Corporate Governance in Singapore and Hong Kong: What Can the Other Asian Economies Learn?

The relative immunity of Singapore's corporations, including family-owned and controlled corporations, from the recent financial crisis can be attributed to reasonably well-functioning financial markets, government oversight and cooperation and coordination among the major domestic players in an open and competitive market structure. The reforms with respect to auditing and accounting - and to some extent board of directors - will undoubtedly strengthen the governance structure; but it does not seem that Singapore will be transformed into a purely equity market based governance structure in the near future. However, a more consolidated banking structure with strong government backing can be expected to become more involved in monitoring the corporations. Over time, some institutional and other large domestic and foreign investors can also be expected to play an enhanced role in monitoring the corporations in Singapore. Hong Kong has a predominance of family-based system (FBS) of corporate governance. The main difference between FBS as a governance system and others such as bank-led (BLS) or equity market-based (EMS) system of corporate governance is that ultimate control of the firm resides with the family groups rather than banks or the equity markets. As the share of external finances rises with the growth of the firm, agency costs increase due to problems of asymmetric information between management and external financiers. FBS can be a workable form of governance under such conditions only with proper monitoring capabilities of the financial system, managerial expertise and market competition. Particularly important for reforming the FBS is the need for recruiting and training competent professionals so that the financial institutions can gather and analyze the relevant information about the firms they finance. Furthermore, there must be formal and informal means to influence the decisions of a borrowing firm when it appears to be not performing well. Several factors explain Hong Kong's success in continuing with gradual corporate governance reforms. First and foremost, is the relative strength of the financial sectors. Both the banks and the equity markets have proved to be much stronger than those in other regional economies during and after the crisis. Second, the presence of both competition and cooperation in the financial sector has made it possible to regulate effectively through the Banking Ordinances and Listing Rules and Takeover Codes. A third factor is that in Hong Kong the insolvency and bankruptcy procedures are relatively straightforward. This makes exit of insolvent firms economically less costly and after such exits the system regains its vigor. Fourthly, increasing the emphasis on accounting and auditing standards improvements will make monitoring, including some further self-monitoring by the family businesses themselves easier. Finally, although this may not be the most significant, the smallness of Hong Kong also makes it easier for informal agreements to be made and kept through reputational and other relational mechanisms. In economies where some of the above characteristics that make reforming FBS in Hong Kong possible are present, some degree of reform of FBS may be possible, so that this system remains effective as an interim type of governance for some time to come. However, the role of banks even in this interim period must be strengthened a great deal more than it is today. Without a strong, independent banking system the agency costs arising from the monitoring problems in most Asian economies will still remain high. In order to improve corporate governance in Asia, the monitoring capabilities of the financial sector - in particular the banking system - must be given top priority.