BOOKSHELF : Corporate Governance Lessons from Transition Economy Reforms

Edited by: Merritt B Fox & Michael Heller
Publisher: Princeton University Press
Reviewer: Jens Mueller

This book will appeal to those readers with an interest in deep academic analyses of several eastern European countries as they progress from state-managed companies to market economies. With each of the nine chapters written by different research teams, the content is varied, yet clearly more an academic discourse than practically relevant call for action.
We can probably learn most from the described failures of rapid privatisation when we apply those lessons to the many Asian countries with whom New Zealand firms trade extensively, and where state-owned businesses are slated for wholesale privatisation by their governments.
Applying the New Zealand model of free enterprise and growth through privately owned interests, many observers call for rapid sell-off by Asian governments of their state-owned firms. This material will likely put dampener on those aspirations. Likely, this robust treatise will support slow-speed conversion of state-managed economies into free market arrangements, for fear of near-instant losses of local infrastructures.
Using the example of Russia’s economy in the early post-Soviet years, the authors describe set of horrendously ineffective activities by the state, resulting in catastrophic loss of value in assets, people contribution and growth opportunities. The common thread linking these failures is lack of solid governance principles. Massive insider self-dealing – in many cases with local governments being active share-dealing speculators – is described as the basis for significant erosion of corporate values in Russia, and it would not be far-fetched to apply these experiences to China, with its several hundred thousand state-owned firms yet to be privatised.
In leap of faith, the authors argue that stronger governance regimes might have prevented this deterioration. It is, however, hard to follow this logic when the most senior politicians and their bureaucracies were active participants in the game of musical chairs in which one company is plundered to support the next which then fails, is stripped of assets for the benefit of third firm, and so on.
This domino effect of destroying values rather than extracting residual values from which to re-build an enterprise appears similar to some New Zealand corporate boards where the personal liability of directors drives decision to close immediately rather than attempt to salvage remaining opportunities.
Privatisation is hailed as generally positive effect on economies, as it widens the gap between corporations and governments, which in terms of governance principles would be desirable outcome. It indirectly illuminates the concern over close ties between governments and corporate organisations, with the inherent risk of conflicts of interest raising its ugly head when long-term decisions are made in board rooms.
In those (few) countries where this free market transition had positive outcomes, the understanding and management of entrepreneurial risks is credited as major factor. This begs the question as to what extent we assist our trade partner countries with education to plan for private ownership on the basis that risks and opportunities are accepted factors in successful businesses.
What most teenagers in the United States learn through their Ebay dealings – and what most business operators in New Zealand learn through education or hands-on work experience – might not be well-known principles in some of our trade partner countries: Namely, that businesses incur risks and, when they plan poorly, can fail with huge personal and corporate losses.
The pre-war Japanese cotton textile industry is used as an example of corporate governance successes through an alignment of interests among many stakeholders, and as little as that specific scenario might appeal to current-day New Zealand, it provides some foundation for the widespread call by stakeholders for increased transparency in governance.
Using Poland and the Czech Republic as examples, the authors endorse the approach of strong compliance enforcement through securities legislation. It is argued that the presence of effective rule-making triggers greater ownership transparency and improves disclosure standards.
By comparison to these tumultuous times in Europe’s Eastern markets, New Zealand appears to be well ahead in the worldwide governance game with an effective separation between government and industry in many sectors, securities legislation which appears not unduly burdensome and the widespread understanding that businesses will always incur some risks that require ongoing competent management.

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