This paper develops a critique of the standard principal-agent approach to corporate governance by developing the idea of a family based corporate governance system (FBS). FBS is contrasted with the bank-led system (BLS) and equity market based system (EMS). Both BLS and EMS are closely associated with the dominant mode of corporate finance by banks and equity markets respectively. In the case of FBS, the financing can come from three different sources. Initially, family business is financed largely by internal funds. As the enterprise grows over time, the role of banks and outside equity becomes more prominent. However, the key difference between FBS as a governance system and BLS and EMS lies in the fact that neither the banks nor the equity markets ultimately control the family business groups. The control resides with the family groups in the final analysis.

The key hypothesis verified is that in economies at a lower stage of development FBS economizes on transactions costs. This holds especially when the share of external finance in the family businesses is low with corresponding low levels of agency costs. These factors help explain the successful performance of FBS during the Asian Miracle when specific government policies encouraged rapid industrialization.Theoretically, the standard principal-agent model seems to be inadequate in explaining completely the successes and failures of the FBS type of governance. A theory of firms as socially embedded organizations that respond to the needs of multiple stakeholders may be a better framework for studying the persistence of different types of governance structures--- often in the same country. Normatively, the ability of the different governance structures to serve the needs of the different stakeholders must be assessed within such a framework. A nonutilitarian, common good approach may be more suitable for this purpose than the existing neoclassical utilitarian approach.This is also consistent with the "realist" approach to corporate governance.