Corporate Governance Lessons from Transition Economy Reforms

By Mueller, Jens | New Zealand Management, November 2006 | Go to article overview

Corporate Governance Lessons from Transition Economy Reforms


Mueller, Jens, New Zealand Management


Corporate Governance Lessons from Transition Economy Reforms Edited by: Merritt B Fox & Michael A 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 a 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 a rapid sell-off by Asian governments of their state-owned firms. This material will likely put a dampener on those aspirations. Likely, this robust treatise will support a 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 a 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 a 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 a 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 a 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 a third firm, and so on.

This domino effect of destroying values rather than extracting residual values from which to rebuild an enterprise appears similar to some New Zealand corporate boards where the personal liability of directors drives a decision to close immediately rather than attempt to salvage remaining opportunities. …

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