In corporate corruption, U.S. can't compete with Asia
By Kate Linebaugh
Bloomberg News Service
HONG KONG — A chairman who is arrested for share manipulation. Companies that retract audited accounts. Earnings restated years later.
This is not the United States of the past few months. This is common fare for investors in Asia, who are inured to tales of companies that fabricate, falsify and obfuscate.
Hong Kong-based Gay Giano International Group Ltd. said recently that it would rehire chairman Cheung Sing-chi as a consultant two days after he resigned following his arrest for conspiring to manipulate the retailer's shares.
Singapore's Asia Pulp & Paper Co., with $13 billion of debt in default, said in April its financial statements from 1997 to 1999 can't be relied on. Chinese retailer Zhengzhou Baiwen Co. was fined last year by regulators for faking financial statements.
"Corporate governance in Asia is worse than that of the U.S. for one simple reason: the rule of law," said Mark Mobius, who manages about $7 billion at Franklin Templeton Asset Management Ltd. "There are some political and macro-economic risks. But the key risk is the lack of law enforcement and, generally, corruption."
One in 10 publicly traded companies in China have doctored their books, the Chinese Securities Regulatory Commission said in March. A November 2001 survey by China's National Audit Office found that 14 out of 16 accounting firms had issued "seriously falsified" reports on behalf of their clients.
"It's very early days in Asia," said Jamie Allen, head of the Asian Corporate Governance Association, which was set up three years ago. "It took America 60 or 70 years to get where it is, and it still has corporate governance problems. This can't be solved overnight or even over the next five to 10 years."
Improving standards
Since the 1997 currency devaluations that led to Hong Kong's Peregrine Investments Holdings Ltd. bankruptcy in 1998 and South Korea's Daewoo Group $80 billion collapse in 1999, Asian countries have tried to improve disclosure and enforcement standards.
South Korea last year required one-third of a company's board to be independent directors. Japanese companies were obliged to report consolidated results starting two years ago.
Thailand earlier this year set up a national board, chaired by Prime Minister Thaksin Shinawatra, to monitor corporate governance. The board plans to cut the number of listed companies an accounting firm can audit to 50 from 300. Thaksin said last week he had even heard of an auditor handling 30,000 companies.
"We have to improve regulations to prevent what's happening in the U.S. right now," Thaksin said during a Bangkok speech. "Many companies are still run by families even though they have shares traded on the stock market. We have to tighten rules to prevent misuse of company funds."
Winning new investors
Improving standards have helped some Asian countries win investors. Thailand, Indonesia and South Korea rank among the top 10 performing stock indexes this year, while the Nasdaq Composite Index is the sixth worst performing as corporate failures like that of Enron Corp. and false profits reported by WorldCom Inc. erode investor trust in corporate earnings.
Some Asian companies are taking action. China National Aviation Co., which bought Air Macau in February and controls Hong Kong Dragon Airlines Ltd., hired Wan Lui in March to run a compliance division.
"They need people to ensure the consistency of the company's policy both on the accounting side and for the Hong Kong stock exchange," said the 29-year-old Beijing native, a graduate of the University of Birmingham in the U.K.
For Hugh Young, managing director of Aberdeen Asset Management Asia, who sits on the corporate governance committee for the Securities Investors Association in Singapore, more needs to be done to protect investors.
"We can't rest on our laurels," Young said.
Loans to parents
In South Korea, prosecutors have charged Yoo Sang, chairman of Posco, the world's second-largest steelmaker, with ordering affiliates to buy shares of a company that operates gambling pools. They paid a 75 percent premium to the market price in exchange for political favors.
Thai Petrochemical Industry, Thailand's biggest debt defaulter under court receivership, is seeking a repayment of about $149 million in loans owed by companies controlled by its former chief executive and founder, Prachai Leophairatana. Prachai lost control to creditors in 2000 after he refused to repay $3.7 billion of debt.
