Governance & the International Firm UniMelb 1 Governance & International Firm Week 6: Corporations in Asia

Governance & the International Firm UniMelb 2Objectives n n The 1997 crisis n n Asian business is family business: understanding its characteristics n n Anglo Model versus Chinese Model n n Westernizing the Chinese family company n n Asian conglomerates: Merchants or Menace?

Governance & the International Firm UniMelb 3 Asian business is family business n n Asian families dominate Asian business where existing (Western) management theories are largely misleading n n Who owns a company in Asia is more important than what it actually does n n More than 50% of all Asian public listed companies are owned by one single shareholder (a patron of a family) n n The importance of family control is often more important than providing high yields to shareholders

Governance & the International Firm UniMelb 4 Asian business is family business n n Asian family-controlled firms exist for things beyond making profit: – –To give family members a job – –To hold the family together – –To honour the ancestral founders of the firm – –For the family’s prestige and honour (importance of ‘face’) n n Unravelling multi-purpose Holdings n n Family infighting n n What do you need to know when dealing with Asian family owned companies? (SULLIVAN, p22-23)

Governance & the International Firm UniMelb 5 Family companies n n A family company is defined as a company started by an individual, and ownership and financial control is held by members of the family n n Small business: – –67% in Malaysia; – –66% in Hong Kong; – –67% in Germany

Governance & the International Firm UniMelb 6 The Anglo Family company n n Unemotional as being determined by impersonal and economic criteria n n Adherence to institutions such as legal system, banking and financial systems, government agencies, and given greater trust n n Where uncertainty avoidance is weak, citizens are positive towards institutions n n Family loyalties are weak n n Communications are bureaucratized n n Outside directors: members or close associates of the controlling family, present or retired employees of the company n n Succession issues in the Anglo Model

Governance & the International Firm UniMelb 7 The Chinese Model n n Immigrant status in SE Asia – –Personal relations & patronage and guanxi relationships n n Building an international identity by developing its cross-border family and clan connections n n Cultural influences on Chinese Model: – –Needs to avoid uncertainty – –Collectivism or group membership – –Power distance – –Entrepreneurial drive – –Confucianism // Protestantism

Governance & the International Firm UniMelb 8 The Chinese Model n n Dangers of over-emphasizing the importance of culture and overlook: – –The extent to which non-Chinese companies are influenced by similar factors – –The influence on Chinese family companies of non-cultural factors n n 12% of American family companies had non-family CEOs – –A successful company responds to both cultural and economic factors n n Loyalty is valued over professional and bureaucratic status n n Danger of “nepotism”

Governance & the International Firm UniMelb 9 The Chinese Model n n Employing outsiders in the Chinese model (Cf MEAD, p280-1) n n Succession in the Chinese model – –Multiple families – –Generational conflicts n n Financing the Chinese Model – –Personal & family savings – –Accumulated profit (i.e. internal cash flow financing) – –If inadequate, access to finance from broader clan

Governance & the International Firm UniMelb 10 Changes in the Chinese Model n n Problems arising from changed context; traditional reward structures may inhibit development n n How to solve the roots of Asian crisis – –Separating ownership from management – –Instituting fair systems for employee evaluation – –Decentralizing top management – –Instituting proper accounting systems – –Hiring outside professionals

Governance & the International Firm UniMelb 11 Changes in the Chinese Model n n Westernization of the Chinese family company – –Draw expertise from outside the family but within the clan – –Outside middle management – –Restructure and streamline – –Raise capital from banks – –Local stock exchange and raise capital from international financial systems – –Sell down family stock to a bare majority holding n n Complete transparency of information disclosure, fairness to all shareholders, responsible and accountable board directors, and truly independent board oversight over executive appointments and compensation represent ideals that cannot be simultaneously legislated and implemented, particularly in the context of China’s evolving market economy

Governance & the International Firm UniMelb 12 Changes in the Chinese Model n n As more international competitors enter the market, the PRC economy will need to break away from its heavy reliance on administrative and policy support from the government and adapt to the rules of a true market economy n n Top executives of SOE are all appointed by the CPC Central Committee. Thus, the government is still the key influential force within these large SOEs n n Opening of stockmarkets in Shanghai (91) & Shenzhen (92) : average state-ownership stake in Shenzhen and Shanghai stood at 70% in 2002

Governance & the International Firm UniMelb 13 Chinese model: “Merchants of menace?”

Governance & the International Firm UniMelb 14 Structure of the Chinese Model n n Little transparency n n Lack of coherent structure n n Cross-shareholdings: “what is profitable is 100% mine, what is less so can be shared with others” n n What are the precise assets and liabilities? Opaque company owner structure: – –Tax avoidance – –Not alerting competitors – –Reduce social jealousy

Governance & the International Firm UniMelb 15 Parallel Feudal System and Chinese Model n n Roman Empire followed by feudal system (during 1300 years) based on loyalty in return for safety // Chinese feudal family company – –Low trust society – –No legal structures in place unless the powerful lord – –Relatively isolationist – –Highly vertically integrated – –Personalized networks & patronage – –Highly political (not purely economic rewards or meritocracy)

Governance & the International Firm UniMelb 16 Westerners in Chinese Model n n Troubleshooting n n Prestige of international flavor n n Corporate window dressing

Governance & the International Firm UniMelb 17 Characteristics of Chinese business n n Know who > know what n n Management & Corporate Structures in Asia vs Western companies (BACKMAN, p201)