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Parmalat: It can, has and will happen in
Asia
By Gary LaMoshi
HONG KONG
- The holiday season brought much cheer to investors in
Asia. Thailand's main stock index more than doubled in
2003 and ranked as the world's top performing bourse
after Argentina's. Mumbai's benchmark finished second in
Asia, rising 73 percent amid record inflows of foreign
money. Singapore and Hong Kong's markets and economies
rebounded from the outbreak of severe acute respiratory
syndrome (SARS) to gains of more than 30 percent.
Throughout Asia, stocks were enjoying their
biggest, and in many cases their first, annual gains
since 1999, and with many indexes poised at or near
four-year highs. Jakarta's market, a 63 percent gainer
in 2003, hit a four-year high in its first trading
session of 2004, bringing President Megawati
Sukarnoputri out to open Monday's session. Even Japan's
Nikkei 225 that's made billionaires into millionaires
over the past decade rose 24.5 percent in 2003.
Asian economies and investors can be excused a
tinge of smugness as they count their money and see
continued scandals elsewhere. In the United States, 2003
revealed widespread cheating for personal profit among
mutual fund managers to whom tens of millions of
Americans entrust their retirement nest eggs. Better
homemaking billionaire Martha Stewart was indicted on
charges stemming from allegations she used illegal
insider information to avoid a US$45,000 loss, the
equivalent for her of stealing a candy bar.
The
final days of 2003 brought reminders that Europe is
badly infected by the disease, too. Italian food
conglomerate Parmalat collapsed after discovery of a
gaping hole in its accounts, estimated at 8 billion
euros (US$10 billion). On the legal side, the US
Securities and Exchange Commission announced a $76
million settlement with Vivendi, the French water
utility that tried and spectacularly failed to become a
global media player.
The Parmalat scandal
appears to be a classic case of corporate fraud
involving several usual suspects. Founder Calisto Tanzi
and members of his family milked Parmalat through
offshore affiliates designed to confound prying
shareholders, lenders and regulators. Parmalat's
long-time auditor, if not co-opted into the conspiracy,
had become far too comfortable with the company to be an
effective watchdog for the company's stakeholders.
No cause for gloating in Asia
At
Vivendi, the story was more complex, featuring
ridiculously bad business judgments and poor oversight
by an overly compliant board of directors. Those
problems, however, quickly led Vivendi executives to
cross the line to fraud by failing disclose the true
extent of the company's financial difficulties.
These scandals may bring gloats from Asian
observers, but they can happen in Asia. In fact, they
have happened here and they will happen here again.
US-type corporate abuses are not unique to Europe and
the US.
Asia is full of publicly listed,
family-controlled companies like Parmalat. Hong Kong's
richest man and most admired investor Li Ka-shing runs
his Cheung Kong and Hutchison Whampoa vehicles as family
businesses and has arranged for his son Victor to
succeed him. Rupert Murdoch encountered uproar from
shareholders when he tried to install his son James as
head of Britain's BSkyB, but Li's choice of successor
hasn't provoked many peeps. Cheung Kong's board of
directors, like most others in the region, makes the
Vivendi bunch look like ruthless watchdogs by
comparison.
Under Italian law, Parmalat had to
change its auditor after nine years, but a loophole
allowed it to retain that friendly auditor for its
overseas subsidiaries, the alleged conduit for its
fraudulent activities. In those Asian countries that
even require independent audits, there are few rules
about auditor independence or auditor rotation.
As for those new US scandals, there are no Asian
laws to prevent local fund managers from engaging in the
same practices that cost US investors billions. Martha
Stewart's use of insider information to avoid a loss
would be smiled upon in China as guanxi, that
one-hand-washes-the-other form of business camaraderie.
Asians know about over-expanding
overseas
The Vivendi case points the way toward
new and dangerous ground for potential scandal for Asia.
The basic path of over-expansion overseas has been well
worn, particularly by South Korea's chaebol.
Daewoo provided the most spectacular example, grabbing
enough assets around the planet to briefly hold the
number two spot on the national corporate roster. Daewoo
founder Kim Woo-choong allegedly used those holdings and
the complex financing that accompanied their acquisition
and operation to skim billions of dollars.
The
new twist on this old Asian theme is that acquirers
aren't just fast talking, sleight of hand artists with
friends in high places like Kim or Vivendi's Jean-Marie
Messier, who came out of the same schools that spawn
French ministers. Messier's biggest mistake may have
been going Hollywood after acquiring Universal Studios,
thus losing the respect and, eventually, the protection
of Vivendi's traditional patrons.
Today,
Asian government-controlled companies are increasingly
moving overseas. They're not only seeking listing on
foreign stock markets in order to gain access to
international capital and respect, but they're buying
actual businesses. Mainland Chinese companies are making
the leap from privileged lives at home to competitive
markets abroad, while older hands Japan Tobacco and
Singapore Telecom are increasingly seeking growth
overseas.
State-controlled companies operating
overseas pose risks to local investors. Suppose that
after a takeover, a state company acquirer decides to
walk away from local debts or arbitrarily dilute local
shareholders. That state company may lie beyond the
jurisdiction of local courts, forcing investors to take
action in courts that are overseen by the same
government owner they're suing. That's not illegal; it's
just scandalous.
Similarly, there's no law
against much of the market manipulation and individual
investor abuse that's rampant in Asia. The low incidence
of scandal in Asia in comparison with the West in recent
years is due mainly to Asia's lax rules and relaxed
enforcement. Enjoy Asia's high returns, but don't let
them seduce you into thinking honesty and integrity have
gained the upper hand.
(Copyright 2004 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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