Asia no longer ‘bad boy’ of corporate governance

HONG KONG – Asia has taken big strides on the road to better corporate governance after its 1997/98 financial crisis, but analysts say investors must view company accounts with renewed skepticism in light of US accounting scandals.

The region is holding its head relatively high even as investor confidence in most other global markets has been left brittle after dubious accounting practices in the US sent U.S. stocks tumbling to five-year lows.

"It is a tad ironic that the very region, which the rest of the world dismissed as funny accounting, is today seen as a safe haven," Raja Visweswaran, head of Asian credit research at Bank of America, said in a recent client note.

Asia has recovered well from the crisis five years ago, with corporates carrying less debt on their books and banks saddled with significantly fewer non-performing loans.

This has helped Asian stock markets to withstand the flood of bad news flowing out of Corporate America and its stock markets.

The benchmark Morgan Stanley Capital International (MSCI) Far East Free ex-Japan index has gained 8.9 percent in US dollar terms so far this year.

This contrasts with a nearly 12 percent fall in the Dow Jones Industrial Average and a 19.8 percent drop in the broader S&P 500 index since the beginning of the year.

"Asia is not the only bad guy on the street. Before, corporate governance was a negative mark for Asia," Robert Conlon, chief investment officer at Investec Asset management, told Reuters.

"Now America has been shown to have probably just as many issues with regards to corporate governance as Asia has," said Conlon, whose company manages US$23 billion of global assets.

Some say, Asia is in many ways better off than the US for now.

Salomon Smith Barney in a recent report said the ratio of average credit to gross domestic product (GDP) – a key indicator of leverage – fell to 114 percent in Asia in 2001 from 123 percent in 1997.

In the US, the ratio is now 288 percent, up from 204 percent in 1994, the report said.

"Asia is the most under-leveraged region in the whole world. A lot of corporate problems in the US comes from the higher level of leverage that corporates took on their balance sheets," said Didier Devreese, chief investment officer at ING Investment Management.

Less pressure on Asian CEOs

Another reason for accounting scandals, some analysts say, is the heavy use of share Asia no…From B-1

options by US companies to reward chief executive officers (CEOs) and other top officials.

"That puts him (the CEO) under enormous pressure to generate the best possible set of results," Conlon said.

Asian corporate chiefs and executives are under less pressure to inflate accounts as regional companies rely much less on share options to compensate employees.

"There is now some suggestions in the US that the share option scheme should be approved by the shareholders," Kwong Ki-Chi, chief executive of the Hong Kong Exchanges and Clearing Ltd (HKEX), told a business seminar.

"But in fact in Hong Kong, we already require share options to be approved by shareholders," Ki-chi added.

Don’t Be Complacent

Some analysts warned that investors should remain vigilant against corporate malpractices in the region as the quality of disclosures remained uneven across Asia.

Fund managers say South Korea has made enormous progress and emerged as the leader in corporate and financial sector reforms in Asia after the 1997/98 crisis.

"Indonesia, Thailand and the Philippines have struggled apart from isolated cases of improvement in corporate governance," Conlon said.

Fund managers cite Asia Pulp & Paper Co (APP) – an Indonesian family-owned company and one of the world’s biggest distressed borrower – as an example of how some countries in Asia have a long way to go before coming anywhere near U.S. standards.

APP defaulted on hefty debt in March 2001, but its $13.9 billion debt restructuring process has dragged as creditors have refused to accept its proposal due to a lack of information about its financial condition and its subsidiaries.

Analysts and officials say there are no fool-proof laws or accounting standards to prevent corporate frauds.

"You have to do your homework and pay for quality at the micro level. You have to look at the individual credit," Visweswaran said.