How much did poor corporate governance contribute to the financial turmoil in Asia? How can Asian companies improve their corporate governance to attract global capital? Will investors returning to the region insist on better governance or will a ‘wall of money’ flow indiscriminately back to wash away progress in transparency? How can Asian companies attract long-term, stabilizing investor capital?
These were questions debated in May when The Conference Board and Temasek Management Services of Singapore held the Asia-Pacific Conference on Corporate Governance and Disclosure in Global Capital Markets. It attracted over 100 executives, investors and government officials from all over the region.
Change in the wind?
Delegates agreed that Asian corporations are already making changes. They’re unwinding corporate cross-shareholdings and are beginning to professionalize family-owned businesses. Banking systems and terms of credit are also under review. But bank lending is likely to remain insufficient for expansion, forcing corporations to seek global capital and face demanding US investors. In some cases, investors are large enough to dwarf entire regional Asian markets (see table on next page).
This is of great concern, as delegates want to avoid massive equity flows, in or out of the region: both can destabilize economies. While delegates agreed it would be hard to eliminate speculators, it was agreed that long-term investment by institutional investors could stabilize markets. But this depends on Asian corporations improving governance .
East meets west?
Institutional investors from Templeton Emerging Markets Fund and the California Public Employees’ Retirement System (Calpers) described typical expectations of global shareholders. Mark Mobius has $270 bn in the Templeton Group of Funds. He cited governance abuses by Asian companies such as:
- producing invalid financial statements which hide insider transactions or negative results;
- making proxies impossible to vote or manipulating the voting process;
- selling off large asset blocks without the shareholders’ knowledge or benefit;
- installing extreme anti-takeover measures to entrench management and rob shareholders of a premium;
- issuing shares with pre-emptive rights which shift the voting power from the general shareholders to a group of insiders; and
- raising capital designated for one purpose that is used in different transactions.
Calpers’ Robert F Carlson stressed the long-term ‘patient capital’ approach of his fund: it invests $160 bn of which $6.6 bn is in the Asia-Pacific region. In view of the globalization of world equity, Calpers has increased its international exposure from 12 percent of the fund’s equity portfolio to 20 percent. Recently it invested $225 mn through the Asian Development Bank, which won’t now invest in companies without good governance.
Ambassador Linda Taso Yang, US executive director of the Asian Development Bank, reinforced the Bank’s commitment to good governance. ‘One size does fit all companies,’ she told the audience. ‘When it comes to good governance, there shouldn’t be regional differences in principles, although there may be differences in approaches because countries are in different economic stages.’
The main differences between the US and Asian economies are that Asian states play a greater role, either owning enterprises or blocks of shares. There is also greater family ownership and a reliance on bank financing.
Governments should set up regimes which are disclosure-based and designed to ensure that market discipline functions effectively. Governments must ensure rules are applied fairly. And, in economies where the state owns enterprises and has shares listed in public hands, it must discipline itself to be accountable.
Calpers has drawn up governance principles for Japan which include:
- making boards accountable toward all shareholders;
- including directors who are truly independent from the corporation;
- reducing the size of boards to enable effective decision-making; and
- appointing independent auditors.
Neither Calpers nor Templeton wants to take over boards. They want to see boards oversee efficiency, which may mean professionalizing family-owned businesses. Some US pension funds also invest stable long-term capital and have low turnover in volatile times. And they represent a large portion of investments made outside the US.
Activist funds tend toward low turnover and don’t just sell if they dislike a company’s short-term outlook. Corporations can seek out these long-term ‘investors’. And these investors notice good governance.
Lasting changes?
James Shapiro, head of NYSE’s Asian operations, believes the crisis was a classic panic that triggered a capital outflow and a liquidity crisis. Although weak governance is a ‘fact’ in Asia, it didn’t cause the crisis.
He has noted a change in attitude. Despite the turmoil in the region, more than half of the NYSE’s new listings in 1998 were from emerging markets. Net purchases of emerging market equity by US investors nearly doubled in 1998 to $23 bn from $12.5 bn, and holdings by US investors of NYSE-listed Asia-Pacific companies has continued to rise.
A listing on the NYSE represents a ‘flight to quality,’ for ‘those companies with greater transparency,’ argued Shapiro. But he warns that recovery masks improvements that still need to be made. With an upturn in the Asian economies, investors could flood Asia with another ‘wall of money’ without scrutinizing good governance practices.
Dr Carolyn Kay Brancato is head of the Conference Board’s Global Corporate Governance Center
