Anglo-Saxon market model fits the bill

With socialism as an economic system seemingly confined to the scrap heap of history, the new millennium is likely to begin with the Anglo-American model of a market economy firmly in the ascendancy. After a decade of economic and institutional paralysis in Japan and corporate sclerosis in high-cost Germany, the nimble high-growth economies of the Anglo-Saxon world seem to offer a model of the best way forward. Indeed, the marketisation of both formerly proud corporatist states is being driven, in part, by foreign equity investors for whom the only rule that counts is profit maximisation. Against this backdrop of converging economic systems, visiting professor John Farrar chose an apparently odd topic for the recent inaugural lecture to the Asian Institute of International Financial Law of the University of Hong Kong. Rather than celebrating the end of economic history, he asked, in a fascinating lecture, whether imposing Anglo-Saxon codes of corporate governance around the world represented ethno-centric arrogance that failed to recognise the unique facets of other countries' systems. Hong Kong, in common with other overseas Chinese communities, has a business structure based on family ownership and loose networks of contractual and often informal alliances that contrasts with the original conception of the British joint-stock company. The notion of the company as a 'legal person' in its own right stems from a 19th- century ruling that has dictated the legal status of companies and subsequent codes of governance ever since. As such, the law recognises the primacy of equity holders' rights over and above those of other stakeholders, whether employees, creditors or some vaguer conception of the enterprise itself. By contrast, Germany's constitution explicitly provides workers' groups a place in the institutional framework governing corporate decision-making. In Japan, a less codified but equally pervasive system accommodating multiple interest groups has evolved, while even in the US, some states have laws requiring outside stakeholders interests to be recognised. Closer to home, Article 14 of the mainland's constitution dictates the pursuit of a 'socialist market economy', while Article 16 recognises the right of the Communist Party to a primary role in the economy. Reconciling these legal and cultural traditions with a global capital market that narrowly focuses on the rights of equity holders (a group with only residual claims on a firm's assets) raises obvious tensions. Most recently, the Asian financial crisis, which according to the Anglo-Saxon model should have wiped out (but in most cases, did not) shareholders and left creditors to pick through recoverable assets, showed the limits to enforcing a global standard of governance. Hong Kong offers an intriguing mixture of a British legal framework and Chinese business culture. The fact that most firms incorporated by SAR residents have no underlying business but are tax-efficient structures for holding property says much. According to Mr Farrar, forcing Anglo-Saxon codes of governance on SAR companies is a matter of putting square pegs into round holes. In any case, new technology and globalisation is changing the nature of corporate relations to render the 19th-century idea of a joint-stock company outmoded. His argument is that these economic changes are altering the very nature of the firm, rendering them effectively 'networks' or 'exchange relationships' that amount to virtual entities which, ironically, is more akin to the traditional Chinese idea of the company. In Hong Kong, the issue is especially relevant, with an outdated companies' ordinance in need of replacement. A blueprint completed by outside consultants two years ago came in for much criticism for taking codes largely derived in other English-speaking countries with little reference to local practice. Perhaps giving some idea of government thinking on the subject, Securities and Futures Commission chairman Andrew Sheng described his former Bristol University classmate's insights as 'revealing the emperor's new clothes'. Corporate governance is, of course, as much about establishing precedents of good behaviour as writing laws. These are increasingly dictated by institutional investors that dominate the allocation of capital around the globe. For Mr Farrar, corporate governance guidelines recently adopted by the Organisation for Economic Co-operation and Development reflect the ethno-centric prejudices of this immensely powerful group. The difficulty with his argument is that it is precisely the Anglo-Saxon system that has proved most enduring, created the greatest economic growth and most transparent distribution of wealth. Perhaps applying Winston Churchill's dictum on democracy: that it is the worst system in the world except for all the others, it is up to proponents of alternative corporate governance codes to promote something better. Improving a system achieved by trial and error over 150 years will be no easy task.