Corporate governance challenges in emerging economies

• DOI: http://doi.org/10.1111/corg.12209
• Author: Till Talaulicar,Seth Armitage,Subrata Sarkar,Wenxuan Hou
• Date: 01 May 2017
• Published date: 01 May 2017

EDITORIAL

Corporate governance challenges in emerging economies

1|INTRODUCTION

Corporate governance research in the context of emerging economies

has received increasing attention in recent years (Allen, 2005; Al‐

Malkawi, Pillai, & Bhatti, 2014; Berglöf & Claessens, 2006; Black,

Gledson de Carvalho, Khanna, Kim & Yurtoglu, 2014; Claessens &

Fan, 2002; Claessens & Yurtoglu, 2013; Crittenden & Crittenden,

2012; Fan, Wei, & Xu, 2011). Academics and practitioners are

becoming aware that the nature of governance problems and the

firm‐level governance mechanisms at work in different countries are

embedded in their own national business system and influenced by

political, social, and legal macro‐institutions (e.g., Aguilera, Filatotchev,

Gospel, & Jackson, 2008; Filatotchev, Jackson, & Nakajima, 2013;

Peng, Wang, & Jiang, 2008). More specifically, governance problems

in developed economies tend to have their roots in dispersed

ownership, small managerial shareholdings, prevalence of standalone

companies, and market‐based transactions. However, emerging

economies are characterized by concentrated ownership, pyramidal

ownership structures, dominance of business groups, and high levels

of related‐party transactions. As a consequence, principal‐principal

conflicts are a major concern of corporate governance in developing

countries (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). In addition,

emerging markets are often subject to weaker formal institutions and

different informal institutions; and these country‐level institutions

tend to have important implications for corporate governance

arrangements and their effectiveness (Hou, Kuo & Lee, 2012;

Cumming, Hou & Wu, 2014; Kumar & Zattoni, 2013, 2016).

To carry forward the success of the special issue on “Asian Corpo-

rate Governance”(Li & Nair, 2009) and to further advance understand-

ing of the relevant issues, the University of Edinburgh Business School

hosted a special issue conference on “Challenges in Corporate Gover-

nance in Emerging Economies”in conjunction with Corporate Gover-

nance: An International Review on 4–5 December 2015 in Edinburgh,

UK. The keynote speech of the conference was given by David

Yermack from NYU Stern School of Business. He discussed the corpo-

rate governance implications of blockchain technology for emerging

countries in terms of improved liquidity and transparency, reduced

costs in trading and voting, and reduced needs for auditing and litiga-

tion. The conference and the special issue attracted about 70 submis-

sions by scholars from various disciplines and from around the globe.

Twelve papers were selected for presentation in the conference. All

papers were subjected to the standard refereeing and editorial process

of Corporate Governance: An International Review. In this article, we

introduce peculiarities of corporate governance in emerging

economies and survey the four articles that were eventually accepted

for inclusion in the special issue.

2|PECULIARITIES OF CORPORATE

GOVERNANCE IN EMERGING ECONOMIES

2.1 |Different governance environments

The differences in the nature and the extent of governance problems

that we observe between developed and emerging economies imply

that firm‐level governance solutions that aim to minimize the costs

of governance‐related efficiency losses are also different (e.g., Zattoni

& Judge, 2012). Typically, governance solutions constitute an optimal

mix of internal and external mechanisms (e.g., Walsh & Seward,

1990) with the weights differing between developed and emerging

economies. Whereas “bundles”of governance mechanisms in devel-

oped economies rely more on board monitoring, executive compensa-

tion and the market for corporate control, in the relationship‐based

systems in emerging economies, a greater emphasis is placed on the

governance role of lending institutions, large blockholders including

family shareholders, and organizational governance hierarchies. In

large emerging economies such as China, India, and Russia, there is,

moreover, significant involvement of state agencies in running busi-

nesses even when some of their shares are publicly listed on the stock

exchanges (e.g., Firth, Fung, & Rui, 2006; Grosman, Okhmatovskiy, &

Wright, 2016; Yang, Chi, & Young, 2011).

Governance developments in both established and emerging

economies also indicate that changes in the economic environment,

as well as changes in cultural, political, and legal institutions, have a

profound impact on the evolution of firm‐level governance mecha-

nisms as well as their effectiveness. In general, every country's national

governance system is path‐dependent (Bebchuk & Roe, 1999). An

important implication of such path‐dependency, particularly in the

context of emerging economies, is that, while regulators and corporate

governance activists promote the adoption of international best prac-

tices, the differences in formal and informal institutions interact with

firm‐level governance developments to provide a basis for multi‐

dimensional, multi‐level corporate governance systems that incorpo-

rate the evolution of their country‐specific institutions.

2.2 |Research perspectives

In recent years, a considerable literature has begun to emerge that has

challenged the objective of modern corporations itself. Specifically,

DOI: 10.1111/corg.12209

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