The Urgency of Corporate Governance (GCG) in Emerging Markets
Tracing why investor protection and GCG mechanisms become vastly more crucial in developing countries to suppress Type II agency problems.
The concept of Good Corporate Governance (GCG) originated from Anglo-Saxon markets (US and UK) where share ownership is widely dispersed. However, when this concept is applied in emerging markets like Southeast Asia and Latin America, its theoretical foundation shifts radically.
Type II Agency Conflict (Principal vs Principal)
In emerging markets, the primary characteristic of companies is highly concentrated ownership, usually in the hands of the founding family or the state. Consequently, the classic agency problem between Managers and Shareholders (Type I) fades. In its place emerges the Type II Agency Conflict, which is the exploitation by Controlling (Majority) Shareholders against Minority Shareholders. GCG mechanisms function as a protective shield for these minority parties.
Internal GCG Mechanisms
Research in developing countries heavily focuses on two internal mechanisms: (1) Independent Commissioners: The proportion of board members not affiliated with controlling shareholders. They act as objective referees; (2) Audit Committee: The organ that ensures financial reporting transparency and external auditor independence. Weak law enforcement in emerging markets forces these internal mechanisms to bear a heavier burden of proof.
Institutional Ownership as a Monitor
Another effective mechanism is Institutional Ownership. Large institutions (like pension funds or mutual funds) possess the resources and incentives to proactively monitor the actions of controlling shareholders. The greater the institutional ownership, the narrower the room for controlling families to commit tunneling (transferring assets to personal affiliated companies).