The need for watchdogs with bite in cronyland
Tunku Abdul AzizPublished: Jan 5, 2001 7:23 AM | Updated: Jan 29, 2008 6:21 PM
With the exception of Singapore, negative perceptions continue to dog much of Southeast Asia. Both local as well as international investor communities, rightly or wrongly, view attempts at reforming corporate governance as half-hearted at best.
They are apparently intended purely as a public relations exercise to deflect criticisms of the way in which corporate Southeast Asia still conducts its business - in the time-honoured tradition, or so it seems, of treating with contempt transparency and accountability in the management of company affairs.
Who can blame potential investors when examples of corporate behaviour in the restructuring process that is less than transparent and accountable pop up everywhere, all the time?
It does not help the regional cause much when, for instance, a Malaysian government spokesman said in parliament recently that the Transparency International Corruption Perceptions Index (TI-CPI) "was only the perception of the organisation that developed it, and, therefore, should not be taken seriously."
It is an extraordinary statement to make on an issue that has been attracting such a great deal of global attention. The TI-CPI has become, since it was first published in 1995, the most important and authoritative international tool for assessing the perceived levels of corruption in selected countries that have been subjected to at least three independent political and management risks surveys.
Countries in the region, particularly Malaysia, that ignore the red flags being hoisted by the international business community are at risk of being seen to be still stuck in the denial mode, a situation they can least afford to live with in the prevailing climate.
While it is true that the TI-CPI is based largely on the perceptions of the expatriate business community and may, therefore, have no basis in fact, the point is that they are real. They exist, and they have an important bearing on the economic well-being of the countries concerned.
We need hardly be reminded that the countries perceived to be seriously corrupt, such as Indonesia, the Philippines, Thailand and South Korea, were among the worst hit by the Asian economic crisis. The Philippines escaped the eye of the economic storm not so much by design but, I suspect, by divine intervention.
Arrogantly dismissive
In any case, that country has been on the IMF/World Bank life support systems, off and on, mostly on, for some four decades. The correlation between the findings of the TI-CPI and the severity of the sufferings experienced by the countries perceived to have developed a high level of tolerance for unethical public and corporate behaviour is, to say the least, uncanny.
It is interesting to compare South Korea's unabashed embrace of good corporate governance and anti-corruption regime on the one hand, and Malaysia's arrogantly dismissive attitude to international opinion, on the other.
On the South Korean local government level, for example, the dynamic, innovative and incorruptible mayor, Goh Kun, is absolutely determined to turn his city of 10 million citizens into an "island of integrity." He has introduced transparency and accountability in administrative systems and procedures that go well beyond mere statutory compliance.
Public dealings with city hall are "on line" with complete access to relevant information that in many countries in Southeast Asia, particularly Malaysia and Singapore, would be hidden behind the Official Secrets Act.
The government of South Korea has established a high-powered special department to review the civil service machinery with a view to adopting, as appropriate, "best international practice", particularly in the areas of public procurement and service delivery, identified worldwide as being highly vulnerable to corruption. This again is all part of the wide ranging measures aimed at improving governance and increasing investor confidence.
The fact that the president and prime minister of the republic and the chief executive of the Seoul Metropolitan Government are deeply committed to redeem the country's blighted image is not lost on the world at large, as evidenced by the large inflows of direct foreign investments into the country. It appears that Korea is enjoying both the peace as well as the integrity dividends.
Incestuous relationships
We cannot even begin to discuss the role of the private sector in the battle for good governance without examining the part governments play in shaping the environment and setting the tone in which business is conducted.
With the exception of Singapore, negative perceptions continue to dog much of Southeast Asia. Both local as well as international investor communities, rightly or wrongly, view attempts at reforming corporate governance as half-hearted at best.
They are apparently intended purely as a public relations exercise to deflect criticisms of the way in which corporate Southeast Asia still conducts its business - in the time-honoured tradition, or so it seems, of treating with contempt transparency and accountability in the management of company affairs.
Who can blame potential investors when examples of corporate behaviour in the restructuring process that is less than transparent and accountable pop up everywhere, all the time?
It does not help the regional cause much when, for instance, a Malaysian government spokesman said in parliament recently that the Transparency International Corruption Perceptions Index (TI-CPI) "was only the perception of the organisation that developed it, and, therefore, should not be taken seriously."
It is an extraordinary statement to make on an issue that has been attracting such a great deal of global attention. The TI-CPI has become, since it was first published in 1995, the most important and authoritative international tool for assessing the perceived levels of corruption in selected countries that have been subjected to at least three independent political and management risks surveys.
Countries in the region, particularly Malaysia, that ignore the red flags being hoisted by the international business community are at risk of being seen to be still stuck in the denial mode, a situation they can least afford to live with in the prevailing climate.
While it is true that the TI-CPI is based largely on the perceptions of the expatriate business community and may, therefore, have no basis in fact, the point is that they are real. They exist, and they have an important bearing on the economic well-being of the countries concerned.
We need hardly be reminded that the countries perceived to be seriously corrupt, such as Indonesia, the Philippines, Thailand and South Korea, were among the worst hit by the Asian economic crisis. The Philippines escaped the eye of the economic storm not so much by design but, I suspect, by divine intervention.
Arrogantly dismissive
In any case, that country has been on the IMF/World Bank life support systems, off and on, mostly on, for some four decades. The correlation between the findings of the TI-CPI and the severity of the sufferings experienced by the countries perceived to have developed a high level of tolerance for unethical public and corporate behaviour is, to say the least, uncanny.
It is interesting to compare South Korea's unabashed embrace of good corporate governance and anti-corruption regime on the one hand, and Malaysia's arrogantly dismissive attitude to international opinion, on the other.
On the South Korean local government level, for example, the dynamic, innovative and incorruptible mayor, Goh Kun, is absolutely determined to turn his city of 10 million citizens into an "island of integrity." He has introduced transparency and accountability in administrative systems and procedures that go well beyond mere statutory compliance.
Public dealings with city hall are "on line" with complete access to relevant information that in many countries in Southeast Asia, particularly Malaysia and Singapore, would be hidden behind the Official Secrets Act.
The government of South Korea has established a high-powered special department to review the civil service machinery with a view to adopting, as appropriate, "best international practice", particularly in the areas of public procurement and service delivery, identified worldwide as being highly vulnerable to corruption. This again is all part of the wide ranging measures aimed at improving governance and increasing investor confidence.
The fact that the president and prime minister of the republic and the chief executive of the Seoul Metropolitan Government are deeply committed to redeem the country's blighted image is not lost on the world at large, as evidenced by the large inflows of direct foreign investments into the country. It appears that Korea is enjoying both the peace as well as the integrity dividends.
Incestuous relationships
We cannot even begin to discuss the role of the private sector in the battle for good governance without examining the part governments play in shaping the environment and setting the tone in which business is conducted.
It is now widely recognised that the Asian economic crisis had, in a sense, less to do with economics and more with politics. No less a person than Singapore's senior minister, Lee Kuan Yew came to that conclusion when addressing leading American businessmen at a Fortune 500 Forum in October 1997.
There is, of course, a great deal of truth in his observation because at the end of the day, it is governments that set the moral and ethical tone; just as it is they that promote the incestuous relationships with certain favoured corporate entities. It is an ethical aberration, and that is putting it kindly.
These cosy, highly unethical arrangements have been dignified in the course of time as Japan Incorporated, Korea Incorporated, and Malaysia Incorporated. Predictably, by their very nature, these arrangements spawn corruption and other forms of corporate and official abuse in the region. Good governance is not a factor in this equation.
In common garden language, the practice blossoms into, for want of a better description, the Incorporated Society of Crony Capitalism, or ISCC for short.
To Dr Mahathir mohamad and his ilk, who among themselves have developed connections into an art form, any suggestion that this practice represents unadulterated cronyism is totally and utterly unfair and mischievous.
In his familiar refrain, such comment smacks of envy and it is nothing more than a Western ploy to discredit Malaysia's achievements under his leadership.
By contrast, Asia's foremost liberal democrat and former Thai prime minister, Anand Panyarachun, the man who gave Thailand the world's first anti-corruption constitution, clearly understands the danger of exploiting connections.
In his inaugural Asia-Euro Foundation speech in Bangkok in 1998, he deplored the fact that the Thais continued to retain their system of patronage networks, "a system based on connections" which could "become deadly because patronage is not based on merit, and, therefore, tends to breed inefficiency and corruption."
The mindless blame directed at foreigners when things, for which you are responsible, go wrong has achieved, with official encouragement, cult status in many countries in the region. A foreigner performs a useful function; he is there, in a manner of speaking, to be clobbered over the head, especially if his name happens to be George Soros whom Mahathir was reported to have called "a moron".
Soros returned the compliments by describing his detractor as "a liability to his own country". It is interesting to speculate just who would have been the favourite whipping boy if Soros had not happened to be a successful money market operator.
Unbridled excesses
Given that political will is crucial to the whole process of developing globally accepted standards of business integrity, its absence can only mean one thing. Unacceptable business behaviour, often bordering on the criminal, is openly tolerated as a business or cultural norm.
Governments of many Southeast Asian countries, used to complete freedom of action, are not likely to submit voluntarily to the discipline and constraints of good governance. For them, the first glimmer of recovery is a signal to return to the good old days of unbridled excesses. Clearly, governments have a responsibility to develop and strengthen national integrity systems, and they ignore this obligation at their peril.
The corporate sector, too, has an important contribution to make to this process. It is, after all, the engine that provides the primary thrust for economic growth. No effective governance reform programme can be introduced and, let alone sustained, against the rearguard action of the corporate community.
The corporate sector has always been part of the obstacle to governance, and recognised as being very much part of the problem of corruption. It is totally opportunistic and considers it its duty to manipulate the often inadequately enforced laws and regulations in order to create an environment in its own image that encourages and promotes practices that even Tiny Rowland in the heyday of his African adventurism would have thoroughly disapproved of.
The absence of effective, non-politicised and independent regulatory bodies in many of our countries appears to those bent on abusing the system almost as a gift from heaven itself. Equally, the absence of enforceable international compliance standards does not help matters.
The corporate community must develop a sustainable business climate by making it possible, and desirable, to conduct business ethically without recourse to corruption. It must put its house in order by developing and adopting an enforceable code of business ethics specifically prohibiting bribery and corruption. It must accept the need for reform in order to bring about greater transparency and accountability in both domestic and international business transactions.
An important challenge facing the corporate community is for it to understand that business is not just about managing risks, making sound investment decisions and coping with economic imponderables. It is about what it can do to bring about the sort of change that will create a new ethical, and level, playing field on which business can take place fairly and transparently; in other words, it must close those windows of opportunity for corruption and crony capitalism, by institutionalising the system of checks and balances.
Panic capital flight
Viewed from the perspective of good governance, corporate Southeast Asia shares many undesirable features and practices. It, therefore, has its work cut out for itself in rearranging its new governance priorities. Also, in preparing to meet the challenges of the global economy, the corporate sector clearly has to address, working in tandem with the relevant authorities, the question of transparency and accountability in the formulation of the economic and financial policies.
This is to ensure that these policies are capable of exploiting the opportunities and meeting the challenges of the globalised economy with its emphasis on much higher standards of corporate behaviour than the region is accustomed to.
This is neither the time nor place to go over the reasons for the crisis that savaged the region with such devastation. I wish, however, to quote Andrew Sheng, Chairman of the Hong Kong Securities and Futures Commission, and a former advisor at the Malaysian Central Bank, who in a paper entitled Global Financial Crisis: Implications for Financial Regulation published in Ekonomica (Malaysia) in July 1999 said:
"Banking problems do not happen overnight, they have very complex roots. Many of the factors are country-specific and originate in defective structural or policy factors. Moreover, bank problems involve political, sectoral, legal, social, institutional and incentive dimensions. What was dynamite was the mixture of over-leverage, inadequate bank supervision, opacity and misunderstanding of risks in many markets, lack of sound bankruptcy laws and panic capital flight.
"Globalisation, technology and financial innovation have created the conditions for large capital flows in the midst of weak corporate governance, outdated laws, policies and institutional structures. The outflow triggered the collapse."
A brilliant summing up of a highly complex, multi-faceted, phenomenon all in one short paragraph. Anyone seriously interested in and concerned about private sector governance should go over very carefully the issues raised in the paragraph I have just quoted.
Corporate rope tricks
Corporate governance practice in Southeast Asia remains, at best, patchy and uneven and, at worst, downright unwholesome in ethical terms. As the Malaysian situation seems to apply equally to the other crisis-hit nations of the region, with minor variations, I shall illustrate my points by using Malaysian cases. It is not because I particularly love or admire Malaysian corporate rope tricks, but then I am much more familiar with them.
Let us take the protection of minority shareholder interests as an example. Several high profile Malaysian cases have underlined the very real possibility "that the legitimate interests of minority shareholders may have been compromised through transactions which have conflicts between the interests of the company itself and its major shareholders.
Recently, toll-road operator United Engineers (M) or UEM announced it was purchasing all the assets (except a 38 percent interest in itself) from its controlling shareholder Renong. The share price took a tumble (a fall of 30 percent) when the shares resumed trading before recovering.
UEM last year pledged its assets and cash flow to effectively enable its controlling shareholder, Renong to restructure its loans.
In 1997, UEM bought a 32 per cent stake in Renong from unknown sources with over RM2 billion in financing which helped support Renong's share price for a while.
Casino and resorts group Genting Bhd/Resorts World bought stakes in a Norwegian cruise operator. The value subsequently fell sharply. The stakes are being sold at a written down value to Star Cruises, a company controlled by the controlling shareholders of Genting/Resorts.
The Genting/Resorts Group is also subscribing to a large number of shares in Star Cruises for some RM 1.7 billion which will make the group move into a large net debt position from the large net cash situation it used to enjoy for many years previously. The share prices of both have been weak.
Magnum, another numbers forecast (gaming) operator, had to write off RM140 million in loans made to an undisclosed borrower. The share price weakened on the announcement.
Ekran Bhd is trying to recover over RM700 million owed by a controlling shareholder.
This is by no means an exhaustive list. If the laws and regulations are such that the interests of the minority shareholders are not afforded sufficient protection, then it is time to do so now. But one suspects that at least some of the problems arise from lack of enforcement.
Turning now to an article by S Jeyasankaran in the Far Eastern Economic Review. He reports that: "Zulkifli Hussain goes to court to assert his rights as a minority shareholder in Malaysia. Zulkifli, who owns 5% of Palmco, a listed oleochemicals maker, is angry because another shareholder, IOI Corp. and its managing director, raised their combined stake in Palmco to over 33% but did not make a general offer to buy the remaining shares at the same price, as Zulkifli alleges is required by law."
In the same article, Terence Mahoney, a private investor and former fund manager is quoted as saying, "Malaysian investors are growing up... Because Malaysia's competitiveness as an equity market has declined relative to other Asian markets such as China, India and Taiwan, there is a realisation that to attract foreign investors, companies have to clean up their act."
Great arbiter
It is quite apparent from all this that effective supervision by the various regulatory bodies remains problematic. An important institution that underpins good corporate governance is the judiciary. Again, with the exception of Singapore, the integrity of the judicial system in each of the countries coming under the purview of our discussion cannot be taken for granted. Can the courts be relied upon to dispense justice without fear or favour?
Corporate Asia is in a flurry of activity to reform governance, not, I might add, because of its natural preference for high ethical standards, but simply that it has little choice in the matter. Globalisation is the great arbiter; it is here to stay.
Reforms now being undertaken in the region cover in varying degrees and intensity, areas of concern to the investing public as enumerated by Andrew Sheng, among other commentators. Our region as a whole is badly in need of these various reforms to promote better corporate governance and generate, in the process, investor confidence.
Like some other countries, after many years in the denial mode, Malaysia finally came clean when the Deputy Prime Minister Ahmad Badawi said:
"It is a fact, both you and I know, that the government engaged in many rescue operations during the crisis. A more laissez-faire government would have allowed many of our key companies to sink... .I am well aware of the rumblings and discontent among the professional business community that the government should not continue to protect those who have blatantly mismanaged their corporate empires and have repeatedly come back crying for help."
The good old days of unfettered excesses look set to change, so we thought. However, the euphoria was short lived. No sooner had the mighty roar of collective approval died down than reality struck with a vengeance.
The government decided to use public funds, yet again, ostensibly this time around to bail out the debt-ridden and incompetently managed national flag carrier, Malaysia Airlines, by purchasing the 29 percent stake of its chairman at RM8 per share when these shares are trading at around RM3.60 each.
The perception, rightly or wrongly, is that it is not MAS that is being saved; the chairman of MAS is being let off the hook with his original investments intact. It is only in cronyland that you are rewarded for running a national airline into the ground. The fact that he is politically well-connected lends credence to the suspicion that this is just another victory for cronyism.
And yet, when it was suggested that it was a bailout, Daim zainuddin, the Malaysian finance minister is on record as saying, " No, it is not true, it is a wrong perception." He rationalised cynically by suggesting that it was a deal done on a "willing buyer and willing seller" basis.
It is this sort of unaccountable official behaviour that stops investors dead in their tracks. It is a regional story with which we have all become only too familiar.
Watchdogs that bite
The question uppermost on everyone's mind concerns not only the pace of change but, more to the point, whether there is sufficient political will to ensure that the change in the pipeline is of such quality as to sustain long-term growth. In spite of protestations to the contrary by governments, the economic crisis is far from over, and it would be the height of folly and irresponsibility to delude the unsuspecting public. We are of course talking about sustainability.
There does not seem to be a great sense of urgency, and there is a danger that many companies may find themselves "reverting to type" and revisiting the scene of earlier spoils and easy pickings on the back of corrupt governments. The challenge for corporate governance is real and the reality, on present showing, leaves little room for complacency.
The corporate sector that persistently takes its cue from the government model of probity and rectitude, without setting its own code of conduct and regulating its own behaviour according to the best international standards, will assuredly be short-changed and marginalised in the new globalised economy. Few governments have the staying power to breast the tape in the good governance race.
However, all is not doom and gloom. The revamping of the securities commission and other regulatory watchdogs now underway in the region has already resulted in many successful prosecutions of "big names" in several countries.
This has clearly helped to drive home the point that it is not only a long prison term on which to concentrate the mind, but also the certainty of companies being exposed, and the consequent disgrace they face, for rogue corporate behaviour. The implications for such companies are far-reaching, and the risks are quite simply not worth the effort.
Watchdogs need to impose, to the fullest possible extent, the sanctions provided by law against directors and the companies they control for breaches under the Companies Act. Watchdogs that only bark are not going to help the process of putting good corporate governance in place. More than anything else, the region needs courageous and tenacious watchdogs that also know how to bite. And perhaps even more important are those that will turn up their noses when temptingly big juicy bones are thrown in their direction.
The challenges facing corporate governance in Southeast Asia stem from the somewhat relaxed cultural, social, and political attitudes to stewardship, a concept that does not seem to have taken root in either the individual or national consciousness. How else do you explain a government secretly dipping its sticky fingers in the national pension fund to support an undercover operation to corner the international tin market, which in the event proved to be an unmitigated disaster?
How else do you explain a government, using public funds and the dubious expertise of its central bank, to speculate on the international money markets? It is mind boggling to say the least. In a more open and democratic society, such unethical behaviour would not only have attracted the most severe public censure but also brought the government down.
At the end of the day, no change or improvement in the way we manage our business operations can be sustained if our attitude to good governance is out of step with contemporary global trends. This applies both to government as well as corporate leadership.
The principles of good governance, grounded as they are in trusteeship, stewardship, transparency, accountability and integrity, are as relevant to the governance of a state as it is to the management of a public listed company. Good governance, like integrity itself, is no longer the luxury of the virtuous; it is a global business necessity.
TUNKU ABDUL AZIZ is vice-chairman of Transparency International and president of Transparency International Malaysia, an anti-corruption NGO. He delivered the above paper at the Institute of Southeast Asian Studies' Regional Outlook Forum 2001 which began in Singapore yesterday.
They are apparently intended purely as a public relations exercise to deflect criticisms of the way in which corporate Southeast Asia still conducts its business - in the time-honoured tradition, or so it seems, of treating with contempt transparency and accountability in the management of company affairs.
Who can blame potential investors when examples of corporate behaviour in the restructuring process that is less than transparent and accountable pop up everywhere, all the time?
It does not help the regional cause much when, for instance, a Malaysian government spokesman said in parliament recently that the Transparency International Corruption Perceptions Index (TI-CPI) "was only the perception of the organisation that developed it, and, therefore, should not be taken seriously."
It is an extraordinary statement to make on an issue that has been attracting such a great deal of global attention. The TI-CPI has become, since it was first published in 1995, the most important and authoritative international tool for assessing the perceived levels of corruption in selected countries that have been subjected to at least three independent political and management risks surveys.
Countries in the region, particularly Malaysia, that ignore the red flags being hoisted by the international business community are at risk of being seen to be still stuck in the denial mode, a situation they can least afford to live with in the prevailing climate.
While it is true that the TI-CPI is based largely on the perceptions of the expatriate business community and may, therefore, have no basis in fact, the point is that they are real. They exist, and they have an important bearing on the economic well-being of the countries concerned.
We need hardly be reminded that the countries perceived to be seriously corrupt, such as Indonesia, the Philippines, Thailand and South Korea, were among the worst hit by the Asian economic crisis. The Philippines escaped the eye of the economic storm not so much by design but, I suspect, by divine intervention.
Arrogantly dismissive
In any case, that country has been on the IMF/World Bank life support systems, off and on, mostly on, for some four decades. The correlation between the findings of the TI-CPI and the severity of the sufferings experienced by the countries perceived to have developed a high level of tolerance for unethical public and corporate behaviour is, to say the least, uncanny.
It is interesting to compare South Korea's unabashed embrace of good corporate governance and anti-corruption regime on the one hand, and Malaysia's arrogantly dismissive attitude to international opinion, on the other.
On the South Korean local government level, for example, the dynamic, innovative and incorruptible mayor, Goh Kun, is absolutely determined to turn his city of 10 million citizens into an "island of integrity." He has introduced transparency and accountability in administrative systems and procedures that go well beyond mere statutory compliance.
Public dealings with city hall are "on line" with complete access to relevant information that in many countries in Southeast Asia, particularly Malaysia and Singapore, would be hidden behind the Official Secrets Act.
The government of South Korea has established a high-powered special department to review the civil service machinery with a view to adopting, as appropriate, "best international practice", particularly in the areas of public procurement and service delivery, identified worldwide as being highly vulnerable to corruption. This again is all part of the wide ranging measures aimed at improving governance and increasing investor confidence.
The fact that the president and prime minister of the republic and the chief executive of the Seoul Metropolitan Government are deeply committed to redeem the country's blighted image is not lost on the world at large, as evidenced by the large inflows of direct foreign investments into the country. It appears that Korea is enjoying both the peace as well as the integrity dividends.
Incestuous relationships
We cannot even begin to discuss the role of the private sector in the battle for good governance without examining the part governments play in shaping the environment and setting the tone in which business is conducted.
It is now widely recognised that the Asian economic crisis had, in a sense, less to do with economics and more with politics. No less a person than Singapore's senior minister, Lee Kuan Yew came to that conclusion when addressing leading American businessmen at a Fortune 500 Forum in October 1997.
There is, of course, a great deal of truth in his observation because at the end of the day, it is governments that set the moral and ethical tone; just as it is they that promote the incestuous relationships with certain favoured corporate entities. It is an ethical aberration, and that is putting it kindly.
These cosy, highly unethical arrangements have been dignified in the course of time as Japan Incorporated, Korea Incorporated, and Malaysia Incorporated. Predictably, by their very nature, these arrangements spawn corruption and other forms of corporate and official abuse in the region. Good governance is not a factor in this equation.
In common garden language, the practice blossoms into, for want of a better description, the Incorporated Society of Crony Capitalism, or ISCC for short.
In his familiar refrain, such comment smacks of envy and it is nothing more than a Western ploy to discredit Malaysia's achievements under his leadership.
By contrast, Asia's foremost liberal democrat and former Thai prime minister, Anand Panyarachun, the man who gave Thailand the world's first anti-corruption constitution, clearly understands the danger of exploiting connections.
In his inaugural Asia-Euro Foundation speech in Bangkok in 1998, he deplored the fact that the Thais continued to retain their system of patronage networks, "a system based on connections" which could "become deadly because patronage is not based on merit, and, therefore, tends to breed inefficiency and corruption."
The mindless blame directed at foreigners when things, for which you are responsible, go wrong has achieved, with official encouragement, cult status in many countries in the region. A foreigner performs a useful function; he is there, in a manner of speaking, to be clobbered over the head, especially if his name happens to be George Soros whom Mahathir was reported to have called "a moron".
Soros returned the compliments by describing his detractor as "a liability to his own country". It is interesting to speculate just who would have been the favourite whipping boy if Soros had not happened to be a successful money market operator.
Unbridled excesses
Given that political will is crucial to the whole process of developing globally accepted standards of business integrity, its absence can only mean one thing. Unacceptable business behaviour, often bordering on the criminal, is openly tolerated as a business or cultural norm.
Governments of many Southeast Asian countries, used to complete freedom of action, are not likely to submit voluntarily to the discipline and constraints of good governance. For them, the first glimmer of recovery is a signal to return to the good old days of unbridled excesses. Clearly, governments have a responsibility to develop and strengthen national integrity systems, and they ignore this obligation at their peril.
The corporate sector, too, has an important contribution to make to this process. It is, after all, the engine that provides the primary thrust for economic growth. No effective governance reform programme can be introduced and, let alone sustained, against the rearguard action of the corporate community.
The corporate sector has always been part of the obstacle to governance, and recognised as being very much part of the problem of corruption. It is totally opportunistic and considers it its duty to manipulate the often inadequately enforced laws and regulations in order to create an environment in its own image that encourages and promotes practices that even Tiny Rowland in the heyday of his African adventurism would have thoroughly disapproved of.
The absence of effective, non-politicised and independent regulatory bodies in many of our countries appears to those bent on abusing the system almost as a gift from heaven itself. Equally, the absence of enforceable international compliance standards does not help matters.
The corporate community must develop a sustainable business climate by making it possible, and desirable, to conduct business ethically without recourse to corruption. It must put its house in order by developing and adopting an enforceable code of business ethics specifically prohibiting bribery and corruption. It must accept the need for reform in order to bring about greater transparency and accountability in both domestic and international business transactions.
An important challenge facing the corporate community is for it to understand that business is not just about managing risks, making sound investment decisions and coping with economic imponderables. It is about what it can do to bring about the sort of change that will create a new ethical, and level, playing field on which business can take place fairly and transparently; in other words, it must close those windows of opportunity for corruption and crony capitalism, by institutionalising the system of checks and balances.
Panic capital flight
Viewed from the perspective of good governance, corporate Southeast Asia shares many undesirable features and practices. It, therefore, has its work cut out for itself in rearranging its new governance priorities. Also, in preparing to meet the challenges of the global economy, the corporate sector clearly has to address, working in tandem with the relevant authorities, the question of transparency and accountability in the formulation of the economic and financial policies.
This is to ensure that these policies are capable of exploiting the opportunities and meeting the challenges of the globalised economy with its emphasis on much higher standards of corporate behaviour than the region is accustomed to.
This is neither the time nor place to go over the reasons for the crisis that savaged the region with such devastation. I wish, however, to quote Andrew Sheng, Chairman of the Hong Kong Securities and Futures Commission, and a former advisor at the Malaysian Central Bank, who in a paper entitled Global Financial Crisis: Implications for Financial Regulation published in Ekonomica (Malaysia) in July 1999 said:
"Banking problems do not happen overnight, they have very complex roots. Many of the factors are country-specific and originate in defective structural or policy factors. Moreover, bank problems involve political, sectoral, legal, social, institutional and incentive dimensions. What was dynamite was the mixture of over-leverage, inadequate bank supervision, opacity and misunderstanding of risks in many markets, lack of sound bankruptcy laws and panic capital flight.
"Globalisation, technology and financial innovation have created the conditions for large capital flows in the midst of weak corporate governance, outdated laws, policies and institutional structures. The outflow triggered the collapse."
A brilliant summing up of a highly complex, multi-faceted, phenomenon all in one short paragraph. Anyone seriously interested in and concerned about private sector governance should go over very carefully the issues raised in the paragraph I have just quoted.
Corporate rope tricks
Corporate governance practice in Southeast Asia remains, at best, patchy and uneven and, at worst, downright unwholesome in ethical terms. As the Malaysian situation seems to apply equally to the other crisis-hit nations of the region, with minor variations, I shall illustrate my points by using Malaysian cases. It is not because I particularly love or admire Malaysian corporate rope tricks, but then I am much more familiar with them.
Let us take the protection of minority shareholder interests as an example. Several high profile Malaysian cases have underlined the very real possibility "that the legitimate interests of minority shareholders may have been compromised through transactions which have conflicts between the interests of the company itself and its major shareholders.
This is by no means an exhaustive list. If the laws and regulations are such that the interests of the minority shareholders are not afforded sufficient protection, then it is time to do so now. But one suspects that at least some of the problems arise from lack of enforcement.
Turning now to an article by S Jeyasankaran in the Far Eastern Economic Review. He reports that: "Zulkifli Hussain goes to court to assert his rights as a minority shareholder in Malaysia. Zulkifli, who owns 5% of Palmco, a listed oleochemicals maker, is angry because another shareholder, IOI Corp. and its managing director, raised their combined stake in Palmco to over 33% but did not make a general offer to buy the remaining shares at the same price, as Zulkifli alleges is required by law."
In the same article, Terence Mahoney, a private investor and former fund manager is quoted as saying, "Malaysian investors are growing up... Because Malaysia's competitiveness as an equity market has declined relative to other Asian markets such as China, India and Taiwan, there is a realisation that to attract foreign investors, companies have to clean up their act."
Great arbiter
It is quite apparent from all this that effective supervision by the various regulatory bodies remains problematic. An important institution that underpins good corporate governance is the judiciary. Again, with the exception of Singapore, the integrity of the judicial system in each of the countries coming under the purview of our discussion cannot be taken for granted. Can the courts be relied upon to dispense justice without fear or favour?
Corporate Asia is in a flurry of activity to reform governance, not, I might add, because of its natural preference for high ethical standards, but simply that it has little choice in the matter. Globalisation is the great arbiter; it is here to stay.
Reforms now being undertaken in the region cover in varying degrees and intensity, areas of concern to the investing public as enumerated by Andrew Sheng, among other commentators. Our region as a whole is badly in need of these various reforms to promote better corporate governance and generate, in the process, investor confidence.
Like some other countries, after many years in the denial mode, Malaysia finally came clean when the Deputy Prime Minister Ahmad Badawi said:
"It is a fact, both you and I know, that the government engaged in many rescue operations during the crisis. A more laissez-faire government would have allowed many of our key companies to sink... .I am well aware of the rumblings and discontent among the professional business community that the government should not continue to protect those who have blatantly mismanaged their corporate empires and have repeatedly come back crying for help."
The good old days of unfettered excesses look set to change, so we thought. However, the euphoria was short lived. No sooner had the mighty roar of collective approval died down than reality struck with a vengeance.
The government decided to use public funds, yet again, ostensibly this time around to bail out the debt-ridden and incompetently managed national flag carrier, Malaysia Airlines, by purchasing the 29 percent stake of its chairman at RM8 per share when these shares are trading at around RM3.60 each.
The perception, rightly or wrongly, is that it is not MAS that is being saved; the chairman of MAS is being let off the hook with his original investments intact. It is only in cronyland that you are rewarded for running a national airline into the ground. The fact that he is politically well-connected lends credence to the suspicion that this is just another victory for cronyism.
It is this sort of unaccountable official behaviour that stops investors dead in their tracks. It is a regional story with which we have all become only too familiar.
Watchdogs that bite
The question uppermost on everyone's mind concerns not only the pace of change but, more to the point, whether there is sufficient political will to ensure that the change in the pipeline is of such quality as to sustain long-term growth. In spite of protestations to the contrary by governments, the economic crisis is far from over, and it would be the height of folly and irresponsibility to delude the unsuspecting public. We are of course talking about sustainability.
There does not seem to be a great sense of urgency, and there is a danger that many companies may find themselves "reverting to type" and revisiting the scene of earlier spoils and easy pickings on the back of corrupt governments. The challenge for corporate governance is real and the reality, on present showing, leaves little room for complacency.
The corporate sector that persistently takes its cue from the government model of probity and rectitude, without setting its own code of conduct and regulating its own behaviour according to the best international standards, will assuredly be short-changed and marginalised in the new globalised economy. Few governments have the staying power to breast the tape in the good governance race.
However, all is not doom and gloom. The revamping of the securities commission and other regulatory watchdogs now underway in the region has already resulted in many successful prosecutions of "big names" in several countries.
This has clearly helped to drive home the point that it is not only a long prison term on which to concentrate the mind, but also the certainty of companies being exposed, and the consequent disgrace they face, for rogue corporate behaviour. The implications for such companies are far-reaching, and the risks are quite simply not worth the effort.
Watchdogs need to impose, to the fullest possible extent, the sanctions provided by law against directors and the companies they control for breaches under the Companies Act. Watchdogs that only bark are not going to help the process of putting good corporate governance in place. More than anything else, the region needs courageous and tenacious watchdogs that also know how to bite. And perhaps even more important are those that will turn up their noses when temptingly big juicy bones are thrown in their direction.
The challenges facing corporate governance in Southeast Asia stem from the somewhat relaxed cultural, social, and political attitudes to stewardship, a concept that does not seem to have taken root in either the individual or national consciousness. How else do you explain a government secretly dipping its sticky fingers in the national pension fund to support an undercover operation to corner the international tin market, which in the event proved to be an unmitigated disaster?
How else do you explain a government, using public funds and the dubious expertise of its central bank, to speculate on the international money markets? It is mind boggling to say the least. In a more open and democratic society, such unethical behaviour would not only have attracted the most severe public censure but also brought the government down.
At the end of the day, no change or improvement in the way we manage our business operations can be sustained if our attitude to good governance is out of step with contemporary global trends. This applies both to government as well as corporate leadership.
The principles of good governance, grounded as they are in trusteeship, stewardship, transparency, accountability and integrity, are as relevant to the governance of a state as it is to the management of a public listed company. Good governance, like integrity itself, is no longer the luxury of the virtuous; it is a global business necessity.
TUNKU ABDUL AZIZ is vice-chairman of Transparency International and president of Transparency International Malaysia, an anti-corruption NGO. He delivered the above paper at the Institute of Southeast Asian Studies' Regional Outlook Forum 2001 which began in Singapore yesterday.
View Comments0