This year marks the 10th anniversary of the onset of the Asian economic crisis when many of Asia's currencies went into a tailspin, unhedged foreign currency loans went through the roof in local currency terms, and company after company was pushed to the brink of collapse.
The crisis was as much about a loss of confidence as anything else; the boom had not been underpinned by sound legal structures, prudent lending or sound corporate governance. Ten years on, Asia is booming once more. But has anything really changed?
The answer is yes. And no. Critical reforms have been made, but there's still work to do. The rest of the world hasn't been standing still: corporate governance reforms have been on-going in the world's mature economies as well, so there is a sense that Asia has had to play catch-up with a moving target.
Stock exchanges around Asia have instituted reforms to enhance transparency and reduce stock price manipulation. China's exchanges have progressed particularly: two years ago, they were at an eight-year low; today, the Shanghai composite index is at an all-time high. Last year, it soared by more than 90%, making it the world's best performing major market. The reforms instituted by the authorities are partly responsible: rules and regulations are more transparent; disclosure requirements on listed companies are much tighter; and uncertainty about whether non-traded, government-owned shares would be dumped on to the market has been resolved.
In Singapore and Malaysia, banking rules have been tightened. Both countries have seen much-needed consolidation in their banking sectors, particularly Malaysia, where the government demanded that the country's 54 financial institutions, including 21 banks, merge to form just 10 banks. This had the effect of reducing banks' exposure to non banking-related parties, which occurs when shareholders persuade their bank to lend money to other businesses they have an interest in without going through the usual diligence procedures. This reform thus reduces the likelihood of lending on a non-commercial basis to related property companies and the like. In Singapore, the government urged local bank owners to divest themselves of their property arms for similar reasons.
Even in Vietnam, the rules were made clearer ahead of its January 11 accession to the WTO, to become the organisation's 150th member. The government is slowly retreating from business too: in 2000, it passed an enterprise act that allows the formation of small and medium-sized businesses. This has paid dividends for the country. Last year, Vietnam was Asia's fastest growing economy apart from China. Intel is building a $600 million microchip plant near Ho Chi Minh City, due to open in 2008. Even Chinese factories are relocating to Vietnam because labour costs are up to a third cheaper.
But the need for caution remains. A recent survey by Asiamoney magazine noted that the typical global fund manager allocates just 4%-5% of their portfolio to Asia excluding Japan, even though the region makes up 23% of the world economy on a Purchasing Power Parity basis. And if Asia-based funds such as those operated by the Government of Singapore Investment Corporation and Malaysia's Khazanah are removed, then that figure is lower still. Some fund managers even make up their Asia quota by buying Australian stocks.
Why is there this reluctance to invest in Asian shares? Says Fred Woollard, managing director of Samuel Terry, a Sydney-based fund: "We're always on the lookout for good buys in Asia. Good companies might well be there, but there is still a dearth of quality information and so more often than not we go away empty-handed." This view is typical and explains why outside investors wanting to share in Asia's growth but anxious to avoid its corporate governance or disclosure problems invest in Western firms with Asia exposure - such as Australia's BHP-Billiton or Germany's Volkswagen.
What, specifically, are Asia's corporate governance problems? There is still not the same climate of openness and disclosure in Asia that prevails in more mature markets. Many employees don't feel sufficiently empowered to disclose even the most minimal information to outsiders. Commercial confidentiality is cited to avoid requests for information that is supplied as a matter of course elsewhere.
But transparency problems start within companies. Bad news tends not to travel up, so when employees know that something is wrong they are less likely to voice their concerns to management than in, say, the US or Western Europe. In many Asian companies, it's still the case that pointing out problems is tantamount to accusing management of not doing their job, causing a loss of face on the part of management and demonstrating disloyalty on the part of the employee.
Another factor is that for some Asian business families, listing is still seen as an exit strategy. Naturally, they want to keep what is profitable and rarely are holding companies listed; instead, the lesser parts of their empires tend to be listed. The family might retain management control, but if they have private, more profitable companies to take care of, then these are more likely to take up their management time.
Shangri-La Hotels and Resorts, the Asian hotel chain, provides an example of the consequences of a mix of listed and private businesses. Controlled by the Hong Kong-based billionaire sugar trader Robert Kuok, each hotel had its functions split up and allotted between the publicly listed Shangri-La Asia and private companies owned by Kuok, with each hotel paying management fees to a private Kuok company.
The higher margin parts of a hotel, such as the popular Chinese restaurants, were also managed by a private Kuok company. The less popular French restaurants were not - they were left with the public company. Even the secretarial and personnel services required by each hotel were not part of Shangri-La Asia but of Kerry Trading Co, another private Kuok company. However, with pressure from minority shareholders, Kuok eventually sold his private management companies to Shangri-La Asia for $155 million in stock.
Complex business structures in Asia are best explained by the complexity of the families behind them. Family businesses exist to give family members something to do. The family might fully appreciate that a certain division is not profitable and that the capital could be better used elsewhere, but nepotism takes precedence over good business sense.
Asia's governments too can work against good corporate governance, if only because they don't always set a good example. The exposure in 2005 of the system of administrating lucrative vehicle import licences in Malaysia showed that they were allocated without tender or any clear guidelines. Trade minister Rafidah Aziz claimed that she wasn't responsible. However, it emerged that the single biggest holder of licences for the year was a former senior official in Rafidah's ministry, and that her niece had been given more than 1,000 licences over the previous two years. The customs director-general stepped in to explain how the licences were allocated, but then it was revealed that a company owned by his son had been awarded permits too. By now even politicians in Rafidah's party were appalled. She responded by releasing the names of all the politicians in the country who had received permits - 337 in all.
It is difficult to see how Asia's private sector companies can be expected to show excellent governance when the region's governments behave like this. However, in contrast, Thailand's new government confirmed the auditor-general, Jaruvan Maintaka, in her job in late 2006 after the administration of the previous prime minister Thaksin Shinawatra had tried to remove her over a technicality. Jaruvan had exposed alleged fraud and corruption in some government projects.
The media is important in the fight for better governance, but in Asia the local media often comes under pressure from governments. Another problem is that many newspapers are owned by the same entrepreneurs that they should be investigating. Joong-Ang Ilbo, for example, one of South Korea's biggest selling dailies, is affiliated with the Samsung Group. And so around Asia, the internet has become important for those looking for more independent comment and reporting - far more so than in the West. This is a new trend, one that was not apparent at the time of Asia's economic crisis 10 years ago.
Foreign investment in Asia has been critical in pushing forward many reforms; for example, foreign fund managers have led the way in fighting for better minority shareholder rights. But, ironically, foreign investors can share in some of the blame as well - too often they rush in despite inadequate governance. China's banks are a case in point. There could hardly be a less deserving sector when it comes to prudence and sound governance, and yet foreign investors are pouring in billions.
An IPO from the Industrial and Commercial Bank of China, held last October, raised $22 billion - the biggest IPO ever. HSBC paid $1.75 billion for 20% of Bank of Communications in 2004. Bank of America paid $3 billion for a stake in China Construction Bank in 2005. That same year, the Royal Bank of Scotland paid $1.6 billion for 5% of the Bank of China. All for a sector that is beset with problem loans and which has been bailed out by the government on at least three occasions.
China's bank managers must think that they're doing something right. Why change? Particularly when most of the investment is in a minority capacity, meaning that the new investors will not have board control. Even China's banking regulator admitted in 2006 that 1,228 of its employees had been involved in bribery and other irregular activities.
So problems remain, but one thing is certain: governance in Asia is much better than it was 10 years ago. Regulations and safeguards are more developed and business has a better understanding of what's expected of it, even if it doesn't always meet those expectations. So proceed to Asia, but with caution.
WHAT DRIVES POSITIVE CHANGE?
The media can be an important factor in bringing about change. The potential for public embarrassment through investigative journalism is very effective at inducing better governance, but the local media is largely tame and under-funded. The rise of more independent online journalism has started to set more challenging standards.
Greater shareholder activism is important. Foreign funds have taken the lead on this, showing local investors how to stand up at an AGM and hold the directors to account. But the business culture in much of Asia works against holding those in authority to account and certainly not publicly, so it will take time to change.
Competition and globalisation are the biggest drivers. Many of the negative aspects of business life in Asia have been possible because local family firms have been shielded from competition. Typically, they have forged alliances with the government, which then protected them with licensing agreements and privileges. The WTO has been very effective in challenging these arrangements, and foreign companies too can be a force for positive change as they set up locally and compete head-on with Asian family-owned firms.