The One-Tier and Two-Tier Board Structures and Hybrids in Asia - Convergence and What Really Matters For Corporate Governance
The One-Tier and Two-Tier Board Structures and Hybrids in Asia - Convergence and What Really Matters For Corporate Governance
The One-Tier and Two-Tier Board Structures and Hybrids in Asia - Convergence and What Really Matters For Corporate Governance
CORPORATE GOVERNANCE
[This article launches first into its discussion on the features of the main board structures in Asia.
Singapore, China and Japan are used as reference jurisdictions for the purposes of illustrating
the workings of the one-tier, two-tier and hybrid board structures respectively. The article then
proceeds to evaluate the failures of the board structures in the three jurisdictions, owing to
structural weaknesses and contextual particularities. Thereafter, it analyses and evaluates the
potential for convergence of a singular board structure in Asia. The article concludes by
highlighting potential areas for reform and offering final conclusions.]
I. INTRODUCTION
Many people look to board structures for answers in times of corporate governance crises as
the board of directors is recognized as one of the most important aspects of corporate
corporation which has good corporate governance practices. The board of directors is crucial in
the same time responsible for looking after shareholders’ interests in the corporation’s
performance, the generation of profits for the corporation and the realization of dividends.2 Put
succinctly, the board of directors is a platform upon which the powers of those who own the
corporation or shareholders as we understand them to be, are balanced against the management
who runs the corporation.3 The 1997 Asian Financial Crisis, together with fraud scandals, acted
*
LLB
(Hons),
National
University
of
Singapore;
Admitted
to
the
Singapore
Bar;
LLM
(By
Coursework),
The
University
of
Melbourne.
This
article
is
based
on
an
assessment
paper
submitted
for
the
LLM.
The
author
wishes
to
thank
Dr
Benny
Tabalujan
for
his
comments
on
an
earlier
draft.
All
errors
remain
the
sole
responsibility
of
the
author.
1
Junwei
Lu,
‘Corporate
Governance
in
China:
Drawing
Lessons
from
USA
and
Japan’
in
Roman
Tomasic
et
al,
Corporate
Governance
–
Challenges
for
China
(2006)
124,
125.
2
Maria
Aluchna,
‘Corporate
Governance
–
Responsibilities
of
the
Board’
in
Guler
Aras
and
David
Crother
(eds),
A
Handbook
of
Corporate
Governance
and
Social
Responsibility
(2008)
<http://www.gowerpublishing.com/pdf/SamplePages/Handbook_Corporate_Governance_Social_Responsibility_C
h10.pdf
>
at
22
September
2010.
3
Ibid.
Page
1
good corporate governance practices can enhance performance and improve access of
corporations to outside capital, and thus indirectly contribute to the sustainable economic
governance practices include, amongst others, the introduction of independent directors, greater
transparency in board matters and enhanced protection of the rights of minority shareholders.5
Generally, all boards, irrespective of their individual board structures, serve as the link between
corporations and their shareholders. Hence, they have a common legally mandated function to
ensure compliance with the law governing corporations and periodical financial reporting. The
oversight of management can be undertaken by either one or two-tier boards, and it is these
differences in board structures which are occasionally linked to board performance and
efficiencies in the different jurisdictions, where either the one or two-tier board is prevalent. In
reviewing the board structures for their shortcomings, one should consider the structural
weaknesses that arise from the mere fact of a board structure per se, such board structure being
either a one or two tier board structure, the differences of which this article is concerned with.
Furthermore, one should also consider purported weaknesses of board structures which can be
can help one make an objective assessment as to whether a particular board structure being
examined will be appropriate in another country that does not have the same particularities as the
reference country in question, and the modifications required if this is not the case.
Generically speaking, the one-tier and two-tier board structures are the two main forms of
board structures that have developed in different countries. It is noted however that hybrid
convergence involving the voluntary selection of different formal rules from other jurisdictions,
combined with the diversity of circumstances and of institutional flexibility between jurisdictions,
4
See
International
Finance
Corporation,
World
Bank
Group,
Corporate
Governance
<http://www.ifc.org/ifcext/corporategovernance.nsf/Content/WhyCG>
at
22
September
2010.
5 rd
Christine
A.
Mallin,
Corporate
Governance
(first
published
2004,
3
edition,
2010)
162.
6
See
Carsten
Jungmann,
‘One-‐Tier
and
Two-‐Tier
Board
Systems’
(2006)
European
Company
and
Financial
Law
Review
426,
451.
Page
2
in substantial variation of board structures across and within jurisdictions.7 The end result of this
is that even in jurisdictions that expressly purport to adopt either the one-tier or two-tier board
structure, one may find, upon closer scrutiny, that such board structure is in actuality more of a
hybrid and borrows characteristics from and possibly beyond the two main board structures.
Pursuant to the above, this article will be structured as follows. Part II first outlines the
underpinnings of the two main board structures in Asia, as well as the hybrid board structure. For
the purposes of outlining the underlying principles of the one-tier, two-tier and hybrid board
structure in Asia, Singapore, China and Japan will be used respectively as the reference
jurisdictions. Parts III, IV and V evaluate the failures of each board structure, owing to both the
structural weaknesses of the relevant board structure as well as the particularities of the
abovementioned three reference jurisdictions. Part VI then discusses any pattern or trend of
convergence in the board structures of Asia, by drawing on the article’s analysis of the
circumstances in the three relevant jurisdictions. It also analyses the actual differences and
similarities between the board structures, discusses the factors that really matter in implementing
good corporate governance standards, and last but not least, explores the possibility for future
convergence. Part VII highlights potential areas for reform and offers some conclusions.
A. One-tier board
The one-tier board structure is the form prevalent in countries such as the United States (‘US’)
and the United Kingdom (‘UK’), and in Asia, Singapore, amongst others. In this article, the one-
tier board structure, as it has come to be known in the US and the UK, will be referred to as the
executive directors and non-executive directors,8 all of whom are in the usual course nominated
and appointed by shareholders. A main advantage of this board structure can be said to be the
7
See
Ronald
J.
Gilson,
‘Globalizing
Corporate
Governance:
Convergence
of
Form
or
Function’
(2001)
49
American
Journal
of
Comparative
Law
329,
357.
8
Mallin,
above
n
5.
Page
3
have direct access to, as a result of being on one board. The non-executive directors are also well
placed to contribute to the decision-making process for the relevant corporation, and the potential
B. Two-tier board
The two-tier board structure, the form prevalent in China, comprises of both a supervisory
board and of an executive board of management. The strict separation between the monitoring
function of the supervisory board and the management function of the executive board has often
been said to be the main advantage that accompanies this board structure, and members of one
board cannot be members of the other.10 Essentially, the supervisory board of a corporation
oversees the executive board to ensure that proper systems have been put in place by the
executive board in running the corporation.11 In most cases, as in Germany, the supervisory
board appoints members of the executive board, and the members of the supervisory board are
certain countries such as Germany and China 13 may have a fair amount of employee
representation as employees are voted into the supervisory board by fellow employees rather
than by shareholders.14
C. Hybrids
Certain jurisdictions such as Japan may offer corporations the option of choosing either
board structure. The Japanese Commercial Code (‘Japanese Code’) was amended in 2001 to
strengthen the supervisory powers of the statutory auditors over directors, in ensuring that the
9
Jungmann,
above
n
6,
459.
10
Mallin,
above
n
5,
214.
11
Ibid.
12
In
China,
members
of
an
executive
board
are
instead
appointed
by
the
shareholders’
meeting,
rather
than
the
supervisory
board.
See
Jean
Jinghan
Chen
‘Corporatisation
of
SOEs
and
Corporate
Governance’
in
David
H.
Brown
and
Alasdair
MacBean
(eds)
Challenges
for
China’s
Development
–
An
Enterprise
Perspective
(2005)
58,
63.
13
Yuwa
Wei,
‘A
Chinese
Perspective
on
Corporate
Governance’
(1998)
10(2)
Bond
Law
Review
363.
14
Ibid.
Page
4
directors act in the interests of the relevant corporation.15 It was further amended in 2002 to
allow corporations the option of either continuing with a separate board of statutory auditors or
of adopting the Anglo-American board structure with independent directors, board committees
and executive officers who are in charge of daily business operations of the corporation.16 Even
though the board of statutory auditors is not labelled as a supervisory board, its function is
somewhat aligned to that of the supervisory board under the one-tier board structure. Pursuant to
the abovementioned amendments, corporations have a choice to elect either a one-tier or a two-
tier board structure. This can be considered to be an enabling approach which allows
corporations to elect the board structure which ‘best suits their particular corporate governance
needs and circumstances’. 17 For subsequent ease of reference in this article, Japanese
corporations’ and corporations that stuck to having a separate board of statutory auditors will be
In Singapore, the accountability of the board of directors and the effectiveness of the board is
reliant to some extent on the degree of independence of the board of directors.18 The Singapore
Code of Corporate Governance 2005 (‘Singapore Code’) specifies that independent directors
should constitute at least one-third of the board.19 The Singapore Code defines an independent
director as one who has no relationship with the company, its related companies and the officers
of these companies, which may interfere with the exercise of the independent director’s business
judgment.20 The Singapore Code also lists out, non-exhaustively, the type of relationships with
15
Asian
Corporate
Governance
Association,
Library
–
Codes
and
Rules
–
Japan
(2006)
<http://www.acga-‐
asia.org/content.cfm?SITE_CONTENT_TYPE_ID=12&COUNTRY_ID=267>
at
23
September
2010.
16
See
ibid.
17
Chao
Xi,
‘
In
Search
of
An
Effective
Monitoring
Board
Model:
Board
Reforms
and
the
Political
Economy
of
Corporate
law
in
China’
(2006-‐2007)
22
Connecticut
Journal
of
International
Law
1,
44.
18
Kala
Anandarajah,
‘State
of
Corporate
Governance
Reforms
in
Singapore’
in
Ho
Khai
Leong
(ed),
Reforming
Corporate
Governance
in
Southeast
Asia
(2005)
241,
249.
19
Guideline
2.1
of
the
Singapore
Code.
See
Monetary
Authority
of
Singapore,
Code
of
Corporate
Governance
2005
<
http://www.mas.gov.sg/fin_development/corporate_governance/code_of_corporate_governance.html>
at
23
September
2010.
20
Ibid.
Page
5
which a director would be deemed not to be independent.21 Notably, it does not expressly take
the view that a representative of a major shareholder cannot be an independent director, unlike
jurisdictions such as the UK and Australia.22 It is noted however that the Singapore Code does
not have the force of law and instead provides corporations with the flexibility to mould their
approach to corporate governance, so long as they are centred around main corporate governance
principles.23
A. Structural weaknesses
In substitution for the supervisory board in the two-tier board structure, independent directors
have the task of monitoring their colleagues who exercise management powers. The notional
idea of being on the same board, despite the accompanying advantage of facilitation of
information transfer between board members, unfortunately brings about the greater dilemma of
monitoring your colleagues whilst working with them.24 It may not be easy to exercise this
Under the one-tier board structure, it is noted that one of the structural problems is the
common practice of combining the positions of both the chief executive officer and the
chairman.25 The danger then is that the standard of corporate governance hinges too much on one
individual, in this instance, the chairman.26 Too much concentrated power in the hands of any
one executive will act to constrain the monitoring powers of the non-executive independent
21
Ibid.
22
Anandarajah,
above
n
18,
250.
23
Singapore
Law
Review,
Corporate
Governance
101:
Has
Singapore
got
it
right?
(21
September
2007)
<http://www.singaporelawreview.org/2007/09/corporate-‐governance-‐101-‐%E2%80%93-‐has-‐singapore-‐got-‐it-‐
right>
at
23
September
2010.
24
Jungmann,
above
n
6,
461.
25
Lu,
above
n
1,
137.
26
Jungmann,
above
n
6,
462.
27
Ibid.
Page
6
B. Particularities of Singapore
1. No independence
As mentioned earlier, the Singapore Code falls short of expressly defining independence as
directors to the board, its follows that majority shareholders can end up dictating the board
Code. One can easily envisage the situation whereby an independent director is voted into the
board by a major shareholder on a shared understanding that such independent director will
represent the major shareholder’s interests.29 It is fallacious for one to expect this ‘independent’
director to exercise his duties impartially against the wishes of the very person who facilitated
his appointment!
2. Shareholding structure
amongst certain family shareholders and the government.30 Though this was the case earlier on,
in recent years, there has been increasing privatization. Nevertheless, the ‘deeply entrenched
family ownership structure’ of Singapore corporations remains to some extent, which makes it
hard to impose global corporate governance standards on such corporations.31 The concentration
directors even more acute. This is because it will be more convenient for the majority
shareholder to exert his influence on independent directors. It follows that, with no effective
28
Singapore
Investor,
The
Independent
Director
–
Myth
or
Reality?
(18
March
2008)
<http://www.sias.org.sg/singaporeInvestor/fa-‐davidgeraldMarch.html>
at
23
September
2010.
29 th
Benny
S
Tabalujan
and
Valerie
Du
Toit-‐Low,
Singapore
Business
Law
(5
ed,
2009)
294.
30
Yuen
Tin
Mak
and
Yuan
Li,
‘Determinants
of
corporate
ownership
and
broad
structure:
Evidence
from
Singapore’
(2001)
7
Journal
of
Corporate
Finance
235,
238.
31
Anandarajah,
above
n
18,
245.
Page
7
check imposed by independent directors, the style of management in such government or family-
owned corporations is likely to remain unchanged, and such corporations may be able to ‘fall
through the cracks’ with corporate governance practices that are beneath the desired corporate
(‘GLCs’), or private sector corporations in which the government has substantial ownership,
fewer independent directors are employed.32 That GLCs have weaker incentives to adopt strong
governance may be explained by the weaker accountability for performance by GLCs which may
respond to non-profit signals, the availability of government funding, lessened exposure to the
On the other hand, it has been argued that concentrated shareholding can work to instead
improve the monitoring of the management, as the majority shareholder has an increased ability
to dismiss incompetent management that do not maximize the wealth of shareholders, and is
placed in a better position of influence to acquire more accurate information about the
management’s performance.34 In addition, the findings of an earlier study conducted indicate that
there is a link between concentrated ownership, or block-shareholding, and dual board leadership,
explained perhaps by the fact that block-shareholders have been observed to influence
corporations to split the roles of chairman and chief executive officer.35 Dual board leadership
thus has the effect of increasing board independence, since the problem of giving any one
individual unprecedented power leading to conflicts of interests down the road, is circumvented.
Henceforth, block-shareholding appears to mitigate one of the structural weaknesses of the one-
tier board structure discussed earlier, that being the concentration of power in any one person.
Despite the legitimate concerns that the block-holders are affiliated to management and thus will
be passive in their monitoring roles against management, findings from an earlier study
conducted have indicated to the contrary that high block-shareholding has a positive co-relation
32
Mak
and
Li,
above
n
30,
237.
33
Ibid
240.
34
Ibid
239.
35
Ibid
253.
Page
8
with board independence.36 In addition, block-shareholding has been argued to be superior to
3. Culture
combined with the ‘well-known unwillingness of Singaporeans to buck the system’,38 means
there may little restraint on the management. Independent directors are fearful of reprisal and are
afraid of not having their appointment renewed by the executive board,39 so much so it has been
said that in reality strong minded independent directors who exercise their intended role are a
rarity.
In 1993, the two-tier board structure was legally mandated under the Chinese Company Law.
Though China’s board structure has been said to largely resemble the classic two-tier board
notably adopted by Germany, it is noted however that China’s executive board of directors is
appointed by the general shareholders’ meeting and not by the supervisory board.40 The 2005
amendments to Chinese Company Law sought to empower the supervisory board’s position as a
monitor41 and to increase its powers in the following ways, amongst others. For one, Article 151
of the Chinese Company Law places on directors of the executive board and senior managers the
duty to offer relevant information to the supervisory board and prohibits such directors and
managers from obstructing the supervisory board from exercising its authority to monitor the
36
Ibid.
37
Andrei
Shleifer
and
Robert
W.
Vishny,
‘Large
Shareholders
and
Corporate
Control’
(1986)
94(3)
The
Journal
of
Political
Economy
461,
461.
38
National
University
of
Singapore,
Corporate
Governance:
Responsible
Institutions,
please
apply
(24
October
2005)
<http://bschool.nus.edu.sg/Portals/0/images/CGFRC/docs/Ethical_Corporation_Interview.pdf>
at
23
September
2010.
39
Anandarajah,
above
n
18,
266.
40
Chao,
above
n
17,
3.
41
Ibid
22.
Page
9
executive board.42 Also, Article 55 of the Chinese Company Law enables the supervisory board
to initiate investigations in the event that it detects that the corporation is running abnormally.43
A. Structural weaknesses
The key advantage of the two-tier board also brings about its structural weaknesses. The
separation of the two boards also means that information asymmetries will exist as members of
the supervisory board may have little access to information which they require to discover
deficiencies of the executive board.44 It is noted that it is common in China for the management
to be suspicious of the supervisory board and hence reluctant to grant to the supervisory board
access to critical corporate information. Keeping supervisory board members in the dark makes
it all the more difficult for the supervisory board to make informed decisions. To worsen this
situation, the supervisory board’s hands are tied in fact to performing an evaluative role of
decisions made on hindsight, rather than exerting an influence on a decision ex ante.45 This
passive rather than active involvement of the supervisory board essentially limits its contribution
in the decision-making process,46 leading to the loss of an opportunity to reach a better decision
with what could have been valuable input from the supervisory board. In this respect, it is noted
further that due to the separation of supervision and management tasks between the two boards,
the efficacies of the supervisory board is essentially dependent on the executive board being
sufficiently cooperative with it and disclosing the necessary information to it which it requires in
its exercise of its powers to monitor the executive board. Henceforth, much is left to the goodwill
of the executive board in assisting the supervisory board to fulfil its function. To exacerbate the
information asymmetries and the limited powers of the supervisory board further, it is noted that
the 2005 amendments do not set out the substance of the duties owed by supervisory board
42
China
Daily,
Company
Law
of
the
People’s
Republic
of
China
(Revised
2005)
17
April
2006
<http://www.chinadaily.com.cn/business/2006-‐04/17/content_569258_13.htm>
at
24
September
2010.
43
Ibid.
44
Jungmann,
above
n
6,
454.
45
Ibid
452.
46
Ibid.
Page
10
members to the company.47 This removes any minute incentive in supervisory board members to
exercise their monitoring role, since the content of their fiduciary duties is ambiguous.
Consequently, supervisory board members are inclined to shirk their responsibilities altogether
by not attending board meetings, the frequency of which is low in any case.48 The words of a
financial controller of a Chinese corporation surveyed in a 2004 study are most telling:
‘The Supervisory Board generally does nothing. I brief them on the annual report. They don’t
understand it (even if they wish to read it.) The Supervisory Board meets twice a year, namely
before the publication of the interim report and the annual report. Each meeting lasts about half
an hour. This is basically a formality. They cannot discuss serious issues. Even the Supervisory
From the above, it appears that supervisory board members are also somewhat implicitly
encouraged to keep to the passive role they are allotted under the current board structure, in part
due to the perceived low opinion of their role within the corporation. Arguably, the purported
advantage of the two-tier board structure in China is defeated, since in reality the supervisory
board is unable to be an effective monitor. It is noted that though Chinese Company Law sought
to confer more powers on the supervisory boards via its 2005 amendments, wherein members of
the supervisory board are authorized to dismiss directors and senior managers, as well as to bring
lawsuits against them, these reforms may not result in positive corporate governance practices
due to existing practices in China which will be discussed in more detail below. In spite of the
2005 amendments, the supervisory board is constrained in its exercise of its regulatory functions
as it is hierarchically beneath the executive board, which is not the case in Germany.50
47
Chao,
above
n
17,
23.
48
Ibid
4.
49
ZZ
Xiao,
J
Dahya
and
ZJ
Lin,
‘A
Grounded
Theory
Exposition
of
the
Role
of
the
Supervisory
Board
in
China’
(2004)
15
British
Journal
of
Management
39,
48.
50
In
Germany,
the
supervisory
boards
are
on
top
of
a
hierarchical
system.
See
Chi-‐Wei
Huang,
‘Worldwide
Convergence
Within
a
Pluralistic
Business
Legal
Order:
Company
Law
and
the
Independent
Director
System
in
Contemporary
China’
(2008)
31
Hastings
International
and
Comparative
Law
Review
361,
378.
Page
11
2. Low professional quality of supervisory board members
Furthermore, research has reflected that the professional quality of members of the
supervisory board is inferior to members of the executive board in corporations listed on the
Shanghai Stock Exchange.51 In addition, no training is given to most supervisory board members
to improve their understanding of the corporation which explains the inability of supervisory
board members to make use of the little information that is made available to them.52
B. Particularities of China
1. No independence
Theoretically, no conflict of interests will arise between members of the supervisory board
and the executive board, due to the clear separation of supervision and managerial tasks between
the two boards. 53 However, in practice, it is a different story altogether as the effective
monitoring of the executive board by the supervisory board is undermined by the composition of
trade unions, or close friends of the senior managers.54 Another important point to note is that, in
practice, the management on the executive board determines the remuneration of the members of
the supervisory board.55 The combined effect of these features in the two-tier board in China
compromises the main advantage upon which the two-tier board structure is premised, as the
members of the supervisory board have ‘virtually no independence from management’ and are
hence weak in appraising management.56 In fact, as very aptly put in the context of a discussion
on independent directors in China, one cannot expect the independence of members of the
supervisory board from the management when their remuneration is decided by the very people
51
Jiang
Yu
Wang,
‘The
Strange
Role
of
Independent
Directors
in
a
Two-‐tier
Board
Structure
of
China’s
Listed
Companies’
(2007)
3
Compliance
&
Regulatory
Journal
47,
49.
52
Chao,
above
n
17,
4.
53
Jungmann,
above
n
6,
450.
54
Wang,
above
n
51.
55
Ibid.
56
Ibid.
Page
12
whom they are supposed to monitor.57 Consequently, supervisory boards have been described as
mere “‘censored watchdogs’, and are hence not allowed to speak up against the management
2. Shareholding structure
The root of poor corporate governance practices in China has been commonly attributed to
the concentration of state ownership of shares in the listed state-owned enterprises (‘SOEs’).59
This high concentration of ownership is closely linked to the control of the executive board, and
in turn has an impact on corporate governance practices.60 A study conducted on the supervisory
boards of twenty-one listed Chinese companies reflects that supervisory board members are
greatly influenced by the government machinery and see themselves as representing the political
interests of the government.61 This is due to the fact that in practice, the shareholders who elected
the supervisors were in effect government ministries as most of the listed companies were largely
either owned by the state or other SOEs.62 It is noted that this phenomenon may be set for change
as the government has transferred control of most SOEs to the private sector. In time, members
of the supervisory board need to be awakened to the fact that they represent economic rather than
public interests, albeit that of the state as an enterprise owner. Even with the reforms that have
occurred or are ongoing, it may take some time to disconnect the link between government
interests and control over a Chinese corporation. This is because even the directors and managers
of Chinese corporations often retain important though indirect ties to the government, and view
members who are aligned with government interests results in the possibility of abuse of
57
SB
Shen
and
J
Jia,
‘
Will
the
Independent
Director
Institution
Work
in
China?’
(2005)
27
Loyola
of
Los
Angeles
International
and
Comparative
Law
Review
223,
240.
58
Wang,
above
n
51.
59
Lay-‐Hong
Tan
and
Jiang
Yu
Wang,
‘Modelling
an
Effective
Corporate
Governance
System
for
China’s
Listed
State-‐
Owned
Enterprises:
Issues
and
Challenges
in
a
Transitional
Economy’
(2007)
7
Journal
of
Corporate
Law
Studies
143,
145.
60
Ibid
147.
61
Ibid
167.
62
Lu,
above
n
1,
149.
63
See
Ok
Tam,
‘Models
of
Corporate
Governance
for
Chinese
Companies’
(2000)
8(1)
Corporate
Governance
-‐
An
International
Review
52,
55.
Page
13
powers64 by these members within a corporation. Consequently, one can understand why the
2005 reforms, though intended to empower the supervisory board, have not resulted in positive
3. Culture
Taking into account the cultural realities in modern China, in combination with the political
context, will explain the effect of the two-tier board structure on corporate governance practices
in China. The quasi-familism culture has been used to explain why the supervisory board in the
two-tier board structure does not work in China. As mentioned above, since government
ministries are often the shareholders electing supervisory board members, the unsurprising
consequence of this is that most of the supervisory board members occupy positions in the
Chinese Communist Party (‘Party’). Set against the backdrop of the quasi-familism culture and
obligations, a typical supervisory board member will not wish to upset the existing relationships
within the SOE as he sees himself as owing loyalties to the Party or his appointers and may go to
the extent of seeing himself as having a moral obligation to remove threats to the political
interests of the Party or his appointers.66 It follows that he and many others who are not Party
members but with similar mindsets, will impute upon themselves duties, beyond the black letter,
to serve the Party’s interests. It is this combination of cultural behaviour of supervisory board
members, together with the existing political situation, that renders ineffectual the monitoring
role of supervisory board members. The ‘wings’ of the supervisory board are effectively clipped,
which may explain why a survey conducted in 2000 reflects the low opinion of the public on the
monitoring ability of supervisory boards. A meagre 3.4% of the respondents to the survey
conducted by the Shanghai Stock Exchange regarded the supervisory board to be most important
64
Tan
and
Wang,
above
n
59,
167.
65
See
ibid.
66
Tan
and
Wang,
above
n
59,
170.
67
Chao,
above
n
17,
4.
Page
14
C. Other particularities – role of independent directors
It is amidst the general dissatisfaction with the supervisory board’s efficacy that the China
Securities Regulatory Commission (‘CSRC’) issued guidelines in 2001 which imposed the
requirement of having independent directors on all corporations listed on the Chinese stock
exchange.68 The introduction of the institution of independent directors, borrowed from the
failures of the supervisory board in monitoring the executive. The Chinese regulatory authorities
have been observed to be inclined towards enhancing the role of independent directors in
corporations, rather than the role of supervisory board members.69 For instance, the CSRC
introduced the notion of independent directors in its 1997 guidelines, but failed to mention or
take any initiative with regard to the supervisory board.70 Currently, China’s laws are silent on
the allocation of duties, powers and liabilities between the supervisory board and independent
directors.71
Under Chinese Company Law, a member of the supervisory board may hold more
supervisory power than an independent director, as he holds the power to supervise directors
himself and is also given the authority by the state to inspect certain company matters.72 It is
noted however that the independence requirements for an independent director is stricter than
what is required of a supervisory board member under the Chinese Company Law.73 In reality,
these requirements may well be ineffectual as the introduction of independent directors has not
been found to improve corporate governance standards in Chinese corporations. In fact, there has
been an increase in the number of corporations sanctioned since 2002 for corporate malpractices
68
Ibid
1.
69
Ibid
13.
70
Ibid.
71
Jie
Yuan,
‘Formal
Convergence
or
Substantial
Divergence?
Evidence
from
Adoption
of
the
Independent
Director
System
in
China’
(2007)
9
Asian-‐Pacific
Law
and
Policy
Journal
71,
85.
72
See
Chi-‐Wei
Huang,
‘Worldwide
Convergence
Within
a
Pluralistic
Business
Legal
Order:
Company
Law
and
the
Independent
Director
System
in
Contemporary
China’
(2008)
31
Hastings
International
and
Comparative
Law
Review
361,
426.
73
Ibid.
Page
15
that independent directors were supposed to guard against.74 Studies conducted have shown that
the vast majority of independent director candidates are nominated by boards of directors which
‘independence’ of independent directors and their ability to prevent abuse by major shareholders.
Most unfortunately, a significant number of independent board directors, like supervisory board
members, are also passive in the exercise of their functions. This is seen from the fact that more
than one-third of surveyed independent directors claimed to have never abstained nor cast an
Last but not least, the disappointing outcome of the introduction of independent directors in
China can partially be attributed to the ‘free-riding’ problem brought about by independent
directors expecting the supervisory board to be responsible for monitoring and hence self-
limiting their own role.77 To avoid further problems down the road, it is crucial for Chinese
legislature to clarify the overlap in functions of the responsibilities of the supervisory board
A 2004 survey conducted reflected that most Japanese corporations have stuck to being
auditor corporations, as only 7% of the survey sample had adopted the Anglo-American board
structure to become committee corporations.79 Notably, the corporations which decide to become
committee corporations can be divided into two groups. One group sincerely tries to improve
corporate governance by appointing independent outsiders to the board, while the other group
takes advantage of the loose definition of ‘external directors’ as ‘never an employee of the firm’
by appointing affiliated parties, such as representatives from the core corporation, to the board,
74
Yuan,
above
n
71,
89.
75
Ibid
88.
76
Ibid
89.
77
Ibid
90.
78
Huang,
above
n
72,
426.
79
Ronald
Dore,
‘Insider
Management
and
Board
Reform:
For
Whose
Benefit?’
in
Masahiko
Aoki,
Gregory
Jackson
and
Hideaki
Miyajima
(eds),
Corporate
Governance
in
Japan
(2007)
370,
375.
Page
16
in order to consolidate the core corporation’s control over its subsidiaries.80 For firms that remain
as auditor corporations, mandatory changes for small corporations include the requisite
appointment of at least two outside auditors who have never been employed by the corporation,
and at least three outside auditors are required for larger corporations.81 Further, in the case of
large Japanese corporations, outside auditors have to comprise at least half of the total number of
auditors after May 2005.82 In either case, the appointment of outside directors or auditors in
management, has been observed as having little effect in detecting and stopping corporate
governance malpractices.83 Some of the reasons for this failure are detailed below.
A. Structural weaknesses
1. Optional reform
It is noted that the 2001 Japanese Code reforms have been criticized for being optional. Not
only do the reforms not provide clear market or managerial incentives to choose the Anglo-
American model, they have also failed to provide an unequivocal direction as they offer two
conflicting models.84 By providing two contradictory measuring yardsticks for the purpose of
evaluating corporate governance standards, the reforms create market confusion rather than
market unity.85 Ironically, the 2001 reforms end up maintaining the market equilibrium pre-
reforms as their practical effect is only that they somewhat codify the optional model developed
outside the Japanese Code pre-reforms. Prior to the 2001 reforms, such corporations, dubbed as
Sony-type corporations, already existed and had similar characteristics to the committee
corporations introduced by the reforms. These Sony-type corporations had around 2 outside
directors and had an established committee system, even though there was no legal requirement
80
Ibid.
81
Ibid
373.
82
See
Zenichi
Shishido,
‘The
Turnaround
in
1997:
Changes
in
Japanese
Corporate
Law
and
Governance’
in
Masahiko
Aoki,
Gregory
Jackson
and
Hideaki
Miyajima
(eds),
Corporate
Governance
in
Japan
(2007)
310,
320.
83
Dore,
above
n
79,
384.
84
Dan
W
Puchniak,
‘The
2002
Reform
of
the
Management
of
Large
Corporations
in
Japan:
A
Race
to
Somewhere?’
(2003)
5
Asian
Law
42,
42.
85
Ibid
62.
Page
17
mandating the same.86 As such, it has been observed that no more efficient structure than what
already existed was sought to be accommodated under the reforms, and there was hence no
2. No independence requirement
It is noted that the aforesaid reforms require for large corporations to have ‘outside directors’,
not independent directors. ‘Outside directors’ as they are defined under the Japanese Code can
include directors who are or have been employees of the corporation, and can also include those
who have material relationships with the corporation’s management.88 These directors are also
traditionally understood, do not have a material relationship with the management.89 Therefore,
corporations which adopted the Anglo-American committee structure can still have a board of
directors composed mainly of inside and grey directors who are dependent upon the
corporation’s management. Due to the lack of an explicit requirement for ‘independence’ from
management,90 most boards remain insider dominated. That grey directors are in the mix, in
addition to some truly independent directors, will compromise the overall independence and
monitoring ability of the institution of outside directors. Because most of such outside directors
can hardly be said to be ‘disinterested friends of the firm’ and many are in fact personal friends
of the president, they tend to scrutinize proposals that come before them as well-wishers.91
Conversely, it has been argued that grey directors have more incentive to monitor the
management than independent directors because the grey directors have a more direct connection
with the corporation. Furthermore, these grey directors could be perceived as a desirable middle
ground reached as they have an appropriate level of independence and yet possess the incentive
86
Ibid
50.
87
Ibid
59.
88
Ibid
65.
89
Ibid.
90
Ibid
72.
91
Dore,
above
n
79,
383.
92
Ibid.
Page
18
The same reforms have also been criticized for attempting to maintain the old governance
structure, such that the boards are still insider-dominated and the distinction between the board
and the management remains unclear, in respect of auditor corporations which have chosen to
remain so. In essence, the auditor corporations post-reforms have the same model, albeit
Not surprisingly, it has been recognized that post adoption of the reforms, the change is in
form, and not in corporate governance practices.94 As discussed above, in either the case of the
committee corporation or the auditor corporation, the boards remain insider dominated, which
ironically is the aspect which the reforms seek to effect change upon. It is submitted that there is
a real effect on corporate governance only when reforms in the actual practices of a board follow
B. Particularities of Japan
1. Shareholding structure
In the 1990s, the ownership structure of Japanese corporations used to be that foreigners
owned only limited stakes in corporations, but substantial stakes were owned by other
corporations and financial institutions. 95 It has been observed that the pattern of stable
shareholding allowed the management of corporations to adopt policies that were insensitive to
profit maximization. 96 This had negative implications on corporate governance, due to the
monitoring of corporations by banks with joint ownership of their debt and equity,97 and more
However, since the 1997 banking crisis and in recent years, there has been an increase in the
exposure of Japanese boards to the stock market, as a result of the un-tangling of cross-
93
Ibid
62.
94
Ibid
42.
95
Hideaki
Miyajima
and
Fumiaki
Kuroki,
‘The
Unwinding
of
Cross-‐Shareholding
in
Japan:
Causes,
Effects
and
Implications’
in
Masahiko
Aoki,
Gregory
Jackson
and
Hideaki
Miyajima
(eds),
Corporate
Governance
in
Japan
(2007)
79,
79.
96
Ibid.
97
Ibid.
98
Ibid
117.
Page
19
shareholding, or inter-corporate shareholding between financial institutions and corporations.99
In fact, the holdings by financial institutions of tradable shares have been found to have fallen
from almost 50 percent of total shareholdings to just 20 percent.100 At the same time, these
amongst foreigner and individual shareholders.101 It is worth mentioning that this unwinding of
cross-shareholding and increase in the dispersion of ownership did not occur uniformly across
be rational for profitable corporations which already have easy access to capital markets and high
foreign ownership pre-crisis, and which hence have no incentive to maintain the same
relationships with banks.102 This is not the case however for less profitable corporations which
need to maintain the same relationships with the banks for financing purposes, as well as to
stabilize ownership of their shares. 103 Notably, it has been argued that there has been a
compromise on the discipline of the management in these less profitable corporations as a result
of their maintenance of relationships with banks, which causes them to be more reluctant to
affect the status quo by implementing reforms to their current boards.104 In fact, a link has
sometimes been drawn between cross-shareholding, or more particularly the bank ownership,
and lax corporate governance.105 It has been suggested that the ownership structure of Japanese
become more dispersed, as is the case in a market-based system, although some features of the
99
Masahiko
Aoki,
‘Conclusion:
Whither
Japan’s
Corporate
Governance’
in
Masahiko
Aoki,
Gregory
Jackson
and
Hideaki
Miyajima
(eds),
Corporate
Governance
in
Japan
(2007)
427,
430.
100
Miyajima
and
Kuroki,
above
n
95,
117.
101
Ibid
80.
102
Ibid
117.
103
Ibid.
104
Ibid.
105
See
ibid
118.
106
See
ibid
119.
Page
20
2. Culture
Japanese corporations are known for their internal mechanisms of corporate governance,
despite the traditional weakness of outside directors when it comes to external monitoring.107 In
Japan, most managers only rise to higher ranks very late in their careers, after slowly working
their way up from being ordinary employees. This ‘long term socialization into a corporate
culture’ during a person’s career path gives rise to an intrinsic motivation within Japanese
managers to counter opportunistic behaviour which harms the corporations they belong to.108
Furthermore, the incentive in building a stalwart reputation amongst your peers is deemed
greater than attaining financial rewards.109 These in-built mechanisms of social control within
Japanese society are often overlooked in Anglo-American dominated discourses which place an
values over the individual when it comes to making decisions.110 It has been observed, for
instance, that the homogeneity of Japanese society and the influence of Eastern philosophies and
religions have reinforced cultural norms which value interpersonal harmony and group behaviour,
and further that such values permeate management practices which institutionalized joint
decision making.111 For this same reason, many outside directors are appointed from related
firms, as incumbent directors are inclined to think that directors who are any more ‘independent’
will be unable to understand the relationship-based issues that are important in order to make
It is submitted that whilst the employee culture has the potential to place an effective restraint
on poor corporate governance practices, on the contrary, business culture contributes to poor
107
Gregory
Jackson
and
Hideaki
Miyajama,
‘Introduction:
The
Diversity
and
Change
of
Corporate
Governance
in
Japan’
in
Masahiko
Aoki,
Gregory
Jackson
and
Hideaki
Miyajima
(eds),
Corporate
Governance
in
Japan
(2007)
1,
28.
108
Ibid.
109
Ibid
29.
110
Masao
Nakamura,
‘Selective
Adaptation
of
Anglo-‐American
Corporate
Governance
Practices
in
Japan’
in
Masao
Nakamura
(ed),
Changing
Corporate
Governance
Practices
in
China
and
Japan
(2008)
235,
241.
111
Ibid
240.
Page
21
management. Paradoxically, this same business culture may also improve corporate governance
outside directors which arise from their better understanding of the corporation. All of the above
are considerations which extend beyond the type of board structure adopted by a Japanese
corporation.
A. Patterns of convergence
First and foremost, for the purposes of discussion, it is important to make a distinction
between functional convergence and formal convergence. The earlier can occur without the latter.
dependent on what actually occurs in practice.112 Singapore, China and Japan are observed to
have somewhat moved towards the Anglo-American one-tier board structure by way of selective
three jurisdictions and even in Asia, Singapore can be considered to have the most advanced
corporate governance regime, which incorporates selected changes that have worked well in
other countries.113 At the same time, it is also submitted that even though Singapore can be said
to be the closest amongst the three jurisdictions to have adopted an Anglo-American board
structure, its specific circumstances, such as the prevalence of concentrated family and
government share ownership in many corporations, as well as the risk-adverse culture which
discourages whistle-blowers from acting, result in some extent of functional divergence from the
Anglo-American board structure. China, on the other hand, while retaining its two-tier board
structure, has incorporated into its corporate governance regime a fundamental characteristic of
the Anglo-American one-tier board structure, that is, the requirement of having independent
directors on the boards of Chinese listed companies. Functional divergence of the role of
independent directors however results from the existing supervisory boards in such companies
112
Shishido,
above
n
82,
323.
113
Anandarajah,
above
n
18,
267.
Page
22
and the lack of clarification of their roles as against independent directors. It also arises from the
harmonious relationships within corporations rather than compliance with black letter law. Last
but not least, in respect of Japan, arguably, formal convergence with the Anglo-American board
structure has taken place as Japanese corporations are given a choice to adopt the committee
style of board structure.114 Being ‘reform by choice’ however, the diversity in the actual choices
corporations make will ensure continued functional divergence arising from the different
unequivocal form has emerged of the Japanese board structure and hence the net effect such
legal reforms has on convergence is ambiguous. In the context of Japan, the selective adaptation
theory works such that keiretsu corporations with complex inter-corporations business
relationships or which are dependent on banks are more likely to be resistant to reform and
choose to remain as auditor corporations rather than to adopt the Anglo-American board
structure.115 Another interesting way of evaluating the board structure available in Japan post-
reforms is to re-examine the auditor corporations pre and post-reforms. Pre-reforms, there was
insufficient distinction made between management and monitoring, and outside directors were
only forced onto a corporation’s board by main bank or keiretsu shareholders if the corporation
was performing badly.116 However, post-reforms, large Japanese corporations which did not
convert to committee corporations had to have at least two outside auditors despite their good
performance.117 Notably, this reform, combined with the effect of the statutory strengthening of
the role of statutory auditors, has been argued to put significant pressure on large Japanese
corporations which are auditor corporations, to become committee corporations in any case,
since two real outsiders have to be accepted to their boards whether they choose to remain an
auditor corporation or not.118 This factor, as well as the gradual unravelling of cross-shareholding
114
Jackson
and
Miyajima,
above
n
107,
27.
115
Nakamura,
above
n
110,
256.
116
Shishido,
above
n
82,
321.
117
Ibid
320.
118
Ibid
322.
Page
23
and bank shareholding pushes Japan towards functional convergence. Functional divergence
from the one-tier board structure can occur due to the business practices of Japanese corporations,
which inclination is to recruit outside directors who are not independent of management, hence
Separately, one should be cognisant of the divergence between corporate governance code
may nevertheless occur due to factors such as the shareholding structure of corporations and
business culture, amongst others. Such functional divergence may work against the theoretical
advantages purported to flow from a specific board structure. Notably, pre-reforms, the Sony-
type corporations developed beyond and despite the Japanese Code, hence effecting functional
convergence without formal convergence. Conversely, business practices can take a path
independent of legislation, such that there is no functional convergence even where there is
formal convergence. To ensure that functional convergence ‘catches up’ with formal
convergence, factors such as prevalent shareholding structure and culture will have to change or
evolve over time in the three jurisdictions. As it is, there is already an increased privatization of
cross-shareholding and bank shareholding in Japan. In the case of Japan, with such unwinding,
for reasons explained earlier in this article, more corporations are likely to adopt the Anglo-
American committee board structure. In the case of Singapore and China, the increased
abilities of the independent directors and supervisory board members as against management.
119
Nakamura,
above
n
110,
258.
120
Organization
for
Economic
Development,
The
OECD
Principles
of
Corporate
Governance
(2004)
<http://www.oecd.org/dataoecd/32/18/31557724.pdf>
at
27
September
2010.
Page
24
The changes in the shareholding structures of corporations may also cause business practices and
It is therefore submitted that there is some extent of convergence in all three jurisdictions, not
being absolute or complete, and to varying degrees, towards the Anglo-American one-tier board
structure. China has cherry-picked the institution of independent directors from the one-tier
board structure while Japan has offered corporations the option to switch to the one-tier board
structure. Any step towards formal convergence in any of these jurisdictions is however
countered by other factors which cause functional divergence including without limitation, the
and by different corporations within those same jurisdictions. The net effect on convergence in
Asia or of the ultimate predominant single type of board structure is hence ambiguous.
B. Actual differences and similarities between the board structures offered in Singapore,
Despite formal structural differences between the various board structures, it is noted that
functionally, there are substantial similarities in the workings of the boards of directors, whether
one-tier or two-tier, due to actual practices. For instance, under both the one-tier board structure
in Singapore and the two-tier board structure in China, the directors are elected by shareholders.
In the Singapore context, independent directors may be voted into the board by a majority
shareholder, which could represent either the interests of a certain influential family or the
government. Similarly, in the Chinese context, the supervisory board members and independent
directors, if applicable, are not uncommonly appointed by shareholders who represent Party
interests. Therefore, whether one-tier or two-tier, both the Singapore and Chinese contexts are
such that the independence and monitoring capacity of the relevant directors or the supervisory
board members are compromised. Furthermore, the introduction of independent directors into the
one-tier board system in Singapore is an apt example of the convening of a separate unit within
Page
25
the board of directors with a supervisory role, which is akin to the supervisory board’s role in the
two-tier board structure. Admittedly though, the distinction between the monitoring function, as
against the managerial function is more formalized in the two-tier board structure, in comparison
to the one-tier board structure.121 Nevertheless, the Japanese example further drives home the
point that substance should prevail over form. As discussed above, post-reforms, regardless of
the monitoring function of the outside auditors or directors respectively is compromised due to
the likelihood of an insider dominated board resulting in any case. The principle of the separation
of managerial and monitoring functions and the ‘original sin’ view that no one can be trusted to
monitor himself, 122 the very premise upon which the two-tier board is based, is defeated if the
business practices of a corporation do not realize this principle, even if the formalized structure is
in place. On a separate note, in respect of the one-tier board structure, though Singapore has been
commended for keeping up with global governance standards, its corporate governance regime
has been criticized for being ‘form without substance’, and further for leading up to box-ticking
It should also be noted that each of Singapore, China and Japan has had its fair share of
corporate governance scandals, regardless of the board structure adopted by the corporate
perpetrators of corporate governance failures in the respective countries. In 2006, the former
chief financial officer and two other executives of a Singapore company Accord Customer Care
Solutions were found guilty for their roles in aggravated cheating, fraud and false financial
reporting.124 More recently, in 2010, the deputy chief executive officer of JEL Corporation
(Holdings) Limited and two of his colleagues were found guilty of falsifying the Singapore listed
company’s accounts.125 The fact that Chinese companies have supervisory boards as purported
121
Ibid.
122
Dore,
above
n
79,
390.
123
National
University
of
Singapore,
above
n
38.
124
Singapore
Log,
ACCS
Executives
Jailed
for
Fraud
(2006)
<http://sg.pagenation.com/?p=2579>
at
17
February
2011.
125
Singapore
Log,
Deputy-‐CEO
Jailed
for
Cooking
the
Books
(2010)
<http://sg.pagenation.com/?p=2559>
at
17
February
2011.
Page
26
‘monitors’ also did not prevent the eruption of the 2008 milk scandal in China, where Chinese
dairy companies, most prominently Sanlu, forsook internal controls and corporate social
responsibility for quick commercial gains.126 In Japan, the internet conglomerate Livedoor Co.
was delisted from the Tokyo stock exchange in 2006 after one of the biggest corporate scandals
With reference to the experiences in all three jurisdictions, at the end of the day, whether
China, the loosely defined outside directors and auditors in Japan, and the board structures under
which they exist, make a difference to corporate governance really depends on the attributes,
personal values and professional qualifications of persons who assume these roles. For instance,
whilst concentrated shareholding in Singapore and China may be frowned upon due to the
likelihood of an affiliation with management, if however, the relevant majority shareholder takes
an active role to monitor and uses his or her power to dismiss incompetent management, the
corporate governance standards of the relevant corporation may in fact be elevated. Furthermore,
in respect of the insider dominated boards in Japan, it is noted that earlier research has
demonstrated that there is no explicit correlation between ‘insiderism’ and poor management.128
In view of the above, the absence of strong external, or internal, oversight should not obstruct a
corporation from getting ethical managers or executive officers with integrity to run the
corporation.129 Simply put, board structures and forms matter much less than the people who
constitute the board and who run the show. To further substantiate this point, a recent survey
demonstrates that some of the corporations who retained the traditional Japanese board structure
appeared to have better performance than corporations who adopted the Anglo-American board
system.130 There is hence no clear indication which structure is superior over the others as the
126
Jenny
Fu,
The
2008
China
Milk
Scandal
and
the
Role
of
the
Government
in
Corporate
Governance
in
China
(2009)
<http://www.clta.edu.au/professional/papers/conference2009/FuCLTA09.pdf>
at
17
February
2011.
127
The
China,
News
Digest:
Japan’s
Livedoor
to
be
Delisted
in
April
(2010)
<
http://thechina.biz/china-‐
industries/japans-‐livedoor-‐to-‐be-‐delisted-‐in-‐april/>
at
25
May
2011.
128
Dore,
above
n
79,
394.
129
Ibid.
130
Nakamura,
above
n
110,
257.
Page
27
workings of any of the board structures depend on a host of other structural and circumstantial
factors.
The Japanese model of corporate governance and particularly the board structures available
from the traditional Japanese board structure with auditors as well as the ‘new’ Anglo-American
one-tier committee board structure. Though Singapore and China have been used as reference
jurisdictions for the purposes of discussion in this article of the one-tier and two tier board
structures respectively, it is submitted that the Singapore one-tier board structure and that of the
Chinese two-tier board structure are hybrids in their own respects. The Singapore one-tier board
structure does not reflect the classic Anglo-American board structure wholesale. Similarly, there
are differences between the Chinese two-tier board structure and the classic German board
structure. They have each been adapted to suit the particular circumstances of Singapore and
China respectively and have evolved from the ‘innovative recombination of elements’.131
Earlier data collected has demonstrated that it is hard to deem any one board structure
superior to the others.132 The effect of economic logic is that over time, the more effective
system may prevail and there may be tendencies for the board structures in different jurisdictions
(in this context, within Asia) to converge. However, it has been suggested that the development
dependence.133 Accordingly, the advantages and disadvantages of any board system must be
assessed against the contexts of the legal and business environments.134 The theory of path
dependence also posits that economic efficiency causes corporate governance systems to evolve,
but arguably, what is economically efficient is constrained by the context the relevant system has
131
Jackson
and
Miyajima,
above
n
107,
39.
132
Ibid.
133
Lucian
Bebchuk
and
Mark
J
Roe,
A
Theory
of
Path
Dependence
in
Corporate
Ownership
and
Governance
(November
1999)
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=202748>
at
29
September
2010.
134
Jungmann,
above
n
6,
448.
Page
28
been placed into.135 It follows that different countries can adopt different board structures, all of
worthwhile then to seek ways to explore optimizing each system within the political, economic,
social, legal and cultural contexts of the relevant country.136 Notably, it has also been suggested
by earlier literature that the transformation of legal systems on a functional level, as compared to
a formal level, would make it easier to avoid the struggle with path dependency and create a
Even though Singapore, China and Japan are not exactly moving towards identical systems
of board structures, despite the variation in implementation, it can be said that there will be
convergence in policy direction, in the sense that reform thus far has been based on the
commonality of certain central principles, such as the need for an ‘outsider’ view to balance the
power held by the management and to enhance shareholder value.138 Demonstrably, even if
attitudes towards the role of board structures in corporate governance change quickly amongst
market regulators, business cultures do not change as quickly. The board systems in Asian
countries, including Singapore, will not become an exact replica of the Anglo-American model,
since predominant shareholding structures, business culture and other circumstances also play a
part in shaping the way these models are applied and adapted in the contexts of other
countries.139 Due to the diversity in current governance systems in Asian countries and differing
towards a single Asian model of board structure in the near future. 140 Nevertheless, the
development of markets, as well as the shared principles that they want to work towards, means
that there may be a convergence at the policy level towards the values sought to be achieved by
the Anglo-American one-tier board structure. Therefore, despite the variation in business
135
Puchniak,
above
n
84,
70.
136
Jungmann,
above
n
6,
449.
137
Huang,
above
n
72,
371.
138
Jamie
Allen,
‘Code
Convergence
in
Asia:
Smoke
or
Fire?’
(2000)
1
CGI
23,
24.
139
Ibid
31.
140
Ibid.
Page
29
practices and company laws in the Asian region as well as worldwide, the principles of good
corporate governance can be said to be converging. Instead of scrutinizing the board structures in
different countries, it may perhaps be more productive instead to look at the underlying
principles understood to represent decent corporate governance standards, such as the rights of
shareholders and their equitable treatment, and the responsibilities of the board of directors.141
These principles have been commonly identified as elements underlying good corporate
governance amongst countries with different board structures. For instance, Principle I of the
basis for an effective corporate governance framework, the consistency with the rule of law and
While it can be said that Singapore, China and Japan have all moved or are moving from
that some countries are at more advanced stage of the transition processes than others.143 This
applies more specifically in respect of board structures as well. As mentioned earlier, though
there is some extent of formal convergence in board structures, continued functional divergence
occurs to counter the formal convergence due to existing shareholding structures and business
practices. Over time, as there is increased privatization of corporations in Singapore and China,
and lesser corporations with banks as major shareholders in Japan, there will arguably be a
formal convergence towards the Anglo-American board structure, but to varying extents in the
different countries due to selective adaptation. Even when combined with any convergence in the
policy direction, the overall net effect is still hard to gauge, due to the different contexts in which
any one time, such as the Anglo-American board structure, is unlikely, and diversity will remain
141
Stephanie
Maier,
‘
How
global
is
good
corporate
governance?’
(August
2005)
Ethical
Investment
Research
Services
1,
5.
142
Organization
for
Economic
Development,
above
n
120.
143
See
Charles
P
Oman,
‘Corporate
Governance
in
Development:
The
Concept,
The
Issues,
The
Policy
Challenges’
in
Charles
P
Oman
(ed),
Corporate
Governance
in
Development
The
Experiences
of
Brazil,
Chile,
India
and
South
Africa
(2003)
1,
5.
Page
30
a unique feature of the board systems in Asian countries,144 despite some extent of convergence
at the policy level. The case for convergence to one board structure is weak, as countries will be
at different stages of the transition process, and will thus have dissimilar political, social,
economic, cultural and legal environments. Furthermore, pressures or constraints for change will
not apply uniformly to corporations within these countries,145 thus resulting in further divergence.
The changes in Singapore, China, Japan and in other Asian countries have not seen their end.
The corporate governance environment is not static and with globalization, there will be new
developments and adaptations in the corporate governance regimes of Asian countries. Reforms
VII. CONCLUSION
One of the main cornerstones of good corporate governance practices, in whichever board
structure, is the independence of the monitoring persons from the management of the corporation.
The Singapore Code, for instance, whilst expressly intending to preserve the notion of
‘independence’ in independent directors, is silent about the mechanism to ensure the successful
implementation of the objective of maintaining such independence.146 One possible reform can
be simply to amend the Singapore Code such that the appointment of independent directors is
made by independent third parties and not by majority shareholders.147 Furthermore, care should
and not just in form. For instance, the remuneration of supervisory board members or
independent directors in China should not be decided by the executive board as this compromises
the independence of the monitoring body. Also, the ‘outside directors’ required to be on the
board of a committee corporation in Japan should not include directors affiliated with
144
Jackson
and
Miyajima,
above
n
107,
30.
145
See
ibid
31.
146
Singapore
Investor,
above
n
28.
147
Ibid.
Page
31
body or independent directors be stringently set out, together preferably with the substance of the
duties of the monitoring body. At the same time, however, a balance should be made to ensure
that not too much independence such that the monitoring body is uninvolved in the corporation
results from these definitions of independence, as this has been recognized to be counter-
productive.148 Moreover, in respect of China, the overlapping and distinct functions of the
Separately, as mentioned earlier, the personal attributes and values of supervisory board
members, independent directors or outside directors and the like are said to potentially impact
upon corporate governance standards more than formal board structures. As such, professional
qualifications should be specified for independent directors, supervisory board members and
outside directors, to ensure that they have the capabilities to perform their monitoring role
properly. The substance of their duties should also be laid out, as should the duties of executive
board members. A positive onus could perhaps be placed on executive board members to share
critical information with the supervisory body or independent directors, in order to alleviate any
information asymmetries. Last but not least, it has been suggested that some form of legal
The path dependence theory demonstrates that piecemeal changes should not be made to a
country, due to the differences in political, historical and economic contexts. 150 A fortiori,
independent changes to an existing predominant board structure should not simply be imported
from other countries on the pretext that these have worked well in such other countries, as they
corporation. In the Chinese context, the coexistence of the supervisory board and the institution
148
Puchniak,
above
n
84,
66.
149
National
University
of
Singapore,
above
n
38.
150
Puchniak,
above
n
84,
70.
Page
32
of independent directors adopted from the Anglo-American board system, is an example of a
legal transplant which reflects the uncertainty of reformers as to which board structure is suitable
for China. Both the systems of supervisory boards and independent directors have been said to be
simply transplanted into China without proper evaluation of their suitability, and as a result, the
mixed system comprising of both the ‘insider’ Germanic and ‘outsider’ Anglo-America models
has been assessed not to resolve China’s corporate governance problems adequately.151
It has not been, nor will it be, the experience of countries to adopt absolutely any board
system which is completely different. This may however be justified in very extreme
country will be subject to the structural weaknesses of the predominant board system, as well as
the particularities of the country of import, such as the prevalent shareholding structure and
business culture. Even if there is legislative intention to import a board system wholesale, with
reference to the analysis in the earlier part of this article, the end result is likely to be a hybrid of
what was incorporated, as there will be functional divergence arising from factual circumstances
and the interaction of the alien system with the political, economic, social, cultural and legal
environments in a country. This fits in well with the point made earlier that it is unlikely that
there will be convergence towards any single board structure in the near future, despite
C. Final conclusions
As demonstrated above, there is no clear superiority of any board system over another.
Political, social, economic, legal and cultural contexts, as well as ownership concentration of
corporations, have a large role to play in terms of shaping the effect of any board system on
corporate governance practices in a country. It was mentioned earlier that the predominant
shareholding structure of corporations in Singapore, China and Japan is still in the process of
change, towards a more dispersed ownership structure. Due to the external pressures such as
151
Tan
and
Wang,
above
n
59,
147.
152
See
Mark
J
Roe,
‘Chaos
and
Evolution
in
Law
and
Economics’
(1996)
109
Harvard
Law
Review
641,
663-‐665.
Page
33
market exposure, there is the likelihood that the corporate governance standards of corporations
in Singapore, China and Japan, via reforms to the board system or otherwise, will improve over
time.153 Some may argue that commercial realities will be sufficient to edge out corporations
with undesirable corporate governance records, as market conditions inevitably compel investors
to judge which corporations have good corporate governance practices, are less risky and are
worthy of their investments. One should however be wary of over reliance on market
mechanisms to sift out corporations with poor corporate governance practices from the good, as
recent corporate scandals have shown. This is where attempts may be made at formal
introduction of certain elements of a board system from another jurisdiction, even though the
counter effect of functional divergence should be borne in mind. Further, one should also recall
that board structures matter less than the attributes of the people who comprise the board, and the
actual independence of the supervisory body or independent directors from the management,
153
Robert
W.
McGee,
Corporate
Governance
in
Asia:
Eight
Case
Studies
(January
2008)
Working
Paper
<http://ssrn.com/abstract=1081954>
at
28
September
2010.
Page
34