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Protecting
Family Corporations?
By Michael Alan Hamlin
March 2003
A not-so-quiet campaign to force
the Securities and Exchange Commission (SEC) to rethink its rule
on the appointment of independent directors began early this year.
Unlike most of these campaigns, this one isn't being run by an association,
labor union, or chamber of commerce with an obvious bias. Instead,
its point men are professors at the Asian Institute of Management
(AIM), who claim that the SEC's rule doesn't reflect the reality
of local business culture.
Well, hello? The rule is intended
precisely to change the reality of local business culture, protect
investors, and attract increased local and foreign investment to
the local stock exchange - which has so far failed to recover from
the whipping it took in the aftermath of the insider trading scandal
allegedly masterminded by close associates of former president Joseph
Estrada. Apparently, in the view of their AIM supporters and the
companies who seek to insulate themselves from independent scrutiny,
transparency and increased investment aren't cracked up to what
they're supposed be.
But before we get to that, in the
interest of transparency, I must confess that I am a former and
disgruntled AIM employee. Since I left the Institute in 1994, I've
refrained from writing about it or its faculty for that reason.
That was mostly for selfish, rather than high-minded reasons. It's
hard to be credible when attacking - or just commenting on - a former
employer, colleagues, and superiors. For what it's worth, though,
I've been pretty consistent in my commentary on the SEC under Lilia
Bautista, who I genuinely admire, and similar efforts to undermine
the reforms she is attempting set in place. I also have a solid
record on protectionist measures of all kinds - I'm against them
- whether they are meant to protect Filipino agricultural industrialists
or American and European mega-farmers.
With that disclaimer out of the way,
let's get back to the issue of independent directors. One of the
things that the Asian financial crisis here and the Enron debacle
in the United States demonstrated is that corporations that don't
have strong independent directors to oversee their operations very
frequently go out of control. When they do, it is investors and
employees who get hurt the most. Those responsible for the meltdown
remain hugely wealthy despite the loss of face.
Consider Daewoo founder Kim Woo Choong,
who fled South Korea three years ago when, as Fortune magazine recently
put it, "his company was collapsing under US$65 billion of
debt." Although Kim lives in exile, he's still living in style.
But Daewoo workers all over the world were laid off, investors lost
fortunes, and South Korea's government had to appeal to its citizens
to donate jewelry so that the banking system - to which Daewoo and
other conglomerates were heavily indebted - could be saved. Similar
patterns can be seen in every Southeast Asian country, including
the Philippines, which has its own corporate fugitives in exile.
In the Enron case, its former top
executives - chairman Kenneth Lay, president Jeffrey Skilling, and
CFO Andrew Fastow - are likely to pay hefty fines and spend some
time in prison as well. But at the end of the day, they will still
be multi-millionaires while, as in the case of Daewoo, thousands
of employees have lost their pensions or their jobs or both, investors
have been crushed, and the market and industry grievously damaged.
Those here who oppose independent
directors and the increased transparency they are supposed to foster
will be quick to suggest that excesses on par with those of Daewoo,
Enron, and other corporate failures and scandals simply haven't
occurred in the Philippines. On the contrary, however, the now renamed
BW Resources' Dante Tan came close to toppling the Philippine Stock
Exchange, and is, incidentally, in exile in New Zealand. The Philippines
has no extradition treaty with New Zealand, so he's safe. But investors,
once again, certainly aren't. Meanwhile, the bourse languishes despite
government-reported GDP growth of 4.5% for 2002, because reforms
aren't complete.
Making sure these sort of shenanigans
aren't repeated seems like a pretty smart thing. But not for AIM
professor Victor Limlingan and co-chairman Felipe Alfonso. Both
feel that Ms. Bautista's reforms are reactive, and too closely resemble
reforms being debated in the U.S. Their argument is anchored, bizarrely,
on the notion that the Philippines' public companies aren't really
very public anyway, and are closely held. Because they are closely
held, the reasoning seems to go, majority owners bear the brunt
of the risk of negative consequences resulting from mismanagement.
As a result, these owner-managers
will make sure their firms don't get into any really messy situations.
There's a lot wrong with this kind of logic, but the principal problem
is that the record shows that this is a bunch of bologna. Daewoo
was closely held, for instance, as were troubled corporations throughout
Asia, including Philippine corporation Victorias Milling, which
imploded in 1997, and is still laying off workers and trying to
work off debt.
Second, it is investors and the public
that invariably pay the price for private-sector debacles. This
happens when large corporations are nationalized because their collapse
would destabilize financial networks held hostage to incompetence
as a result of willy-nilly lending in desperate efforts to stave
off the inevitable. And when public money is used to rescue lenders
themselves, as the Philippines has done repeatedly with government
financial institutions.
The bottom line is that as long as
a corporation is public, its investors, no matter how small, deserve
to be protected because the corporation is using their money. And
independent directors who will honestly and thoughtfully supervise
the corporations and the investors they serve are a key component
of the reforms that will make this possible. So when someone tells
you a universal rule doesn't fit the Philippines, what they are
really saying is "We're not ready to be that honest."
That's something we shouldn't let
them get away with.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001). Write him at mahamlin@teamasia.com.).
Copyright © 2003 Michael Alan
Hamlin. All Rights Reserved.
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