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Unraveling the corporate governance
mystery
By Gary LaMoshi
HONG
KONG - Scandals rocking US stock markets since late 2001
have amply demonstrated the price of bad corporate
governance. Closer to home, a recent McKinsey study in
Thailand found that good governance correlated with a
company market's valuation: the better the practices,
the higher the valuation.
That report mirrored
findings in the United States, the United Kingdom and
other developed and emerging markets around the world.
Long before Enron became a household word (for its New
Economy business model, not its scandals), experts
preached that good governance pays.
As any good
preacher knows, the best you can usually hope for is
that people listen to the sermon on Sunday morning and
don't sin until Sunday afternoon. Frequently congregants
sleep through the sermon. There's an undeniably
somnolent quality to the term "corporate governance"
and, often, to people who talk about it about.
Before estimating the size of this promised pie
in the sky from good corporate governance, let's define
the term. Stay awake, because billions of dollars are at
stake.
Vogue style
Corporate
governance at the most basic level boils done to
protection for investors, assurance that the company is
striving to produce value for shareholders. When you
give a company your money in exchange for its shares,
you want some guarantee it isn't springing for $6,500
shower curtains in the chief executive officer's flat
(as was the case at disgraced US conglomerate Tyco) and
that you'll be able to sell those shares for their fair
market value.
At the corporate level, good
governance means addressing what economists call the
agency problem, the conflicts of interest between
investors and employees. Shareholders, the owners of the
company, want maximum returns on their investment, while
employees, right up to the CEO, care more about salary,
benefits, and, above all, continued employment.
Independent boards of directors, independent audits,
timely financial reporting (see Singapore's capitalist myth,
November 7, 2002), and communication with shareholders
are common ways companies demonstrate that management
gives full consideration to shareholders' interests.
Regulators also play a key role in corporate
governance by creating and managing orderly markets for
trading shares. Government or market regulators set
standards for companies to list on stock exchanges and
be entrusted with the investing public's money. They can
compel companies to follow best practices or set looser
standards. Independent audits, for example, cost money
and thus reduce profits, sop unless regulators require
them, companies will not take the initiative on their
own. Regulators also boost investor confidence in less
arcane ways, such as barring convicted securities frauds
from getting second chances to scam the public.
In the wake of the 1997 regional economic
crisis, good governance has become a watchword in Asia,
with mixed results (see US-style corporate abuses 'unheard' of
in Asia, December 21, 2002). The World Bank and
International Monetary Fund prescribe it. Increasingly,
major investors insist on it.
California
designer exclusive
Last year, the California
Public Employees' Retirement System (CalPERS) instituted
a unique review process to select emerging economies for
stock-market investments of US$1 billion. CalPERS is the
largest US public pension fund, with assets of $135
billion. Its investment criteria identified key
corporate-governance measures such as stock-market
regulation and transparency plus related financial
considerations, including market liquidity, settlement
times, and transaction costs.
In addition,
CalPERS included broader measures beyond stock markets
for each country - political stability, financial
transparency and labor standards. (Politically correct
CalPERS has also chosen to divest tobacco company
holdings.)
When the scores were toted up, 13
developing markets passed the CalPERS test, 11 countries
where CalPERS already owned stocks plus new eligibles
Poland and Hungary. In Asia, South Korea and Taiwan
retained CalPERS seals of approval. (Japan, Hong Kong
and Singapore rank as developed markets.) The
Philippines, removed from the eligible list in the
original rankings, was reinstated after intensive
lobbying; CalPERS said it had made an error in its
initial reckoning about the Manila market's settlement
system, and $15 million of Californians' retirement
money stayed on the board in Makati.
Stock
markets in China, India, Pakistan and Sri Lanka didn't
pass muster. More embarrassing, three markets where
CalPERS held investments were blacklisted, their stock
portfolios marked for liquidation: Indonesia, Malaysia
and Thailand. Those three markets suffered withdrawals
of more than $120 million in CalPERS' investment
dollars, based on the Philippine investment figure and
relative market caps. By that formula, emerging Asia as
a whole missed a $200 million opportunity from that one
investor because of poor governance.
The cost of
bad governance on individual company valuations is even
more stunning. South Korean investor-rights advocate
Jang Ha-sung, a founder of the regional Center for Good
Corporate Governance in Seoul, estimates that Samsung
Electronics' market cap would be $12.5 billion higher if
its governance standards matched its world-class
computer chips. That's one company.
Walk a
mile in my Guccis
Perplexed investors ask, Why
don't companies simply adopt best practices and make us
all richer? In Asia, where most companies have
controlling shareholders to reap the lion's share of
that higher valuation, the reluctance seems even more
puzzling.
Since bad governance diminishes market
value - and controlling shareholders have the power to
change things - you'd expect them to lobby regulators to
draw up laws in line with international best practices,
then tear up their company bylaws and ask CalPERS to
rewrite them. They haven't because Asia's controlling
shareholders also have the most to lose from good
corporate governance.
One problem is that most
Asia controlling shareholders are founding families
rather than investment banks or corporate raiders like
Carl Icahn. An institution or raider wants to build up
the value of the company and sell it. A founding family
generally wants to keep control and use it to run the
company. An independent board of directors that did its
job properly might threaten the family's prerogatives.
It might insist that all those nephews holding
corporate-vice-president portfolios hit the road in the
name of shareholder value. That move would not only
subvert the rationale for family control but sow
discontent that might endanger it.
When families
aren't the controlling shareholders in Asia, governments
usually are. Profits are not the top priority. Even
honest regimes often use state companies to support
political priorities - one reason for their legendary
inefficiency - such as building a plant in an
economically depressed area and keeping unprofitable
factories at work to prevent unemployment. In less
honest situations, state companies give politicians
ample patronage opportunities, and can provide a host of
services to ruling parties, including campaign funds
from the corporate till or the pockets of managers who
owe their jobs to government leaders. Family or
government, Asia's controlling shareholders are much
more interested in the control part than the shareholder
part of their titles.
(©2003 Asia Times Online
Co, Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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