding agreements between banks and corporations to honor the restructuring agreements; f) equal treatment for all creditors of a single category; and g) penalties for broken agreements. This approach demands strong confidence in the official mediating institutions; in the British case, all relevant stakeholders had strong confidence in the Bank of England.