Bitten by the Corporate Governance Bug
Haddock, Fiona, Global Finance
Long renowned for their opaque business practices and disdain for minority shareholders, Asia's corporations are undergoing a dramatic transformation. They are discovering that good corporate governance is not such a bad thing. By Fiona Haddock
When the Enron scandal hit the headlines back in 2001, there was a certain sense of v v satisfaction in Asia. Following the economic crisis of 1997, many had become weary of the lecturing by US-led global bodies. They found further comfort in the knowledge that those Asian companies that were destined to fail already had-back in 1997. Yet the region's regulators paid heed. If a feted international blue chip of the likes of Enron could go down in flames, what hope for the rest?
In fact, Enron-like behavior had already been unearthed in Asia. In China in mid-2001, a local paper revealed that a stock market darling, Guangxia Yinchuan Industry, had been posting fictitious profits for several years. Exaggerating its financial statements with falsified sales and export figures, the company managed to inflate its net profits by some Rmb745 million (approximately $90 million). Not only was the company discredited but, as with Enron, its auditor was also shamed and eventually stripped of its practicing Iicense by the finance ministry.
Other companies named in local newspapers as having inflated their profits included the state-owned retail company Zhengzhou Baiwen, while Sanjiu Pharmaceutical, China's largest pharmaceutical company, was reported to have misappropriated funds to the tune of Rmb2.5 billion.
It is little wonder then that 2001 ushered in the start of China's big drive to improve its businesses' corporate governance. Over the next 18 months the country introduced mandatory quarterly reporting (outdoing Hong Kong, which remains half yearly) and new regulations stipulating that 50% of a company's directors should be independent.
China is not the only country in the region to seek such reforms. Since 1997 corporate governance has become a major theme in Asia. According to Jamie Alien, secretary general of the Asian Corporate Governance Association (ACGA), there has been an increasing convergence among the region's regulatory regimes as they move closer to international standards and to each other. The major areas of convergence, notes Alien, are accounting and auditing standards, corporate reporting-both financial and non-financial-board independence and shareholder rights and legal reforms (see box, right).
These findings are supported by the investment bank CLSA's annual corporate governance survey. Focusing on a number of set criteria, the bank uses a qualitative approach to assess 10 of the region's markets. Its 2003 report, presented in association with ACGA, demonstrates continued improvements, particularly among the mid-ranked countries such as India, Korea, Malaysia and Thailand.
The improvements may be significant, but the report's title, "Fakin' It," suggests there is still a way to go. While there has been considerable progress in formincluding making publicly stated commitments to good corporate governance, setting up of board committees, appointing nominally independent directors-there is good reason to believe that the substance is still lacking.The report refers to its system of scoring companies and remarks, "Having a betterknown system of examining CG scores can defeat the purpose: It makes it easier for companies to put up a fake front and browbeat the analysts preparing the CG score." CLSA's head of Hong Kong research, Amar Gill, who is largely responsible for the report, exudes an air of weary resignation: "You can't really know a company's commitment to corporate governance until it is put to the test," he concludes.
Actions Speak Loudest
South Korea is a prime example. It boasted the biggest improvements in its corporate governance score over the past two years, and yet it is there that the SK Corp. …