Comparative Law and Institutions in Asia:

Is Corporate Governance Following Economic

Norms & Converging: Evidence from Southeast
Asia

Professor Benedict Sheehy

Canberra Law School
University of Canberra, Australia
Introduction
• Debates in law
• Long standing discussion about the balance between economics and
law in shaping law reform
• Argument is that law must follow economic rationality
• Global discussion on convergence of corporate law and governance
• Argument is that countries are converging on USA model
• Corporate governance codes follow from 1992 Cadbury Report
• Following: UK Financial Reporting Council established The Committee on the
Financial Aspects of Corporate Governance
Issue:
• Despite:
• rather similar colonial economic histories, subsequent development and
shareholding patterns, and
• addressing very similar issues,
• Using Cadbury’s “comply and explain” regulatory standard
• BUT
• Philippines and Malaysia have developed their respective corporate
governance systems and codes differently.
Background
• Corporate governance codes follow from 1992 Cadbury Report
• Following: UK Financial Reporting Council established The Committee on the
Financial Aspects of Corporate Governance
• One innovation: “comply or explain” rather than mandatory, one-size-
fits-all standard
• “Comply or explain” disseminated globally
• Asian financial crisis of 1996-7 led to reform in the region
• Reform included corporate governance codes including “comply or
explain”
Philippines and Malaysia
• Both adopted “comply or explain”
• Philippines
• 2002, SEC issued Code of Corporate Governance “to raise investor confidence,
develop capital market and help achieve high sustained growth for the
corporate sector and the economy”
• Malaysia
• developed Directors Code of Ethics in 1996 and in 2002, Malaysian Code of
Corporate Governance (“MCCG”)
• Revised in 2007, 2012, 2017
Malaysia 2017 reform
• Adopted
• “Comply or explain an alternative”
• Transplanted from South Africa and commended in UK
• Simple explanation of non-compliance is insufficient
• Must explain how the organisation is addressing the risk
How to explain divergence?
• Issue:
• Long standing discussion and argument that law follows economic
rationality
• Global discussion and argument that countries are converging on USA
model
• BUT
• Evidence does not support: it contradicts
Market structure and composition
1. The markets are quite similar
1. Dominated by a few large companies
2. Marked by cross-holdings
3. Family firms
2. BUT Foreign Direct Investors
1. main foreign investors in Malaysia are Singapore, HK, Japan and US.
2. Philippines are Japan, Netherlands, US and Singapore.
(Although both Singapore and the US are top sources of FDI, they are in a
different order. In Malaysia, Singapore is the top source. In the Philippines, it is
the US.)
Geography and Norms of FDI Providers
• Geographically, Singapore is next to Malaysia. The two countries are separated by
a causeway a mere 1.0 kms in length.
• Easy for Singaporean investors to monitor corporate behaviour and attend meetings in
person.
• Singapore has a business sector dominated by family businesses. Accordingly, concentrated
holdings are less of a concern.
• Singapore is strongly influenced by the UK.
• Both Singapore and Malaysia follow UK corporate regulatory norms.
Geography and Norms of FDI Providers
• Philippines relies more on the US for its FDI.
• Geographically, US is on the other side of the planet
• Monitoring and participating in investment oversight is logistical problem
• US does not follow a ‘comply or explain’ model:
• Instead Sarbanes-Oxley Act empowers:
• i) regulators (granting increased powers of investigation and prosecution) and
• ii) shareholders through increased shareholder rights particularly in litigation
• Sarbanes-Oxley norms do not expect to rely on comply or explain and Philippines will address
USA
Conclusion
• There is significant complexity in Asia and corporate law
• Law does not necessarily follow economics
• Law instead responds to local norms and geography
• Divergence is to be expected