As Asia emerges from the crisis that began in 1997, governments across the region are reforming their financial sectors. One critical element of these reforms is the revamping of corporate governance.¹ Asian boards have traditionally been corporate symbols rather than management structures. Many people in the region are now beginning to realize that an independent board with management-oversight authority is critical to building a healthy financial system and economy.² Weak and ineffective boards failed to prevent Asian banks from accumulating excessively risky loan portfolios, which ultimately caused the crisis. Revamping corporate boards is now seen as a critical lever in reforming the financial sector.

But introducing sound corporate governance is no easy task (see sidebar, "Elements of good corporate governance"). Barriers stand in the way of implementation, and strong government support for change is often lacking. But McKinsey’s experience in South Korea has shown that policy makers can change corporate-governance practices by taking a series of concrete actions focusing on the composition and processes of boards. Although it will undoubtedly take some time for the newly created boards to become fully established, South Korea is now well on its way. Other countries reforming their financial...