Introduction
Firms are no longer evaluated solely on financial performance but increasingly on how they manage environmental risks, address social responsibilities, and uphold sound governance − dimensions collectively referred to as Environmental, Social, and Governance (ESG) criteria.Footnote 1 Regulatory developments in major jurisdictions have reinforced this shift. In the European Union (EU), the Corporate Sustainability Reporting Directive imposes detailed ESG disclosure obligations on large companies and listed entities,Footnote 2 while the United Kingdom (UK) mandates climate-related financial disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) for large listed and private companies.Footnote 3 These statutory requirements embed ESG considerations into corporate reporting and extend regulatory expectations beyond voluntary compliance.
In parallel, institutional investors − particularly in the UK and the United States (US) − have become increasingly influential in shaping corporate governance. This development is closely tied to dispersed shareholding structures, which limit concentrated control and enhance the need for investor oversight.Footnote 4 Legal and regulatory frameworks in both jurisdictions have supported this role. In the UK, the Stewardship Code provides a formal mechanism encouraging active engagement with investee firms in support of long-term value and sustainability goals.Footnote 5 In the US, although there is no statutory equivalent, stewardship practices have evolved through market norms: large asset managers engage in shareholder voting, publish stewardship policies, and interact with management on ESG issues.Footnote 6 Meanwhile, the Securities and Exchange Commission (SEC) has expanded ESG-related disclosure expectations through existing materiality rules and proposed climate reporting standards.Footnote 7 These developments − though different in form − collectively promote transparency and empower institutional investors to influence corporate behaviour in alignment with long-term ESG objectives.
East Asian jurisdictions have also introduced ESG-related reforms in recent years. In China, stock exchanges have issued sustainability disclosure guidelines that mandate ESG reporting for selected categories of listed companies, including those in major indices and overseas-listed firms.Footnote 8 Japan and South Korea have adopted stewardship codes modelled on the UK framework to promote institutional investor engagement and long-term value creation.Footnote 9 Despite growing formal commitments to ESG principles, the corporate governance environment in East Asia remains distinct from that of Western markets. In China, the Communist Party-state continues to play a central role in corporate affairs, with Party Committees institutionally embedded in the governance of state-owned and, increasingly, private firms.Footnote 10 In South Korea, control remains concentrated in family-owned conglomerates (chaebols), sustained through complex pyramidal structuresFootnote 11 and cross-shareholdings.Footnote 12 In Japan, long-standing cross-shareholding arrangements and interlocking corporate relationships continue to insulate management from external shareholder influences.Footnote 13
These distinctive governance features raise a critical question: to what extent do ESG reforms in East Asia − while formally adopting global legal instruments − produce substantive changes in corporate behaviour? In other words, can transplanted mechanisms, such as stewardship codes, ESG disclosure mandates, and shareholder engagement rights, function effectively in governance systems where authority remains concentrated in the state (China), family ownership (South Korea), or intercorporate networks (Japan)? Existing comparative corporate governance scholarship often focuses on either formal institutional convergenceFootnote 14 or the implementation of ESG and sustainability policies,Footnote 15 but tends to overlook the structural constraints imposed by entrenched domestic power arrangements.Footnote 16
This paper addresses this gap by examining how formal ESG legal mechanisms interact with insider control in China, South Korea, and Japan. It argues that ESG reforms in these countries are often absorbed into insider-dominated governance structures, as insiders with significant decision-making power continue to control the process, preventing meaningful shareholder involvement and constraining the influence of institutional investors. As a result, the potential of global ESG reforms to drive substantial change in these regions is significantly diminished.
Drawing on agency cost theory and case studies from China, South Korea, and Japan, the paper demonstrates how insider control shapes the adoption, function, and limits of ESG reforms. It moves beyond surface-level institutional comparisons to theorise the structural constraints on sustainability governance in East Asia. It develops the theoretical framework by applying agency cost theory to the governance challenges inherent in ESG reform, before then discussing the various insider control structures in the three jurisdictions and their associated agency costs. It presents jurisdiction-specific case studies and offers a comparative analysis, highlighting the divergence in governance function, and develops recommendations for reform. The paper concludes by reflecting on the broader implications for comparative corporate governance and sustainability.
Agency Cost Theory and ESG
This part develops the theoretical framework for applying agency cost theory to the governance challenges of corporate sustainability. It does so by moving through three steps. First, it revisits the classical principal-agent problem in corporate governance and explains how the rise of institutional investors has created a second layer of conflicts − what Gilson and Gordon term ‘agency capitalism.’Footnote 17 Second, it adapts this framework to the ESG context, showing how investor behaviour gives rise to rational reticence and rational hypocrisy. Third, it extends agency theory beyond internal corporate actors to capture external pressures, highlighting the interactions among beneficial owners, institutional investors, managers, regulators, and ESG stakeholders. Taken together, this provides an extended model of ESG-related agency costs, which clarifies that debates centred on institutional investors are not directly applicable to East Asia.
Agency costs and agency capitalism
In modern corporate governance, agency costs arise from conflicts of interest between shareholders (as principals) and managers or directors (as agents).Footnote 18 The classical Berle-Means model emphasises this problem in public corporations with widely dispersed shareholding, where no individual shareholder holds sufficient voting power to influence management directly.Footnote 19 This dispersion necessitates delegation of decision-making to corporate managers, whose interests may diverge from those of shareholders.Footnote 20 Managers may pursue objectives such as entrenchment, reputational gains, or personal compensation, leading to inefficiencies and loss of firm value.Footnote 21 These misaligned incentives generate agency costs, which include both direct costs (such as monitoring expenditures) and indirect costs (such as managerial decisions that prioritise personal or short-term interests over long-term firm value).Footnote 22 To address these risks, corporate law has developed internal governance mechanisms − such as independent boards, shareholder voting rights, and executive compensation policies − that aim to align managerial conduct with shareholder interests.Footnote 23 In jurisdictions such as the UK and the US, these mechanisms are grounded in enforceable fiduciary duties and statutory corporate protections.
In recent decades, the rise of institutional investors has introduced new dimensions to agency cost theory.Footnote 24 As Gilson and Gordon argue, the ownership of public corporations − particularly in the US − has become increasingly concentrated in the hands of institutional investors, including pension funds, mutual funds, and index funds.Footnote 25 This shift has created a second layer of agency costs, termed ‘agency capitalism,’ where institutional investors act as intermediaries between beneficial owners and corporate managers, forming a dual agency relationship.Footnote 26 The reconcentration of ownership has thus created a dual agency problem: one set of agency costs arises between corporate managers and institutional investors, and another between institutional investors and their ultimate beneficiaries.Footnote 27
This second-layer conflict is especially pronounced in the context of passive investing. Index funds and other passive vehicles typically lack strong financial incentives to engage in firm-specific governance interventions.Footnote 28 Their business models emphasise asset growth and market coverage, rather than activist oversight. This disengagement is often characterised as ‘rational reticence’ − a strategic reluctance to expend resources on monitoring when the financial returns from such efforts are diffuse.Footnote 29 While institutional investors may cast votes on shareholder proposals, they rarely initiate reforms or challenge underperforming boards, allowing corporate managers greater discretion and reducing the disciplinary effect of shareholder oversight.Footnote 30
In contrast to passive institutional investors, activist shareholders − most notably hedge funds − often pursue concentrated investment strategies aimed at directly influencing corporate governance. They typically acquire significant stakes in underperforming firms and exercise their shareholder rights to push for changes in leadership, corporate strategy, or capital allocation.Footnote 31 By doing so, activist shareholders can reduce agency costs: they monitor management closely, challenge entrenchment, and realign managerial decisions with their own interests, particularly in systems where dispersed shareholders lack the resources or incentives to intervene.Footnote 32 Yet activist campaigns also generate new forms of agency costs. Hedge funds are frequently driven by short-term return objectives, which may press for strategies such as stock buybacks, asset sales, or aggressive cost-cutting. These actions can inflate share prices in the short term but undermine long-term value creation, shifting costs onto future shareholders or other stakeholders.Footnote 33
Agency costs in the ESG context
Building on Gilson and Gordon’s theory of agency capitalism, the integration of ESG considerations introduces a new dimension to corporate governance and agency costs. ESG-related risks − such as climate change, labour exploitation, or governance failures − are long-term, diffuse, and often difficult to measure using traditional financial metrics. Institutional investors, particularly the ‘Big Three’ index funds (BlackRock, Vanguard, and State Street), have become focal points of ESG expectations due to their substantial ownership stakes across public markets.Footnote 34 However, their engagement is often criticised for prioritising systemic, portfolio-wide risks over firm-specific governance reforms.Footnote 35 For passive investors managing highly diversified portfolios, the costs of firm-specific ESG activism are concentrated on the engaging fund, while the benefits are spread across all market participants.Footnote 36 This free-rider problem weakens the incentive to engage, encouraging a reliance on symbolic or standardised stewardship − taking minimal action while still claiming credit for being ESG-friendly.
The growing prominence of ESG has also revealed a gap between institutional investors’ public commitments and their actual governance practices − a phenomenon scholars describe as ‘rational hypocrisy.’Footnote 37 Large asset managers frequently issue ESG statements and join global sustainability alliances, yet these outward commitments are not matched by substantive changes in investment strategy. For example, despite widespread claims that ESG assets totalled $35 trillion in 2021, research shows that only about 6% of the $31.3 trillion managed by major institutions was subject to explicit ESG screening or weighting.Footnote 38 This discrepancy illustrates that much of what is classified as ESG investing relies on broad or self-defined labels rather than substantive portfolio adjustments. Adopting ESG labels and making public pledges is relatively low-cost and helps to satisfy reputational and regulatory expectations, whereas reshaping portfolio strategies or engaging in sustained stewardship is resource-intensive and may reduce short-term returns.
Expanding agency theory: internal and external stakeholder influences
However, decisions about sustainability are not made inside the firm alone. They involve a chain of actors that includes five main groups: beneficial owners, institutional record owners, corporate managers, regulators, and ESG stakeholders. Each group affects how companies respond to sustainability in different ways.
Beneficial owners, such as pension members, individual investors, or fund clients, increasingly report preferences for sustainable investments. A 2025 Morgan Stanley survey reports that 77% of investors are interested in sustainable investing and 70% believe strong ESG practices can deliver higher returns, while more than 60% also report concern about greenwashing and unreliable ESG data.Footnote 39 Because beneficiaries do not make investment decisions directly, their preferences are channelled through institutional record owners who control portfolio choices, voting, and engagement. In agency-cost terms, this creates a potential misalignment between end-investor preferences and actual governance outcomes.
Institutional record owners act as the main transmission channel between beneficiaries and companies. Yet the literature identifies two common tendencies that complicate this role: rational reticence, a reluctance to engage in costly firm-level stewardship within diversified portfolios, and rational hypocrisy, public endorsement of ESG without meaningful changes to portfolio strategy or engagement. These behaviours weaken incentives to monitor or improve firms’ ESG practices and widen the gap between beneficiary preferences and stewardship actions.
Corporate managers are the ones who ultimately turn ESG expectations into day-to-day policies and decisions inside companies. Investors may call for lower carbon emissions, better labour standards, or stronger governance, but managers decide whether and how to implement these changes. In principle, managers are subject to investor oversight through mechanisms such as shareholder voting or direct engagement. In practice, however, when that oversight is inconsistent, managers often prioritise goals linked to pay or job security, such as meeting short-term financial targets. ESG policies may then be adopted in name only, for instance, by publishing reports or setting broad targets that are not backed by operational change.
Regulators and ESG stakeholders provide additional external pressure. Regulators may mandate that companies disclose information, such as carbon emissions or workforce diversity, or that investors incorporate ESG factors into their investment decisions.Footnote 40 When investors are subject to these duties, they demand higher standards from firms, which can encourage managers to act. Stakeholders such as advocacy groups, non-governmental organisations, and the media also exert reputational pressure through rankings, campaigns, and exposure of poor practices.Footnote 41 These mechanisms can push companies toward more credible ESG action, but their impact depends on the strength of enforcement and the responsiveness of managers. Where regulation and reputational pressure are weak, ESG commitments risk becoming a formality rather than a driver of substantive change.
Taken together, the extended framework highlights that sustainability is shaped by multiple actors, each introducing its own incentives and potential agency costs. Whether ESG commitments are carried out in substance or reduced to symbolism depends on how these incentives and pressures interact. In the US and UK, institutional investors often play the central role in this framework, so much of the debate has focused on whether they genuinely monitor management or fall back on rational reticence and rational hypocrisy.
In East Asia, however, corporate governance is not primarily driven by institutional investor oversight but rather by entrenched insider control. These insider structures reshape the incentives of investors, managers, regulators, and stakeholders, leading to distinct patterns of agency costs in ESG adoption. The next part examines how this operates in China, South Korea, and Japan.
Agency Costs and ESG Reforms in East Asia
East Asian firms are typically characterised not by dispersed ownership but by insider control, exercised by the state, founding families, or affiliated corporate groups. In many cases, these insiders do not hold a formal majority of shares but are able to exert control through mechanisms such as pyramidal structures, cross-shareholding, political appointment powers, or stable shareholder alliances.Footnote 42 As a result, corporate governance in the region is shaped more by enduring relational structures and non-legal forms of influence. Insider control can mitigate the classical agency problem between dispersed shareholders and managers, since insiders have both the incentive and the capacity to monitor management directly.
Institutional investors, whether active or passive, rarely occupy the role of controlling shareholders in East Asia. This weakens their position in corporate governance and means that problems of rational reticence and rational hypocrisy may be even more pronounced than in Western markets. Without significant ownership stakes, institutional investors have limited leverage and are often sidelined in corporate governance, making it harder for them to influence company decisions.
At the same time, insider control introduces a different set of risks, as controlling insiders may exploit their position to extract private benefits at the expense of outside shareholders or the firm as a whole.Footnote 43 These entrenched authority structures also shape how sustainability is pursued: ESG priorities are filtered through political goals, family interests, or corporate alliances, and thus follow paths that diverge from Western systems where institutional investor activism plays a greater role.
The following sections examine how insider control operates in China, South Korea, and Japan and how these structures affect ESG adoption. In China, Party-state authority channels corporate priorities toward national policy goals, which can either advance or sideline sustainability. In South Korea, family dominance within chaebol groups allows long-term strategic planning and internal coordination, but it also creates risks of self-dealing and resistance to reform. In Japan, cross-shareholding and corporate networks stabilise management but weaken external oversight, limiting the force of stewardship reforms. Taken together, these cases illustrate how insider control not only creates agency costs but also determines the extent to which ESG goals are promoted, diluted, or redirected in East Asia.
China
The relationship between ownership and control in China diverges significantly from that in liberal market economies. While private and institutional shareholders may hold portions of equity in companies, effective control often resides with state shareholders − typically central or local government authorities acting through designated controlling entities such as state-owned parent companies or sovereign investment arms.Footnote 44 These state actors exert considerable influence over corporate governance, including the appointment of senior executives and the determination of strategic priorities.Footnote 45 In key sectors, this governance structure facilitates alignment between corporate activity and national policy objectives, with state-owned enterprises (SOEs) often regarded as instruments for advancing the state’s political and economic goals.Footnote 46
A critical mechanism underpinning this state–corporate alignment is the institutionalised coordination between Party authority, state shareholders, and regulatory agencies. At the apex, the Chinese Communist Party (CCP) sets strategic policy direction through its top leadership organs, particularly the Politburo and the Central Committee.Footnote 47 Within firms, Party Committees − formally embedded in the governance structures of all SOEsFootnote 48 and increasingly present in private enterprises − exercise political oversight over management decisions.Footnote 49
Alongside this Party-led governance layer, regulatory authorities carry out administrative enforcement. The China Securities Regulatory Commission (CSRC) oversees disclosure and governance standards in listed firms;Footnote 50 the State-Owned Assets Supervision and Administration Commission (SASAC) exercises shareholder rights on behalf of the state;Footnote 51 the Ministry of Ecology and Environment (MEE) sets sustainability policy targets;Footnote 52 and the People’s Bank of China (PBoC) guides green finance through monetary tools and credit policy.Footnote 53 Together, these institutional actors implement ESG priorities not through market-based investor pressure, but through a vertically integrated system of political and administrative control. This Party-state architecture constitutes the foundation through which ESG governance is operationalised in China’s political economy.
In this context, minority shareholders often bear agency costs when managers align their conduct with the interests of state controllers rather than with shareholder value. However, where state priorities converge with ESG principles − such as mandates on carbon neutrality, environmental transparency, or anti-corruption − this alignment can enhance long-term sustainability outcomes. In such cases, the state functions as a de facto steward, disciplining managers and imposing strategic consistency in areas where market-driven systems often fall short. This creates a structural paradox: while private shareholders exercise limited influence, they may still benefit indirectly from state-led initiatives that promote ESG goals. Yet this benefit is contingent, not guaranteed − it depends on the consistency, credibility, and enforcement of the state’s policy agenda.
However, the same Party-state governance structure that facilitates ESG alignment can also deprioritise sustainability when political or ideological imperatives take precedence. In recent years, increasing emphasis on ‘Party leadership in all aspects of corporate governance’ has led to the expansion of Party Committees’ roles in both SOEs and key private firms.Footnote 54 This includes the appointment of Party-affiliated executives and the mandatory consultation with Party bodies on strategic decisions in SOEs.Footnote 55 These measures may weaken the managerial autonomy required for long-term innovation and sustainability planning. In extreme cases, appointments based on political loyalty rather than professional competence may compromise operational effectiveness,Footnote 56 while sustainability objectives − such as governance transparency or labour protections − are sidelined in favour of fulfilling broader political directives. This dynamic introduces a new type of agency cost: one in which the divergence is not between shareholders and managers, but between commercial or ESG objectives and political control.
In scenarios where political loyalty and ideological conformity are prioritised over commercial performance, private shareholders face heightened agency costs. Managers operating under state or Party supervision may be incentivised to fulfil political mandates rather than maximise firm value or deliver meaningful ESG outcomes.Footnote 57 Under such conditions, transparency and accountability may deteriorate, as managerial decision-making becomes increasingly answerable to Party Committees and political authorities rather than to boards or shareholders.Footnote 58 Sustainability goals − pollution control, labour protections, and board independence − may be postponed or deprioritised in favour of maintaining political alignment and internal Party discipline. Ultimately, the effectiveness of ESG governance in China’s state-capitalist model hinges on the degree to which national policy priorities remain aligned with long-term development and responsible corporate conduct. Where such alignment exists, state-led ESG can function as an effective stewardship mechanism. Where it does not, political intervention becomes a source of structural agency risk for minority shareholders and external stakeholders.
South Korea
In South Korea, corporate governance is shaped by the enduring dominance of family-controlled conglomerates. While institutional and public shareholders now hold substantial stakes in many listed firms, strategic control frequently remains in the hands of founding families.Footnote 59 These families maintain influence through pyramidal ownership structures, intra-group shareholding, and the appointment of trusted executives and board members across affiliated entities.Footnote 60 Through such mechanisms, they can concentrate voting power and managerial control without holding a majority of equity. Although this governance structure facilitates long-term strategic planning and internal coordination, it also introduces significant agency risks for minority shareholders. Related-party transactions, tunnelling of corporate assets, and resistance to external oversight remain persistent concerns in chaebol-led firms.Footnote 61
To address these risks, South Korean regulators have implemented a range of formal oversight mechanisms. The Financial Services Commission (FSC)Footnote 62 and the Korea Fair Trade Commission (KFTC)Footnote 63 have issued rules aimed at increasing transparency, limiting unfair internal transactions, and curbing monopolistic practices linked to cross-shareholding and group-based control. These regulatory interventions are complemented by a growing emphasis on institutional stewardship, most notably through the role of the National Pension Service (NPS). As the country’s largest institutional investor and steward of public pension assets, the NPS has become an increasingly prominent actor in corporate governance reform.Footnote 64 Since adopting the Korean Stewardship Code in 2018, the NPS has enhanced its engagement in shareholder voting, board appointment scrutiny, and the promotion of ESG disclosure and performance across listed companies.Footnote 65
However, the NPS’s role as a reform-oriented shareholder remains institutionally constrained. As a quasi-governmental entity under the supervision of the Ministry of Health and Welfare, the NPS is exposed to political pressures − particularly in high-profile corporate decisions that intersect with chaebol interests. Despite its formal mandate to act in the long-term interests of pension beneficiaries, the NPS’s decision-making processes have at times been criticised for aligning with dominant corporate actors.Footnote 66 These concerns reflect a deeper structural tension: while South Korea’s legal and regulatory reforms signal a shift towards more active shareholder oversight, their effectiveness remains dependent on the political independence and institutional credibility of key governance actors.
Japan
A central challenge for corporate governance in Japan is balancing new rules on shareholder stewardship with longstanding relational practices that insulate management from outside pressure. While legal reforms have sought to enhance shareholder engagement and transparency, many listed firms remain embedded in legacy networks of cross-shareholding and intercorporate ties.Footnote 67 Although the keiretsu system has declined following financial liberalisation, its institutional logic persists through reciprocal equity stakes, board interlocks, and long-term trading relationships.Footnote 68
These structures create agency costs, where managerial entrenchment is sustained by group loyalty rather than disciplined by shareholder oversight. In contrast to the Anglo-American model, where board turnover and shareholder intervention serve as key accountability mechanisms, Japan’s cross-shareholding and intercorporate personnel flows weaken external monitoring.Footnote 69 For instance, within the Toyota group, Toyota Motor and Toyota Industries hold reciprocal equity stakes and operate within an integrated supply network.Footnote 70 In 2016, over twenty executives from Toyota Industries were seconded to Toyota Motor, showing how personnel transfers reinforce cohesion and continuity.Footnote 71 While this supports operational stability, it reduces the effectiveness of external scrutiny, including in areas such as ESG risk management and disclosure.
To address these concerns, Japan has introduced two major stewardship frameworks: the Corporate Governance Code (2015, revised 2018 and 2021) and the Stewardship Code (2014, revised 2017, 2020 and 2025).Footnote 72 The Corporate Governance Code, issued by the Financial Services Agency (FSA) and the Tokyo Stock Exchange (TSE), encourages listed firms to appoint multiple independent directors, improve board diversity, and disclose sustainability-related risks and strategies.Footnote 73 The Stewardship Code, aimed at institutional investors, promotes active engagement, voting transparency, and monitoring of investee companies.Footnote 74 Together, these codes are intended to realign incentives between managers and shareholders and strengthen ESG accountability. Although formally voluntary, they operate on a ‘comply or explain’ basis and have been widely adopted among TOPIX-listed firms, contributing to the gradual reduction of cross-shareholdings and increased ESG-related disclosure.Footnote 75
Large global asset managers and Japan’s Government Pension Investment Fund (GPIF) have become central actors in pushing ESG reforms. With relatively dispersed ownership in listed companies, these investors are able to exercise meaningful voting influence, especially on matters such as board composition, climate strategy, and capital allocation.Footnote 76 According to the GPIF Stewardship Activities Report 2023–2024, 94% of domestic companies by market capitalisation were subject to engagement, and all equity asset managers disclosed their proxy voting records.Footnote 77 However, the report also highlights that some domestic asset managers prefer a gradual, dialogue-based approach.Footnote 78 For example, when requesting improvements such as increasing the number of independent external directors or enhancing board diversity, these managers often allow a grace period of nearly a year before enforcing changes to their voting policies.Footnote 79 This approach helps maintain cooperative relationships, but it also means managers face less immediate pressure to change. By contrast, some foreign asset managers were observed to adopt a more direct style, providing feedback on voting results and explaining the reasons for opposing proposals.Footnote 80 Therefore, even with formal stewardship reforms, entrenched patterns of managerial insulation remain an important factor in how ESG is implemented. The extent to which these reforms improve governance will depend on how actively investors use their influence.
Insider Control and the Limits of ESG Reform: Three Case Studies from East Asia
This part South Korea, and Japan approach ESG reform within different governance environments. These firms, central to their national economies, provide a useful lens for seeing how sustainability rules and policy initiatives interact with ownership structures, institutional incentives, and the priorities of those who hold controlling power. The focus here is not on measuring ESG performance itself, but on tracing how entrenched corporate authority shapes the form, ambition, and credibility of ESG implementation. The selected firmsFootnote 81 play a dual role: as large and visible companies, they are often the first targets of regulation, and as industry leaders, they set examples that influence practices across their sectors.Footnote 82 Their scale and visibility make them especially revealing cases for understanding how domestic governance logics condition the uptake of ESG frameworks.
Party-state control in China: political guidance within SOEs
China’s largest listed firms operate within a politically embedded model of corporate governance, where control rights are not merely a function of shareholding ratios but are exercised through overlapping channels of state ownership and Party authority. As table 1 demonstrates, four of the five largest publicly traded companies − namely, the major state-owned banks and PetroChina − are majority-owned by state-affiliated institutions such as Central Huijin Investment Ltd (a wholly owned subsidiary of China Investment Corporation), the Ministry of Finance (MOF), and the China National Petroleum Corporation (wholly owned by the SASAC). While HKSCC Nominees Ltd appears as a substantial shareholder in public disclosures, its role is custodial on behalf of Hong Kong investors and does not confer voting power or governance influence.Footnote 83 This structure enables the Chinese state to shape corporate direction and ESG implementation not through shareholder activism or market incentives, but through administrative control and policy alignment mechanisms overseen by agencies such as the SASAC.
Ownership of China’s largest companies
Table 1 Long description
The table lists major shareholders and their ownership shares for five of China’s largest companies, focusing on who controls each firm. Four large state-owned banks show heavy state-linked ownership, with Central Huijin as the top shareholder in each: Bank of China 64.13%, China Construction Bank 57.14%, Agricultural Bank of China 40.14%, and Industrial and Commercial Bank of China 34.79%. The Ministry of Finance is also a major owner in two banks, holding 31.14% of Industrial and Commercial Bank of China and 35.29% of Agricultural Bank of China. HKSCC Nominees Ltd holds sizable stakes across all five companies, ranging from 8.73% in Agricultural Bank of China to 37.52% in China Construction Bank, indicating substantial holdings via Hong Kong nominee accounts. PetroChina differs from the banks by having a single dominant controlling shareholder, China National Petroleum Corporation, with 82.46%, while HKSCC Nominees Ltd holds 11.43%. Smaller stakes appear for entities such as China Securities Finance Corporation and the National Social Security Fund, generally under 7%. Percentages reflect shareholding at a specific reporting date and nominee holdings may represent multiple underlying investors rather than a single decision-maker.
Source: National Enterprise Credit Information Publicity System (shareholding as of 30 September 2024)
At the ownership level, strategic control in China’s largest firms is primarily exercised through sovereign holding entities such as Central Huijin, which holds significant equity stakes in major financial institutions. Unlike fiduciary institutional investors in Anglo-American systems, Huijin’s role is not to maximise shareholder value or drive ESG risk mitigation through market-based mechanisms. Instead, it advances broader state objectives – most notably, financial system stability and alignment with national policy goals.Footnote 84
This model of embedded oversight allows the state to exert influence without direct involvement in daily management. Other state-affiliated investors, such as the National Social Security Fund (NSSF), also operate under mandates that prioritise policy conformity.Footnote 85 With extensive holdings in SOEs and close coordination with government agencies, NSSF has limited independent incentives to promote sustainability beyond state directives. Even when SOEs act as shareholders − as in the case of Sinopec’s 1% stake in PetroChina − they are unlikely to push for improved ESG standards, instead reinforcing the policy status quo.
Beyond ownership structures, the CCP maintains direct authority within SOEs through institutionalised Party Committees. Following a 2017 directive jointly issued by the CCP Central Organisation Department and SASAC, all centrally administered SOEs were required to revise their articles of association to embed Party leadership into corporate decision-making.Footnote 86 This arrangement is now legally codified in the 2023 Company Law: Article 170 explicitly states that Party organisations in state-funded companies ‘play a leading role… [and] research and discuss major operational management matters,’Footnote 87 thereby formalising the Party’s role in shaping firm-level strategy. These provisions institutionalise political leadership as part of the company’s legal structure. Party Committees are formally empowered to participate in management decisions, oversee executive appointments, and enforce ideological alignment.
As formalised in corporate charters and guided by internal Party regulations, the CCP’s leadership in SOEs is further operationalised through a system of ‘dual entry and dual responsibility.’Footnote 88 This framework allows individuals to concurrently hold positions in both the Party Committee and other governance organs, including the board of directors and executive management. For example, a Party Secretary may also serve as Chairperson or CEO, institutionalising vertical integration between political leadership and corporate administration. This ensures that strategic decisions − ranging from major investments to ESG disclosures − are aligned with Party objectives. While this system facilitates coherent policy transmission, it also centralises control, limits board autonomy, and insulates management from shareholder accountability. ESG priorities − such as environmental targets or anti-corruption compliance − are thus pursued to the extent they align with the Party’s macroeconomic agenda. In practice, sustainability is not treated as a multi-stakeholder goal, but as a component of state-led development strategy.
Under this politically embedded governance structure, ESG practices in China’s major SOEs are primarily compliance-oriented and shaped by state regulatory mandates rather than investor stewardship. For example, the Green Bond Endorsed Project Catalogue (2021), jointly released by the PBoC and other agencies, defines eligible sectors and project types for green finance, guiding capital allocation in line with state objectives.Footnote 89 Similarly, MEE’s 2021 Measures for Environmental Information Disclosure set reporting obligations for companies in key industries.Footnote 90 In response, major banks have begun publishing ESG and green credit reports to demonstrate compliance.Footnote 91 Yet these disclosures have been criticised for prioritising policy-driven metrics − such as the total volume of green loans issued or the number of clean energy projects financed − while providing little discussion of ESG-related risk events or governance failures.Footnote 92 In this way, disclosure practices align with formal compliance and regulatory expectations, but they fall short of offering a full picture of sustainability performance.
The above illustrates how the Party-state’s pro-sustainability priorities can advance ESG reporting and performance in certain areas. However, when national priorities shift, the same governance structures can push companies to act in ways that weaken or even contradict sustainability commitments. For example, although China had pledged to reduce carbon emissions, by mid-2021 the government redirected its focus to energy security, driven by concerns over powering economic recovery and rising geopolitical tensions.Footnote 93 This policy turn led to renewed approvals of coal-fired power projects and a state-backed effort to secure coal supply. The shift deepened in 2024, when China began construction on 94.5 GW of new coal power capacity, the highest level in a decade.Footnote 94 In parallel, coal mining companies received $42.5 billion in financing in 2023, with 81% coming from Chinese banks, including the Industrial and Commercial Bank of China.Footnote 95
Besides, private investors remain structurally marginalised. With small stakes and limited governance access, they are unable to influence ESG practices, which are instead shaped by Party Committees and administrative mandates. ESG reform seldom originates from shareholder activism and is largely shaped by political priorities and ideological norms. As a result, ESG implementation in China’s largest SOEs reflects not market discipline or stakeholder accountability, but a vertically integrated model of state ownership and political oversight. This arrangement enables rapid alignment with state-defined objectives, which may sometimes promote sustainability but at other times undermine it, while leaving little room for independent investor engagement. In this context, the agency-cost problem in ESG governance takes a different form: it is less about managers pursuing their own interests against shareholders, and more about the systemic tension between political control and corporate autonomy in sustainability decisions.
Chaebol governance in South Korea: family control and the role of the NPS
As shown in table 2, Korea’s top five listed companies include three family-controlled conglomerates − Samsung Electronics, Hyundai Motor, and Kia Corporation − where strategic decision-making remains concentrated in the hands of founding families, most notably the Lee and Chung families. The remaining two firms, KB Financial Group and Shinhan Financial Group, are major financial institutions held predominantly by institutional investors, with the NPS serving as a key shareholder in both.
Ownership of South Korea’s largest companies
Table 2 Long description
The table lists major shareholders and their ownership or control percentages for five large South Korean companies as of late September 2024. Kia Corporation is the most concentrated, with Hyundai Motor Company holding 34.34%, far above any other single stake shown. Hyundai Motor’s largest holder is Hyundai Mobis at 21.86%, followed by the National Pension Service of Korea at 7.15%, with smaller stakes for Mong-Koo Chung at 5.44% and Eui-Sun Chung at 2.67%. Samsung Electronics has no dominant shareholder; the largest stakes are Samsung Life Insurance at 8.61% and the National Pension Service at 7.35%, with Samsung C and T at 5.01% and the Lee family members each around 1.6%. In financial groups, the National Pension Service is the top listed holder for both KB Financial Group and Shinhan Financial Group at 8.26%, while other named investors are each below about 6%. Percentages reflect reported shareholding and control and may not capture indirect influence, voting agreements, or cross shareholding beyond the entities listed.
Source: MarketScreener (shareholding as of 30 September 2024)
Despite relatively modest direct shareholdings, founding families in Korea’s top chaebol groups retain effective control through layered cross-shareholding and influence over key affiliates. In Samsung’s case, Jae-Yong Lee and his family directly hold only 3.27% of Samsung Electronics, yet Lee exercises de facto control over the group. This influence is sustained through Samsung C&T − widely seen as the group’s de facto holding company − which owns 5.01% of Samsung Electronics and 19.06% owned by Lee.Footnote 96 Samsung Life Insurance, which holds an additional 8.61% of Samsung Electronics, is also indirectly influenced by Lee via his stake in Samsung C&T, which in turn owns 19.34% of Samsung Life.Footnote 97 Though Lee’s indirect ownership translates to a relatively small aggregate equity interest, this multi-layered structure enables him to exert strategic control over key corporate affiliates and board appointments, effectively consolidating leadership without needing a controlling stake.
Although the NPS holds a substantial 7.35% stake in Samsung Electronics, it has rarely contested the Lee family’s control. In South Korea’s chaebol-dominated economy, founding families wield disproportionate influence − not only through complex shareholding structures but also via longstanding ties with political and financial institutions. This concentration of power discourages shareholder activism, especially from domestic institutional investors, many of whom hold smaller stakes and face disincentives to act. A central barrier is the collective action problem: passive investors benefit from any improvements secured by activist investors without assuming the risks.Footnote 98 Those who do challenge dominant chaebols risk retaliation, given that these conglomerates often extend their influence beyond corporate governance into financial markets and state institutions.Footnote 99 The threat of economic or political backlash makes sustained activism particularly difficult, even for significant stakeholders like the NPS.
Institutional inertia is further reinforced by the fact that many Korean investors maintain close ties with chaebol affiliates, creating strong disincentives to oppose family interests. This reluctance is particularly pronounced in areas like sustainability, where benefits accrue gradually and do not always translate into short-term financial returns. A clear illustration is the 2015 merger between Samsung C&T and Cheil Industries. While foreign activist investor Elliott Management publicly opposed the deal − arguing it diluted shareholder value and reinforced Lee family control − most domestic investors remained passive.Footnote 100 Notably, the NPS, despite being a major shareholder and formally tasked with protecting pension assets, voted in favour of the merger under government pressure,Footnote 101 highlighting the limits of institutional independence in chaebol-related governance.
In recent years, the NPS has taken gradual steps toward more active involvement in corporate governance and sustainability. With sizeable equity positions in major firms such as Hyundai Motor, Kia, KB Financial Group, and Shinhan Financial Group, it holds potential leverage as a long-term institutional investor. Since the 2015 amendment to the National Pension Act, the NPS has been legally required to consider ESG factors in its investment decisions.Footnote 102 This was strengthened by the introduction of a responsible investment clause in 2016 and further institutionalised through the adoption of the Stewardship Code and the Responsible Investment & Governance Principles in 2018.Footnote 103 These developments have enabled the NPS to begin exercising its shareholder rights more assertively in support of governance reform and sustainability objectives.
Moreover, the NPS has a statutory fiduciary duty to safeguard and enhance the long-term value of its assets.Footnote 104 To fulfil this obligation, it engages actively with investee companies, exercises voting rights, and applies negative screening to exclude industries that conflict with its sustainability commitments.Footnote 105 In 2021, for example, the NPS excluded investments in coal mining and coal-fired power as part of its climate change strategy.Footnote 106 It has also developed an internal ESG Evaluation System comprising 61 indicators spanning areas such as climate change, industrial safety, and fair trade.Footnote 107 According to its 2023 Responsible Investment Report, the NPS conducted materiality assessments on 59 ESG topics, which led to confidential engagements with companies regarding issues such as environmental law breaches.Footnote 108 These interventions prompted several firms to take corrective action, including improving work processes, enhancing workplace safety, and reforming governance structures – particularly by addressing the excessive concentration of power in individuals holding multiple executive and board roles within the same corporate group.Footnote 109
Given its substantial equity positions in Korea’s largest firms, the NPS is well-positioned to play a leading role in advancing corporate governance and sustainability reform. Even within chaebol-dominated sectors, a growing presence of institutional shareholders creates opportunities for coalition-building. By collaborating with other investors − particularly foreign funds less constrained by domestic political ties − the NPS could help generate collective pressure for more transparent and responsible corporate practices. Crucially, greater transparency around its voting decisions, especially within complex ownership groups, would enhance accountability and signal a stronger public commitment to ESG objectives. Such disclosure could also bolster public trust in the NPS’s stewardship role and reinforce broader reform efforts in South Korea’s concentrated corporate landscape.
Cross-shareholding in Japan: investor activism and corporate reform
Among Japan’s five largest listed companies, three − Toyota Motor, Mitsubishi UFJ Financial Group (MUFG), and Sumitomo Mitsui Financial Group (SMFG) − operate within corporate groups characterised by cross-shareholding and mutual support among affiliated firms.Footnote 110 These structures reflect the enduring legacy of Japan’s keiretsu system, where ownership and influence are dispersed across a network of related companies. The remaining two firms follow distinct governance models. Sony functions with greater independence, supported by a substantial proportion of foreign institutional shareholders. Nippon Telegraph & Telephone (NTT), by contrast, remains partially state-owned, with the Ministry of Finance holding a 34.72% equity stake, making it the company’s largest shareholder and ensuring a continuing government presence.Footnote 111
Compared to the concentrated control exercised by the Party-state in China or founding families in South Korea, Japan’s corporate governance model is characterised by a more decentralised structure. In many leading firms, control is diffused through cross-shareholding networks in which companies hold equity stakes in one another, often reinforcing long-term business relationships rather than direct managerial dominance. As shown in table 3, except NTT − which remains subject to government influence via the Ministry of Finance’s 34.72% holding − the other four firms display more diversified ownership structures. These include not only internal group affiliates but also significant stakes held by institutional investors. Prominent among these are domestic asset custodians such as The Master Trust Bank of Japan and Custody Bank of Japan, as well as major foreign investors like JPMorgan Chase and State Street, whose presence reflects Japan’s partial openness to global capital flows.
Ownership of Japan’s largest companies
Table 3 Long description
The table lists each company’s largest shareholders and their ownership percentages, highlighting who has the most voting influence. For Toyota Motor, the biggest holder is The Master Trust Bank of Japan at 11.68%, followed by Toyota Industries at 7.31% and Custody Bank of Japan at 5.57%. Mitsubishi UFJ Financial and Sumitomo Mitsui Financial are led by The Master Trust Bank of Japan trust accounts at 15.55% and 16.36%, with Custody Bank of Japan trust accounts next at 5.59% and 6.14%. Sony’s largest holder is also The Master Trust Bank of Japan trust account at 18.1%, and it has a notably large depositary receipt holder position via Citibank at 8.8%. Nippon Telegraph and Telephone differs from the others because the Ministry of Finance is the largest shareholder at 34.72%, far above any other listed stake. Across most companies, trust and custody banks appear repeatedly, indicating shares are often held in nominee or custodial structures on behalf of underlying investors rather than as direct operating-company ownership.
Sources: Websites of Toyota, Mitsubishi UFJ Financial, Sumitomo Mitsui Financial, Sony, and Nippon Telegraph & Tel (as of 30 September 2024)
Against this backdrop of decentralised yet stable ownership, institutional investors have become increasingly vocal in pressing Japanese firms to strengthen their ESG practices. A prominent case is Toyota Motor, where a group of foreign institutional investors has repeatedly challenged the company’s climate strategy. Pension funds such as AkademikerPension (Denmark), Storebrand (Norway), and APG Asset Management (Netherlands) have criticised Toyota’s heavy reliance on hybrid and hydrogen vehicles, as well as its lobbying efforts to delay electric vehicle (EV) regulation.Footnote 113 These investors argue that Toyota’s approach is incompatible with the goals of the Paris Agreement and have called for greater transparency in the company’s climate-related lobbying activities.Footnote 114 In response, Toyota’s board defended its multi-pathway strategy − including hybrids, hydrogen, and EVs − as better suited to the needs of diverse global markets, and reiterated its commitment to achieving carbon neutrality by 2050. Nevertheless, many foreign investors viewed this as inadequate.Footnote 115 A shareholder proposal seeking enhanced disclosure on climate lobbying was tabled at the 2023 annual general meeting but was ultimately rejected, backed by domestic institutional shareholders and firms within Toyota’s cross-shareholding network.Footnote 116
These tensions escalated further in May 2024, when Danish investor Kapitalforeningen MP Invest submitted a shareholder proposal at Toyota’s annual general meeting.Footnote 117 The proposal called for enhanced sustainability governance, specifically requesting an amendment to Toyota’s Articles of Incorporation that would mandate the publication of an annual report assessing whether the company’s lobbying activities align with the goals of the Paris Agreement.Footnote 118 Despite drawing support from some foreign institutional investors, the proposal received only 9.17% of shareholder votes and was ultimately rejected.Footnote 119 The outcome reflected continued resistance from domestic investors and Toyota’s affiliated shareholders.
Institutional investors have also taken more direct action to challenge Toyota’s leadership. At the June 2024 annual general meeting, several domestic asset managers − including Sumitomo Mitsui DS Asset Management and Mitsubishi UFJ Asset Management − voted against the reappointment of Chairman Akio Toyoda and Vice Chairman Shigeru Hayakawa.Footnote 120 Nissay Asset Management, a subsidiary of Nippon Life Insurance Company, went further by voting against the entire board of directors.Footnote 121 These votes reflected growing dissatisfaction with the board’s perceived resistance to sustainability reform, with critics describing its actions as ‘strongly in opposition to the needs of society’ − a pointed reference to Toyota’s hesitant climate transition.Footnote 122 Even traditionally supportive investors such as Fukoku Capital Management joined the opposition, citing broader social and environmental risks associated with the company’s slow progress on ESG objectives.Footnote 123
The wave of climate-related proposals and increasingly assertive voting by both foreign and domestic institutional investors underscores a growing challenge to Toyota’s ESG strategy. Although all nominated directors were ultimately reappointed − with over 92% of votes cast in favour − this outcome was largely secured through support from Toyota’s cross-shareholding network.Footnote 124 The result should not be read as a rejection of shareholder activism, but rather as evidence of the enduring insulation provided by Japan’s keiretsu structures. Nevertheless, signs of resistance within this system are becoming more visible. In a corporate environment where board reappointments typically attract near-unanimous approval,Footnote 125 the decline in support for Chairman Akio Toyoda is notable. His approval rating dropped from 96% in 2022 to just 71.9% in 2024 − an unusually sharp fall for a legacy leader in a company known for strong internal cohesion and board continuity.Footnote 126
In response to mounting investor pressure, Toyota has announced a series of governance reforms aimed at enhancing transparency and board accountability.Footnote 127 These include clarifying executive responsibilities, revisiting the criteria for determining director independence, and reaffirming its commitment to shareholder engagement.Footnote 128 While Japan’s cross-shareholding structures continue to shield corporate leadership from direct investor influence, the Toyota case shows that this insulation is no longer impermeable. Institutional investors − both foreign and domestic − are increasingly willing to challenge entrenched governance practices, particularly on sustainability grounds. Although incremental, these developments signal a gradual evolution in Japan’s corporate governance landscape, as even traditionally insulated firms begin to respond to calls for greater transparency, environmental responsibility, and shareholder accountability.
A similar pattern of ESG-related investor pressure can be observed in the case of Japan’s leading financial institutions, particularly MUFG and SMFG. In 2021, MUFG became the first Japanese bank to face a shareholder resolution calling for alignment with the Paris Agreement. The proposal, filed by a coalition of institutional investors, urged MUFG to adopt and disclose a plan for transitioning its financing activities away from fossil fuels.Footnote 129 Although it was ultimately rejected, the resolution received 23% of shareholder support − an unprecedented level of dissent in Japan’s banking sectorFootnote 130 − and attracted backing from global investors such as Legal & General Investment Management and Federated Hermes.Footnote 131 In response, MUFG introduced a phased restriction on new coal project financing and pledged to achieve net-zero financed emissions by 2050, although critics argued that the measures remained vague and insufficiently ambitious.Footnote 132
Similar pressures have been directed at SMFG, which has also faced sustained scrutiny over its exposure to coal and fossil fuel infrastructure.Footnote 133 In 2022 and 2023, environmental groups and ESG-focused asset managers raised concerns over SMFG’s financing of high-emissions projects, prompting calls for clearer disclosure and time-bound phase-out targets.Footnote 134 In response, SMFG has strengthened its climate-related reporting, updated its coal finance policy, and announced a long-term commitment to carbon neutrality.Footnote 135 However, like MUFG, its transition plan has been criticised for lacking clear implementation timelines and interim targets.Footnote 136
These cases highlight that Japan’s largest companies − despite being embedded in cross-shareholding networks and traditionally insulated from shareholder activism − are increasingly subject to investor-led demands for sustainability accountability. Across sectors, global institutional investors are beginning to reshape ESG expectations at the top of Japan’s corporate hierarchy, using shareholder resolutions, public engagement, and reputational pressure as tools for gradual governance reform.
Across the three systems, the degree and form of insider control differ, shaping the effectiveness of ESG reforms. In China, state control is the most direct: Party-state authority can enforce ambitious sustainability goals but can just as quickly redirect companies when other political priorities take precedence. In South Korea, chaebol families maintain strong, personalised control, which undermines the effectiveness of institutional oversight, even as the NPS begins to push for stronger ESG practices. Compared with the other two, Japan presents the weakest form of insider dominance, with cross-shareholding still insulating managers but gradually eroding under the influence of international investors. Taken together, the comparison shows that the strength of insider authority determines how far ESG rules and investor pressures translate into meaningful corporate practice.
Convergence and Divergence: Reform Pathways in East Asia
Over the past two decades, corporate governance has undergone a process of transnational diffusion, with many jurisdictions adopting similar mechanisms of oversight, disclosure, and accountability.Footnote 137 This process has been driven by global standard-setting bodies, the demands of international investors, and the competitive pressures of financial integration.Footnote 138 East Asian jurisdictions have not been exceptions to this trend. China, South Korea, and Japan have each introduced rules on ESG disclosure, stewardship responsibilities for institutional investors, and board reforms, often modelled on Anglo-American precedents.Footnote 139
However, the adoption of these rules has often functioned less as a transformative reform and more as a signalling device, designed to demonstrate conformity with international benchmarks. In practice, the operation of ESG disclosure regimes, stewardship codes, and board reforms continues to be filtered through existing structures of corporate authority. In China, Party-state control channels reforms through political hierarchies; in South Korea, founding families in chaebols continue to dominate key corporate decisions; and in Japan, cross-shareholding networks maintain relational forms of insulation. Although these governance arrangements belong primarily to the ‘G’ dimension of ESG, they exert decisive influence on overall sustainability outcomes. These entrenched structures re-embed new ESG rules within older hierarchies, limiting their transformative potential.
This functional divergence reflects a broader insight in comparative governance: convergence in legal form does not necessarily yield convergence in practice. Rules that prove effective in institutional contexts marked by dispersed ownership and strong investor oversight − such as the US or UK − encounter a very different environment in East Asia, where corporate control remains concentrated in political, familial, or relational insiders. The result is institutional alignment in appearance, without substantive change in the underlying distribution of power.Footnote 140
In the context of sustainability, where the interests of multiple stakeholders are at stake, this misalignment is clear. Party-state authorities, family owners, and corporate groups often pursue objectives that differ from those assumed in global standards, which are primarily designed around the role of institutional investors. This creates a gap between formal rules and actual incentives: controllers may have little reason to prioritise ESG for stakeholders if doing so conflicts with their own interests. Even in China, where the state has actively promoted ESG in recent years, performance has faltered whenever national priorities shifted. As noted above, concerns over energy security led to renewed approvals and investment in coal projects, undermining earlier sustainability commitments. The effectiveness of ESG governance rests not merely on the formal adoption of rules, but on their capacity to recalibrate, or at least be internalised by, existing controllers. Without such adaptation, ESG reforms may stay at the level of procedural compliance rather than achieving meaningful transformation.
To enable meaningful corporate sustainability in East Asia, governance reforms need to proceed along two tracks. First, insider controllers should be incentivised to pursue sustainability. Second, and more difficult but ultimately more transformative, is the gradual reduction of insider control in East Asian companies.
With respect to the first track, the problem is that East Asian insider controllers are driven by interests distinct from those of institutional investors in the US and UK. The latter can be nudged toward sustainability because they act as fiduciaries for beneficiaries: their legal duties require them to manage entrusted capital prudently and in the beneficiaries’ interests.Footnote 141 As sustainability risks, such as climate change, are increasingly recognised as material to long-term financial returns,Footnote 142 fiduciary norms provide both a legal and normative channel through which regulators and market actors can press these investors to integrate sustainability considerations. By contrast, controllers in East Asia are animated by very different imperatives: political survival in China, intergenerational family control in South Korea, and corporate group cohesion in Japan.
One possible response is to extend fiduciary duties to controlling shareholders. In East Asia’s concentrated ownership systems, these controllers exercise significant and often unchecked voting power, which places them in a position of discretionary authority vis-à-vis minority shareholders and the corporation as a whole. Their influence over management and corporate outcomes is functionally similar to that of directors, who are already bound by fiduciary duties.Footnote 143 On this theoretical foundation, controlling shareholders should likewise be subject to obligations of good faith, to avoid abusing their powers, and to refrain from exploiting conflicts of interest.Footnote 144 By placing direct legal duties on controlling shareholders, the law could reduce the risk of entrenchment, tunnelling, and expropriation, and instead guide their authority toward supporting the company’s long-term and sustainable growth.
Another possibility is that these jurisdictions develop governance responses that incentivise insiders by allowing them to internalise sustainability as part of their own strategic objectives. In China, the Party-state could embed sustainability into political priorities and cadre performance evaluations, thereby transforming it into a dimension of political accountability for state and party-affiliated controllers. In South Korea, where family-controlled conglomerates seek to maintain influence, sustainability rules could be linked to eligibility for state-backed financing or public procurement, giving families a financial incentive to align with ESG standards. In Japan, where corporate groups are bound together by stability and trust, sustainability rules could target lead firms and parent companies, requiring them to apply ESG standards in procurement and supply-chain management, and to meet ESG disclosure obligations. Because affiliated firms rely on these central companies for long-term contracts and stable relationships, they would face strong pressure to comply with ESG requirements in order to preserve their position within the network.
However, the more far-reaching and transformative track is to reduce insider control in East Asian firms. Although politically and institutionally challenging, such change has already begun to take shape across the region. Each jurisdiction has adopted reforms aimed at reshaping ownership patterns and strengthening minority shareholder rights. In China, the state has advanced mixed-ownership reform by introducing private and foreign capital into SOEs, with the goal of diluting exclusive state control, improving efficiency, and diversifying boards.Footnote 145 In South Korea, the National Assembly amended the Commercial Act to extend the fiduciary duties of corporate boards beyond the company itself to include shareholders, thereby strengthening the protection of minority investors.Footnote 146 In Japan, regulators have advanced tangible reforms to unwind cross-shareholdings and reduce insider control. In March 2023, the TSE urged listed firms to prioritise capital efficiency and accelerate reductions in cross-shareholdings, contributing to a decline in the strategic shareholding ratio from 31.5% to 30.8% in fiscal 2023.Footnote 147 Following regulatory pressure and public scrutiny, long-standing insider shareholders committed to phasing out their strategic holdings within six years.Footnote 148 In June 2024, leading banks MUFG and SMFG began divesting significant stakes in Toyota Motor Corporation to unwind entrenched cross-shareholding ties.Footnote 149
Beyond these reforms, more can be done to reduce insider control. In China, further progress will require not only diversifying SOE ownership but also giving private shareholders a real voice on sustainability, for example, by allowing separate votes on ESG issues or enabling them to elect independent directors. In South Korea, reducing the dominance of founding families may involve stricter regulation of related-party transactions and making cumulative voting mandatory in board elections. Under this system, minority shareholders can combine their votes to secure representation on the board. In Japan, regulators could require companies to set clearer timetables for unwinding cross-shareholdings, while also imposing stronger penalties on firms that fail to meet capital efficiency or ESG commitments. Across all three jurisdictions, empowering institutional investors through enhanced voting rights, collective engagement mechanisms, and access to shareholder remedies would further shift power away from entrenched insiders. Taken together, these steps would make insider control more contestable and create greater space for sustainability reforms to take root.
In sum, simply transplanting Anglo-American tools such as independent directors, stewardship codes, or shareholder lawsuits is not enough. On their own, these formal measures are often weakened or turned into box-ticking when the deeper political, family, or relational structures of power remain intact. The pathway to meaningful corporate sustainability in East Asia lies in approaches that adapt international standards while rebalancing power between entrenched controllers and other shareholders within local institutions. Only by addressing these deeper dynamics can reforms move beyond symbolic compliance and foster genuine, long-term sustainability.
Conclusion
This article has examined how insider control in China, South Korea, and Japan shapes the adoption and effectiveness of sustainability reforms. While global ESG frameworks and investor expectations continue to influence regulatory developments, the implementation of sustainability initiatives in East Asia remains strongly conditioned by existing institutional arrangements − Party-state control in China, family dominance in South Korea, and cross-shareholding in Japan. These structures limit the reach of shareholder activism and constrain the role of institutional investors in driving sustainability-related change. As a result, although there appears to be convergence with global sustainability standards, the substance of these codes diverges in practice.
To achieve meaningful reform, this paper advances two recommendations. First, insider controllers should be incentivised to internalise sustainability, either by imposing fiduciary duties on controlling shareholders or by tailoring mechanisms to local contexts. For example, integrating ESG targets into cadre performance evaluations in China, linking ESG compliance to regulatory approvals or financing in South Korea, or channelling ESG obligations through lead firms and parent companies in Japan. Second, and ultimately more transformative, is the gradual reduction of insider control. Recent steps such as mixed-ownership reform in China, expanded board duties in South Korea, and efforts to unwind cross-shareholdings in Japan suggest this process is underway. Building on these reforms will require measures like stronger minority protections, cumulative voting, and clearer timetables for reform, so that authority is rebalanced and institutional investors can act as effective stewards.
In short, corporate sustainability in East Asia is unlikely to advance through legal transplantation alone. Formal rules tend to have limited impact when filtered through existing hierarchies of power. More promising are hybrid governance pathways that adapt international norms to local contexts while directly addressing insider control. For policymakers, this may involve designing reforms that both incentivise insiders and make their dominance more open to challenge. It also highlights the need to look beyond formal convergence and to pay closer attention to how authority operates within firms. If sustainability is to take root in East Asia, it will be less through the mimicry of global codes than through reforms that respond to the institutional realities of concentrated control.
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