Playing a New Tune
Increasingly global stock markets and the Crisis should prompt Asia's largest companies to be much more open. Will it happen?
By ALEJANDRO REYES
During this year's annual meeting season in Japan, the new openness tune was heard in a variety of places. About 250 companies broke with tradition by calling shareholders together five days earlier than the customary date of June 29, when 88% of Japan's top listed companies held their sessions. Fuji Heavy Industries (No. 84), whose shares held by foreigners rose in one year by more than 10% to 17.5% of capitalization, for the first time delivered an English-language invitation to foreign shareholders and provided English translations of voting documents. Toshiba (No. 14) flew its president Nishimuro Taizo to the U.S. immediately after its annual meeting to give a detailed account of management policy to American fund managers. Hitachi (No. 9) dispatched its president to Europe and its vice president to America for the same purpose. Another electronics giant, NEC (No. 17) recently set up a new investor relations task force at its headquarters and convened a series of meetings with Japan-based stock analysts who follow the company.
Those that fail the inclusion test are in for a rude shock. Competition for fresh capital from stock issues is fierce, especially since Asian banks have generally not sufficiently recovered from previous poor credit decisions to resume lending - and may not reach loan levels of the past anytime soon. "Investors are looking at corporate governance more than ever," said Donald Johnston, secretary-general of the Paris-based Organization for Economic Cooperation and Development, speaking recently at the World Economic Forum's Singapore business conference. "The penalty for a lack of corporate governance is the lack of investment flows." Former GE Capital boss Gary Wendt, who has raised a new global fund, says that he won't be investing in Asian ventures outside Japan because "the region still hasn't got religion." For Wendt, Asian corporations have yet to change their ways following the Crisis.
Despite the skepticism from some investors like Wendt, there are signs that significant corporate reforms are happening. "New management concepts, among them corporate governance, will settle in corporate Japan in the first decade or two of the 21st century," says popular economist Tanaka Naoki. "Good corporate governance means that a company belongs to shareholders. When shareholders are able to express their will in the future, managers not living up to expectations will be fired."
If that were to happen, it would partly mimic what is occurring in the West, where top-level managers who do not perform are increasingly apt to be removed. However, there continues to be a substantial difference in how corporations - and executives - are judged in Asia versus the West. Says Morimoto Masayoshi, a Sony senior executive vice president who travels to the U.S. and Europe every three months to meet the company's big foreign shareholders: "Japanese investors and analysts tend to focus on past figures, but American and European analysts and investors always ask, 'What is Sony going to do next?'" Morimoto is in charge of public and investor relations for Sony, and he has seen the tremendous pressure Western investors can exert: "To put it bluntly, they want to know if the stock is going to go up or down. If you can't answer all their questions clearly, they think, 'I don't quite understand what Sony is doing. This is dangerous; the stock is a sell.' That's what happens."
That sort of pressure remains rare in Asia, but there is no question that investors are becoming more militant. At times, annual meetings can even become boisterous - particularly when activists like South Korean professor Jang Ha Sung takes an interest. At the annual meetings of 15 Japanese companies this year, institutional investor SG/Yamaichi Asset Management voted against management proposals for the first time in a campaign for increased disclosure. Nippon Life Insurance, one of the most influential investors in Japan, reportedly criticized several managements.
In April, directors of Siam Commercial Bank in Bangkok faced a rowdy crowd of 400 people, many of whom were protesting a bank recapitalization plan that could have given foreign shareholders majority control. Over four often-heated hours of debate, shareholders made it clear that they would never allow a sell-out, which they complained would violate the bank's founding guidelines. In the end, the board soothed frayed nerves with assurances that the bank would stay in Thai hands. (The sale later proceeded with Thai ownership assured.) The bank seemed to learn its lesson. Less than three months after the meeting, the board confirmed that Jada Wattanasiritham would take over as president and CEO - a choice in favor of experience and professionalism over connections. She has stressed to Asiaweek that she will seek greater shareholder involvement at Siam.
One institutional investor actively seeking a bigger role is Templeton Asset Management, whose Emerging Market Fund President Mark Mobius has been barnstorming across the region to preach the virtues of better governance. The flamboyant, jet-setting fund manager has stirred controversy in Hong Kong by calling for a boycott of listed firms that dilute minority shareholders' interests with share placements. The effort has been only partly successful. Most listed companies in Hong Kong can place before shareholders at annual meetings a motion asking that directors be given the right to issue new shares worth up to 20% of existing equity. Despite the fact that this kind of dilution usually reduces the value of existing shares, such motions tend to pass without much discussion. In May, however, Templeton voted against a share placement that utility Hongkong Electric planned without first offering the new issue to existing shareholders. Nevertheless, the motion passed. At an extraordinary general meeting of Thailand's Phoenix Pulp & Paper in June, comments by shareholders in the audience were duly noted - to be written up in the minutes and available at next year's annual meeting.
One rare success for minority shareholders in Hong Kong occurred when parent company Wheelock took upmarket department store Lane Crawford private. In July, minority stockholders ganged together to demand a better price. It worked. The buy-out offer was eventually sweetened by 5.9% to $51 million. Overseas investors, who may not be intimately familiar with the companies they're investing in, can be particularly heartened by such stories. "One client in Switzerland gave us $70 million to invest only in companies that are restructuring or that are improving corporate governance as a result of the Crisis," says Mobius. "There's growing realization that these will be the companies that are most interesting - the ones that are being forced to change, or at least challenged on this front."
This might explain why Mobius and Templeton have so far stayed away from investing directly in China. Standards of disclosure and transparency for China-listed companies remain relatively undeveloped. Mobius is keen to change that. Up to now, very little of the more than $1 billion Templeton has invested in China has been put directly into Chinese companies outside Hong Kong. One reason: insufficient information. Also, foreign investors are restricted to buying B shares on the Shenzhen and Shanghai markets, where cheaper A shares are reserved only for locals. "All shareholders are created equal," Mobius asserts. He might add (but doesn't): at least they should be. He reckons that if China's two-tier market system were abolished, investment would pour in. "We're willing to live with fluctuations in the market, but no longer with the lack of accountability."
Mobius has made it clear he is unwilling to let Templeton invest in Malaysia, where minority shareholders have long been concerned about the potential impact of political cronyism on corporate decision-making, until there is more openness. As a rule, Malaysian companies whose directors had good political connections attracted better and bigger projects and more investment (see story page 72) than those that did not. Before the Crisis hit, corporate maneuvers that discriminated against minority shareholders were common among politically favored conglomerates.
In recent months, however, Malaysia seems to have experienced a change of heart, as old laws appear to be better implemented and new rules are being planned. The Malaysian Institute of Corporate Governance, which is headed by Megat Najmuddin Khas, has produced a guidebook for corporations and now conducts regular seminars for directors of listed companies, but Najmuddin admits much more effort is needed to improve the situation. "We need to encourage companies to list on the stock exchanges and therefore be open to public scrutiny," he points out.
Nevertheless, short of a change of leadership in Malaysia, it's hard to tell what would convince Mobius to resume investing there. However, communication with shareholders should go a great distance toward satisfying even the staunchest critics. "Silence is the most deadly message [a company] can send," says James Shapiro, Tokyo-based vice-president for Asia Pacific of the New York Stock Exchange. Companies must articulate a focused strategy and offer adequate projected rates of return.
Concentration of power is another investor turn-off. In Hong Kong and elsewhere, majority shareholders usually control boards of directors, and the chairman of the board typically doubles as the chief executive. That makes it all the more important for a company to have truly independent directors - outsiders regarded for their integrity and stature - and not just acquiescent associates of the majority owner. Independent board members "can act independently of decision-makers and review them in a way that they consider fair and objective," explains Lawrence Chia, partner at Deloitte Touche Tohmatsu Corporate Finance in Hong Kong.
Part of the drive to improve corporate governance involves management. In Japan, a growing number of corporations have appointed a chief operating officer with the aim of streamlining decision-making in a company and, in the process, making management more responsive to shareholder concerns. Sony introduced the title of COO only in 1997. Since then, 179 corporations - 7% of the biggest public companies in Japan - have created such a position or announced plans to do so.
But company and boardroom restructuring aren't enough. Governments must also move to upgrade laws on corporations and enforce rules and regulations that previously may have been ignored. In a bid to clean up the poor image of Thai companies, the Commerce Ministry has put forward amendments to the Public Company Act that call for increasing the rights of small shareholders, curbing the powers of controlling shareholders, and removing obstacles in the way of the debt restructuring.
Of course, a revolution in corporate governance is going on elsewhere in the world. But whether Asia ever wants to go as far as the U.S. in pursuit of the short-term profits that make shareholders happy is open to question. Will it have a choice? The proliferation of electronic stock trading is rapidly presenting all investors with myriad options of where to invest. And certainly, higher shareholder returns are attractive everywhere.
At the same time, competition for investment and the wide use of the Internet will be an encouragement for companies to open themselves to scrutiny - assuming that is what the world's shareholders will demand. Asian companies aren't ready for that much disclosure. And while the Crisis was seen as a push in the right direction, the quick and strong recovery now underway for some economies may remove some of the imperative. That could set the stage for what has become another buzzword: complacency. Companies may lose their zeal to reform, while investors could become less demanding if they're making money. "Many investors don't give a damn," says a foreign businessman in Bangkok who decries the gambling-den attitude on the local bourse. "They just dive in."
The comparison to gambling seems especially apt because, without transparency, disclosure and good corporate governance, being a minority shareholder almost anywhere in Asia remains a crapshoot. Just because Asia doesn't want to copy the West's single-minded pursuit of profits, doesn't mean its job is done. Johnston of the OECD, which has adopted a code of corporate governance, says that there is no question of applying "an Anglo-Saxon model." What is evolving, he says, is a global protocol that is flexible enough to accommodate a wide range of traditions. Think of good corporate governance as the software of globalization. If it doesn't work, the whole system could abruptly crash.
- With additional reporting by Yulanda Chung/Hong Kong, Julian Gearing/Bangkok, Murakami Mutsuko/Tokyo, Laxmi Nakarmi/Seoul, Arjuna Ranawana/Kuala Lumpur and Jonathan Sprague/Tokyo