Memo to corporations: Greed is not good

Not too long ago, before the dot com bubble made paupers of high flying investors in the equities market, it was the general feeling that greed is good. Now, of course, we know that greed is still one of the deadly sins and far from good. For two days last week, top corporate taipans from here and from the region gathered at the Manila Mandarin to repeatedly hear that mantra: Greed is not good.

It isn’t because, one speaker pointed out, that today’s generation of business leaders have become greedier. It is just that the appetite for greed has increased with the tremendous growth in opportunities to be greedy. But a backlash has shown that too much greed is bad for business. It is now more or less agreed that it is to the advantage of today’s business executives to rein in their appetites. Business gurus, like the guys at AIM, advise their flock: Repent, if you want the value of your stocks to appreciate in the market.

They now call their act of contrition by a fancy name: Corporate governance. Not that they are all that contrite for the abuses of the past, but they are at least putting up a public veneer of doing something about it. Not that they have a choice, of course, because governments are under pressure to legislate new regulations to make sure that greed does not overwhelm the corporate environment again.

From what I heard over two days, it seems that we have some ways to go. Asian business academics and executives are saying that stringent regulations in the United States are not all relevant to our environment. They talked of cultural factors in Asia, notably the family-oriented businesses, differentiating us from the free- for-all environment that created Enron and WorldCom.

I fail to see the significance of the supposed Asian cultural milieu in the publicly held corporations. Greed is greed, Asian or American. Asian family-run corporations screw minority shareholders as viciously as the Harvard-trained MBAs of Enron and WorldCom. I sense a lingering reluctance of Asian managers to recognize the danger posed by corporate greed in the long- term health and growth of Asian corporations.

There were, of course, paeans to transparency and accountability. At the same time, however, there were warnings that complying to new rules of governance may be costly and may also impinge on the entrepreneurial creativity of the Asian manager.

In the end, it was agreed that corporate governance eventually is all about the character of the Chief Executive Officer. It is all about moral leadership, something no government regulation can assure. The real responsibility for corporate governance, one speaker pointed out, lies on the Chief Executive Officer rather than regulators.

There were a number of suggestions on how to structure corporations to assure improved governance and accountability. Most mentioned during the conference is the need to separate the function of the Chairman of the Board from the Chief Executive Officer. Combining the functions in just one person is a bad idea in terms of good governance, it was consistently pointed out.

Much importance was also placed on the role of independent directors in corporate boards. However, there was also enough skepticism on how independent these independent directors really are. Filipino speakers also brought up the problem of a shallow bench of available independent directors in the country… and the meager honoraria they are paid and not commensurate to the new responsibilities they must assume. Honestly trying to comply with the rule on independent directors could be a real challenge, it was alleged.

This is why some so-called independent directors end up sitting on dozens, if not hundreds of boards. Wash Sycip, the keynote speaker, is probably Exhibit A of the overextended director. Bobby de Ocampo, president of AIM, the organizer of the conference, publicly confessed he too is serving on more boards than he can manage.

Given the expanded responsibilities lodged on these independent directors, it is just physically impossible for even the most talented and motivated of them to carry out their functions well if their attention is so fragmented. I suggested that SEC issue rules that will limit independent directors to no more than two or three directorships. I don’t think they liked that. There are just not enough trained, experienced and well-connected potential directors they could tap.

Not to forget… mention was also made of the need to have honest accountants, bankers and lawyers. They are supposed to be among the first line of defense in assuring good governance. If the Andersen people in Enron were more professional and, yes, less greedy, the firm wouldn’t have vanished like a bubble in the Enron mist. What happened to Andersen should be warning enough.

Banks, on the other hand, must impose good governance covenants in their loan documents and enforce them. The IFC, a World Bank subsidiary, has learned its lesson with that awful mess in All Asia, an IFC official said. It now insists on good governance safeguards before they lend or invest. In fact, a one-million-dollar loan a local eye institute borrowed from IFC required safeguards that could cost a good part of the loan proceeds.

Just before the conference closed, they revealed the results of a survey among the participants on what are their principal governance concerns. In so many words, the principal concerns revolved around how principal shareholders and management screw minority shareholders. There are just not enough rules to control or eliminate that sort of behavior even among publicly held corporations that are still part of closely-held family business empires.

That’s probably because the amount of shares sold to the public in IPOs is so insignificant, making it easy to abuse minority shareholders. We may need legislation that would mandate more significant number of shares being sold to the public by those doing IPOs to justify being called a publicly held corporation. As it is, the only way minority shareholders can make money is to trade stocks, not be partners in the enterprise.

That is why I found most interesting a proposal advanced by an Australian speaker for the constitution of parallel watchdog boards. The members of this board are elected on the basis of one vote per shareholder, thereby making it more democratic. While it does not second guess or overrule the main board, it gets a better chance of being heard to protect the interest of minority shareholders.

The bottom line is, corporate governance is all about winning back the trust of investors. Someone in the conference estimated that good governance commands a premium of as much as 30 percent on stock prices. Then again, if you asked the Enron executives and directors, greed paid off handsomely. Despite the scandal, it seems they are still able to hang on to the fruits of greed. They are crying all the way to the bank.

Jose Pidal Joke

You know you have arrived as a politician once you are the subject of a text joke. Here‘s one possibly inspired by Thailand‘s donation of old air force planes to our beloved Philippine Air Force.

Q: Kung ang ekonomiya ng ibang South East Asian countries ay De-MOTOR na, ano naman ang ekonomiya natin under GMA.

A: De-PIDAL

Boo Chanco’s e-mail address is [email protected]