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US-style corporate abuses 'unheard' of in
Asia
By Gary LaMoshi
HONG
KONG - When Asian economies crashed in 1997 under the
weight of crony capitalism, the region got religion
about reform. Good corporate governance has become an
Asian mantra, with new laws and regulations to improve
corporate behavior and clean up capital markets
appearing, patterned on practices in more developed
markets.
Then came Enron, or more precisely the
collapse of Enron just over a year ago. That accounting
scandal and subsequent revelations of corporate
wrongdoing on similarly massive scales at WorldCom,
Tyco, Global Crossing, Adelphia Communications and
others have cratered stock markets and shattered the
notion that US regulations and its Securities and
Exchange Commission (SEC), the stock market watchdog,
are the gold standard for the rest of the world.
US scandals have yielded some positive reforms,
far outnumbered by positively embarrassments. Despite a
handful of executives paraded before camera in
handcuffs, none has spent a night in jail. Tyco's
disgraced chief executive officer Dennis Kozlowski can
only travel among his three luxury homes, though he
obtained a judge's permission to visit his ski chalet in
Colorado for a family Christmas holiday. When he's not
visiting his lawyers to work on his fraud defense,
WorldCom's fired chief financial officer Scott Sullivan
supervises construction of a US$15 million mansion that
will include an art gallery and movie theater in
Florida; under state law, home assets are shielded from
legal judgments.
This week, Tyco's former lead
independent director Frank Walsh settled charges
stemming from an illegal $20 million payment from Tyco
in 2000. The case highlights how corporate directors,
legally obligated to protect shareholders' interests,
more often scratch one another's backs. As punishment
for his fundamental breach of public trust, Walsh had to
pay fines of $22.75 million; that comes to about 9
percent interest on the money, hardly a deterrent. He
handed over checks to pay the bill, then walked out of
the courtroom a free man.
Legislate now, fix
later
Early this month in Tokyo, London Stock
Exchange (LSE) chairman Don Cruickshank blasted the
Sarbanes-Oxley Act, the cornerstone of US reform efforts
diluted by lobbyists with vested interests in the
current system. "We are particularly critical of the
'legislate now, let the SEC pick up the pieces later'
approach of the act," he said.
A centerpiece of
the act is creation, through the SEC, of a new
independent public board to oversee the accounting
industry. The SEC's choice to chair the new board was
revealed to have been a director of a company that had
fired its auditor amid fraud allegations. Worse, the SEC
chairman knew about the incident and failed to inform
the other four SEC commissioners, who endorsed the
nominee in a rare divided vote. The nominee resigned in
less than three weeks, after taking the SEC chairman and
chief accountant down first. The accounting industry,
which fought creation of the board, sees a new chance to
defang it with a familiar Wall Street insider named the
new SEC chairman.
In contrast to this ugly
spectacle exposing the cynicism of US reform efforts,
post-crash Asia's rules win high marks from
corporate-governance experts. This Philippine
declaration is cited as a model of probity for
directors' behavior and investor rights, in contrast to
Tyco's Walsh and his US cohorts:
It is the duty of the directors to promote
shareholder rights; remove impediments to the exercise
of shareholders' rights and allow possibilities to
seek redress for violation of their rights. They shall
encourage the exercise of shareholders' voting rights
and the solution of collective action problems through
appropriate mechanisms. They shall be instrumental in
removing excessive costs and other administrative or
practical impediments to shareholders participating in
meetings and/or voting in person. The directors shall
pave the way for the electronic filing and
distribution of shareholder information necessary to
make informed decisions, subject to legal
constraints. This month, Thailand's central
bank introduced more stringent rules for commercial bank
boards of directors. These rules come on top of
stock-exchange regulations and the banks' own governance
code. They lay down strict guidelines on board
composition and committees, including the number of
independent directors (with an explicit definition of
independent that closes potential loopholes regarding
share ownership and nepotism loopholes) and their
assignment to the critical audit committee.
The
desired reaction from investors is to tut-tut that poor
little Thailand and the Philippines can be so much more
sincere and forthright about ensuring good governance
than the mighty United States. Perhaps you might be
inspired to sell your stock in sleazy Citigroup, a
monument to imperial executive excess and unfathomable
accounting even before the latest scandal involving its
chairman, a former star stock analyst, and a $1 million
corporate contribution to his twins' elite nursery
school, and buy Krung Thai Bank shares. But you might
want to take a closer look at those regulations than
that press-release snapshot above.
Board
building planks
For example, the Thai rules say
that up to a third of the board of directors may be bank
executives; best practices peg that number at zero,
since the board's job is to oversee those executives and
people generally can't oversee themselves effectively.
US boards largely ignore this principal, too, though the
most progressive ones have just one management member,
the chairman, who usually doubles as chief executive
officer.
Those carefully defined independent
board members at the Thai bank must comprise one-quarter
of the board, smaller than the management contingent.
The definition says an independent director can't be
related to a majority shareholder or member of senior
management; it doesn't say those relatives can't serve
on the board as toadies, or, rather, non-independent
directors.
Worse, the rules also stipulate that
an independent director cannot hold more than 0.5
percent of the bank's shares. The ideal director for
shareholders is someone with a significant investment in
the company with no connection to management, so
restricting an independent director's shareholding makes
no sense from a good-governance point of view. It makes
a lot of sense to help boards freeze out unwanted
corporate raiders that try to make money for all
shareholders (including themselves) by buying
undervalued companies and lighting a fire under
management to boost the share price. Of course with the
Thai government holding controlling stakes in most
banks, investors interested in maximizing shareholder
value don't pose much of a danger.
So let's look
at the board a Thai bank might assemble under these
rules. We'll give it 12 members (the minimum number is
nine and at least three have to be independent; 12 fits
in those three independents as the mandated 25 percent
of the board). We'll start with the top four executives
of the bank. Each of them could install a favorite
relative or spouse, and let the chairman pick two. For
independent directors, the bank could choose the chairs
of three companies that rely on the bank for credit,
although they'd never let the bank's stranglehold on
their companies influence their work as directors,
right? Or the bank could install the heads of its law
firm, top supplier and favorite charity as independent
board members. Or the previous chairman and two retired
vice chairmen, provided they transferred enough shares
to their wives or children to get under the 0.5 percent
rule, if necessary.
Philippine
clean
That model of probity, the Philippines,
just issued its own rules about independent directors.
They also close loopholes on nepotism and further refine
director independence to exclude former company
officials, related company executives, large clients or
suppliers, and company advisors. These rules define
"independent director" better than the Nasdaq market
does.
Before handing a bouquet to Philippine SEC
chair Lilia R Bautista, note the number of independent
directors prescribed to promote shareholder rights and
all those other great ideas: two or 20 percent of the
board, whichever is less. At least one
independent director must be a member of the board's
nominating committee, to be outvoted as required by the
two (or more) non-independent directors rounding out the
committee. The New York Stock Exchange's corporate
accountability standards set down this year mandate a
majority of independent directors on the board and the
nominating committee.
It's not just Thailand and
the Philippines where reforms fall short. LSE chairman
Cruickshank was in Japan badmouthing US rules to drum up
overseas listings for his London market. Sarbanes-Oxley
rules require audit committees with only independent
directors as members to choose any US listed company's
independent accountant; most Asian corporate boards
don't have audit committees. That's fine with Cool
Britannia.
Japanese companies let shareholders
choose auditors, in the spirit of a rule some US
reformers seek. (US shareholders currently must endorse
the audit committee's choice, but they can't change it.)
Of course, Japanese companies all hold their shareholder
meetings on the same day, conduct their business based
on shareholders present (fortunately, management
shareholders show up), and pay off yakuza to
avoid disruptions.
Vote, we dare
you
Investor advocate David Webb, on his
Webb-site.com, recently recounted the ridiculous effort
required to vote shares in Hong Kong. Brokers are not
required to solicit voting instructions from shareowners
and, as a result, are not interested in receiving them.
For investors who dare defy market practice and high
hurdles to hold their own shares, there is an online
voting system. It operates during market hours only
(somebody tell the Stock Exchange of Hong Kong the
Internet runs 24 hours a day, every day) and, best of
all, does not identify the resolutions it allows
shareholder to vote on. All you see are numbers and
voting boxes; the proxy form that would reveal the
resolutions' content is not available online.
Hong Kong's stock market has also backed off
from two major disclosure reforms unveiled with great
fanfare last January. First it abandoned the proposal
for quarterly financial reporting (the US standard).
Rival Singapore just enacted this change from annual
figures over the yelps of even its government-controlled
companies (see Singapore's capitalist myth,
November 7).
This month, Hong Kong dropped its
proposal for companies to report individual executive
compensation in place of the current practice of giving
lump-sum figures for the top group. One reason you read
and hear so much about obscene pay packages for US
executives is that they have to be disclosed.
When it comes to executive pay, and dozens of
other items subject to regulations under US securities
laws, the best that can be said is that corporate abuses
disclosed in the United States remain unheard of in Asia
- either because they don't exist or because companies
aren't forced to reveal them. For investors, Asia
remains the mysterious East.
(©2002 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com
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