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Are OECD-prescribed “good corporate governance practices” really good in an emerging economy?

Are OECD-prescribed “good corporate governance practices” really good in an emerging economy?,10.1007/s10490-010-9206-8,Asia Pacific Journal of Manage

Are OECD-prescribed “good corporate governance practices” really good in an emerging economy?   (Citations: 6)
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This paper examines whether adopting OECD-prescribed corporate governance principles can solve the major corporate governance problem in an emerging economy—controlling-shareholder expropriation. We argue that “good governance practices” in OECD countries (e.g., an active board of directors, separation of chairperson and the CEO, significant presence of outside directors, and a two-tier board) cannot mitigate the negative effect of controlling-shareholder expropriation on corporate performance for two main reasons. First, most good governance practices are mainly designed to resolve conflicts between shareholders and the management but not conflicts between controlling and minority shareholders. Second, board directors are typically not independent to controlling shareholders, and supervisory directors often have low status and weak power in a firm. Using a panel of over 1,100 Chinese listed firms between 2001 and 2003, we find supportive evidence for our arguments. We discuss the implication of our study for public policy and strategies of investors.
Journal: Asia Pacific Journal of Management - ASIA PAC J MANAG , vol. 28, no. 1, pp. 115-138, 2011
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    • ...When a firm is controlled by the top shareholder, the effectiveness of several internal governance mechanisms (e.g., managerial compensation schemes and board of directors) would also be very limited (Berglöf & Pajuste, 2003; Chen, Li, & Shapiro, 2010; Claessens & Fan, 2002; Morck, Wolfenzon, & Yeung, 2005)...
    • ...In contrast with the small shareholders who often “vote with their feet” when firm performance is poor because they have few incentives or abilities to monitor managers (Jensen & Meckling, 1976), block shareholders would have enough voting power and incentives to collect information and monitor managerial opportunistic behaviors (Chen et al., 2010; Hengartner, 2006; Pi & Lowe, 2010)...
    • ...However, previous empirical findings on the effectiveness of independent directors are inconclusive (Chen et al., 2010 ;H u et al.,2010; Peng, 2004)...
    • ...But in the very first study examining the role of independent directors of Chinese listed companies, Peng (2004) finds that non-affiliated outside directors—independent directors—do not contribute to firm performance (measured as ROE and sales growth) (also see Chen et al., 2010 ;H u et al.,2010)...
    • ...Following previous studies (Chen et al., 2010; Hu et al., 2010; Lo, Wong, &...
    • ...Previous studies based on the principal–principal perspective have emphasized the tunneling of minority investors by large shareholders (Chen et al., 2010; Dharwadkar et al., 2000; Jiang & Peng, 2010; Peng & Jiang, 2010; Su et al., 2008; Young et al., 2008), but have always ignored the additional costs that large shareholders bear for their block ownership, which results in the entrenchment effect of increased ownership ...
    • ...In comparing our findings with previous studies (Chen et al., 2010; Hu et al., 2010; Peng, 2004; Su et al., 2008), our empirical findings provide strong evidence that board independence impacts negatively on controlling shareholders’ extracting PBC in Chinese listed companies...
    • ...On the one hand, until 2001, Chinese listed companies have been required to introduce independent directors into the boards (Chen et al., 2010; CSRC, 2001 ;P eng,2004; Peng, Zhang, & Li, 2007), and the independent director system in Chinese listed companies is basically set up by June 30, 2003, when at least one third of the board should be independent directors...
    • ...Not surprisingly, studies that use data before 2003 (Chen et al., 2010; Peng, 2004 ;S u et al.,2008) do not find independent directors’ governance impact...

    Jin-hui Luoet al. The private benefits of control in Chinese listed firms: Do cash flow ...

    • ...A second is reforming boards of directors, including the election of active and independent board members (Peng, 2004) and the separation of the board chair and CEO positions (Chen et al., 2011)...
    • ...There are strong reasons for being skeptical about the potential for implementing these and related measures in the Asian context, as well as the likely consequences of their implementation (Chen et al., 2011)...
    • ...Chen et al. (2011) empirically evaluate whether and how the adoption of specific “good governance practices” recommended by the OECD affects the corporate performance of Chinese listed companies...
    • ...One of the explanations offered by Chen et al. (2011) for their failure to identify a positive and statistically significant linkage between corporate governance reforms and corporate performance is that most good governance practices recommended by the OECD are designed to resolve conflicts between shareholders and managers but not between controlling shareholders and minority shareholders...

    Steven Globermanet al. Corporate governance and Asian companies

    • ...In conclusion, a uniform set of restructuring initiatives may not be appropriate in different institutions across Asian countries (Chen, Li, & Shapiro, 2011)...

    Yi Jianget al. Are family ownership and control in large firms good, bad, or irreleva...

    • ...More recent research by Chen et al. (2011)...

    Sanjay Peterset al. How relevant is corporate governance and corporate social responsibili...

    • ...Research shows that controlling owners prefer to use firms to generate private benefits of control (e.g., appropriation of the firm’s opportunities and assets, outright theft, excessive managerial pay, perquisite consumption), which are not shared by minority shareholders in proportion to the shares owned (Carney, 2008; Chen, Li, & Shapiro, 2010; Shleifer & Vishny, 1997; Sun, Mellahi, & Liu, 2010)...

    Shou-Min Tsaoet al. The impact of internationalization on performance and innovation: The ...

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