THE ONE-TIER AND TWO-TIER BOARD STRUCTURES AND HYBRIDS

IN ASIA – CONVERGENCE AND WHAT REALLY MATTERS FOR

CORPORATE GOVERNANCE

Hui Yun Corinne Tan*

[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

governance. 1 It follows that an effective board is seen to be an essential ingredient in a

corporation which has good corporate governance practices. The board of directors is crucial in

a corporate governance system as it is representative of the interests of a corporation, and is at

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  
 

Electronic copy available at: http://ssrn.com/abstract=2140345

good corporate governance practices can enhance performance and improve access of

corporations to outside capital, and thus indirectly contribute to the sustainable economic

development of countries. 4 Recommendations commonly proposed to improve corporate

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

attributed to the particularities or contextual circumstances of a country.6 This form of analysis

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  
 

Electronic copy available at: http://ssrn.com/abstract=2140345

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.

II. VARIOUS BOARD STRUCTURES IN ASIA

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

Anglo-American board structure. It is characterized by a single board comprising of both

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  
 

Electronic copy available at: http://ssrn.com/abstract=2140345

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

for better made decisions in a one-tier board structure9 is thus increased.

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

formally appointed by the shareholders’ meeting. 12 Furthermore, the supervisory boards in

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 adopting the Anglo-American board structure will be referred to as ‘committee

corporations’ and corporations that stuck to having a separate board of statutory auditors will be

referred to as ‘auditor corporations’.

III. EVALUATING THE ONE-TIER BOARD IN SINGAPORE

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

1. Dilemma of monitoring colleagues

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

monitoring function effectively in practice.

2. Concentration of power in one person

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

directors and the representation of the interests of shareholders.27

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

independence from majority shareholders.28 As shareholders can vote on the appointment of

directors to the board, its follows that majority shareholders can end up dictating the board

composition. This undermines the concept of ‘independence’ as introduced by the Singapore

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

Corporate governance in Singapore has previously been described to be largely government-

based and family-based, as there is high ownership concentration of corporations in Singapore

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

of ownership of corporations makes the problem of lack of independence of independent

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

governance standards. For instance, when one considers government-linked corporations

(‘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

market and weaker monitoring by shareholders.33

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

dispersed shareholding in establishing effective corporate control and monitoring.37 Therefore, as

demonstrated above, the final impact of concentrated shareholding in Singapore on board

effectiveness is unclear and may be subject to other factors.

3. Culture

The lack of independence of independent directors and the concentrated shareholding,

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.

IV. EVALUATING THE TWO-TIER BOARD IN CHINA

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

1. Information asymmetries and limited powers of the supervisory board

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

Board’s report is drafted by the Secretary to the Board of Directors.’49

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

a typical supervisory board, which comprises of ‘political officers’, leaders of non-functional

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

backed by the controlling shareholder or the government”.58

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

themselves as representing state interests. 63 Moreover, the presence of supervisory board

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

corporate governance practices.65

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

its accompanying network of interpersonal relationships, termed guanxi, and reciprocal

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

to the internal monitoring system.67

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

Anglo-American board structure, is a reflection of the Chinese legislature’s inklings of 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

are usually controlled by large shareholders, 75 henceforth compromising the purported

‘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

opposing vote at a board meeting.76

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

members, and of independent directors in listed companies.78

V. EVALUATING THE ALTERNATIVE BOARD STRUCTURES IN JAPAN

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

committee corporations or auditor corporations respectively, though intended as a check on

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

added success due to the same.87

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

commonly acknowledged as ‘grey’ directors, in contrast with independent directors whom, as

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

to exercise their monitoring function.92

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

statutorily certified, as that of the traditional Japanese corporations pre-reforms.93

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

a formal change in the board structure.

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

relaxed financial constraints of corporations in their decision making processes as a result.98

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

changes were accompanied by an increased dispersion of share ownership of corporations

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

Japanese corporations, as different financial institutions and corporations reacted differently as a

result of rational decision-making. For instance, the unwinding of cross-shareholding is seen to

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

corporations previously characterized by cross-shareholding will, with the passage of time,

become more dispersed, as is the case in a market-based system, although some features of the

previous cross-shareholding arrangements will be retained, resulting in a hybrid of cross-

shareholding by other corporations as well as by institutional investors.106

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

over-emphasis on external checks and balances.

Separately, it is also noted that Japanese corporations place an emphasis on group-oriented

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

decisions for the relevant corporations.

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

corporate governance practices as outside directors appointed are not independent of

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

practices within a Japanese corporation as a result of better decision-making by the selected

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.

VI. WILL THERE BE AN ASIAN CONVERGENCE?

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.

Formal convergence is achieved via legislative reforms, while functional convergence is

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

adaptation of particular characteristics, formally, as well as in practice. Undeniably, amongst the

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

quasi-familism culture in Chinese corporations, which focuses on the maintenance of

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

incentives of stakeholders and diverse responses of corporations to pressure. To date, no single

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

somewhat defeating the purpose of an auditor corporation converting into a committee

corporation. It is also caused by the uneven and selective implementation of corporate

governance practices by different types of Japanese corporations discussed earlier.119

Separately, one should be cognisant of the divergence between corporate governance code

recommendations and corporate governance practices in reality.120 Oftentimes, despite noble

intentions to entrench legally recognized board structures in countries, functional divergence

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

shareholding in corporations situated in Singapore and China, as well as gradual unwinding 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

privatization of shareholding in corporations may increase the impartiality and monitoring

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

culture to evolve accordingly over time.

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

predominant shareholding structures in corporations in the relevant jurisdictions discussed,

cultural predispositions and business practices, as well as selective adaptation by jurisdictions

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,

China and Japan, and what really matters

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

whether a corporation remains as an auditor corporation or converts to a committee corporation,

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

exercises instead of actual compliance and enforcement.123

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

in the nation’s history.127

With reference to the experiences in all three jurisdictions, at the end of the day, whether

independent directors in Singapore, supervisory board members and independent directors in

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.

C. Potential for convergence

The Japanese model of corporate governance and particularly the board structures available

to Japanese corporations can easily be described as ‘hybrid’ as it involves a mix of elements

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

of legislation, including that of formalizing a particular board structure, is driven by path

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

which may be considered to be efficient within their respective environments. It may be

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

better climate to generally encourage convergence of corporate governance practices.137

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

political and cultural environments, it is submitted that there is no likelihood of convergence

towards a single Asian model of board structure in the near future. 140 Nevertheless, the

recognition of Asian governments of the fundamental nature of corporate governance to 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

Organization for Economic Development Principles of Corporate Governance stipulate, as the

basis for an effective corporate governance framework, the consistency with the rule of law and

the division of responsibilities amongst supervisory, enforcement and regulatory authorities.142

While it can be said that Singapore, China and Japan have all moved or are moving from

predominantly relationship-based to more rules-based governance systems, it can clearly be seen

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

these board structures are placed.

It is hence submitted that a perceptible shift or convergence to a singular board structure at

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

in respect of board structures are bound to continue.

VII. CONCLUSION

A. Some suggested reforms

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

be taken to ensure that ‘independence’ of monitoring persons or a body is achieved substantially,

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

management. It is henceforth crucial that the ‘independence’ requirement of any monitoring

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

supervisory board and independent directors should be clarified in time.

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

protection is required to encourage independent directors or the monitoring body to ‘whistle-

blow’ and cry foul against the management.149

B. Legal transplants – will they work?

The path dependence theory demonstrates that piecemeal changes should not be made to a

country’s corporate governance system based on what is economically efficient in another

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

may not be as economically efficient in the country of import or in respect of a particular

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

circumstances.152 Any introduction of an adapted characteristic of another board system into a

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

convergence in corporate governance policy direction and shared governance values.

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

convergence in a bid to improve corporate governance practices, including, by way of

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,

amongst other things.

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