‘Failure of corporate governance has led to the global economic crisis’

Newsline spoke to Prof Jang about the role of corporate governance (CG) in the prevailing global economic meltdown. Following are excerpts of the interview:

Newsline:Is failure to adopt corporate governance (CG) practices one of the causes of the financial crisis?

Prof Jang: It is one of the major root causes. Transparency and accountability, the two basic tenants of CG, were completely flouted by the investment and commercial banks in the developed world, resulting in the crisis. All the risk management and funding schemes were envisaged without any regulatory mechanism. In fact, the current crisis and the Asian financial crisis of 1997 have one common cause— failure of corporate governance.

NL: Is it fair to say the CG reforms introduced after the 1997 Asian crisis has helped dilute the effects of current crisis in Asia?

Prof Jang: Yes, to a larger extent. What we face is a crisis of liquidity and not of insolvency. All the Asian economies made significant progress in CG after the crisis. However, it was mainly restricted to introducing new rules and regulations, without much attention being paid to its enforcement. For example, you will find some independent directors in the Board of Directors of every corporation now. But how much influence they really exert, is the crucial factor.

NL: You have been the leader of ‘minority shareholder activism’ in Korea. Do you see its feasibility in India too?

Prof Jang: According to my experience, the corporations are even willing to pay penalties, but will not share information with the minority shareholders.

In Korea, in response to a lawsuit, a corporation willingly paid 10,000 dollars, but declined to share information even after the court ordered. Such is the low desire levels for transparency. But then, we came up with an innovative idea and started filing a law suit everyday. The public humiliation was such that the corporation had to budge. Such things are possible in India too, as the economic scenario in both the countries is very much the same— dominated by family-run businesses.

NL: Is there something to be learned from the successful micro-finance model, in terms of balancing collaterals with trust?

Prof Jang: Surely. The level of trust that the micro-financing institutions generate, the concept of group lending for better risk management and the specific targeted lending are some of the features that need to be emulated.

NL: What’s your take on the bailout packages being offered by every national government?

Prof Jang: It’s a clear case of ‘privatising profits and socialising losses’. But I agree that these are needed to sustain and stabilise the economy. Once it happens, the governments must focus on improving CG in all the public and private entities across the world. It’s the only way out.