A (Behavioral) Law and Economics Approach to Reforming Asian Corporate Governance

Abstract

The Asian economic crisis has vividly exposed the damage wrought by poor corporate governance practices in Asian firms. Institutional investors and international agencies are consistent in their demand for better corporate governance. Yet, the vast majority of managers and controlling interests persist in their old ways. This article argues that the quick focus by governments to the practicalities - rules and mechanisms - risks missing other essentials, with suboptimal results. Penetrating corporate governance reform requires a shrewd harnessing of market forces. There are inherent cognitive and valuation problems associated with market appreciation for good corporate governance. There is thus a role for the regulator to fix the issue prominently on the radar screen of investors so as to induce the demand for good corporate governance. Such a strategy is desirable from the perspective of protecting the small investor; it is also important because of its strategic advantage in increasing the political capital for government led initiatives. The article examines the parameters for an effective strategy, drawing on insights from behavioral law and economics scholarship.