Improving corporate governance became a priority in Asia when the financial crisis of 1997–98 revealed just how poorly many companies there were run. Although the region has since made significant progress, some reforms now being debated in the United States and Europe shouldn't be a priority in Asia, where ownership structures and enforcement capabilities are different from those in the West, and the infrastructure and culture of corporate governance are less mature.
The take-awayAsia's most pressing need is to improve the foundations of corporate governance, such as financial reporting, the independence of auditors, regulatory enforcement, and legal systems. Just as important—and far trickier—will be getting companies to comply. Given Asia's starting point, progress on corporate-governance reform will take time.
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The financial crisis that overran much of Asia in the late 1990s prompted most of the affected countries—joined later by India—to make improved corporate governance a priority. Nearly all of them now require listed companies to have independent directors and audit committees (Exhibit 1). Agreement is growing, at least in principle, on what good governance entails, and most countries in the region have adopted explicit governance codes (see "Why codes of governance work"). Securities laws and the listing requirements of stock exchanges have been strengthened, regulatory authorities have enhanced powers, and the media are more inquisitive and probing.
Yet progress is uneven. Across Asia, too many companies remain unconvinced of the value of good governance, and change faces real-world impediments and disincentives. Moreover, the institutions needed to ensure good governance—judicial systems, capital markets, long-term institutional investors that can push for better governance—continue to be underdeveloped in most of these countries. Laws and regulations aren’t enforced rigorously; well-trained accountants and other professionals are scarce.
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