|
Transparency's Purpose
By Michael Alan Hamlin
December, 2004
If you were to ask a colleague about corporate transparency,
whether it's important, and whether it's widely practiced in the
Philippines, what sort of response do you expect you'd receive?
While I could be wrong, I'd bet that the most frequent response
would probably be, "Huh?" Before portable LCD projectors
became commonplace (and death by PowerPoint), the response might
have been even more curious, perhaps something like, "You want
to know about the transparencies I use for my presentation? Why?"
Okay, that may be a stretch, but not by much. In the
debate over transparency, like many debates, it's not unusual for
advocates to assume that others understand the issues. In this case,
not just what we mean by the term, "corporate transparency,"
but more importantly, why it is important enough to dedicate pricey
corporate sponsorships for senior-level conferences, study grants,
and considerable editorial space to. This general lack of awareness
of corporate transparency and its relevance is prevalent even in
the aftermath of such broad financial debacles as the Asian financial
crisis, and similar corporate catastrophes, such as, of course,
Enron.
A good definition for transparency might be "corporate
truth telling." The practice of transparency refers to being
open and honest with shareholders and other stakeholders, such as
employees, financial institutions and creditors: everyone who has
a stake in a given firm's financial performance. When management
misleads stakeholders about the financial performance of a company,
stakeholders wind up taking financial risks that have not been disclosed
to them. That means financial resources were obtained by pretense,
and that's a bad thing.
While it would be inaccurate to suggest that all firms
that fail to practice corporate transparency are crooked or poorly
run, it would be fair to suggest that generally firms that fail
to openly disclose the details of their financial performance have
something to hide. In Enron's case, the company failed to present
a clear and accurate picture of its financial performance because
it was proactively attempting to mislead shareholders and regulators
alike. Management's purpose was to make the firm look highly profitable
when in fact it its financial position was extremely precarious.
Worse, management did these things while enriching itself and creating
conditions in which employees, shareholders, and creditors would
collectively lose billions of dollars.
Some of those executives are in jail, such as former
CFO Andrew Fastow, and others are likely headed there such as former
chairman Kenneth Lay and former CEO Jeffrey Skilling. Fastow gave
up $23 million as part of a plea bargaining agreement with the U.S.
Securities & Exchange Commission, and Lay and Skilling are also
likely to have to cough up considerable funds eventually. But that
won't help employees whose pensions have disappeared, stockholders
whose holdings are now worthless, and creditors who are owed millions
of dollars.
The notion of corporate transparency assumes that companies
- even when they have something to hide - will be open and forthright
with their stakeholders. That seems a utopian hope, but regulators,
the rationale goes, believe that if the risks become too great for
crooked managers - i.e. substantial financial loses and jail time
- that they will toe the line. I'm not so sure. Fastow will be out
of jail in a few years, and he's still going to be a very rich man.
While he has to endure some pain, he's going to have a very comfortable
life.
High profile corporate scandals - Merrill Lynch, CitiGroup,
and AIG are among firms recently embroiled in financial peccadilloes
- have become commonplace in the United States. But what about the
Philippines, and Asia? Asia in general and the Philippines in particular
are considered opaque in terms of corporate transparency. Indeed,
Transparency International ranks most of Asia very low in its annual
Corruption Perception Index (CPI), and the Philippines is among
the lowest, or most corrupt in the perception of respondents. It
is ranked 40. Indonesia is 46, Thailand, 39; and South Korea 34.
Malaysia is 32. Only Singapore comes out fairly well, at nine.
There's an important correlation here, which is hard
to miss. And it is that Singapore, one of Asia's most prosperous
economies, is also perceived to be one of its least corrupt; and,
Indonesia, with one of the lowest per capita incomes in Asia, is
one of the most corrupt. The Philippines, which has traditionally
languished economically behind its neighbors, is likewise considered
to be among Asia's most corrupt economies. This suggests that more
rigorous standards of transparency and good governance translate
into faster, more equitable growth.
Indeed, for anyone who has done business in Singapore
and Manila, the contrasts can be striking. While corruption is mostly
considered a government issue, private-sector corruption can also
be persuasive, and ranges from petty infractions to gross misbehavior.
For example, it is common knowledge in the direct marketing industry
that employees of financial institutions often steal lists of clients
from their employers and sell them to list brokers and other interested
parties. Marketing managers steer car raffles to their friends.
Purchasing managers are susceptible to suppliers represented by
classmates and relatives. And of course, it is the private sector
that pays off corrupt government officials.
The stunted equity market in the Philippines is perhaps
the most glaring example of how poor corporate governance and lack
of transparency can hobble an economy. The Philippine stock market
is considered the oldest in Asia, but is also the smallest among
its peers. When foreign funds pulled out of the market in the aftermath
of the Asian financial crisis, local scandals such as that revolving
around what used to be known as Belle Corporation, and concerns
over money laundering, one popular television program focusing on
the market was discontinued.The reason? It was generally assumed
that the market was manipulated by insiders, and a television show
focusing on expert technical investment advice was completely extraneous
to reality.
But it would be a mistake to assume that it is only
Philippine firms and Filipinos that seek to corrupt business practice
in the Philippines. The U.S. Foreign Corrupt Practices Act (FCPA)
came about in an attempt to inhibit U.S. corporations from bribing
foreign government officials and other customers. It is common knowledge
that many Japanese firms budget a "facilitation fee,"
as an accepted way of doing business. Ironically, it was a scandal
involving a U.S. aerospace firm, Lockheed - later acquired by a
competitor - and the late former Japanese prime minister Kakui Tanaka,
that gave rise to the FCPA.
But it will take more than the FCPA to stop unscrupulous
behavior. For example, I recently talked with an executive who left
one of the Philippines' major conglomerates to work for a multinational
entertainment firm. In both jobs he's had substantial experience
managing joint ventures involving Philippine and foreign firms.
When this executive worked for the Philippine conglomerate, however,
he said he was impressed with the way partners were treated. "Even
if a foreign shareholder had just one percent of a venture, they
were always consulted and treated in a completely transparent way,"
he said.
Surprisingly, perhaps, that hasn't always been the
case with his present multinational employer. "I always try
to represent the interests of all shareholders," he told me,
"but my employer doesn't always seem to understand why that's
important." Fortunately for both his local partners - and his
multinational employer - this executive stubbornly insists on sticking
to the rules of proper behavior.
It is true that transparency, or lack of it, is a serious
problem in the Philippines. And it needs to be addressed. But addressing
it effectively also requires that everyone decide to play by the
rules.
(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), and he is currently at work on
High Visibility: The Making and Marketing of Asian Professionals
into Celebrities. Write him at mahamlin@teamasia.com.).
Copyright © 2004 Michael Alan
Hamlin. All Rights Reserved.
|
