Does Corporate Governance Affect The Financial Performance Of A Company In Asia Countries?

Introduction

Corporate governance plays an important role in today’s corporate world. It has a tremendous impact on a company’s financial performance. There were many scandals due to improper corporate governance or lack thereof. Enron and WordCom bankruptcies are solid examples of a corporate governance failure that have sparked attention to this subject and encouraged researchers to explore the effects of corporate governance on a firm’s performance. Asian financial crisis has triggered an extensive research of the topic. Many researchers found that bad governance had been among the major causes of the crisis.

Corporate Governance in Asia

There are seven main components of corporate governance such as board size, independence of board from management, separation of CEO and Chairman, financial expertise of directors, number of board meetings, role of external auditors and committees on the board. The author concludes that there is a positive correlation between corporate governance and financial performance. According to the research, high governance rating typically positively affects a company’s performance while bad governance worsens its performance.

The main driver of an active research of corporate governance in Asia was the financial crisis during the 1990s. The major issue in Asian corporate governance was a lack of protection of minority rights. Unlike the US, the main problem was related to agency problem. The Asian companies were not run badly. Instead they were hurt by capital misallocation. Asian corporate governance was extremely dominated by insiders while financial markets did not support positive governance. This has a negative impact on a company’s performance. A lack of protection of minority shareholders rights makes companies more vulnerable to external shocks thereby hurting their performance. Asian financial crisis is a great example of bad corporate governance and its effects.

There is a difference between Asian corporate governance and the Western one. According to the analysis, the classical prescriptions do not work in Asian countries. The board does not play such an important role in Asia. Therefore, the Western ‘good governance practices’ are not so beneficial and useful for Asian companies. There is a difference between Asia and Anglo-American countries in terms of corporate governance. According to their research, the Western companies are incentivized to compete for financial resources on liquid equity markets and this strongly affects their approach to corporate governance. Thus, the governance impacts a company’s performance primarily through capital markets. On the other hand, Asian markets are younger and less developed, so the effects of corporate governance are smaller compared to the West. However, closer integration between capital markets is likely to enhance the role of corporate governance in Asia.

Conclusion

Corporate governance is important in Asian countries and has an effect on a business’s performance. The Asian financial crisis showed that the effect of corporate governance was very strong However, due to economic differences between the Anglo-American world and Asia, the governance plays a smaller role in the region. In addition, classical approaches widely used in the West are less efficient in Asia. On the other hand, closer integration of financial markets and globalization will probably lead to a convergence between Asia and the West and strengthen the role of corporate governance.