Michael Backman is an author specializing in analysis of Asian corporate practice.

Thriving in the new millennium

Most Asian economies are recovering from the economic crisis of 1997-1998, but it should not be assumed that all of Asia has learned the lessons taught by this crisis. Perhaps the most important lesson is that poor corporate governance, corruption, and cronyism are not appropriate in a modern economy. However, these problems have not yet been dispelled from Asia.

Many Asian currencies were linked to the U.S. dollar, bringing them some measure of stability prior to the economic crisis. However, this link also meant that a group of economies with very poor records on rule of law and corporate governance had the values of their currencies determined by the U.S.—an economy that performs strongly in the areas of law and corporate governance. This mismatch meant that Asia’s currencies became overvalued relative to the underlying value of their assets—assets that had become increasingly marred by corruption, cronyism, and little corporate regulation.

THE PROBLEM OF LOW STANDARDS. In much of Asia, constraints on companies to ensure that they do the right thing work poorly. Regulation, the threat of bankruptcy, minority shareholders rights, the threat of exposure in the media, and auditing are all of a low standard. There have been some reforms, but not enough. Many of these problems will be apparent for at least the next five or ten years. There has been a lot of pain in Asia, but, as yet, insufficient gain.

The two main problems with regulation in Asia are, first, poorly drafted laws and, second, bribery and corruption. The first feeds into the other. Vague laws that allow bureaucrats to exercise a fair degree of discretion inevitably lead to corruption, particularly if the bureaucrats are poorly paid. It is not the Soeharto-level corruption that is so damaging to an economy, but more petty bribery on the part of lower level bureaucrats that render practically any law inoperable.

Because of bankruptcy procedures in Asia, the economic crisis has not been accompanied by the expected flood of assets onto the marketplace for purchase by cashed-up Western investors. The problem is not so much due to inadequately drafted laws, but more with their enforcement.

For example, the entire country of Indonesia saw just 13 bankruptcies in the 10 years to 1994, yet Singapore saw almost 300 in 1998 alone. This disparity has much more to do with law enforcement than the law itself, and, as usual, the problem lies with bribery of the court and other officials. Bankruptcies need to be seen as a positive sign of an economy’s prospects, since they are key in removing capital and assets from the hands of poor managers, which, in Asia, are often business families that can’t or won’t pay perhaps 70% of their debt, yet still maintain full control.

SHAREHOLDER ISSUES. The fact that practically all companies listed on stock exchanges in Hong Kong, China, and Southeast Asia are controlled by a majority shareholder, which is typically the founding family, is also a threat to the minority shareholder. In Asia, listing on a stock market is all too often designed to achieve one of three things:

1. To get rid of the company because it is no longer profitable

2. To float a small part of the company so that the majority owner can achieve a market valuation for its entire stock and then use it as collateral for a bank loan

3. To bring in other shareholders in a minority capacity who can then be regularly fleeced with rights issues to raise cash, which is then often spirited from the company to the majority shareholders’ other interests via unfavorable related-party transactions.

Another major constraint on business in Asia is that the local media is largely ineffective. Many local media outlets are part of a wider, diversified conglomerate and thus are compromised by their owners’ other interests. Also, in several Asian countries, local journalists are very poorly paid, making them susceptible to bribery and ‘sponsorship.’

Auditing is yet another problem with business in Asia. A recent paper prepared by the U.N. Conference on Trade and Development found that most East Asian countries do not subscribe to or enforce international accounting standards in financial transactions. This poor level of enforcement has led to allegations of sloppy work on the part of some Asian accounting firms. Who actually audits the auditors is a very legitimate question in Asia.