Waking up to Asian economic miracles

By Alistair Jones

SMU Office of Research – American economist Milton Friedman cast a long shadow with his 1970 article, 'A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits'. For decades, it became a touchstone for free-market economies, interpreted as the sole purpose of a firm was to make money for its shareholders.

But there's an alternative dynamic, an awareness that companies also have a responsibility to stakeholders – such as employees, customers, suppliers, communities and government. This stakeholder capitalism has a corporate purpose beyond profit maximisation, aiming to deliver long-term value and better outcomes for people and the planet, while also being profitable.

During the past few years, stakeholder capitalism has moved from the progressive edges into the mainstream of Anglo-American business, championed at a global corporation level, including at the 2020 World Economic Forum at Davos.

“Viewed through an Anglo-American lens, corporate governance around the world is living a woke moment,” writes Dan W. Puchniak – a Professor of Law at Singapore Management University (SMU) – in a new paper, 'No Need for Asia to be Woke: Contextualising Anglo-America’s ‘Discovery’ of Corporate Purpose'.

Professor Puchniak's article has won the 2023 European Corporate Governance Institute (ECGI) Working Paper Prize for Law, generally considered the top annual prize in the world for corporate law scholarship. He is the first person based at an Asian university to be awarded the honour in the prize's 18-year history.

Late to awake

It is apt that Professor Puchniak is Asia-based because his paper demonstrates that long before Anglo-America’s recent 'discovery' of corporate purpose, Asia was already awake to it, and it has been integral to its most important and dynamic economies, such as China, Japan, India and Singapore.

So, what has prompted this new Anglo-American enthusiasm?

“I think that Anglo-America's discovery of corporate purpose, at least until my paper, was because of a rise in social activism around climate change; because of a rise of the environmental, social and corporate governance (ESG) movement, which has a longer history, but has really come to the fore in the past several years; and because of an increasing gap between rich and poor, which has caused an increased focus on how employees are protected in companies,” Professor Puchniak says.

“And these are all domestic issues in the US, and in the UK, which have forced this reconsideration of how companies should behave in societies, or the role that companies should play in societies.”

But how can we understand an apparent Anglo-American blindness to the economic successes in Asia?

“Throughout the 1990s and into the 2000s, America was clearly the sole economic superpower in the world. Because of that, I think that from a corporate law perspective, there was an extremely strong focus on what the US was doing and the approach that the US was taking,” Professor Puchniak says.

The US became the model to emulate, along with corporate governance trends set by the UK.

“London and New York traditionally have been seen as the most important financial centres in the world. However, we know this has changed and it has changed dramatically,” Professor Puchniak says.

Need for reform

Asian economic miracles have not been without negative aspects. As an example, Professor Puchniak cites Japan's job-for-life employment system.

“Generally, lifetime employment had been limited to male employees because women were seen to play a predominant role in Japanese families, and therefore, when they started a family, they would leave the workforce and then come back as part-time employees,” he says. 

Japan's workforce has been losing out by undervaluing Japanese women, who tend to be extremely well-educated. Another downside of lifetime employment is that it deters a liquid labour market. And Japanese boards have been dominated by lifetime employees, largely excluding independent directors.

“Traditionally, shareholders have not had much say or influence on how big Japanese companies were managed because lifetime employees generally voted the shares that were held in something called kabushiki mochiai, which is cross shareholding. And basically, lifetime employees had all of the power and shareholders did not,” Professor Puchniak says.

Japan is still an economic powerhouse but it has stagnated during recent decades.

“What has gone on in Japan is that this push towards corporate purpose around the world has allowed the Japanese government to say, 'we're going to stick with our traditional stakeholder approach', and not make many of the necessary changes to integrate a more shareholder-friendly approach,” Professor Puchniak says.

“Why? Because [they] can now say, 'we're following this global corporate purpose movement', and so it provides them with cover to resist hard reforms that need to take place if Japan wants to maintain competitiveness in the global economy.”

In his paper, Professor Puchniak also looks at issues facing China, India and Singapore, and likely responses to the corporate purpose movement. He is most optimistic about Singapore where GDP per person is double Japan’s and significantly higher than every G7 country.

Context matters

“Singapore has been great at being very cognisant of what the global trends are, but then thinking about them and applying them in a very thoughtful, pragmatic and efficient way to Singapore's unique situation,” Professor Puchniak says. For example, it has done “a very good job of embracing the sustainability movement, especially with respect to climate”.

“If you read the company's act in Singapore and you read the corporate governance code, you will see that traditionally the focus has been on long-term shareholder value. But, in fact, what is at the core of Singapore’s unique system of corporate governance in practice is still family firms and government linked companies (GLCs) when we look at who has the shareholder power in listed companies.”

“Singapore has also done something very innovative in terms of global shareholder stewardship by creating a code of stewardship for family companies. Family companies are extremely important in Singapore and in Asia, and Singapore has been a leader in this approach.”

It will be the family firms and GLCs that define the purpose that corporations play within Singapore.

“And that purpose, arguably since 1965, and especially since the 1970s, has been not just to make as much money as possible, but to make that money in a way that benefits Singapore and Singaporeans as a whole.”

“And I think that Singapore in this way has always been taking a purposeful view of companies. [It] can latch on to or build on this trend and can maybe be a leader in Asia for defining corporate purpose in a way that is more relevant for the region.”

Professor Puchniak believes outcomes should be the focus of good corporate governance and purpose, not prescribed methods or universal models.

“The point of the [paper] and my research is not to say that stakeholder capitalism is always right or good for every country. It is also not saying that shareholder capitalism is good for every country. What it is saying is that different countries have different systems and they must adapt those systems over time to tackle the important problems in their unique societies,” he says.

“In every country there is a need to balance the idea of stakeholders and shareholders.”

Back to Research@SMU August 2023 Issue